Golden Entertainment Inc (GDEN) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2013 Lakes Entertainment earnings conference call. My name is Keith and I will be your operator for today. At this time, all participants are in a listen-only mode. Later on, we will conduct a question-and-answer session. (Operator instructions). As a reminder, today's conference is being recorded for the purposes. And with that, I would now like to turn the conference over to your host for today, Mr. Tim Cope, President of Lakes Entertainment.

Good afternoon and welcome to Lakes Entertainment's first quarter 2013 earnings conference call. On the call with me is Mr. 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 an update on our casino projects. I will then discuss the first quarter financial results and recent business events, and then we will conduct a question-and-answer session. Now I'll turn the call over to Lyle Berman.

Thank you, Tim, and welcome, everyone, to Lakes' first quarter 2013 earnings call. The completion of the renovation project at our Rocky Gap Casino located near Cumberland, Maryland is almost complete. We expect the renovations to be completed in time for the May 2013 controlled casino demonstration, when our casino processes will be observed by the Maryland Lottery and Gaming Control Agency. We expect to receive approval from the agency to officially open the new casino to the public as soon as May 22.

The Rocky Gap Casino Resort is a AAA, four-diamond resort that will include a casino, hotel, spa, four restaurants and the only Jack Nicklaus signature golf course in Maryland. The new gaming facility will feature approximately 550 slot machines, 10 table games, a casino center bar and a new hotel lobby bar and food outlet. We have also commenced construction of an events center and conference space at Rocky Gap and expect it to open during the fourth quarter of this year.

The total cost of the Rocky Gap project is currently expected to be approximately $35 million. During the fourth quarter of 2012, we closed on a $17.5 million financing facility that will be used to finance a portion of the Rocky Gap renovation project. At the end of the first quarter, we had invested approximately $20 million in the project including the $6.8 million purchase price and the $2.1 million VLT license fee. During April 2013, we made an initial $3 million draw on the financing facility.

The Red Hawk Casino, located near Sacramento, California, again showed improvements in both top- and bottom-line financial results during the first quarter of this year compared to the first quarter of 2012. Increases in key business indicators such as guest visits, gaming revenue per guest and the number of food covers combined with improved operating margins contributed to an increase in management fees from the Red Hawk Casino compared to the prior-year first quarter. We continue to work closely with Red Hawk's executive team as well as the Shingle Springs Tribal Gaming Authority, to manage this property as efficiently as possible.

Lakes previously had an agreement with Jamul Indian Village to develop a casino on the tribe's trust land near San Diego, California, but terminated the agreement in March of 2012. Lakes had loaned the Jamul tribe approximately $57.5 million including accrued interest under the agreement, which were previously written off. As we previously announced, a wholly-owned subsidiary of Penn National Gaming recently entered into a definitive agreement with the Jamul Indian Village to jointly develop a Hollywood-branded casino and resort on the same trust land.

Pursuant to a subordination and inter-creditor agreement Lakes entered into with the Jamul and Penn related to the proposed casino, Lakes agreed to modify the terms of this outstanding debt with Jamul to reflect that the total debt outstanding is currently $60 million and that interest on the debt will accrue at 4.25% after the Penn casino opens. Lakes has agreed that it will subordinate payment of its debt until the senior financing is paid in full, but that current interest on the subordinated debt will be paid to Lakes on a quarterly basis when the casino opens, so long as there is no default under the senior financing agreement. When the senior financing is paid in full, Lakes will receive repayment of its outstanding principal and interest.

Lakes has also entered into a 10-year option agreement with Penn that grants Penn the right to purchase approximately 98 acres of land which Lakes owns adjacent to Jamul's trust land. The purchase price for the land is $7 million and increases annually by 1%. We believe this is good news for Lakes as it provides for the potential opportunity for Lakes to recover its financial investment in the Jamul project.

We continue to maintain a 10% ownership interest in Rock Ohio Ventures' 80% ownership in the Horseshoe Casino Cleveland, the Horseshoe Casino Cincinnati, which opened March 4; and the Thistledowns Racino, which introduced video lottery terminals last month. The Horseshoe Casino in Cleveland opened during May of last year and features approximately 2100 slot machines, 89 table games, a 30-table poker room and multiple food and beverage outlets. Horseshoe Casino in Cincinnati features approximately 2000 slot machines, 87 tables, a 31-table World Series of Poker room, several food and beverage outlets and a parking structure. The Thistledowns Racino in the North Randall, Ohio features its existing racetrack, 1100 video lottery terminals and new dining and night life options.

With that, I will turn the call back over to Tim to provide an overview of recent business and financial results. Thank you.

Thank you, Lyle. Net loss for the first quarter of 2013 was $0.3 million compared to net earnings of $1.8 million in the first quarter of 2012. Loss from operations was $1.9 million for the first quarter of 2013 compared to $1.6 million for the first quarter of 2012.

Basic and diluted losses were $0.01 per share for the first quarter of 2013 compared to earnings of $0.07 per share for the first quarter of 2012. First quarter 2013 revenues were $3.3 million compared to prior-year first quarter revenues of $2 million. The increase in revenues was due to an additional $0.8 million in management fees earned during the first quarter of 2013 compared to the first quarter of 2012, related to the Red Hawk Casino. Also contributing to the increase was the addition of $0.6 million in revenue related to the operation of our Rocky Gap property, which was acquired on August 3, 2012.

During the first quarter of 2013 property operating expenses for the Rocky Gap Casino and Lodge, which primarily relates to room, food and beverage and golf, were $0.6 million.

For the first quarter of 2013, selling, general and administrative expenses were $3.8 million compared to $2.3 million in the first quarter of 2012. Included in these amounts were Lakes' corporate, selling and general administrative expenses of $2 million during each of the first quarters of 2013 and 2012, and Rocky Gap selling, general and administrative expenses of $1.8 million during the first quarter of 2013.

Lakes' expenses certain projects' preopening costs as incurred. During the first quarter of 2013, Lakes recognized preopening expenses of $23 million related to the Rocky Gap object.

There were no impairments and other losses during the first quarter of 2013. Lakes recognized impairments and other losses of $0.9 million during the first quarter of 2012, which are a result of the March 2012 determination that Lakes would not continue to move forward with the casino project with the Jamul Tribe and the termination of this agreement with the Jamul Tribe.

Amortization of intangible assets related to the operating casinos was $0.3 million for each of the first quarters of 2013 and 2012. Other income, net, was $1.5 million for the first quarter of 2013 compared to $1.3 million for the first quarter of 2012, a significant portion of which relates to non-cash accretion of interest on notes receivable.

There was no income tax benefit for the first quarter of 2013 because the Company has utilized all carry-back potential. The income tax benefit for the first quarter of 2012 was $2 million and resulted from the Company's ability to carry back its taxable losses to a prior year and receive a refund of taxes previously paid.

In summary, we continue to move forward with the renovation of our AAA, four-diamond award-winning Rocky Gap Casino Resort. We're looking forward to a successful controlled demonstration of gaming on the 20th of this month, which we expect will allow us to officially open for gaming shortly thereafter. We continue to have a stable balance sheet, which reflects a book value of approximately $4.25 per share.

We will continue to focus on operating our existing businesses as effectively as possible while we consider new investments in order to increase shareholder value.

Now I'll turn the call over to the operator for questions.

(Operator instructions) [Roy Berry], Private Investor.

Tim, I have a question on Rock Ohio Ventures, which I understand is a partnership that you have. Have you gotten the K-1 on your partnership? And also, I've been away from accounting a long time, but I thought partnership income had to be reported, both the income or loss.

No, what we have is an equity investment of 10% or whatever Rock in Ohio owns; and you know, they're 80%, so we're an 8% investor. As such, on our balance sheet, we reflect the dollar value of our investment. And it doesn't change after that point.

So there's no reflection of income or loss whatsoever until there is a dividend received?

That's correct.

Okay, about three quarters ago on the conference call, Lyle discussed a monetized bonding arrangement for the Rock Ohio Ventures, and that was the last I heard of that item. Is the senior partner still interested in some type of a monetized interesting-paying situation, or is that just one of those discussions that died?

I think maybe, to refresh you on what I said, was that -- we were talking about -- I think the question asked was, how can we monetize our investment? And the answer was multiple ways. One, we can certainly just sit back and wait for dividends. We have both an equity interest as well as a loan interest. The loan will probably be paid back with interest before the equity distributes anything. It's possible that we could sell our interest to Rock Gaming or Caesar's at some point in the future after the business has stabilized a little and we know what we have. We are clearly at the mercy of Rock Gaming and how they monetize theirs, or pretty much so. But the bottom line is that I think Rock would like to monetize -- get some cash flow from it, and we certainly know Caesar's would like to. So we think ourselves as well as our two partners are certainly motivated on the same page.

Okay, so there's a possibility of a dividend if you can get your cash flow up to where you can pay a dividend.

That is very possible, yes.

Last question I had, Lyle, is the California tax rates on slot play from 1912 to 1915 -- I've heard about -- read about three different versions on what you put out. Just basically, what is the California tax percentage on slot play from, say, 1912 to 1915?

From 19.12 to 19 -- ?

I mean 2012 to 2015. I'm only a century behind.

And are you asking what is -- the tax rate in California for slot machines varies by tribe because it has to do with what compact the agreement the tribe signed with the state and at what point in time they signed it.

Okay, and recently -- the compact changed recently and I read about three different versions on basically what the rate changed to.

Are you specifically talking about Shingle Springs?

Yes.

Shingle Springs has entered into a tentative agreement with the state to change the terms of the compact, and it has to be approved -- it has to be approved by the legislative process. The rate -- Tim, can you tell us -- are we at liberty to say exactly what the rate is? I'm not sure. I know the state has been the tribe a very good benefit.

But it doesn't get passed on monitor until it is approved by the state?

Approved by the state, and then approved again by the Governor's office. It won't take effect at the very earliest until 2014.

Okay, then if it's a retroactive rate situation, would they get a refund then, or how would that --

I don't believe they get any refund.

Okay, and they just quit whatever it is and catch up?

Yes.

Okay, I think that's all the questions I have.

Tim O'Brien, DG Capital.

First, Just on Rocky Gap, do you expect to use the debt to finance the rest of the spend there, I guess the extra $15 million?

Yes, we do.

Okay. And with Rock Ohio, do guys expect to have to make any payments there, either for that new sky bridge or for potential second casino they're talking about down the road?

When we entered into the loan agreement, Rock was responsible for putting up $222 million and we agreed that we would put up to a maximum of 10% of that, or $22 million. We have put up to date, I think, around $18 million. They still have the ability to call for more, but that's all. But we don't expect to contribute any more than that. And when they do the second casino, which is probably another year or two off -- I'm not sure. I'm not privy to the plans, but I know they are working on them. I believe they are planning to take the cash flow from the three casinos and probably leverage that, to finance that one.

Got it, alright, great. Is there anything you can say on any discussions with the tribe and Shingle regarding any kind of restructuring of your debt there?

I think all we can say at this point is we're still continuing to have conversations with them. We have nothing to report at this time.

Okay. And then SG&A -- it looks like at least nominally it has been picking up over the last couple of quarters as you brought on Rocky Gap. Is there a level where that -- sort of a leveling off of that amount?

I think actually it had peaked previously. What's happened is we have some -- I would call them one-off type of professional fees, expenses, primarily legal fees related to getting to the licensing approval at Rocky Gap or some one-off type of help in the state of Maryland, but there's not a consistent increase in G&A.

Okay, will that be broken out in your Q, what those --

Well, we will discuss it somewhat, more in the MD&A section, yes.

Okay. Alright, great, that's it for me. Thanks.

[Carl Hanson], (inaudible).

You guys are pretty modest about all the progress you have been making. It has been a tremendous quarter from my perspective. I've got a couple of questions here, one on Jamul Tribe matter. Did Tim get past the hurdles that were holding you up?

We don't know. We're not privy at this point to their discussions. They have announced that they plan to start construction by the end of the year, and I'm repeating what we read in the newspaper. Whether they plan to start construction without all of the hurdles or not, that I don't know.

I noticed that Penn had a press release a couple days before your press release, so they made it look pretty favorable.

Yes, we agree, but again, we don't have private conversations. We are not privy to any more than what we read in that press release, although we kind of pare at what they say.

Yes. Anyway, as far as the value of that $60 million note, I would assume that at some point, there are longer benchmarks that would have some salable value if you had a better use for the money.

Well, we agree with that. And of course, the more certain the casino is that it's under construction and/or even results opening, it would accrue in value all that way. So the first step would be to see it start construction. At that point, it has value. And of course, because it pays current interest, it's not insignificant. I think once they are open, depending on -- because we think it's a marvelous site. It's one of the best sites in the San Diego market, and we think with Penn behind them, they're going to do wonderful (multiple speakers). We only hope that they -- we want them to get started every bit as quickly as --

(multiple speakers) I see the interest starts when the casino opens.

That's correct.

And Penn is quite a bit larger entity than Lakes, I gather.

Oh, yes, Penn Gaming is quite a bit larger and has substantially more resources than we do.

So I would say, once construction starts, it will be of value, and the casino opening would be additional, and plus one year of success would be even more.

I agree with all the above.

Anyway --

And of course, we carry that on our books at no -- it's not reflected on our book value.

And also, the land they have a $7 million option on, that's combined with a couple of other pieces of land. So it isn't set out separately, but it's pretty modest, $1 million or less.

No, no, no, no, no. It's 98 acres that are contiguous to the tribe's 7 acres. And although the tribe cannot use that land for casino gaming because it is not in trust, they can use it for a hotel, they can use it for parking, they can use it for all other kinds of amenities they want with their casino.

Oh, they don't want it --

Oh, for sure.

I was referring to carrying value or book value. (multiple speakers) You're carrying the land very modestly and in the 10-Q, I think it was -- or 10-K, it was lumped with a couple of other parcels for $1.3 million.

Yes, and they have the option to buy it at $7 million.

You will get that someday.

We agree with that, too.

And Rock Ohio, who are some of the other owners? Is there a guy by the name of Dan Gilbert that I see?

We are in a joint venture partnership, or guess it's not a partnership, but it's an equity interest; it's called Rock Ohio Ventures. And Dan Gilbert, who owns the Cleveland Cavaliers, as well as Quicken loans, he is the majority owner of that entity.

Is it apt to become a public company? (multiple speakers)

I have not spoken to him in a couple of years, so I don't know the answer.

Oh, okay.

I would agree -- we would like to see it, though. That would give us a monetization of our investment.

Yes, you would spin that out too, huh?

Yes.

Anyway, Rocky Gap annual meeting -- any special arrangements for shareholders if they attend, or is it pretty well booked up that time of year?

Tim, I will defer to you on that.

It's going to be booked up, but if shareholders request, we can certainly work out an arrangement for them.

Should you want to come, let us know, the sooner the better.

It should be a good introduction to potential shareholders in the area.

I think so.

Anyway, I may be there. I'm not sure.

Well, make sure you single us out and say hello.

Thanks much.

(Operator instructions) Steven Chang, Rudgear Capital.

Thank you for taking my questions. Could you clarify again the land? The 98 acres -- is it held on your books at zero or $1.1 million?

It's actually on our books for $960,000, that land in the Jamul area.

And once the casino operations begin at Rocky Gap, could you talk about how much your operating costs might increase?

We don't expect operating costs at the Lakes to increase at all. In fact, they may decrease.

So, compared to running the hotel currently, opening the casino, there's a minimal increase in staffing needed?

I think what Tim was referring to is at Lakes level, our G&A will not go up. As a matter of fact, it will probably go down because some of our people move there full-time to run the casino, if that was your question.

If your question is -- will we see more operating costs now that it's open? The casino, of course, because the hotel was running during the winter at very low occupancy. Now we expect it to run at very high occupancy. And of course, we still have more -- we'll be serving more food, beverage, and of course we have the casino.

Could you give some idea of what kind of revenue you might need from Rocky Gap to the EBITDA breakeven or any kind of metrics like that for Rocky Gap?

We are not giving projections at this point in time. What we are guiding people to do is really, in Maryland, they publicly report win per unit for slot machines and table games to the state each month. And we are guiding analysts to just take a look at what the market is producing and come to their own conclusions, based on a 200-room hotel and a casino operation.

Great, I appreciate it, thank you.

And gentlemen, there's no other questions at this time.

Okay, well, we want to thank all of you for your questions as well as participating in the call. We will be focusing and continuing to execute our strategy of generating shareholder value. That you once again for your interest in Lakes and we will speak with you again on our next earnings call. Thank you.

Ladies and gentlemen, that will conclude today's call. Thank you very much for joining us and you may now disconnect. Have a great day.