Golden Entertainment Inc (GDEN) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2010 Lakes Entertainment earnings conference call. My name is Josh, and I will be your coordinator for today. At this time all participants are in a listen only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions) I would now like to turn the presentation to our host for today's call, Tim Cope. You may proceed.

Thank you, Josh. Good afternoon and welcome to Lakes Entertainment second quarter 2010 earnings conference call. On the call with me is Lyle Berman, lake's 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 laws, including statements concerning business strategies and their intended results and similar statements concerning anticipated future events and expectations that are not historical facts. These statements do not guarantee future performance and are subject to risks and uncertainties, including those risks described in our filings with the Securities and Exchange Commission.

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. Now I will turn the call over to Lyle Berman.

Thank you, Tim, and welcome everyone to Lakes' second quarter 2010 earnings call. A number of positive events took place for Lakes during our second quarter resulting in an increase of available cash of nearly $20 million. In addition, we recently announced the completed termination agreement with Penn National Gaming, Inc, related to the planned Penn casino projects in Ohio which culminated in the third quarter $25 million cash payment to Lakes. These positive events related to our cash position and are offset somewhat by a continuing harsh economic environment in the northern California market surrounding the Red Hawk Casino and the lower than expected results from Four Winds Casino, primarily due to an unusually low table games hold percentage for the period.

Continuing the discussion regarding the Four Winds Casino results, the second quarter continued to see the negative comparison in year-over-year operating results due to the new casino competition in the market this year, which did not exist at this time last year. In addition, one particular guest was unusually lucky at our table games during the quarter. The positive news at Four Winds is that our customer counts increased not only from the first quarter, but also compared to the same quarter last year, and we continue to see improved results in July.

In northern California, chronic macro and micro economic realities continue to adversely impact Red Hawk Casino's ability to achieve consistently strong financial results. Although strong guest counts continue, unemployment rates and a lagging housing industry result in less customer spend than anticipated. The poker room that was open near the end of 2009 continues to post results that exceed our expectations. The value pricing program we implemented in our restaurants, along with greater emphasis on guest services, continues to generate an increase in the local following. While every effort is being made to improve operating results, we do not anticipate a significant improvement in the northern California economy in the near future. I will next discuss our project in Tunica, Mississippi.

As previously announced, we entered into a development services and management agreement with the Abston-McKay Ventures where in Lakes will perform a certain development and management services for a potential casino located at the former Isle of Capri site in Tunica, Mississippi. The owners of the project are currently working on the financing plans for the casino development. Next I would like to discuss Ohio.

As we previously announced, we entered into agreements with both Rock Ohio Ventures and with Penn Ventures, a subsidiary of Penn National Gaming, giving us the right to purchase up to 10% of the equity in the entities owning casino development rights in Columbus, Cincinnati, Cleveland, and Toledo, Ohio, at a purchase price equal to 10% of the cost of the equity to fund the development of those casinos. On July 13, Lakes entered into a termination agreement with Penn Ventures whereby in exchange for a $25 million payment from Penn to Lakes, Lakes agreed to relinquish all right, title and interest it had in the casino projects in Columbus and Toledo which are proposed to be developed by Penn. Lakes had previously funded approximately $1.9 million under the funding and option agreement with Penn. The termination agreement does not affect Lakes' investment with Rock Ohio Ventures and its proposed casino developments in Cincinnati and Cleveland. Rock has made progress with respect to the site acquisition, but the details of the proposed casinos, including size and scope and the construction time line, are still under consideration.

With respect to the Jamul Indian Village Casino project near San Diego the traffic, environmental, engineering and other required studies are now underway and planning is still ongoing to design the proposed Jamul Casino. Current plans are to provide for approximately 1,000 class 2 gaming devices along 25 class 2 table games. However, the Jamul Indian Village does have a compact with the state allowing for class 3 gaming should all regulatory and legal requirements be met. Work with CalTrans is slowly progressing to ultimately determine the best possible site access and design. 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. Net earnings for the second quarter of 2010 were $3.9 million, compared to $2.8 million in the second quarter of 2009. The loss from operations was $3.5 million for the second quarter of 2010, compared to earnings from operations of $1.5 million for the second quarter of 2009. Basic and diluted earnings were $0.15 per share for the second quarter of 2010, compared to $0.11 per share for the second quarter of 2009.

Lakes Entertainment recorded second quarter 2010 revenue of $4.8 million, compared to prior year second quarter revenues of $7.1 million. This decrease was primarily related to a reduction in management fees earned from the Four Winds Casino Resort due in part to an unusually low table games hold during the second quarter of 2010, and also due to new competition that entered the Four Winds Casino Resort market during the third quarter of 2009. Also contributing to the decline in Lakes' second quarter 2010 revenue were decrease in management fees earned related to the Cimarron Casino project, due to termination of that agreement in 2010, as well as a decrease in management fees from the Red Hawk Casino.

For the second quarter of 2010 Lakes selling, general, and administrative expenses were $3.3 million, compared to $3.8 million in the second quarter of 2009. Selling, general, and administrative expenses consist primarily of payroll and related expenses, travel expenses and professional fees, all of which decreased compared to the prior year second quarter.

Net unrealized gains or losses on notes receivable related 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. The second quarter of 2010 net unrealized losses on notes receivable were $1.5 million, compared to net unrealized gains of $2.5 million in the prior year period. The net unrealized losses in the second quarter of 2010 consisted of losses related to the Jamul Indian Village, due primarily to ongoing issues in the credit markets. The net unrealized gains in the second quarter of 2009 were related to the project with the Jamul Tribe and the Iowa Tribe of Oklahoma, due primarily to improvements in the credit markets during that quarter. Lakes recognized impairment losses of $0.7 million and $1.7 million during the second quarter of 2010 and the second quarter of 2009 respectively, related primarily to continued uncertainty surrounding the completion of the Jamul project.

Amortization of intangible assets related to the operating casinos was $2.8 million for the second quarter of 2010, compared to $2.5 million for the second quarter of 2009. Other income or expense net for the second quarter of 2010 was $1.8 million, compared to $1.3 million for the second quarter of 2009.

The income tax benefit for the second quarter of 2010 was $5.6 million, compared to a provision of less than $0.1 million for the second quarter of 2009. Lakes income tax benefit in the current year period consists of current income tax benefit of $5.7 million and a current provision of approximately $0.1 million of interest and a Louisiana tax audit matter. As a result of changes in estimated annual income, including the recent $25 million payment from Penn, which will be recognized as income in the third quarter of 2010, the majority of Lakes' estimated annual income is now expected to be recognized during the second half of 2010. Therefore, the current period tax benefit primarily represents the adjustment needed to reflect the appropriate year to date provision for the six months ended July 4, 2010.

In summary, we continue to focus on operating our managed properties as efficiently as possible. We have significantly improved our available cash position as a result of the $7.2 million we received from UBS when it purchased our auction-rate securities, in addition to the $8.3 million refund we received on a deposit related to the previously contemplated Kansas project. And additionally, as Lyle mentioned, during the third quarter we received a $25 million payment from Penn Ventures. We continue to have an investment in Rock Ohio Ventures and its proposed casino developments in Cincinnati and Cleveland. We look forward to making additional investments in these projects and continue to evaluate other projects which we believe will add value to our Company in the future. Now I will turn the call over to Josh for questions.

(Operator Instructions) And our first question comes from the line of Mark Smith of Feltl & Company. Mark, you may proceed.

Great. Thank you. Hi, guys. Can you quantify at all the impact if Four Winds from competition compared to this one lucky person at your tables?

Well, an interesting way to do it, it's pretty hard to quantify the competitive impact, but, as Lyle mentioned, our customer accounts have actually increased. So, from a competitive standpoint I would say we're holding our own and doing better. The majority of the decrease in operational revenue and our management fees was reflected just to the one-time occurrence from the particular lucky customer.

Has there been much in value promotions at Four Winds?

Well, we consistently do value promotions. It's called, the mail well, the major value promotion is what we call the mailbox when we put offers of basically slot coin redemption which people can come and redeem, and we use that as a function of their average daily theoretical loss. In other words, if a person loses on average $1,000 a day when they come in, we may send them a 25% coupon, meaning a $250 incentive to bring them in.

Okay. And then can you quantify at all Cimarron on this quarter? What kind of impact year-over-year?

As you know, we never release property specific information. It was certainly not a material change for the quarter, and it won't be going forward.

Okay. All right. Next, any update on current trends, kind of what you guys have seen in July?

Well, in July in particular, we've seen at Four Winds, customer counts and revenue were both very good. I think they equaled or exceeded our expectations. In Red Hawk, again, our customer counts were every bit as anticipated. The win was probably slightly below what we anticipated.

Okay. And last question, just anything that's new in Ohio as far as your deal with Rock? And then kind of secondly to that, outside of that, is there anything that we should be looking at as a use of cash? You guys have got a pretty good kitty of cash out there right now. Anything else that could -- you could use that cash for in the near term?

Well, obviously, at all times we're looking at that use of our cash and the best and highest return. Currently, certainly the best and highest return that we have available to us right now is Ohio with Rock Ventures. Independent of that, we're looking at a variety of things, but nothing specifically that we can say. When it comes to Rock Ventures, we very much would like to be able to tell everyone, all of our investors and potential investors kind of quantify the impact on that, and yet we don't have quite the information we need from Rock. It's our understanding, and you understand we are passive investors. We have the right to invest. We have no operational responsibility of any kind, but yet we think owning up to 10% of both Cleveland and Cincinnati is a wonderful opportunity.

It's our understanding that Rock Ventures is currently negotiating with several -- I'll call them large, sophisticated management companies that would come in and probably develop and manage both properties on behalf of Rock. Once they've made that decision we would expect to receive from that management company projections on both size and scope of the projects, together with quantifying our potential investment need and the timing of that investment. We don't know at this point how much debt they're planning to put on, although they've told us they want to put as much debt as possible. That being said, it all that to do with the economics at the time they go to market, so I'm sure they don't even know. But, quite frankly, once that information is quantified to us, we would very much like to distribute that information to you and others, to everyone, such that you could quantify the impact, which I think is quite significant to our Company.

In the near term, in looking at the opportunity there, is it out of line for us to assume if you were to monetize that opportunity, kind of similar to what you did with Penn, that we would look for anything drastically different from what you were able to get in cash out of the Penn agreement?

I think for a variety of reasons the Rock venture is probably worth more, but you will have to -- you understand that one of the reasons we did this is, although we had the right to invest 10%, we really didn't have have the funds to do it. And therefore, we weren't going to be in the mode of doing some type of equity raise, not on our Company, but perhaps in a subsidiary, where the equity would go to fund these things. So, we really wouldn't be participating in the full benefit of it. Now with the cash on our balance sheet, we have the ability to fund ourselves the full amount, we think, because we don't know the exact number of the Rock Ventures. So, we think the -- again, the financial returns on those two properties will be very significant.

Okay. Great. That's helpful. Thank you.

(Operator Instructions) And our next question comes from the line of David Hargreaves of Sterne Agee. David, you may proceed.

I'm hoping you can help us out. We usually have the property specific results for Four Winds and Shingle by now, and to look at the fees, they were off pretty significantly. I'm trying to get a sense for how we could maybe glean some sense as to how Pokagon did and how Shingle Springs did, any sort of elaboration you could give us would help out a lot.

With regards to the note holders at each property that get that financial information, those will be sent out here shortly. I think their independent auditors are just finalizing those audits now. So, those note holders will receive that. We have calls -- our regular quarterly calls are anticipated next week, I believe. So, at that point in time, you certainly -- those note holders will get that additional information.

As a general statement, I think as Lyle mentioned, second quarter, Four Winds was a good quarter in terms of certainly guest counts and general business results with the exception of our one particular table game player, and July has certainly exceeded expectations. In terms of Red Hawk, they had a quarter, I would say, going along fairly flat to prior year, with the exception of June, June for some reason was unusually lower in volume than we had expected. It's come back again a little bit in July and August. So far it's actually improved.

And can you say anything about the Thunder Valley opening and how the impact has been there?

I think certainly we felt some impact first part, maybe throughout July. I think that expansion opened about the 4th of July weekend, and not only had the hotel and additional casino, they had outdoor entertainment events, which I believe they have since canceled. So, I'm sure everybody in our market, we share a lot of similar customers, went to Thunder Valley to see the new property and experience it, and I think we felt that probably in July, and I think maybe now we're seeing the customers return back to Red Hawk.

Have your soldiers on the ground there sensed anything more aggressive in promotional from that property? Are they advertising heavily? Are they giving away a lot right now?

One of the things we do there, on a regular basis, as you say, the soldiers on the ground, they go to all our competitors, not just Thunder Valley. They go to Cache Creek and Jackson Rancheria and Lake Tahoe and Reno on a regular basis. So far we have not determined really any exceptional marketing efforts in any of those properties at this point.

Can you talk about any sort of new policies or angles the new GM, Tracy Mimno, is taking with the property? Anything you could elaborate on, on changes that have been made?

I think Tracy brings a lot of hands-on experience, both in the marketing side, because she had a strong marketing background. So, she's very focused on using the mailbox effectively, looking at customer demographics, the right areas to promote to, and coupled with her financial background she's spending dollars wisely. So, I think our margins are slightly improving, even though the revenues are flat or down a little bit. So, I think we are starting to see some of that benefit. In addition to that, Tracy has implemented a strong guest service program, a formalized program in house where, as everybody knows, the one thing really helps you stand out against the customers -- or against competition is guest service. Everybody has a slot machine, but you like to get them back through good customer service. So, she's taken a very strong, aggressive stance on implementing a good guest service program as well.

And then just order of magnitude, when you say that June was soft, in a debilitating sort of way, or just a little softer than expected?

I think just softer than expected. Like I say, we're going along throughout the first five months of the year pretty much how we expected. June just happened to fall off a little more than expected.

And then lastly, you mentioned the credit markets. Is financing your only obstacle at this point to moving forward with Jamul?

No. I wish it was. We would solve that. Our obstacles in Jamul is that CalTrans has to bless -- the Rancheria has a seven-acre site, and the egress and exit on that site is on a two-lane road. We have to do a large number of studies in order to give CalTrans the information that they need in order to bless and give a permit to allow traffic, commercial traffic to go in and out of the site. And they are cooperating with us, although they're somewhat slow, and we're cooperating with them, and then once they can give us the permit, the only thing that would stop us from construction, of course, other than money, would be if there would be a lawsuit. But, no, the credit markets have nothing to do at this point with our going forward.

Well, it's a good site. Good luck with that.

Thank you.

And our next question comes from the line of [Roy Berry]. Roy, you may proceed.

Got one question for Tim Cope and another question for Mr Berman, but I'll ask Tim first. How's the Louisiana lawsuit coming?

Louisiana lawsuit is to the position now where Lakes is going to file a motion for summary judgment, probably this next week. We expect that motion to be heard by the judge sometime in the Fall, probably in October time frame. Depending on how that motion goes, we either could win in a very short period of time this year, or if it has to go to trial that would be the first part of next year.

Lyle, you own land in Mississippi, and I think it's -- sounds like good land, and of course you got a monopoly on the land in -- south of Sacramento. Sounds like you're in a good position to start talking to some hotel or motel company to go joint venture of some kind. Am I thinking badly, or is that a possibility?

Well, it's a two-part question. The first part was, we own land in Vicksburg, Mississippi. The land has been deemed a legal gaming site. The project is on hold on there for a couple of reasons. One is the credit markets. Two would be our ability to fund our share of equity, and lastly, I guess, we're just not sure with five casinos there, that now is the right time to open a casino. So, when you say a hotel development, I don't think a hotel development there without a casino makes any sense. Maybe you meant that combined?

That's what I meant.

Yes. At this point the project is just on hold. On south Sacramento, are you referring to the Red Hawk Casino?

Yes. You've got a monopoly on the land around the casino.

Well, the tribe owns the land around the casino.

But they do have the monopoly.

Yes, they have the monopoly and we're working together with the tribe to see if we can get an outside hotel company to come in and develop a hotel for us. We've been working on that for a while, and it's still in the working stages.

Okay, what about the land in Oklahoma? Has it got a gambling potential?

At this point, the only land -- I don't think we own any -- we sold that piece.

No, we have about 100 acres in Oklahoma, which is contiguous to the now trust land that the tribe could develop a casino on in the future.

Right. And if they develop the casino, I think the highest and best use of our land would be to sell it back to them at a profit.

Okay, that answers my question. There could be some motel situations in Lakes' future?

Yes.

Okay. Thank you.

And our next question comes from the line of [Rich St. Jean] of White Gaming. Rich, you may proceed.

Yes. How much longer do you have on the Four Winds contract?

Approximately two years.

Okay. Has there been any violation on the Red Hawk loan compliance ratio?

No, there has not.

And my final question, how is the Red Hawk lawsuit going with Sharper Image going?

Well, that's in the legal stages. I can't really comment on it other than we believe the tribe is innocent and they do too.

Thank you very much.

And our next question comes from the line of [Frank Janecky]. Frank, you may proceed.

Yes, thank you. Hello, gentlemen. Could you share with us a little bit about the type of table games that you guys are developing or services, whatever it is? I see references to that, but I don't recall any news on specifics. Could you share some of that with us?

Yes, we have two particular games -- well, we have more than two, but there's two that were focused on marketing right now. Number one is World Poker Tour All In Hold 'em. It's a table game like Blackjack that is based on Hold 'em. And we've had some moderate success with it. It seems like it's very sketchy. For example, it's been at Bellagio resort for the last, I think, three years. It's been at Wynn Resort in Las Vegas for two years doing quite well. Other companies -- some companies have not done well with it, and have removed it. And like I said, it's a little sketchy.

On the other one that we think has much more potential is a side bet on a crap table called bonus craps, and all it is, it's just a side bet on how many numbers come up. It's a very exciting side bet. It's starting to get traction. Again, it's in Las Vegas in a few casinos. I believe it is in Winn Resorts right now. It's been in Sam's Town for about four years. It's in New York, New York. So, we're starting to get some real traction. It's in both of our casinos in Michigan and Sacramento. It seems it's in the IP in the Gulf Coast. Wherever we put it, it does incredibly well, and it probably adds in the range of about $100,000 a month -- I'm sorry, a year in incremental gaming win.

That being said, you would think people -- casinos would flock -- would call us wanting it, and yet there seems to be -- just a general thing that most casinos don't want to try new games. And this is an interesting one because it takes no more real estate, it's on a crap table. It takes no more labor. And our selling pitch is usually try it for free for six months and you'll like it. Like I said, it's starting to get traction. I think by the end of next year it should be doing quite well for us and be a profit center finally.

That sounds very interesting. My next and last question is just total curiosity. This hit that this gentleman or party achieved at Four Winds in early -- early in the second quarter, what kind of games was he playing, anyway?

He was playing Blackjack. He had an incredible streak of luck. Obviously, when somebody has that much luck, we look at it from the every angle. We have experts to review the tapes that we had to say is there anything at all funny about what you see him doing? When he does something unusual, does that result in a win? And quite frankly, he got a total clean bill of health from virtually everybody who looked at it. It appears that it was just an extraordinary lucky streak. I believe we've won a little bit back from him since his high point, and he's still a very good customer, and we value him.

Well, that's an interesting story.

Yes, it is.

Okay, thank you.

And at this time we are showing no further audio questions available. Lyle Berman, you may proceed.

I want to thank everybody for tuning in and listening to us. I think today we gave a little bit -- some good news, along with some moderate, not as good a casino results as hoped for, but we certainly think the sale to Penn and receiving $25 million strengthens our balance sheet, and will give us some substantial options to do in the future. Thank you very much. Bye now.

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