Golden Entertainment Inc (GDEN) 2010 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the third quarter 2010 Lakes Entertainment earnings conference call. My name is Carmen and I'll be your coordinator for today. At this time all participants are in a listen-only mode. (Operator Instructions). Later we will conduct a question-and-answer session. I would now like to turn the call over to your host for today, Mr. Tim Cope. Please proceed.

Thank you, Carmen. Good afternoon and welcome to Lakes Entertainments' third quarter 2010 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 under 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 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 third 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' third quarter 2010 earnings call. First, 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 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 equity to fund the development of those casinos.

During the third quarter, 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. We consider this a positive move for our Company, as it now considerably strengthens our balance sheet.

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 acquisitions, and has recently announced Rock Gaming and Harris, agreed in principle to form a joint venture to develop and operate downtown casinso in Cleveland and Cincinnati. According to public information, on the Rock Gaming officials are optimistic they will be able to break ground for new casinos in Cleveland and Cincinnati next year.

In Michigan, the third quarter result of Four Winds casino showed significant improvement from last quarter, and from third quarter of 2009. We continue to see positive results in guest counts, gaming play and overall net revenue amounts. We are pleased that this property continues to perform well in this market, and exceeded our expectations this quarter. At this time, the Pokagon Band of Potawatomi Indians has elected to independently manage their second casino, Four Winds North, which will be located in Hartford Township, Michigan. However, Lakes will continue as the management company for Four Winds Casino Resort in New Buffalo, Michigan.

In northern California, we saw a slight increase in management fee income in the third quarter, related to the Red Hawk Casino. Continued emphasis on providing best gaming product on the market, along with award-winning food venues, is helping to create a loyal customer database. Programs to improve guest service have been implemented along with marketing programs to drive repeat business.

In Tunica, Mississippi, we have entered into a development services and management agreement to perform certain development and management services for a potential casino located at the former Isle of Capri site. The owners of the project are currently working on the financing plans for the casino development.

With respect to the Jamul Indian Village Casino project near San Diego, the tribe has been negotiating with Caltrans for several months to finalize appropriate development and escrow agreements so that the required traffic analysis can proceed. Efforts are continuing, and additional meetings with Caltrans are planned in the near future. The Jamul Indian Village does have a compact with the state, allowing for Class III gaming, should all regulatory and legal requirements be met.

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. Net earnings for the third quarter of 2010 were $15.1 million, compared to $2.3 million in the third quarter of 2009. Earnings from operations were $2.2 million for the third quarter of 2010, compared to $0.7 million for the third quarter of 2009. Basic and diluted earnings were $0.50 per share for the third quarter of 2010, compared to $0.09 per share for the third quarter of 2009. Third quarter of 2010 revenues were $8.2 million compared to prior year third quarter revenues of $6.6 million.

This improvement was primarily related to an increase in management fees earned from the Four Winds Casino Resort during the third quarter of 2010, compared to the prior year period. Partially offset by the elimination of management fees from the Cimarron Casino project due to the termination of that agreement in May 2010.

For the third quarter of 2010, Lakes' selling, general and administrative expenses were $2.9 million compared to $3.5 million in the third quarter of 2009. Selling, general, and administrative expenses consist primarily of payroll and related expenses, travel expenses, and professional fees. The decrease in selling, general, and administrative expenses during the third quarter of 2010, compared to the third quarter of 2009, resulted primarily from the decrease in professional fees.

Net unrealized gains on notes receivables 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 project and evolving market conditions. In the third quarter of 2010, net unrealized gains on notes receivable were $0.5 million, compared to net unrealized gains of $0.9 million in the prior year period. The net unrealized gains in the third quarter of 2010 consisted of gains related to the Jamul tribe, due primarily to improvements in the credit markets. The net unrealized gains in the third 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 $0.6 million during the third quarter of 2010, and the third quarter of 2009, related primary 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 third quarter of 2010, compared to $2.6 million for the third quarter of 2009. Other income or expense net for the third quarter of 2010, was $23.8 million compared to $1.1 million for the third quarter of 2009. The other income, net for the third quarter of 2010, includes a net gain of $23.1 million related to the Penn termination agreement mentioned by Lyle. The income tax provision for the third quarter of 2010 was $11 million compared to a benefit of $0.4 million for the third quarter of 2009.

In summary, during the third quarter, we significantly improved our available cash position, which provides us with flexibility when considering potential new business opportunities. Recently, we implemented a reduction in force of 13 corporate office positions, in an effort to streamline and reduce the Company's cost structure and align our work force with anticipated business needs. We expect to save approximately $1 million per annum as a result of this cost savings measure.

Our business focus continues to remain on operating or managed properties as efficiently as possible, and to maintain an investment in Rock Isle Ventures and its proposed casino developments in Cincinnati and Cleveland. Both Jamul and Tunica remain in our project pipeline, and we continuously evaluate other projects which we believe will add value to our company in the future. Now I'll turn the call over to the operator for questions. Operator?

(Operator Instructions). We'll wait one moment while questions compile. The first question comes from the line of Mark Smith from Feltl, please proceed.

Hi guys. Just a couple quick questions today. First, can you give us any more insight in to the improvements primarily at Four Winds whether year-over-year or sequentially? And also the impact that Red Hawk had on management fees during the quarter?

There was a slight improvement on management fees for Red Hawk. The major focus of course in both casinos is to drive repeat customers with incentives sent to our database . And Four Winds, I believe they went a little lower down into the database to send more incentives to people, we call it putting offers into the mailbox, and I think that's primarily the result of improved revenue. Of course just everyday operating the best we

And my second question, how much of this was due to, perhaps, an improving macro environment versus initiatives that you had to drive traffic.

We like to take credit for everything. It's hard to measure that. I will say this, in the months when we benchmark our results to the marketplace and specifically to blue-chip. We have consistently done better than blue-chip does on a relative, last year-this year basis. It's interesting, we get their data, of course they don't get ours.

And then lastly can you give us the sequential improvements during the quarter, how that looked, and then if you'd give us an update on current trends that you're seeing?

I think, let me stay with Four Winds for a minute, I think we saw improvements start at the end of the second quarter, but attribute to maybe a busier tourist season throughout the summer, but clearly, July, August, September all performed well, fairly consistently well. October and November are continuing to have a good trend.

Moving out to California, and I think as we possibly mentioned before, the competition out there, the most current competition, closest competition, Thunder Valley opened a new casino expansion in July, where they added a whole new hotel, new parking and entertainment complex and additional slot machines. I think we felt that, opening in July and August in the Red Hawk Casino, but September bounced back very strong. We're obviously very pleased with September results and October and November are continuing about to maintain a consistent trend with the prior year. So I guess I would say July, August were down and September was back up.

Great, thank you.

In the next question comes from the line of [Michael Tucker from Park Capital]. Please proceed.

Good quarter.

Thank you.

Quick question. Basically Harrah's is running around doing an IPO based on their opportunity to invest with Rock Ventures. Yet you have 10% in these two casinos and your stock trades at $15 million above cash. Can you give any thoughts to why that exists, and what management could potentially do to realize that value?

This is Lyle Berman. I think it exists because I don't think we call it the Street or Wall Street really understands the potential of our Ohio investment and that possibly is true because we have not put out any members because Rock and Harrah's have not. It is our understanding that once they finalize the agreement, which they I would expect to happen by the year, when they finalize that, that at that point in time, they will put out projections that we will -- not projections and revenue, but they will be projecting what we call the size and scope of the facility, such that the analysts will be able to extrapolate what that means to Lakes. I think that investors that own our stock will be pleasantly surprised because I think it's a very lucrative investment to have that.

Right. And then obviously, the decision to sell the Penn made sense because you couldn't fund all four casinos?

That is correct. When we looked at that, it was rather interesting, Penn was buying from us 100% of the 10%, but we weren't going to have 100% of the 10% because we had to raise money and give up quite a bit of it. So, we made that so now that we have the complete ability to fund the Rock Ventures, our 10% interest there.

Right. And I would assume that if the price was right, you would consider doing the same thing with the other? With these two or just because of minority interest? $75 million or $100 million, it's not out of the question that it could be worth that?

Of course not, and quite frankly, everything is for sale at the right price. But I don't think there would be even any conversation in that until after it opened and we saw the results.

Right. If you have any thoughts on the timing? That there's been a lot of talk about 2012, there is talk about a temporary casino in Cleveland which there are questions about the constitutionality of that. And can you give any thoughts on that?

It's my understanding that they have, again, we're very passive investors, but it is our understanding that they are strongly considering, and it's not called a temporary, I think it's called a Phase Two approach. And thinking of doing Phase One in the Higby building which was a very large department store on the site. And I don't think they made a final decision, but if they did that, it is my understanding it could open as early as late 2011.

Okay. And then just a question for Tim just on obviously the recognition of the $25 million from Penn. Is it a taxable event? Is there anything, writedowns or losses that are going to offset the cash taxes associated with that is that going to be a cash outflow this year?

We'll have a cash tax outflow this year. The numbers you see and the change in the payables reflect the benefits we have already taken in terms of either NOLs or some capital losses that we took advantage of. To offset the taxable effect of the Penn sale.

Okay so how much, and I'm sorry I haven't seen the Q yet, I was just wondering?

We will probably have about an $8 million or $9 million tax check to write as a result of this.

Okay. Thanks a lot.

Okay.

And the next question comes from line of [Roy Berry], private investor. Please proceed.

I have two questions for Timothy Cope. Question two depends on the answer the question one. How are you coming with the State of Louisiana IRS?

The most current information there is we have a hearing this coming Monday in Louisiana with the judge. Just to refresh your memory, there's been a motion for summary judgment filed by us to dismiss the case, which the judge will hear on Monday. The state has also filed a motion for summary judgment to dismiss the case, and he's going to hear that motion on Monday as well. Now, the judge said at that point in time, be fully versed in all the details of the claims from both parties, and he could make a decision Monday. He could just say Lakes, you win, he could say State, you win, or he could say, no, it's going to go to trial in the future. So, yet to be determined what happens Monday, but right now we're probably anticipating a trial sometime in the first quarter of next year.

Okay the next question, basically, you said that during this year, 2010, you're in about the 40% tax bracket. My question concerns this liability of $17 million for potential state income tax. Should that be carried at 100% or at 60%?

Actually not doing either one. Carrying it at about 80% just based on an estimated amount that we may be potentially liable for.

So there's no potential, if this liability is available at the end of the year, there is no potential for reduction for the fact that state tax payments are deductible on the federal tax return?

That's all taken into account already.

That's okay. You've answered that question.

And the next question comes from line of [David Higley] from Stern Agee, please proceed .

Hi, gents. I'm just trying to look at the management fees that you guys have been reporting and your commentary on the flow management fees and trying to interpolate a little bit what Red Hawk's EBITDA might have looked like and based on my best efforts, it looks like EBITDA was probably north of $20 million. Would you be willing to comment on that?

I don't think we really can comment. I know everybody likes to know how the actual bottom-line results are out there, within the next week we'll be sending out their reviewed financial statements from the audit firm to the bondholders that have that. And obviously the bank lenders have those financial statements, but other than that, it's confidential information.

Would you be willing to refresh our memory as to the relevant leverage covenant and whether you guys expect to be in compliance?

We certainly expect to be compliant at the end of the third quarter.

Excellent. And I guess part of this was already answered, I guess the $47 million in cash you guys have roughly, I was wondering if there are any sort of accrueds or expected outflows, I guess you have a tax payment you're expecting, is there anything else?

No that's it. That's really that $8 million or $9 million I mentioned earlier is really the only drain on the cash that we anticipate in the near future other than as Lyle mentioned, potential cash call on the Ohio projects.

And I appreciate the monthly commentary on the trends. Very recently we've seen Thunder Valley has been advertising, they're giving away $10 million worth of incentives and prizes, and I'm just wondering if you're feeling the impact of that campaign?

I don't think any more than we had previously. Again, I think we felt the hotel and expansion opening, everybody of course wanted to go see the entertainment venues, the new hotel, the new slot area, which is very nice, by the way. But I think we have come back since that time . Red Hawk has rebounded against

Has there been a shift in the composition of your play and where it's coming from? You say you've kept pretty much the same customers. Anything noticeable you can share about trends in play?

I think the only comment there is I think we're seeing a lot more closer in customers coming more often and I think that speaks to Lyle's comment about marketing to the general population more often. The lower average daily theoretical play. I think where opportunity now exists in Red Hawk is to garner more traffic, more customers and higher quality play from a little bit further away.

And, just shifting to Four Winds, did the decision about the tribe managing this independently, I wasn't aware they can do that. Are they going out and hiring consultants for construction purposes and design purposes?

Yes. They've hired -- it is a smaller casino, and the tribe came to us and preferred that they ran it themselves and we concurred that was fine. They certainly plan to use some of their existing management at the existing casino in the management of it, the higher up. And we have worked out a cost sharing agreement with them on that. In terms of developing the casino, yes they have hired some outside consulting firms to do that.

And, with respect to expanding the main property, is that something they have an option to do as well ? They can self manage say a hotel expansion or

During our initial five years, any expansions of any kind relating to the casino, be it restaurants, casino slot machines, table games and/or hotel, would all fall under the umbrella of our managing it. At the end of five years of course, we only have a five-year contract, at the end of five years, they have the option to either do it themselves, renegotiate with us, or go to another company. They can do pretty much what they want.

Has there been any movement towards --?

We've had some preliminary talks with them, but I don't think at this point we are, nothing is definitive enough to announce.

Okay, thank you very much.

(Operator Instructions). The next question comes from line of [Frank Enkin], private investor, please proceed.

Thank you. Hello gentlemen, nice quarter.

Thank you.

I'm curious about the development of the two casinos in Ohio that are yet to be built. You said that construction would start sometime in 2011, do you have any target dates at this time on when the completion of either one of those might be?

They, again, we would probably find out about the same time the public does. Rock Ventures and Harrah's have not put out any definitive schedules, however they have publicly announced that they expect to start construction sometime in 2011. My guess is that due to architecture and engineering, I would be surprised that they would start before the early second half of 2011. But that's speculation on our part. We would expect them to open by late 2012, unless of course, they do a Phase One on the Higby building in Cleveland, which I'm told could be operational by the end of 2011.

Okay. Thank you. The other quick question on those two new casinos, is there any opportunity for management contracts for you folks in those casinos?

No, there is not. They are making an agreement with Harrah's to manage both of them.

Manage both of them. Well, it was worth a try.

We tried.

I know. Thank you very much.

And we have no further questions at this time.

Well, thank you very much operator, for all of your questions. We will focus on continuing to execute on our long-term strategy of generating 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. Bye now.

This concludes the presentation for today. Ladies and gentlemen you may now disconnect. Have a wonderful day.