Golden Entertainment Inc (GDEN) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2009 Lakes Entertainment, Inc. earnings conference call. My name is Ken and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session toward the end of today's 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 conference, Mr. Tim Cope, President of Lakes Entertainment, Inc. Please proceed, sir.

Thank you, Ken. Good afternoon and welcome to Lakes Entertainment's third 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 and Litigation Reform Act of 1995. These statements do not guarantee future performance and therefore undue reliance should not be placed on 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 will conduct a question-and-answer session. Lyle?

Thank you, Tim, and welcome everyone to Lakes' third quarter 2009 earnings call. I would like to start off by discussing the status of our Ohio investment. As we recently announced, we have entered into agreements with Rock Ohio Ventures and Penn Ventures, a subsidiary of Penn National Gaming, to fund up to 10% of the cost of the referendum in November 2009 to amend the Ohio Constitution to authorize casino gaming in Columbus, Cincinnati, Cleveland and Toledo, Ohio. Pursuant to those arrangements, we have the right to purchase up to 10% of the equity in the entities owning those casinos at a purchase price equal to 10% of the cost of the equity to fund the development of those casinos.

As announced yesterday, the referendum passed on Tuesday, November 3, paving the way for the development of the casinos. Pursuant to our agreement we now have the right to purchase up to 10% of the equity ownership in the casinos in exchange for funding 10% of the equity capital required to develop the casinos. If we choose to invest additional funds in these casinos, we may need to obtain additional financing. We are not required to continue to fund up to that amount, rather we can discontinue funding at any time for any reason and still keep our equity interest that we purchased up to the time we discontinued funding.

We are a passive investor in these ventures and will have no management or operational responsibility. The details of the proposed casinos including size and scope and the construction timeline are still under consideration. We look forward to partnering with Rock and Penn in this venture.

I would next like to discuss the status of our Kansas project. On August 24, 2009, we announced that we joined the Chisholm Creek Casino Resort application currently pending before the Kansas Lottery to develop and operate a casino project in the south central zone of the state of Kansas. Phase One of the proposed Chisholm Creek Casino Resort is planned to feature 1300 to 1500 slot machines, 30 table games and other amenities, which may include a number of restaurants and a hotel to be developed by a third party hotel developer.

Additional phases of the development could include expanded gaming positions, an entertainment center and other market-driven amenities. The Sumner County Commissioners endorsed the proposal and the Kansas Lottery Commission approved the lottery gaming facility management contract for the proposed casino. The management contract was subsequently forwarded by the Kansas Lottery Commission to the Lottery Gaming Review Board for its ultimate decision of awarding the management contract, the decision of which is expected to be made by the first quarter of 2010.

Lakes will own approximately 17% of the Chisholm Creek Casino Resort and will be the sole manager of the operation of the casino. For its management services, Lakes will receive approximately 6.8% of the casino's earnings before interest, taxes, depreciation, amortization and management fees. Lakes plans to obtain additional sources of financing to fully fund its portion of the development cost related to the project, either through a secondary public offering, debt or a combination thereof.

The next project I would like to discuss is the Red Hawk Casino in Shingle Springs, California, which is the casino project with the Shingle Springs Band of Miwok Indians. The casino features approximately 2100 slot machines and gaming devices, 75 gaming tables, ten different food and beverage outlets, retail space, a child care facility and arcade, and approximately 3200 covered parking spaces. It also has a dedicated interchange from US 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.

Third quarter results continued to show solid guest counts, but customer spend continues to be less than anticipated and results from the slot machines continue to run below our expectations. The current economic challenges continue to impact 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. We continue to look for new marketing programs designed to drive top-line results in a cost efficient manner, while at the same time evaluating all aspects of the operations to improve bottom-line profitability.

The greater Northern California area has become a highly competitive gaming market in an unfortunate economic environment. However, with approximately 4 million people living within a 50-mile radius of a casino, we continue to believe that Red Hawk Casino is well positioned to benefit from our large number of customers as the economy improves.

Near New Buffalo, Michigan, the Four Winds Casino continues to produce operating results which were in line with expectations. The tough economy, coupled with additional competition from the Horseshoe Casino Barge, Blue Chip expansion and the opening of the FireKeepers Casino certainly has had a negative impact on Four Winds' operations for the quarter, but we are pleased to report not to the level anticipated. We continue to evaluate all areas of Four Winds' operations to produce the best possible results.

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. The Iowa Tribe continues to await Bureau of Indian Affairs approval of the proposed lease agreement for the remaining 15 acres of the proposed Ioway Casino Resort development, which will be located on US Route 66 near Chandler, Oklahoma.

We are currently working with the newly-elected Tribal Officials on plans to develop the casino project on the approved 64-acre site. The casino is currently planned to feature approximately 1200 Class III slot machines, 25 table games, 3 restaurants and a 150-room hotel.

The facility is master planned for future development that may include additional gaming space, hotel rooms, a golf course and other market-driven amenities. 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 near San Diego. Traffic, environmental, engineering and other required studies are now 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'll turn the call back over to Tim to provide an overview of recent business issues and financial results. Tim?

Thank you, Lyle. Before we get to the third quarter results for Lakes Entertainment, I would like to remind everyone that after November 21, 2008, operations of WPTE have not been included in Lakes' results of operations; and historical results up to that date are included only as discontinued operations.

Lakes Entertainment reported earnings from operations of $0.7 million for the third quarter of 2009 compared to a loss of $0.5 million for the third quarter of 2008. Net earnings applicable to Lakes Entertainment for the third quarter of 2009 were $2.3 million compared to a loss of $5.7 million in the third quarter of 2008. Basic and diluted earnings were $0.09 per share for the third quarter of 2009 compared to losses of $0.23 per share for the third quarter of 2008.

Earnings from operations were $2.2 million for the nine months ended September 27, 2009, compared to a loss of $7.5 million for the nine months ended September 28, 2008. Net earning applicable to Lakes Entertainment for the nine months ended September 27, 2009 were $6.1 million compared to a loss of $17.8 million for the nine months ended September 28, 2008. Basic and diluted earnings were $0.23 per share for the nine months ended September 27, 2009, compared to losses of $0.72 per share for the nine months ended September 28, 2008.

Lakes Entertainment reported third quarter 2009 revenue of $6.6 million compared to prior year third quarter revenues of $8.4 million. This decrease was primarily due to a one-time addition to revenue of approximately $1.8 million in the third quarter of 2008, which was the result of the approved Compact Amendment between the Pokagon Band and the state of Michigan that reduced the Four Winds Casino Resort gaming tax. The decrease was also affected by new competition that entered the Four Winds Casino market during the third quarter of 2009, offset by fees from Red Hawk Casino, which opened in December of 2008.

For the third quarter of 2009, Lakes' Selling, General and Administrative Expenses were $3.5 million, compared to $4.2 million in the third quarter of 2008. Selling, General and Administrative expenses consist primarily of payroll and related expenses, travel expenses and professional fees. Included in Selling, General and Administrative Expenses were costs associated with the application for a gaming site in the state of Kansas of approximately $0.2 million during the three months ended September 27, 2009.

Development costs associated with the 2008 Ohio Casino Resort initiative were $4.7 million during the third quarter of 2008. Net unrealized gains on notes receivable relate to the Company's notes receivable from Indian tribes for casino projects that are not yet opened, which are adjusted to estimated fair value based upon the current status of the related tribal casino projects and evolving market conditions.

In the third quarter of 2009, net unrealized gains on notes receivable were $0.9 million compared to net unrealized gains of $1.8 million in the prior year period. The net unrealized gains in the third quarter of 2009 consisted of $0.7 million related to the project with the Jamul Tribe and $0.2 million related to the project with the Iowa Tribe of Oklahoma, all due primarily to improvements in the credit markets.

Lakes also recognized impairment losses of $0.6 million during the third 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 project due to the recognition of a gain associated with the continued progress toward a fourth quarter 2008 opening of the Red Hawk Casino, partially offset by unrealized losses associated with a decrease in probability of opening the casino project for the Jamul Tribe.

Amortization of intangible assets related to Indian casino projects for the third quarter of 2009 was $2.6 million compared to $1.7 million for the third quarter of 2008. The increase of $0.9 million related to the amortization of intangible assets associated with the Red Hawk Casino, which began when it opened in December 2008. Amortization in the third quarter of 2008 related primarily to the intangible assets associated with the Four Winds Casino Resort.

Other income net for the third quarter of 2009 was $1.1 million compared to expense net of $0.2 million for the third quarter of 2008. The increase was due primarily to interest earned on notes receivable from the Shingle Springs Tribal Gaming Authority.

Lakes Entertainment reported revenue for the nine month period ended September 27, 2009, of $21 million compared to $18.9 million in the prior year period. This increase was primarily due to fees from the Red Hawk Casino which opened in December 2008, partially offset by a decrease at Four Winds Casino Resort due to new competition that entered the market during the third quarter.

For the nine months ended September 27, 2009, Lakes' Selling, General and Administrative expenses were $11.3 million compared to $11.7 million in the prior year period. General, Selling and Administrative expenses consisted primarily of payroll-related expenses, travel expenses, professional fees. Included in the SG&A expenses were costs associated with the application for a gaming site in the state of Kansas of approximately $0.5 million during the nine months ended September 27, 2009.

Development costs associated with the 2008 Ohio Casino Resort Initiative were $10.4 million during the first nine months of 2008. Net unrealized gains on notes receivable relate to the Company's notes receivable from Indian tribes for casino projects that are not yet opened, which are adjusted to estimate fair value based upon the current status of the related tribal casino projects and evolving market conditions.

For the nine months ended September 27, 2009, net unrealized gains on notes receivable were $3.2 million compared to net unrealized gains of $1 million in the prior year period. The net unrealized gains in 2009 consisted of $2.8 million related to the project with the Jamul Indian Village and $0.4 million related to the project with the Iowa Tribe of Oklahoma due primarily to improvements in the credit markets.

Lakes also recognized an impairment on long term assets in the amount of $2.9 million during the nine months ended September 27, 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 Red Hawk Casino project, due to the recognition of a gain associated with the continued progress toward a fourth quarter 2008 opening of the Red Hawk Casino, partially offset by unrealized losses associated with a decrease in probability of opening the casino project for the Jamul Tribe.

Amortization of intangible assets related to Indian casino projects for the nine months ended September 27, 2009, was $7.6 million compared to $5 million for the nine months ended September 28, 2008. The increase related to the amortization of intangible assets associated with the Red Hawk Casino, which began when it opened in December 2008. Amortization in the 2008 period related primarily to intangible assets associated with the Four Winds Casino Resort.

Other income net for the nine months ended September 27, 2009, was $3.9 million compared to less than $0.1 million for the nine months ended September 28, 2008. The increase was due primarily to interest earned on notes receivable from the Shingle Springs Tribal Gaming Authority.

With regards to our liquidity position, as of September 27, 2009, we had $7 million in cash and equivalents and approximately $8 million in current investments and securities, net of advances on our existing UBS line of credit. In addition, we have $6 million available under a separate undrawn bank line of credit.

We currently believe that our cash and equivalents balance and our cash flows from operations may not be sufficient to meet our recorded obligations and operating expenses during the next 12 months, including the ongoing litigation matter with the Louisiana Department of Revenue. If Lakes is not successful in this matter and is required to pay up to an $8.6 million assessment plus interest during the next 12 months, it may be necessary for Lakes to obtain additional financing.

Also as Lyle mentioned, Lakes plans to raise additional equity or debt capital or a combination thereof, as needed to satisfy our Kansas investment obligation; and if we choose to invest additional funds in the Ohio casinos, we may need to obtain additional financing as well. Lakes currently expects to be able to obtain funds in order to fulfill its potential future liquidity needs. However, we cannot assure you that such financing will be available at all or at acceptable terms or that such financing will not be dilutive to our shareholders.

In summary, we were pleased with the performance of the Four Winds Casino Resort, as it saw new competition enter its market during the third quarter and results remain strong. We continue to focus on improving operating results at the Red Hawk Casino and to help the Cimarron Casino achieve the best possible operating results. Making progress on the casino opportunities of both the Iowa Tribe of Oklahoma and the Jamul Indian Village also remains a priority.

We continue to work through the application process for a gaming site in the state of Kansas. We have invested in each of the four casino projects in Ohio that were approved in this week's election. We believe this investment will add value to our Company, which will continue to benefit our shareholders over many years.

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

(Operator Instructions) Our first question comes from the line of Mark Smith with Feitl and Company. Please proceed.

Hi guys. First off, Tim can you talk about the SG&A rate and whether the current run-rate is a good thing for us to continue to look forward to, about $3.5 million?

I think that $3.5 million, $3 million to $3.5 million is probably a good run-rate at this point, going forward.

Okay. Second, Lyle, can you talk a little bit about traffic trends at Red Hawk and also at Four Winds during the quarter? As you saw increased competition at Four Winds and also maybe as you worked on the marketing and other things at Red Hawk -- any changes that you saw?

Really not too many changes in Red Hawk based on the overall seasonality. It seems to be the traffic counts are pretty flat. With Four Winds, we did see a little bit of a decrease in customer counts when the FireKeepers opened in August. That's the one in northeast of us.

Yes. Have you seen any change -- do you think there will be more of a trial period up there and then people may settle back in?

Well, we think there is certainly -- everybody is going to give a trial in that market. The problem is it's an hour, twenty minutes from us or an hour, ten to twenty minutes from us, and quite frankly, for the day trip customer that wants to go in and play slot machines or Blackjack for an hour or two, it's just a competitive advantage in distance that you can't overcome.

When it comes to the customer who wants to stay overnight, for example, in our hotel, we actually think we have an advantage. They don't have a hotel and we have not seen any decrease in that. And that's of course a better business.

Okay. Occupancy rates, rates kind of see the same thing at Four Winds?

Yes. Occupancy in the high 90%s.

Okay. And then lastly, Tim, the expenses in Ohio here during Q3 were, I believe you said $4.7 million. Can you talk about spend since the end of Q3 for Ohio?

The $4.7 million you're referring to was 2008.

That's total 2008.

That's an '08. Yes, that was an initiative a year ago that we lost last year in Ohio.

Okay. Oh, it was 2008? Okay.

Yes. That was 2008, yes. This year in the third quarter we had spent approximately $250,000. Going forward we have announced, I think, we have about a total of about $4.3 million that we have already incurred just recently here in the last few days in the fourth quarter.

Right at the end just in the run up to the election?

That's correct, that's right.

Okay. Perfect. That's it for me. Thanks.

(Operator Instructions) Our next question come from the line of David Hargreaves with Sterne Agee. Please proceed.

Could you talk about how -- what you're doing with the management in Shingle Springs right now? Are you looking for a new GM currently?

I can speak to that a little bit. As you know, we recently -- the GM resigned and there is a replacement and search process taking place right now. The assistant GM there has taken the interim General Manager's role and with the assistance of Lakes Managers that are spending a considerable amount of time there, helping through the transition process here, things are going, I think, fairly smoothly.

We are searching. We started a search for a new GM and we will evaluate any new candidates we get along with the acting interim General Manager to come up with a full-time replacement here in the near future.

Are there any changes you're making to the way you're marketing the property or the way you're positioning it? How do you feel your level of awareness and penetration is with the local Sacramento area?

This is Lyle. The awareness in Sacramento obviously is higher than it is in the Bay Area. We did a market survey in the Bay Area and quite frankly, I guess it was good news that it was very low because it gave us a lot of opportunity. But, clearly our marketing strategies continually get redefined as we see what works and what doesn't. When we say what works, what works best to get the best bang for our dollar, the highest return on investment.

Most of our specific marketing is, of course, is mail marketing in the mailbox to people who are on our database and those are proving very highly successful. We send them incentives to come to the casino; we are able to track their play exactly. We know exactly how many people came for the promotion and how much money they spent and they seem to be doing very well.

But we clearly need a greater exposure in both Sacramento and the Bay Area, but more so in the Bay Area than Sacramento and we continue to work on getting that.

Has your competition continued to be blasting the local area with promotions? Are they showing any sign of fatigue?

No, well, Thunder Valley is very promotionally-oriented, run by Stations Casinos. They are our major competitor. The Cash Creek Casino, that does more of their marketing in the Bay Area. But no, Thunder Valley is a very competitive -- we compete very much with each other.

Any updates on the status of your FF&E financing at Red Hawk?

With regard to the FF&E financing, we did enter to an agreement with the lending group where the covenant tests have been modified going forward, so we have reached an agreement with the lending group and we are proceeding accordingly.

Excellent and with respect to Jamul, I'm wondering if there is any new information or if it's just a lack of progress that is causing you to sound a little more pessimistic about the probability of that being developed?

I don't think it's a lack of progress. When we met with the Caltrans and the Tribe, the three of us all met and what we agreed to at that time and Caltrans, California Transportation, convinced us -- and we had worked with them before on Sacramento. And they said, look guys, we are not here to obstruct anything, we just have to comply with all of our rules and regulations, so you are going to have to do all of these studies and submit them to us and then we will cooperate with you and we will see how this can be achieved.

I think they have been a little bit slower in reacting than we wanted them to, but in fact, we're still doing pretty much what we said we were going to do and we expect them to do the same. Tim, do you have anything more to add specifically?

No, I think that's exactly where we are at. We have had some productive meetings with them here in just the last several weeks and I think we have a game plan of what everybody is looking for moving forward.

So, it's more a question of timing then you think than --?

Absolutely.

Excellent. Great. See you guys out in Vegas.

Okay, yes; we'll see you for dinner.

There are no further questions. I would like to turn the call over to Lyle Berman for closing remarks.

Tim and I both want to thank you very much for being interested in our Company and dialing in and we'll look forward to talking to you in another three months. Thank you.

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