Golden Entertainment Inc (GDEN) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2009 Lakes Entertainment, Inc. earnings conference call. I will be your coordinator for today. At this time, all participants are in listen-only mode. We'll conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Tim Cope, President and Chief Financial Officer. Please proceed, sir.

Thank you, Dan. Good afternoon, and welcome to Lakes Entertainment's second quarter 2009 earnings conference call.

On the call with me is Lyle Berman, Lakes' Chairman of the Board and Chief Executive Officer. As we begin our prepared remarks, I would like to remind everyone that this call may contain forward-looking statements within the meaning of the Federal securities law, including statements concerning business strategies and their intended results, and similar statements concerning anticipated future events and expectations that are not historical facts. These forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements do not guarantee future performance, and therefore undue reliance should not be placed upon them.

Lyle will begin our discussion today with a general overview and update on our Casino projects. I will then discuss the second quarter financial results and recent business events, and then we'll conduct a question-and-answer session.

Lyle?

Thank you, Tim, and welcome everyone to our second quarter 2009 earnings call.

I would like to start off by discussing the status of our potential Kansas project. On April 1st, 2009, we submitted an application to the Kansas Lottery Commission for a gaming facility manager license to develop and operate a casino in the south-central Kansas gaming zone. Two other companies submitted applications, and the Commission is expected to evaluate applications and award one license to operate a casino resort in Sumner County in the south-central Kansas zone. Our proposed development is for an approximately $317 million investment in a casino resort facility, located either in Mulvane or Wellington. The first phrase of development will feature approximately 2,000 slot machines, 60 table games, a poker room, a number of restaurants, retail space and a hotel, which will be built and operated by a third-party hotel company. The second phase could include an entertainment center, a child care facility, and other market-driven amenities.

The Sumner County Commissioners endorsed the proposal for both sites. Submission of the final project to the Kansas Lottery Commission is expected to occur on August 28th, 2009. The commission is expected to award the license within 30 to 60 days following the submission. The project is planned to be financed through a combination of equity from Lakes, equity in the project from third-party investors, and third-party project debt. Currently, we're working with a large financial institution in New York to complete the financing plan for the development, and are confident that the financing can be secured on acceptable terms prior to the August 28th, 2009 deadline.

The next project I would like to discuss is the Red Hawk Casino in Shingle Springs, California, which is a casino project with the Shingle Springs Band of Miwok Indians. The casino features approximately 2,100 slot machines and gaming devices, 75 gaming tables, 10 different food and beverage outlets, retail space, a child-care facility, arcade, and approximately 3,200 covered parking spaces. It It also has a dedicated interchange from U.S. Route 50, which is the road connecting San Francisco and Lake Tahoe, allowing easy access for our customers to the casino only a few hundred yards away.

Second quarter results continue to show solid guest counts, table-game revenue and food and beverage revenue. It's apparent, however, that the customer spend continues to be less than anticipated, and results from slot machines continue to run below our expectations. We have implemented a number of revenue improvement programs, along with stringent cost-control measures, in an effort to improve future bottom line results.

The gaming floor continues to be analyzed, to provide our guests the product they want. Several adjustments to the machine layouts have been made to increase overall visibility and improve customer traffic flow. Approximately half the slot floor has been changed, either by game type, denomination or location, and the total slot machine count has increased by approximately 20 units. Table games, which continue to do well at Red Hawk, have been enhanced with the addition of more roulette tables, baccarat games, and other products to keep and create even more excitement in the casino. In addition, we have added table games to the non-smoking casino floor, which have proven to be successful.

Marketing costs continue to be reviewed, and now that the initial opening period is behind us, the marketing programs have been refined to eliminate duplication of costs. Marketing efforts continue to be focused on driving additional Bay Area customer visits, and to provide value propositions to our local guests. Likewise, staffing levels have been scrutinized and similarly reduced, to provide optimum levels of guest service at appropriate levels of expense. All areas for revenue-enhancement or efficiency improvements continue to be reviewed, so that the operating results can be improved. Future plans include the addition of a hotel and possible expansion of the gaming floor, each designed to attract more customers and increase revenue.

There is no doubt current economic conditions continue to affect Red Hawk operating results. Throughout central California, including the Sacramento area, the housing and financial markets continue to be under severe pressure, limiting our customers' amount of discretionary spending. However, with approximately 4 million people living within a 50-mile radius of the casino, we continue to believe that Red Hawk Casino is well-positioned to benefit from our large numbers of customers as the economy improves.

The Four Winds Casino in New Buffalo, Michigan, continues to produce strong operating results. Despite the tough economy and additional competition from the Horseshoe Casino Barge and the Blue Chip expansion, the Four Winds gaming revenue market share continued to increase during the second quarter compared to the first quarter. Recently, the Four Winds Casino opened a completely new non-smoking slot section of approximately 50 machines, an expanded gaming area in the bus lobby, and a new slot tournament section. Along with these gaming enhancements, a new service bar area was added, and the Timbers Restaurant seating capacity was increased to almost double the size. All of these changes, and many others, were made to continually offer our guests the best possible product, and improve the overall operating performance.

In Perkins, Oklahoma, the Cimarron Casino continues to show strong results. The casino, which is owned by the Iowa Tribe of Oklahoma, contains approximately 370 class III slot machines, with a small food outlet, and caters to a good local market. We are currently working with the newly-elected Tribal officials on plans to develop the proposed Ioway Casino Resort on an approved 64-acre site. We continue to await Bureau of Indian Affairs approval of the proposed lease agreement for the remaining contiguous 15-acre parcel.

The proposed Ioway Casino Resort will be located on U.S. Route 66 near Chandler, Oklahoma. We anticipate a 12 to 18-month development and construction timeline, with a possible opening of the Ioway Casino in the fall of 2011. The casino is currently planned to be built in phase, and will feature approximately 1,200 class III slot machines, 25 table games, three restaurants, and a 150-room hotel in the first two phases development. The facility is master planned for future amenities that may include additional gaming space, hotel rooms, a golf course, and other market-driven developments. Successful completion of this project is dependent upon the ability to obtain construction and equipment financing on terms and conditions that make this a viable casino project.

There is not much new news to report on the Jamul Indian Village Casino project near San Diego. Environmental studies are underway, and planning is still ongoing to redesign the proposed Jamul Casino to provide for approximately 1,000 class II gaming devices, along with 25 class II table games.

In Vicksburg, Mississippi, we own or have the option to own 400-plus acres of land in Vicksburg. Due to the current financial environment, the proposed casino resort development remains on hold at this time.

With that, I will turn the call back over to Tim to provide an overview of recent business issues and financial results. Tim?

Thank you, Lyle.

Earlier today, Lakes Entertainment reported second quarter 2009 revenues of $7.1 million, a 20% increase in comparison to prior year period revenues of $5.9 million. This increase was primarily due to fees from the Red Hawk Casino, which opened in December of 2008. For the second quarter of 2009, Lakes' selling, general and administrative expenses were $3.8 million, compared to $3.6 million in the second quarter of 2008. Selling, general and administrative expenses consisted primarily of payroll and related expenses, travel expenses and professional fees. Including in the selling, general and administrative expenses were costs associated with the application for a gaming site in the state of Kansas of approximately $300,000 during the second quarter of 2009. Development costs associated with the Ohio Casino project, which was terminated after the November 2008 election, were $4 million during the second quarter of 2008.

Net unrealized gains on notes receivable relate to the Company's notes receivable from Indian tribes for casino projects that not yet open, which are adjusted to estimated fair value, based upon the current status of their related tribal casino projects and evolving market conditions. In the second quarter of 2009 net unrealized gains on notes receivable were $2.5 million, compared to net unrealized gains of $1.1 million in the prior year period. The net unrealized gains in the second quarter of 2009 consisted of $2.2 million related to the project with the Jamul Indian Village, and $300,000 related to the project with the Iowa Tribe of Oklahoma near Oklahoma City, due primarily to improvements in the credit markets. Lakes also recognized impairment losses of $1.7 million during the second quarter of 2009, due primarily to continued uncertainty surrounding the completion of the Jamul project. Unrealized gains in the prior year period related primarily to the notes receivable related to the Red Hawk Casino, due to the increase in number of months until the opening of that project.

Amortization of intangible assets related to Indian casino projects for the second quarter of 2009 was $2.5 million, compared to $1.7 million for the second quarter of 2008. The increase of $800,000 related to the amortization of intangible assets associated with the Red Hawk Casino, which began when it opened in December of 2008. Amortization in the second quarter of 2008 related primarily to the intangible assets associated with the Four Winds Casino project.

Other income or expense net for the second quarter of 2009 was $1.3 million, compared to less than $100,000 for the second quarter of 2008. The increase was due primarily to interest earned on notes receivable from the Shingle Springs Tribal Gaming Authority. Earnings from operations were $1.5 million for the second quarter of 2009, compared to a loss of $2.4 million for the second quarter of 2008, and resulted primarily from the items previously mentioned. Net earnings applicable to Lakes Entertainment, Inc. for the second quarter of 2009 were $2.8 million, compared to a loss of $5.2 million in the second quarter of 2008.

In summary, continued solid results from Four Winds, coupled with the addition of fees from the new Red Hawk Casino, have contributed to substantial improvement in Lakes' revenue and net earnings compared to the second quarter last year. We remain focused on improving our operating efficiencies at Lakes, and continue to seek new business opportunities, such as in Kansas, in an effort to increase our shareholder value.

Now I will turn the call over to the operator for questions.

(Operator Instructions). Your first question comes from the line of Justin Sebastiano from Morgan Joseph. Please proceed.

Hi, guys. You mentioned that the slot win really hasn't really improved at Red Hawk. You know, you're changing the layout and the denoms. What denoms are doing well? Is it the pennies that are doing --

I think what we're changing more is a better mix of pennies and $0.02 denominations, and then some of the $5s, $25s are becoming more down to the $1s and quarters.

Okay. And how is then, the marketing, I guess, at Red Hawk? Were you focusing now -- are you changing your focus to certain areas? What are you doing differently on that front?

In marketing per se, when you first open you cast a very wide net, and you do general marketing, and then once you get your database, which has grown rather dramatically in the six months or so we have been open, actually I think it's seven months now, almost eight months.

Right.

We are now more focused on some general marketing. The general marketing primarily is to cast a wider net in the Bay Area. That is an area that we think is still not as aware of our product as we would like it to be. And then specifically, we do direct marketing to our database. We find that direct marketing to a database, you get your highest returns and they are more measurable, because you are able to quantify exactly what it cost, and how much revenue you have got on a virtually on a per incentive basis. For example, if you sent out a group of people an incentive to come up and pick up a new blender, you know exactly how much the blender cost, you know how many people redeemed, and you know what their win was on that day of visit. So we're doing probably more of that.

Okay. So you mentioned a database, what -- how many people are we up to now on that? What is the number?

Tim, do you have that? I don't have that.

No, I don't have that off the top of my head this time, but it continues to grow probably somewhere around 3,000, 4,000 a week. So it's continuing to grow. We like to compare it, obviously, to our Four Winds property and we're probably slightly ahead at this point in time in terms of growth of the database than we were in Michigan.

Okay. So it is safe to say then that you are almost at 200,000, but not quite there?

I was going to guess a little -- I think it's a little over that, actually.

A little over. Okay. You mentioned that you added 20 machines. Whose machines did you put in there? What manufacturer, or was it a split among them?

It was actually a little bit of a split, because the net effect of adding 20 was a combination of taking some out that weren't performing as well, and then bringing more new ones back in.

Okay. Who didn't perform well? What machines?

I think that was a matter of just evaluating the market, primarily. I wouldn't say it was any particular vendor that didn't perform well.

It's more the model within the vendors. For example, red-white-and-blue may not have done well as green, yellow and purple.

Understood.

It's more fine tuning where you have 20 of A and 20 of B; A is performing much better than B, you might end up with 25 As, only 10 Bs and maybe five new Cs.

Okay. What is the house average there?

You know, I would like to tell you, but we can't do that. Obviously, that is particular to the tribal ownership.

Got you, okay. And then as for Four Winds, what is your database there right now? The number?

Four Winds is almost 550,000 people; just slightly under that, I believe.

How much do you think is coming out of Chicago?

That is our third largest market. I would say it's probably 15% to 20%.

Okay. And you said that the market share is improving. Can you kind of give us a degree of what that improvement is? You could give us your market share, but I don't assume you are going to do that, though?

I can't do that either. Obviously, when the Horseshoe opened last fall or late summer, they captured a huge amount of market right out of the gate, with the new Mother of All Boats, and everybody else's market share declined. Since that time, we're actually working -- clawing our way back, I would say, and we're seeing this year our market share continually to ramp up. I can't tell you exact percentages, but gradually it's increased every month since then.

So you are back to pre-Horseshoe opening?

It's not a dramatic market share difference. We're talking about in the percent range.

Okay. Do you think you are back to pre-Horseshoe expansion opening?

Almost, almost.

Okay. So what is the occupancy at Four Winds these days?

It runs almost 100%; it's got to be about 99% every day.

That's not just the weekend, that is every day?

Yes, on a monthly basis.

Right, but remember the hotel, we primarily market and give to our better customers. So at this point we would say we're very good at giving away rooms.

(Laughter)

And the non-smoking slots, did you take from your existing slot floor or did buy new ones to put in there?

It was a combination. We rearranged -- we had a kind of a deli/restaurant Silver Creek area down by the bus lobby that we removed.

Right, I remember.

We made that into all non-smoking section, pretty much based on customer requests. Again, as a combination of some new product and rearrangement of some other product.

Lastly, Blue Chip, I guess Boyd today on their call was saying that Blue Chip is being affected by the weak local economy, and that is really hurting the results there. Are you seeing that impact at Four Winds?

I would say slightly, but I'm surprised, pleasantly surprised, I guess, by that minimal impact that we're seeing. There is definitely -- I would say there is some impact, but I think it's much more positive than expected.

I think our bigger concern, just so -- is that a large Native American Casino opened in Kalamazoo, which is somewhat northeast of us. They opened about a week ago, and I believe that we were getting 10% to 15% of our business out of that market.

Certainly we're going to lose some -- we won't lose the overnight business out of that market, but we will lose some of the day trip market, because it's 15 minutes or less as compared to an hour or more. At least for the first week we haven't seen anything, any much effect, but I think we will. That is one of the reasons that we're going to start marketing a little bit heavier in the southern Chicago market, to replace the Kalamazoo business.

Got you. So that 10% to 15% Kalamazoo, how much of that is overnight versus just the day-trippers?

I don't have that one.

I assume you are talking about Fire Keepers, right?

Yes.

Okay. I think that actually opens today. They might have had some practice days, but I think today is official --

I think today was their announcement of the official Grand Opening, but they have been open and operating for a few days now.

Yes, okay. Thanks, guys.

(Operator Instructions). Your next question comes from the line of Mark Smith from Feltl and Company. Please proceed.

Hi guys, just two quick questions for you. First, can you talk about the kind of traffic trends that you saw at Red Hawk and also Four Winds during the quarter, and any indication of how July looks?

I can speak to -- traffic trends are actually holding up very well at both properties. It's eerily similar, Four Winds' traffic counts compared to Red Hawk, and very close together, what we see on a weekly basis there. So I think the good news is that there is a lot of people coming to both properties.

So you haven't seen a downturn over the last month or two?

Not really. They really continue to hold pretty consistent.

Okay. And now it's just a case of turning the traffic at Red Hawk into spending money?

I think that is the trick. It would be a lot different conversation if nobody was coming, but there are a lot of people showing up at Red Hawk, and I think now it's just a matter of one, getting the right mix of product in there like we're working on, but frankly it's a matter of outlasting the economic downturn.

We also think that a hotel -- the sooner we can get a hotel, we're working on that actively with some outside hotel companies that would perhaps put it up with their money, but we're very actively seeking a hotel. It's a very important part of the mix.

Okay. Perfect. And then last question, can you just talk a little bit about your SG&A and any opportunities for savings and leverage on that line?

Well, in this particular quarter we had a couple -- I would call one-time costs, part of which is the Kansas expenses referred to earlier, a little over $300,000 we spent in SG&A towards the application process for Kansas. And that either will continue to some minor degree, but theKansas issue will be decided here shortly, so that wouldn't be a continuing cost.

The other -- we had a couple of other unusual things, and some one-time travel-related costs that will no longer be in place next quarter, and then we're continuing to evaluate all the other costs. Payroll was actually down this quarter a substantial amount, and some of other costs are also coming in lower than we originally had --

To the extent of payroll I think we'll see a bigger impact in the third quarter, because it will be a full quarter of labor-savings.

Okay. That is it for me. Thank you.

At this time there are no further questions in the queue. I would now like to turn the call back over to Mr. Cope for closing remarks.

In fact, you get to turn it over to me. Just one second. I want to thank you very much Dan, and for all of your questions. We will focus on continuing to execute on our long-term strategy in 2009, in order to generate shareholder value. Thank you, once again, for your interest in Lakes, and we will speak with you again on our next earnings call. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.