Golden Entertainment Inc (GDEN) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2013 Lakes Entertainment, Incorporated earnings conference call. My name is Sara, and I'll be your operator for today.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes.

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

Thank you, Sara.

Good afternoon, and welcome to Lakes Entertainment's third-quarter 2013 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 projects. I'll then discuss some 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 Mr. Lyle Berman.

Thank, you Tim, and welcome, everyone to Lakes' third-quarter 2013 earnings call.

As we previously announced on August 29, 2013, we received a cash payment of $57.1 million from the Shingle Springs Tribe, pursuant to the terms of the debt termination agreement that we entered into with the Tribe, relating to moneys we had previously advanced to the Tribe for the development of the Tribe's Red Hawk Casino, located in Placerville, California

As a result of that payment, the management agreement under which we were managing Red Hawk terminated, and we had no further obligations or responsibilities with respect to Red Hawk Casino. Due to the receipt of this recent cash payment, we currently have cash and short-term investments of approximately $90 million. We are evaluating various business opportunities to determine the best course of action to add value for our shareholders.

The third quarter was the first full quarter that including gaming operations at our Rocky Gap Casino Resort, which we purchased in August of 2012. Since its acquisition, we have added a gaming facility, which opened on May 22, 2013.

Rocky Gap is a AAA 4-Diamond resort, that includes a casino, hotel, spa, four restaurants, and the only Jack Nicklaus Signature Golf Course in Maryland. The Casino features 558 slot machines, 10 table games, 3 poker tables, a casino center bar, and a new hotel lobby, bar, and food outlet. Both Casino revenue of $10.5 million and total revenue of $14.6 million met or exceeded our revenue expectations for the quarter.

We have implemented marketing initiatives, which have made the surrounding communities better aware of our offerings, and we continue a busing program, which has been well-received. Additionally, we expect the conference and event center to open this month, which we believe will drive additional gaming and non-gaming revenue. We have recently added a three-table poker room, which also adds additional gaming revenue.

Finally, we are just putting the finishing touches on refurbishing the buffet area of our Lakeside Restaurant. We believe these changes, with the continued emphasis on operating efficiencies will positively impact both top and bottom line operating results. The total cost of the initial purchase of Rocky Gap, along with the conversion of the old meeting space into a new casino, restaurant, and hotel refurbishments, and the construction of a new event and meeting space, is currently expected to be approximately $35 million.

We continue to maintain a 10% ownership in Rock Ohio Ventures' 80% ownership in the Horseshoe Casino in Cleveland, the Horseshoe Casino in Cincinnati, and the Thistledown Racino. The Horseshoe Casino in Cleveland features approximately 2,100 slot machines, 89 table games, a 30-table poker room, and multiple food and beverage outlets.

The Horseshoe Casino in Cincinnati features approximately 2,000 slot machines, 87 table games, a 31-table World Series of Poker room, several food and beverage outlets, and a parking structure. The Thistledown Racino in North Randall, Ohio, features its existing racetrack, 1,100 video lottery terminals, and new dining and night life options.

Finally, we own 25% of Dania Entertainment Holdings, LLC, which equals an indirect ownership of approximately 5% of the Company operating the Dania Jai Alai Fronton. That company has a Florida gaming license, and is in the development phase of expanding the existing property into a full-scale racino operation.

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

Thank you, Lyle.

Third-quarter results: Net earnings for the third quarter of 2013 were $19.6 million, compared to a net loss of $1 million for the third quarter of 2012. Earnings from operations were $18.8 million for the third quarter of 2013, compared to a loss from operations of $2.5 million for the third quarter of 2012.

Basic and diluted earnings per share were $0.74 and $0.73 respectively, for the third quarter of 2013, compared to basic and diluted losses of $0.04 per share for the third quarter of 2012. Lakes reported third-quarter 2013 net revenues of $15.5 million, compared to prior-year third-quarter net revenue of $3.6 million.

Included in these amounts were net revenues of $14.1 million, and $1.7 million for the third quarters of 2013 and 2012 respectively, related to the operation of the Rocky Gap Casino Resort. Also included in net revenues were $1.4 million in management fees earned during the third quarter of 2013, compared to $1.9 million earned during the third quarter of 2012, related to the Red Hawk Casino. The decrease in management fees earned during the third quarter of 2013 compared to the third quarter of 2012 was due to the August 2013 termination of the management agreement between Lakes and the Tribe, for the management of the Red Hawk Casino, which resulted in only two months of management fees in the current year third quarter.

As Lyle mentioned, during July of 2013, Lakes entered into a debt termination agreement with the Tribe relating to amounts Lakes had previously advanced to the Tribe, and per that agreement, the Shingle Springs Tribe paid Lakes $57.1 million during the third quarter of 2013, which constituted full and final payment of all debt owed to Lakes as of that date. As a result of the receipt of the debt payment, during the third quarter of 2013, Lakes recognized approximately $17.4 million in recovery of impairment charges, because the Shingle Springs notes were carried on our balance sheet as $39.7 million, as of the payment date.

During the third quarter of 2013, Lakes also recognized a gain of $3.8 million on extinguishment of liabilities associated with contract acquisition costs, related to the project with the Shingle Springs Tribe, that were no longer opened upon the termination of the management treatment between Lakes and the Shingle Springs Tribe. In addition, during the third quarter, $2.4 million of intangible assets related to the development and management agreement with the Shingle Springs Tribe were considered fully impaired, and were written down to zero, resulting in Lakes recognizing an impairment charge of $2.4 million during the third quarter of 2013.

During the third quarter of 2013, property operating expenses for Rocky Gap, which primarily related to gaming operations, rooms, food and beverage, and golf, were $8.2 million. 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.

The increase in property operating expenses resulted primarily from the inclusion of gaming-related expenses in the current year quarter. Gaming commenced in May 2013, therefore, there were no such expenses in the prior-year third quarter. In addition, because Rocky Gap was acquired on August 3, 2012, the prior-year third quarter included only a partial quarter of operating expenses.

For the third quarter of 2013, selling, general, and administrative expenses were $5.4 million, compared to $2.8 million for the third quarter of 2012. Included in these amounts were Lakes' corporate selling, general and administrative expenses of $1.3 million, and $2 million during the third quarters of 2013 and 2012, respectively. The decrease in Lakes' corporate selling, general and administrative expenses was due primarily to a decrease in professional fees, as well as decreases in payroll and related expenses, and travel expenses.

Rocky Gap selling, general and administrative expenses were $4.1 million, and $0.8 million during the third quarters of 2013 and 2012 respectively. The increase in Rocky Gap selling, general and administrative expenses was due primarily to increases in professional fees, marketing and advertising expenses, and payroll and related expenses related to the addition of gaming during May of 2013.

Lakes recognized impairments and other losses of $3.4 million during the three months ended September 29, 2013, compared to $2 million during the three months ended September 30, 2012. Included in the current year impairments is the $2.4 million related to the intangible asset associated with the development and management agreement of the Shingle Springs Tribe.

In addition, receivables of approximately $1 million from related parties that are directly related to the development and opening of Lakes Indian Casino projects were determined to be uncollectible, and were impaired during the three months ended September 29, 2013. The prior period impairments and other losses include $1.3 million related to the write down from land held for sale near Vicksburg, Mississippi to its agreed upon sale price, as well as $0.7 million related to costs associated with development plans for Rocky Gap, which was subsequently revised.

Depreciation and amortization was $0.8 million for the three months ended September 29, 2013, compared to $0.2 million for the three months ended September 30, 2012, an increase related to depreciation in Rocky Gap's fixed assets. The Company has existing net operating loss carry forwards of approximately $57 million related to prior years, that are available to offset future taxable income. In addition, during 2013, as a result of the debt termination agreement, and the discount in the amounts received on the Shingle Springs notes, compared to their face value, the Company expected a tax deduction of approximately $13 million.

There was no income tax provision for the third quarter of 2013, because the Company released valuation allowances against deferred tax assets relating to taxable losses available to offset current income. The $0.1 million income tax benefit for the third quarter of 2012 related primarily to current income tax benefits.

We are pleased that during the third quarter our Rocky Gap Casino Resort met our revenue expectations, producing an average slot win per unit per day of approximately $180, and a table game win per unit of approximately $1,460. Hotel revenue per available room was slightly over $100, with an average occupancy rate of 85%. Rocky Gap net income before income taxes for the quarter was approximately $750,000.

Construction of a new event center at Rocky Gap has stayed on track, and will be available for use, beginning next week. The new event center will be able to accommodate large groups, and will feature multiple flexible use meeting rooms. We look forward to expanding our business with this new amenity.

We also recently amended our $17.5 million financing facility relating to the Rocky Gap project, to reduce the interest rate from 10.5% to 5.5%, which will provide significant savings and interest expense over the remaining term on the loan. Monthly principal and interest payments on the outstanding amount of the financing facility will begin December 1, 2013, and continue for 84 months. We have drawn $13.4 million on the financing facility, and although we don't currently plan to make additional draws on the facility, we do have the ability to draw the remaining $4.1 million any time through December 31, 2018.

I'll now turn it back over to Lyle to provide a Company recap.

We currently have a cash and short-term investments balance of approximately $90 million. Additionally, of the $21 million we currently have invested in Rock Ohio, $18.2 million is earning 15% payment in kind interest. Although this interest is not being recorded on Lakes' books, we estimate this $18.2 million will be worth approximately $25 million by the end of the year.

As a result of our investment in Ohio properties, we indirectly own approximately 8% of the Cleveland and Cincinnati casinos, and the Thistledown Racinos. Additionally, our note with the Jamul Tribe, which is currently capped at $60 million will become due and payable when and if a casino currently in the pre-development stage by Penn National opens and any third-party casino development funds have been repaid, and we will begin receiving a cash interest payment of 4.25% once the casino opens. This note was written off our books in prior years.

We believe our overall assets have substantial value that are not fully reflected in our balance sheet, that when considered with our cash position, gives us flexibility when considering new opportunities that will enhance shareholder value.

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

(Operator Instructions)

The first question comes from the line of [Paul Stringler, Espinol]. Please proceed.

Couple quick ones. First, the $18.2 million at Rock Ohio, that tranche will be worth $25 million by the end of the year, or will the entire $21-million investment be worth $25 million?

No, just the $18.2 million will have grown to have a face value of $25 million by the end of the year, as it carries a 15.2% -- 15% PIK interest.

So, if it's PIK interest, you guys are not -- your stake in the Rock Ohio Ventures is not increasing though. You're just getting paid with more debt.

That is correct. As are our partners.

Right. And then just on Rocky Gap, those were some great numbers. It looks like EBITDA came in at about $2.5 million for the quarter?

We don't really give out EBITDA numbers, but that would be a little bit high. We'll be filing our Q in the next couple of days, and we'll actually have Rocky Gap segmented, you'll be able to see the pieces of the puzzle. But that estimate is a little bit high.

Okay. And just, I guess, when we think about this quarter versus subsequent quarters, is this a fair run rate? Or with the event center and maybe fewer wrap-up costs, can we expect margins to increase at Rocky Gap?

I think, obviously, we think margins will increase. However, when we opened -- we opened in May, so we had June, July, August, September, October. We've had, all those have been very good months. So far, November has come in very strong.

However, typically in the casino business, between Thanksgiving and Christmas is pretty much a down time. We haven't run through that one year, so we would expect the fourth quarter probably to be a little bit less than the third, but then I think we'll be ramping up, and it should be equal or greater.

Great. Thanks a lot. Keep up the good work.

The next question comes from the line of Carl Hanson, Feltl. Please proceed.

Couldn't resist talking to you again. Anyway, Tim, the $57-million loss carryforward, in past years, I've seen some companies set up a tax asset on their books, and then subtract the valuation to still arrive at zero, but at least it's visible. I'm wondering if you've ever thought about doing that.

Carl, we actually have done that same accounting, we do have deferred tax assets with the full 100% valuation against it. It's just not under current GAAP, you don't show that gross on the balance sheet.

Oh, okay. In past years, I've seen it. I haven't seen it recently.

Similarly, as far as visibility, would it be feasible to put the $60-million note on the balance sheet, along with the valuation of $60 million? It is still lined up at net zero, but the visibility would be there.

Same concept, right. At this point in time, there is no value to it. It's been written off. Until the project is actually opened, we have no ability to collect on anything. So, again, as a gross, we don't put receivables on the balance sheet that aren't deemed of any value.

Right. I was just thinking of visibility even though the carrying value is still zero.

We do talk about it all the time, and tell people about it.

(laughter) Okay. I got it. Rock Ohio, are there future developments? If they are, I understand the expected cash flow will pay for it.

There are a number of future developments going on in Ohio. A couple of the significant ones, of course, other than just maturing of the business, is that the government did attempt to, and I think effectively has shut down all of the sweepstakes slot machines in the marketplace, which I think -- I'm not sure, but I think it's in excess of 10,000 machines or so, and they are in the process of shutting those down.

In addition, in Cleveland, the parking ramp today does not connect directly to the casino, so people have to park, walk outside to get to the casino. They are under construction with a park -- with a skyway, that goes from the parking ramp directly into the casino. That should come onstream in the first quarter of next year, and we think that will have a significant effect as well.

Lastly, you talked about the increase in value of the $18 million, but at one point, taking the overall investment there, I recall something being alluded to the fact that, that investment could be value -- could bring something north of $100 million. Is that a realistic thought?

No. (laughter) Don't believe it is. Right now, we put $18.2 million investment in that has -- carries that PIK. We have an obligation, if called upon, to put in $4 million more, although we don't think it's going to be called upon. And then, of course, we have another $2 million, or $2.5 million, invested that doesn't have the PIK.

We have never put out a number value on it, other than stating that the face value of our note would now be $25 million. The results of Ohio are across the board with all four casinos, the two that we're part of, as well as the Toledo and Columbus, are doing, I would say, reasonably less than projected, although still profitable.

They're doing -- I know the Cleveland and Cincinnati are doing in the neighborhood of $20 million a month. I think they projected it as somewhere in the $25 million to $30 million. But the ramp-up is taking a little bit slower. They've been getting a significant number of guests, but the win per guest is below expectations.

Thank you very much. Looking forward to next time.

The next question comes from the line of Tim O'Brien, DG Capital. Please proceed.

Just first, you mentioned in the past and you mentioned again that you don't see your value reflected in today's stock price. What are your thoughts on one of your options being buying back stock or issuing a dividend here? How high is that on your list of things you're contemplating?

I would say it's in the -- that's two out of our top three. The third one is, of course, investing in a new business, and we are looking at all three of those options, and they kind of -- we look at them all together.

As you are well aware, we only got the money in September -- or, yes, in September, so -- or late August, so it's only been a couple months that we've been focusing on it. But those clearly are on our agenda every time we have a Board meeting to talk about the priorities.

Okay. And how long have you been looking at sort of all these alternative businesses? Are you --?

We've really just started looking at them in the last 30 to 40 days because, up until September, we didn't know when we would get the money or how much. And, now that we have it and it's real -- it's in the bank -- we're aggressively starting to look.

Any thoughts of whether this will be a gaming business or outside of gaming?

Our primary focus is on gaming, but we are willing and -- we are able and willing to look outside the gaming industry as well.

Okay. On Jamul, Penn has made some interesting or favorable comments on that project. Do you have any thoughts on the likelihood of that going forward in timing? I know -- I believe you have some land there that might be sold to them.

Yes, in addition to our $60-million note from the Tribe, we have 100 acres that is contiguous to the reservation that we negotiated with Penn, and gave them an option to buy it at approximately $7 million. We believe that they'll execute that option, once they start construction and they know they're under construction. It's our understanding, through reading in the weekly gaming sheets, that they are actively working with the Tribe, and they expect to start construction sometime in the 2014 time frame. I can't substantiate that, other than that's what we've read.

We don't have any direct knowledge, although we do know that Penn is actively working with the Tribe. And, of course, what we know is, we know it's one of the best sites there is in the San Diego market, and would be -- once constructed, and they get through the legal hurdles will be a very successful casino. And if they do open, we're very confident that we would probably get our entire payment back with interest, over time.

Okay. Great. On Rocky Gap SG&A, I think, Tim, you mentioned, it came in at about $4.1 million for the quarter. I think that compares, if my numbers are right, to $2.6 million last quarter.

Any one-time fees in there -- you mentioned professional fees -- any one-time professional or marketing fees? Or is that the run rate SG&A you would expect for Rocky Gap?

That's about what we would expect at Rocky Gap. The big number in there is marketing, of course. So, subject -- somewhat flexible with the revenue, how the marketing spend goes, but that'd be the difference between quarter over quarter because this was the first full quarter of casino operations.

Okay. And can you -- I didn't catch it when you mentioned it, can you say again what the table and slot win per day were?

The slots were $180, and tables were $1,460.

Okay. Got it. Thanks, appreciate it.

(Operator Instructions)

With no further questions at this time, I would like to turn the call back over to Mr. Berman and Mr. Cope for closing remarks. Please proceed.

Thank you very much for all of your interest and 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. Thank you, goodbye.

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