Golden Entertainment Inc (GDEN) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2012 Lakes Entertainment earnings conference call. My name is Darcel, 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)

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

Thank you. Good afternoon. Welcome to Lakes Entertainment's third-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 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 third-quarter financial results and recent business events, and then we will 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 2012 earnings call. As we previously reported on August 3, we closed on the purchase of the Rocky Gap Lodge & Golf Resort near Cumberland, Maryland. Rocky Gap is a 3A, 4-diamond resort, which includes a 250-room hotel, convention center, spa, two restaurants, and the only Jack Nicklaus Signature Golf Course in Maryland. We are in the process of finalizing the development plans to renovate the existing facilities, to convert existing convention and meeting space into a gaming facility that will feature approximately 550 video lottery terminals, a casino center bar, and a new hotel lobby bar and food outlet. We also plan to include table games, should they be approved today by the voters of Maryland.

We currently expect to open the gaming floor during the second quarter of 2013. The existing hotel, restaurants, spa, and golf facilities will remain open during the renovation. The total cost of the Rocky Gap project is currently expected to be approximately $30 million. At the end of the third quarter, we had invested approximately $10 million in the project, including the $6.8 million purchase price and the $2.1 million VLT license. Although we have enough cash on hand to fund the entire cost of the project, we may obtain third-party financing for a portion of project costs.

The Red Hawk Casino, located near Sacramento, California, again showed improvements in financial results during the third quarter of this year compared to the third quarter of 2011. Red Hawk has made several changes that have increased both top-line and bottom-line results, including opening a new quick-serve restaurant, consolidating the table games to one area, and relocating the gift shop so that more slot machines could be placed in that high-traffic area. These changes have also resulted in labor efficiencies, increased energy, and favorable guest reviews. With the focus on strong business fundamentals and operating efficiencies, the property has been able to convert incremental revenue to improve profitability. We are encouraged by the positive trend of this property. Red Hawk was recently voted Best Casino in the 2012 Strictly Slots Magazine's; Best of Slots Awards in the Native West category, that includes Native American casinos in nine western states. Red Hawk took home seven first-place wins, including Best Overall Casino, Best Casino for Reel Slots, Best Slot Club, Best Comps, Best Casino for Progressive Slots, Best 50-cent Slots, and Best $5+ Slots.

We continue to maintain a 10% ownership interest in Rock Ohio Ventures; 80% ownership in the open and operating Horseshoe Casino, Cleveland; the casino under development in Cincinnati, which is expected to open in 2013, and the Thistledowns Racetrack. The Horseshoe Casino in Cleveland opened during May and features approximately 2,100 slot machines, 63 table games, a 30-table poker room, and multiple food and beverage outlets. The downtown Cincinnati casino is under construction and is planned to open in the spring of 2013 and is planned to feature approximately 2,000 slot machines, 85 table games, a 31-table World Series Poker room, food and beverage outlets, and a parking structure. 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 losses for the third quarter of 2012 were $1 million, compared to net losses of less than $0.1 million in third quarter of 2011. Loss from operations was $2.5 million for the third quarter of 2012, compared to loss from operations of $10.5 million for the third quarter of 2011. Basic and diluted losses were $0.04 per share for the third quarter of 2012, compared to $0.00 per share for the third quarter of 2011. Lakes Entertainment reported third-quarter 2012 revenues of $3.6 million, compared to prior-year third-quarter revenues of $0.3 million. The increase in revenues was partially due to an increase in fees earned from the management of the Red Hawk Casino near Sacramento, California, during the third quarter of 2012, compared to the third quarter of 2011. Also positively impacting revenues during the third quarter of 2012 was the addition of $1.7 million in revenue related to the operation of the Rocky Gap Resort since August 3.

During the third quarter of 2012, property operating expenses for Rocky Gap, which primarily related to rooms, food and beverage, and golf, were $0.8 million. There were no such expenses during the third quarter of 2011. For the third quarter of 2012, Lakes' selling, general, and administrative expenses were $2.8 million, compared to $2.5 million in the third quarter of 2011. This increase was due to the addition of administrative costs associated with the operation of Rocky Gap, which are partially offset by decreases in Lakes' corporate selling, general, and administrative expenses. During the third quarter of 2011, Lakes incurred a loss on convertible note receivable of $4 million related to a potential Jai-Alai fronton project in Florida. There were no such losses during the third quarter of 2012.

Lakes recognized impairments and other losses of $2 million and $1.1 million during the third quarters of 2012 and 2011, respectively. The current quarter impairments and other losses included $1.3 million related to the write-down of land held for sale near Vicksburg, Mississippi, to its agreed-upon sale price. Lakes expects to close on the sale of this land during the fourth quarter of 2012. Also included in impairments and other losses for the three months ended September 30, 2012, were $0.7 million related to costs associated with development plans for the Rocky Gap project, which were subsequently revised. The prior-year third-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 third quarter of 2012, and for the third quarter of 2011. There were no net unrealized losses on notes receivable during the third quarter of 2012. In the third quarter of 2011, net unrealized losses on notes receivable were $2.7 million, related to the project with the Jamul Tribe, due primarily to ongoing issues in the credit markets. Other income net of expense was $1.4 million for the third quarter of 2012, compared to $1.3 million for the third quarter of 2011, a significant portion of which relates to non-cash accretion of interest on the Company's notes receivable. The income tax benefit for the third quarter of 2012 was $0.1 million, compared to a benefit of $9.1 million for the third quarter of 2011. Lakes' income tax benefit in the current year quarter relates primarily to current income tax benefit. Lakes' income tax benefit in the prior year period was primarily due to 2011 timing differences and related valuation allowances.

In summary, we are excited to have closed on the purchase of the Rocky Gap Lodge and Golf Resort and are working diligently on our plans to convert existing convention and meeting space into a gaming facility. Third-quarter 2012 results showed improvements over third-quarter 2011 at the Red Hawk Casino, and we're encouraged by the improvements and results at this property. We continue to work closely with the Red Hawk's executive team, as well as the Shingle Springs Tribal Gaming Authority to manage this property as efficiently as possible. Our focus remains managing our existing business as effectively as possible, while evaluating potential new investments that will enable growth to support creating shareholder value. Now I'll turn the call over to the operator for questions.

(Operator Instructions)

Your first question comes from the line of David Hargreaves with Sterne Agee. Please proceed.

Congratulations on all the accolades you guys are getting on the Red Hawk project. Sounds like things are going well. Could you talk a little bit about what's driving the revenue, if it's a recovering economy or not, or visitation versus spend-per-visit, and what you see happening there?

Well, I think, in general, it's two things. I think the economy is getting a little better, but I think our overall strategy was to become much more focused on value and overall friendliness to the locals, so to speak, primarily driving it with what we call the mailbox, putting a free play into the mailbox for our good slot customers, coupled with incredible value in food pricing. I think, at the end of the day, we've seen primarily more visitation. I don't think our revenue per guest has gone up significantly, but we are clearly driving more customers with all of the strategy we just talked about.

You just said that you're adding some more slots. Could you give us what the unit count currently is, and are you adding more class two or class three?

I think you misunderstood. Number one, we are continually trying to put in more class two relative to class three, if they can perform. What we've done is rearrange slots to put more slots, the same slots, but in two better areas. One was we combined the pits, if you go in the front door, to the left side, so that more slots could be put on the right side, which is a more highly trafficked area.

And then we took the gift shop, which was in prime location, and moved it to the back of the casino. So we basically took a low-margin gift shop operation and put it in essentially the worst slot location in order to move slots from the worst location to probably now number one. But we didn't add any. I believe we're at like 21 --

2,200.

2,200, 2,150 -- somewhere in that neighborhood.

I see. And then, has the CapEx associated with this been material?

No, it hasn't. It was all really approved earlier in the year as a capital improvement plan, so it's been well-managed throughout the year.

And most of this, of course, is CapEx is not buying hard goods, but it's just labor and rearranging things.

Right.

It's an inconvenience, but it's clearly not extraordinarily expensive.

I'm sure you guys probably noticed that Coyote Valley amendment that the Governor signed off on, and it was interesting; his comments that accompanied that signing. That must be something that's being looked at. I'm just wondering if you could let us know if there's any sort of compact discussions going on?

I'm going to sound ignorant to you. (laughter) I read all my trade magazines pretty good. I'm not familiar with the Coyote comp that -- What was --?

They cut the revenue share portion to the tribe. And specifically, on the website he cites that it was to comply with a rigorous requirement that the tribe be the primary beneficiary of any gaming --

Oh, that was for the new compact.

Right.

Yes. When it comes the old compact, the tribe with their attorneys are in negotiations with the state, I think, regularly, but there's nothing that has come of it as of this point.

And any update on Sharp Image?

Actually, we just discussed that today, but, no, it's in appeal. We feel highly confident it's going to win. We will win the appeal, but again, that's not money out of Lakes' pocket.

Okay. And there's been a lot of property-level management turnover, and I was just wondering if you guys could bring us up to date on the changes, and maybe if you feel more -- Should we be anticipating more, or should we think that things are stable, and how many --? (multiple speakers)

I think, actually, it's fairly typical in most casino environments, as you're well aware. I think we've certainly stabilized the general manager position. Some of the key positions underneath it are being filled. So I think it was just a matter of continually look for the best possible team there.

Last question, I promise. So we are expecting positive comps in the third quarter. Last year, the third quarter was the weakest quarter, and I'm just thinking, looking to the fourth quarter, if that isn't somewhat of a more challenging comparison, and any comments you'd be willing to offer would be appreciated.

It's hard to comment on fourth quarter. So far, so good, I guess would be my only comment through the first month, but you're right, it's always hard to compare going forward this year. And remember, there'll be some disruption going on within the current moves, the renovation projects going on, so I think we picked a good time to do the upgrades on the casino floor, and I would hope that the comparisons would be satisfactory at the end of the quarter.

Thank you so much for your time.

[Carl Hansen, Fetto]

Thanks, guys. I appreciate the progress. I think the Rock Ohio, I think of it as an invisible growing asset. I wonder if they've been able to finance the continual development, or whether they've called for more money? And I also wonder if that entity is seeking additional ventures. I know you said at your annual meeting you thought that all the development could be taken care of by cash flow, which is wonderful, but you'll have an asset that's really growing. Is there a way that you can show that? (multiple speakers)

Are you done?

For that one, yes. (laughter)

First off, we certainly believe it's a hidden growing asset, as you do. We have a minimal investment in it, and we think, in the long run, it's going to be a very good asset, although we are a silent partner and, at this point, it doesn't distribute cash. Relative to the financing, the three entities -- the Cleveland casino of course is fully financed and open, the Cincinnati casino is fully financed and will open in the spring of 2013, and Thistledowns has been fully financed and is scheduled to open with about 1,200 to 1,200 plus slot machines, probably in the next three or four months.

All of those facilities are fully financed, and although Lakes has a commitment to put in a total of $24 million, I believe we have funded about $19 million. Although the last $5 million could be called, at this point, it appears to us that it won't be.

There is one more entity that we would be partners in if and when -- Well, anything that Rock Ohio does in Ohio, we are partners with, but anything they do outside of Ohio, we are not. They have the right to open one more casino in Cleveland, and if they do that, it's presumed that would be financed from the cash flow of the existing three operations, but probably wouldn't be started construction for several years. But we don't anticipate, other than those four things -- two in Cleveland, Thistledowns, and Cincinnati, that's the extent of our partnership with Rock Ohio.

I had a question about the Rocky Gap. You changed plans and took a write-down. What happened?

We originally planned to build an additional 50,000 square foot facility at a total cost in the $64 million range, and when we went out to get financing, unfortunately, we were not able to find the debt component of that. We were prepared to put in about $20 million of equity, and the debt was going to be the balance, and we hired a very professional investment firm to go out and find the money for us, but at the end of the day they were not able to.

So we went back and looked and said, what can we do that's going to be almost as good, maybe better, we'll see, but we took the 25,000 square foot convention space, will be remodeling that completely into a new casino, slightly smaller -- instead of 800 machines it'll be 550 machines. And then we will be adding more space and reconverting some of the hotel rooms to add meeting space, because certainly we still want to be prepared to handle conventions in Rocky Gap.

Well, it sounds like a good plan to me. How expensive is that compared to the $64 million on a new building?

About $30 million altogether.

Including the purchase price?

Yes, including everything.

That sounds pretty darn good.

Well, we like it, and hopefully it will perform well enough so that we'll want to expand very quickly and build it somewhat bigger.

Quick question, on the Jamul Tribe, have they made any progress on getting someone else to further their cause?

We are not real privy to what's going on there, but we do hear the rumors, and we have our inside rumor people. And rumors have it that they are getting very close to making a deal with a casino company, which is very good for us, and we hope they do.

Yes, you could have another hidden asset there.

Very much so.

And lastly here, the tax loss carry-forward, do you still have a big one?

Yes, it's in the --

Yes, by the time we've closed on 2012, we anticipate to have about a $50 million loss carry-forward.

Though we would very much like to replace that with a $50 million of profits.

(laughter)

We look forward to the day when we will be paying taxes again.

(laughter) I'm getting to an age where I hesitate to buy green bananas, so I hope it happens quick. (laughter)

Okay, thank you.

Thank you.

(Operator Instructions)

Roy Berry.

Okay, I'm asking a question about the conference call after quarter one, and during that conference call, I got cut off, so I'll apologize if I've got my facts wrong. But anyway, after quarter one, I remember you were talking about negotiations with the Ohio group, I think you call them Rock Caesars Ohio, that was for some type of convertible bond with up to a 24% premium, and then I never heard another word on it. What is or was the status of those negotiations?

I think you might be a little confused. I think what you are talking about was when we, as well as Rock, we originally put up $2 million for our share of the referendum. And had they been able to finance the entire casino projects without any more money, we would have owned our 8% for no more money other than our $2 million. What happened was they needed what amounted to $20 -- Our share was $22 million additional monies, maybe, up to $22 million, and that represented 8%, so it was in the close to $300 million they needed for what we would call pseudo-equity, and that money was raised with our money.

We committed to $22 million; we put in $17 million, so we have about $5 million up. That new money received a 15%, called a PIK, payment in kind, meaning we get a 15% interest, but we don't get it paid right away, it just accrues. And then that new money also got 25% of the equity, and I think that's maybe what you're talking about, and that's what happened, but because we are on both sides of the fence, we do get a 15% interest rate accrued on our new money, and then we still own 100% of our equity -- 8% of the equity, because we participated in both.

Are you taking that money that's accruing in the income, or is it just another hidden asset?

No, that is not accrued. That does not come into income.

Okay. People are discovering lots of hidden assets with -- (multiple speakers)

Yes. (laughter)

Second question, and this one I probably know the answer, but I've been reading about Rock Caesars Ohio buying an out-of-state business called the shares and Caesars Interactive, which is the World Series of Poker and an internet poker thing. And are you at all possible that you might be invited into that situation?

No, we are not. We are not part of that. We were not consulted on it, and that is a separate entity between a different Rock, same owners.

(laughter) Okay.

Different legal entity than the one we are in. We weren't asked to join. I might have, I think long-term it's a good asset. But no, we are not part of that nor do we intend to be.

You've answered all my questions.

Thank you.

Thank you very much.

Paul Strigler, Esplanade.

Hey, guys. Two quick ones. One, given what you said about Rocky Gap generating about $1.7 million in revenue and about, looks like $800,000 in costs, did it actually generate positive this quarter?

[If it didn't.] Remember, we bought it on August 3, and so for the first almost full two months, net profit was about $180,000.

That's a turnaround from when Maryland operated it, so that's --

Well, we had two good months. It's a seasonal business there, so as the winter hits, things will probably go the other way.

And then, can you just talk about what operating cash flow was? Because if you net out the Rocky Gap acquisition, looks like either you were neutral on cash or maybe generated a tiny bit of cash.

Yes, I think there's a probably -- you'll see it in the 10-Q; there'll be a cash-flow statement, which we'll file tomorrow, but you're right, we generated just slightly positive cash for the quarter.

Great. Thank you so much.

David Hargreaves, Sterne Agee.

Sorry, just a quick follow-up. I was wondering when you're going to be reporting the Shingle Springs numbers, the detailed release.

The conference call is planned for next Tuesday, and there'll be an announcement going out.

Thanks very much.

And there are no further questions at this time.

Thank you very much, operator, for all of your 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 will speak with you again on our next earnings call. Goodbye.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.