Golden Entertainment Inc (GDEN) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2012 Lakes Entertainment, Inc. earnings conference call. My name is Pam, and I will be your operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator instructions). As a reminder, this call is being recorded for replay purposes. I would now like to turn the conference over to Mr. Tim Cope, President and Chief Financial Officer. Please proceed.

Thank you, Pam. Good afternoon and welcome to Lakes Entertainment's second-quarter 2012 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 including statements concerning business strategies and their intended results and similar statements concerning anticipated future events. These statements are subject to risks and uncertainties, including those risks described in our filings with the SEC, and actual results may differ materially.

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, recent business events and then conduct a question-and-answer session. Now I will turn the call over to Mr. Lyle Berman.

Thank you, Tim, and welcome, everyone, to Lakes' second quarter 2012 earnings call.

As we recently announced, we are pleased that on August 3 we close on the purchase of the Rocky Gap Lodge & Golf Resort near Cumberland, Maryland. Rocky Gap is a AAA, four-diamond resort which includes a 215-room hotel, convention center, spa, two restaurants and the only Jack Nicklaus signature golf course in Maryland. The purchase price of approximately $6.8 million was paid at closing.

Contemporaneous with the closing, Evitts Resort, our wholly-owned subsidiary, entered into a lease with the Maryland Department of Natural Resources for approximately 260 acres of real property on which Rocky Gap is situated. The initial lease term is 40 years.

Earlier this year, Evitts was awarded a video operation license for Rocky Gap by the state of Maryland Video Lottery Facility Location Commission. The Commission recently approved Evitts' revised development plans which include the renovation of the existing facilities to convert the approximately 24,000 square feet of convention and meeting space into a gaming facility that will feature a minimum of 500 video lottery terminals, a bar and a food outlet. The total cost of the Rocky Gap acquisition and development project is expected to be between $25 million and $30 million. We currently plan to fund the entire cost of the project with Company cash, but may obtain third-party financing for a portion of the project costs.

The Red Hawk Casino, located near Sacramento, California, again showed improvements in both top-line and bottom-line results during the second quarter of this year compared to the second quarter of the prior year. Red Hawk has also seen increased spending per guest, which has resulted in increased gaming and non-gaming revenue. These improvements are largely attributed to attractive promotional offerings, liberal gaming products, excellent dining and Red Hawk's philosophy of offering quality and value throughout the property. Recently, the property enhanced the casino floor and opened a new, faster dining venue also on the casino floor, which have resulted in positive feedback from the guests. With a focus on strong business fundamentals and operating efficiencies, the property has been able to convert incremental revenue to improve profitability.

In addition to improved results, Red Hawk has again won the lion's share of viewers' and readers' choice recognition awards, both locally and in the gaming publications, including being named the Sacramento area's best casino.

We continue to own a 10% interest in Rock Ohio Ventures, which owns 80% in the casino projects in Cincinnati, Cleveland, Ohio, and Thistledowns racetrack in Cleveland. During the second quarter, we made an additional investment of $4.5 million, bringing our total investment in Rock Ohio Ventures to $22.2 million. The Horseshoe Casino in Cleveland opened during May and is performing well. This casino features approximately 2100 slot machines, 63 table games, a 30-table poker room and multiple food and beverage outlets. The Cincinnati casino is under construction and is planned to open in the spring of 2013 and is planned to feature approximately 2000 slot machines, 116 table games, including poker, food and beverage outlets and a parking structure with approximately 2500 basis.

We continue to evaluate other business opportunities to determine the best possible manner in which to increase shareholder value. We remain well-positioned to pursue these opportunities because of our stable balance sheet and no debt.

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

Thank you, Lyle. Net earnings for the second quarter of 2012 were $0.4 million compared to net earnings of $9.5 million in the second quarter of 2011. Loss from operations was $1.1 million for the second quarter of 2012 compared to earnings from operations of $15.8 million for the second quarter of 2011. Basic and diluted earnings were $0.02 per share for the second quarter of 2012 compared to earnings of $0.36 per share for the second quarter of 2011.

Second quarter 2012 revenues were $2.5 million compared to the prior year second-quarter revenue of $28.2 million. The decrease in revenue was primarily due to the buyout of the management agreement for the Four Winds Casino Resort in New Buffalo, Michigan during June 2011. Pursuant to the buyout agreement, the Pokagon Band of Potawatomi Indians paid the Lakes a buyout fee of approximately $25.4 million. The decrease was partially offset by an increase in fees earned from the management of the Red Hawk Casino during the second quarter of 2012 compared to the second quarter of 2011. Revenues in the current year quarter related to the management of the Red Hawk Casino.

For the second quarter 2012, Lakes' selling, general and administrative expenses decreased in comparison to the second quarter of 2011 by approximately $0.4 million to $1.9 million. This decline resulted primarily from decreases in travel and related expenses due to the termination of the Company's aircraft lease during the fourth quarter of 2011 as well as decreases in payroll and related expenses. Lakes recognized impairments and other losses of $1.4 million and $0.6 million during the second quarters of 2012 and 2011, respectively.

The current quarter impairments and other losses included $0.8 million due to March 2012 determination that Lakes would not continue to move forward with the casino project with the Jamul Indian Village near San Diego, California, and the termination of Lakes' agreement with the Jamul Tribe. Also included in impairment and other losses for the three months ended July 1, 2012 were $0.6 million related to costs associated with development plans for the Rocky Gap project which were subsequently revised. The prior year's second-quarter impairments and other losses were due primarily to uncertainty surrounding the completion of the project with the Jamul Tribe.

Amortization of intangible assets related to the operating casinos was $0.3 million for the second of 2012 compared to $9.2 million for the second quarter of 2011. The decrease in amortization costs related primarily to the buyout of the management agreement for the Four Winds Casino Resort, which resulted in the full amortization of the remaining intangible assets associated with that project during the second quarter of 2011.

Net unrealized gains and losses on notes receivable relate to the Company's notes receivable from Indian tribes for casinos projects that are not yet open, which are adjusted to estimated fair value based on the current status of the related tribal casino projects and evolving market conditions. There were no net unrealized gains or losses on notes receivable during the second quarter of 2012. In the second quarter of 2011, net unrealized losses on notes receivable were $0.1 million related to the project with Jamul Tribe, due primarily to ongoing issues in the credit markets.

The net amount of other income was $1.4 million for the second quarter of 2012 compared to $1.3 million for the second quarter of 2011, a significant portion of which relates to non-cash accretion of interest on the Company's notes receivables. The income tax benefit for the second quarter of 2012 was $0.1 million compared to a tax provision of $7.7 million for the second quarter of 2011. Lakes' income tax benefit in the current year quarter was primarily associated with the Company's ability to carry back its estimated 2012 taxable loss to a prior year and receive a refund of taxes previously paid. This benefit was partially offset by current income tax provision. Lakes' income tax provision in the prior-year period consisted primarily of current income tax provision.

We are pleased that the second-quarter 2012 results showed improvements over the second quarter of 2011 at the Red Hawk Casino, and we continue to work closely with the property's executive team as well as the Shingle Springs Tribal Gaming Authority to manage this property as efficiently as possible with the goal of continuing this positive trend. We are also very excited to proceed with the development of a gaming facility at the Rocky Gap property. We are currently operating the existing hotel, golf course, restaurants and spa, all of which are planned to remain open during development. We currently expect the gaming facility to open in mid-2013.

We also remain optimistic about our investment in Rock Ohio Ventures, which recently opened its first casino in Ohio, and the development of the second casino and the track is well underway. Our focus remains on achieving increased shareholder value by maximizing returns from existing operations and investments as well as evaluating potential new projects.

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

(Operator instructions) David Hargreaves, Sterne Agee.

I was wondering if you could give us any updates on the Sacramento market and what you're seeing in that environment.

This is Tim. I guess in general, based on, obviously, results at Red Hawk, there seems to be a slight improvement in the market, based on what we just internally evaluate the competition there. I would say that we are more than holding our own. But the economy in general, I think, continues to be challenged in the Northern California area in general.

You probably heard there's a high-yield bond deal out for the Graton Rancheria now. What is your perspective on how that might impact Shingle?

This is Tim. I guess my initial reaction is any new competition, any new casino project in that general northern California market will certainly have some effect. But I don't think it will have a material effect on Red Hawk, just simply due to location. You know, Graton proposed project is in the North Bay Area. Our primary Bay Area customers come from either South Bay or East Bay. So it's a little tough -- it's just a tougher drive to get around the Bay there from where Graton is to get over to the Red Hawk Casino. They potentially will affect the casinos closer to them in that northern part of the city.

Any updates you are able to provide on a potential compact amendment or negotiating process?

No, I think in compact, negotiations are really strictly between the tribes themselves and the state.

I see. And any key dates we should be aware of with respect to the Sharp Image appeal that are coming out?

I wish I could tell you one, but we don't know of any key dates coming up, either.

And at the property, has the leadership transition been -- anything you can say about continuity there?

Well, I think it's been very well received. The nice part of the new general manager, Brian De Lugo, he had been there already for a couple of years as the Gaming Vice President. And it is a casino, so it's very nice to have the continuity of now the senior leader coming from the gaming side of operations. And we think we are seeing the benefit of some of the initiatives that are taking place there.

Okay, thank you very much.

(Operator instructions) [Carl Hanson], [Philips].

Hi, Jim and Lyle, It's nice to see the success going forward. I wonder if Rock Ohio operations, whether you will be picking up any equity in earnings in your accounting statements, and also if there's going to be any additional investment, or will the cash flow kind of carry it at this point?

Well, this is Tim. I can speak to the accounting. Because we own 10% of Rock's 80% -- essentially, we are an 8% owner. As a result, our accounting rules our purchase accounting. It's basically just cost accounting process, cost basis. So our line item on the balance sheet won't change until such time as there are dividends issued.

This is Lyle Berman. When it comes to additional monies, we were originally obligated to commit certain amounts of monies to the project, and we have committed $20 million. And we have approximately, I think, $5.5 million to $6 million left. We don't know if that's going to be needed or not. We hope not. I think our partners hope not, too. If we do need it, the casino in Cleveland is already open and funded, as is the Cincinnati casino all funded. They may need a little more what I'll call pseudo-equity for the Thistledowns Racetrack, but it's going to open this -- primarily, it's going to open as a temporary facility in its current location. And then I believe the overall plan is to move it -- I think it's to the Akron area. I think it's Akron. So at this point, there's a possibility we will contribute $6 million more, but very possibly not.

Does that mean your cash flow from the existing casino is already throwing off some pretty good cash?

I'm sure it's throwing off cash, but we don't get it. It's not distributing cash because there's a high debt service on it.

And I guess, getting back to Rocky Gap, do you have enough cash on hand to finance the redevelopment, so to speak. But once it's complete, you have to find long-term financing?

We are very apt to find long-term financing once it's complete. However, we may even find long-term financing before it's complete.

Sounds good to me. It looks like next year, you are going to have several gaming operations.

And hopefully we'll be announcing one or two more.

Wonderful, thank you guys.

Steven Chang, Rudgear Capital.

With Red Hawk, it appears that you received some payments back from them. Is that correct? And was that interest or principal payments or payments for your management services?

We received some from the deferred management fees that had been accrued from an earlier period.

Just to clarify, we get fees from -- we earn management fees. Sometimes they are payable, sometimes they are accrued if the waterfall doesn't allow to be paid. We get interest on our debt, and we do not get -- we have waived any principal repayments on our debt until, I believe, 2014.

In addition, any time the tribe -- the waterfall does not provide the tribe with $500,000, we lend the tribe $500,000 and then we get it paid back when the waterfall allows it. So, sometimes, we have an accrual both for management fees and that $500,000. I believe, as we speak today, we are all even on the $500,000 loans. Is that correct, Tim?

That is correct.

And we do have, I think, in the neighborhood of $4 million to $4.5 million of earned management fees, but not paid. They are 100% current and always have been, the interest on our loan. And like I said, we voluntarily agreed with the tribe to waive principal payments in the first -- I think it was for two years until 2014.

But the fact that they did pay some of the management fee payable -- that indicates that there is a level of -- it's generating enough cash to make that payment?

That is correct.

And with Rocky Gap, when would you need to start spending on the construction of that?

We expect to start around November 1. And it will be about a six-month project. We're not building a new building; we are redoing the 24,000-foot convention space and we are adding a little more parking, but not a parking deck. So it shouldn't be more than a six-month period, so we expect to open sometime in the second quarter of 2013, as opposed to -- our older plan was over a year for construction.

Great, thank you very much.

Shawn Kravetz, Esplanade Capital.

Thank you. My question is answered. Keep up the good work, gentlemen. Thanks.

[Roy Berry], Private Investor.

Good day, and if I'm repeating something, I've got cut off twice, so I may have missed something. But I have two questions for Tim Cope. Tim, according to your 2011 end of the year statement, there is a $20 million allowance for impaired notes receivable on Mohawk. Now that Red Hawk is profitable, when do you envision taking that $20 million back into income?

Roy, it's a good question. Really, what that impairment is based on is long-term forecasts of future cash flows, and if they are assured and such that they can repay our notes 100% over a certain period of time. So we will certainly be evaluating that again at the end of next year. But as of right now, we wouldn't make that change until we go back through and work with the property and determine another long-term cash plan.

Okay, so it's possibly an end-of-the-year situation?

It's possible. We certainly will evaluate it again at the end of the year.

Okay, and it would back to income, rather than the balance sheet?

That would be true.

Okay, my second question is, on Ohio future income, hopefully you will be getting some. They're getting lots of praise in the papers. Will you be using the cost method or the equity method of income reporting? I think they both are available.

It's cost method basically because of our percentage ownership and lack of in control. It's just strictly a passive investment. So we are using the cost method.

So, in effect, if they don't distribute money, you don't report income?

That's correct.

Unless they keep it for, say, something like Cincinnati?

I think it really needs to these distributed out of the company to us before we would report it as income.

Oh, okay. In other words, if they hold Cincinnati money -- are they required to distribute it before you put money back in Cincinnati, or can they put money in and say we put money in for you, or for Cincinnati?

Well, they couldn't do it on our behalf. Our obligation is, as Lyle mentioned earlier, is to fund up to that another $5 million approximately to keep our 10% interest. That includes the money into Cincinnati.

However, when you say Cincinnati, you are aware that the casino is completely funded.

No, I'm not.

Yes, the Cincinnati casino is completely funded, 100%.

So, in other words, right now, it's just in a pre-opening situation?

That's funded, too.

We don't expect to see any money from the Cleveland operation going to supplement Cincinnati at this time. It could happen, but I don't believe that --

So your only unit funding requirement is the Rocky Gap?

And we are obligated for $6 million more -- up to $6 million more, which they possibly need -- might need for Thistledowns.

Okay. Then I've got a third question on that is -- Thistledowns is rearing its -- into the future sometime next spring. Will you be a part of the Thistledowns situation?

Yes, we are. We own 8% of that as well.

So there may be some funding on Thistledowns later on?

Only up to our $6 million obligation. That's the most that we have to put back in.

Let me ask another question while I'm thinking about it. You are operating the motel at Rocky Gap right now?

We like to call it a hotel.

Hotel, yes, it's beautiful, by the way. I love the picture. Will you be recording in the next quarter profit and loss from the hotel operation?

Yes, we will.

So have you got a handle on any -- whether it's going to be profitable or not, or you're just starting?

Well, we're just starting. Obviously, it's a very seasonal project right now, obviously, because it's a resort destination. So we are entering into the fourth quarter, which will obviously be the slower part of the season. But it's hard to tell. It's a property that has been under the guidance or potential sale for five years, since Maryland had authorized a casino license to be placed there. So historically, and through no fault of their own, they have been hesitant to do any proactive operation. So as a result of that, hotel occupancy has suffered because they didn't know if they had a place to sell or not, or rooms to sell. So I think our challenge right now is to improve the existing operations, and then, as we enter into the slower period, get the renovation, construction started, like Lyle mentioned, so that we can open the first part of next year, second quarter, with a casino operation as we head into their season, tourist season.

One more question -- according to this morning's Maryland paper, the governor of Maryland wants to authorize blackjack and table games in this special session. Have you got any plans for expansion into blackjack and table games if they should suddenly open up in the next month or so?

Absolutely. Our redesign plan is configured in such a way that we would include table games.

And no more questions; you answered a lot of them, thank you.

Jerry Lintner, Private Investor.

My question relates to Cincinnati and Cleveland casinos. As I understand the conversation about the equity method of accounting, no income will be recognized by the Company until there is a cash distribution received. I guess the question would be, as I'm thinking through the dynamics of that, my assumption is that all the cash will be dedicated to paying debt service for a few years as provided in the loan documents. Can you share with us when under those loan documents the cash might be available to be distributed out to Lakes?

This is Tim. I'm certainly not privy to that particular loan arrangement, or their future forecast. We wouldn't be able to comment on that, anyway. We don't comment, really, on future operations, and certainly not our own operations. So, unfortunately, I just would not be able to give you a good guess on that.

Is that loan document a public document somewhere?

I don't believe it is.

Okay.

Kent Green, Boston American Asset Management.

Yes, my question pertains to just a housekeeping question, and Tim, I'm sure you could answer this. Invest for the consolidated investee -- that's your Ohio operations?

That's correct.

And then the notes and interest receivable, $36 million -- do you anticipate any more impairment of that particular amount?

Not at this time. That is the impaired value at this point on the Shingle Springs note.

Very good, thank you.

With no further questions in queue, I would like to turn the call back over to Mr. Tim Cope for closing remarks.

Well, thank you, operator, and thank everybody for the questions. We will focus on continuing to execute on our strategy of generating shareholder value. Thank you once again for your interest in Lakes and we'll speak with you again on our next earnings call.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.