Full House Resorts, Inc.
Q4 2012 Earnings Call Transcript

Published: 6 Mar 2013

[Operator:]

Good day, and welcome to the Full House Resorts Fourth Quarter 2012 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. William Schmitt of ICR. Please go ahead.

[William R. Schmitt:]

Thank you, Tiffany, and good morning. By now, everyone should have access to our earnings announcements and Form 10-K, which has been filed with the SEC. These may also be found on our website at fullhouseresorts.com under the Investor Relations section. Before we begin our formal remarks, I would like to remind everyone that part of our discussion today may include forward-looking statements. These statements are not guarantees of the future performance, and therefore, undue reliance should not be placed upon them. We refer all of you to our recent filings with the SEC for a more detailed discussion of the risks that could impact the future operating results and financial condition of Full House Resorts. I would now like to introduce Andre Hilliou, Chairman and CEO of Full House Resorts. Andre?

[Andre M. Hilliou:]

Thank you, Bill. With me today on the call is Mark Miller, our Chief Operating Officer; and Deborah Pierce, our Chief Financial Officer, who will assist me in reviewing our fourth quarter. We welcome Deborah to her first Full House conference call. Overall, it was an exciting 2012 for Full House. In March, we closed a chapter in Full House's history with the sale of our interest in Gaming Entertainment Michigan, otherwise known as GEM, and the associated FireKeepers management contract. We used the fund received to pay off the debt facility we used to finance the acquisition of the Rising Star Casino in 2011 and to help us acquire the Silver Slipper Casino in Hancock County, Mississippi, finalizing the transformation of Full House from a management fee model to primarily a non-operator of regional casino properties. In December, construction began on a third-party hotel at the Rising Star Casino Resort. We are very excited about this development, which should significantly improve the overall performance of the Rising Star, when it's expecting to open during Q4 this year. In December, Deborah Pierce joined our team as the new Chief Financial Officer. She has extensive financial experience in both public and private companies and most recently served as Chief Financial Officer for Hooters Casino Hotel in Las Vegas since 2005. Prior to that, she served as a key financing -- finance executive in various other casinos' operation, including Vice President of Finance for Ameristar Casinos, Inc. We are pleased to welcome Deborah to the Full House family. Mark Miller retained his title and responsibilities of Chief Operating Officer after wearing 2 hats for quite a while. As we have grown the company through the addition of the Silver Slipper Casino, as well as I need to concentrate on organic growth initiative, we have freed Mark to fully focus his attention on our company operation. Last month, we commenced trading on the NASDAQ under the same ticker symbol, FLL. Transferring our listing to NASDAQ was a decision we made to further enhance our overall visibility and branding while increasing the liquidity of our common stock. Moving to our result, our fourth quarter was challenging on several different levels due to increased competition for Rising Star from new Ohio casinos and inclement weather during the important last week of December. We closed on the acquisition of the Silver Slipper Casino on October 1, 2012. And it was the first quarter that Silver Slipper results were included. While results there were below our internal expectation, we are impressed with the existing management team, and now we are working with them to improve performance. We are continuing to evaluate the opportunity towards the hotel, to the property, and we are currently working on the design and pricing. We hope to have a further update about the hotel in the coming weeks. Our Rising Star Casino faced a difficult quarter compared to the prior year. Revenue was down from the prior year period due to the opening of a new casino in Columbus, Ohio, which negatively impacted our results primarily during October. While we saw performance began to stabilize for November and the early part of December, results were further impacted from bad weather condition in the last week of December, the important New Year's week. You will recall that we had an unseasonable warmer December last year. For the quarter, our property management team did a good job of proactively managing our cost structure in response to the decline in revenue. For the first 2 months of 2013, we have seen result more in line with the prior year, but we'll face a newly opened Cincinnati casino starting in early March, actually now. We look forward to a new 104-room hotel in Rising Star, which should greatly enhance the overall profitability of the property when we open in the latter portion of Q4 2013. Our Northern Nevada operation performed as expected. EBITDA for the quarter was up primarily due to improved result at our Grand Lodge Casino. Overall for the quarter, we generated adjusted EBITDA of $3.1 million compared to $4.8 million in the prior year period, although not in apples-to-apples comparison because of the addition of the Silver Slipper. If you exclude the contribution from GEM in the first quarter of 2011, our fourth quarter '11 adjusted EBITDA would've been around $2.4 million. I would not turn -- I will now turn the call over to Mark to go into more detail about the financial result for the quarter, and then I will close with a few additional comments. Mark?

[Mark J. Miller:]

Thank you, Andre. Deborah and I will review a few highlights of our fourth quarter 2012 financial performance and condition before we respond to questions you may have. For the fourth quarter ended December 31, 2012, the company had a net loss of $800,000 or $0.04 per share compared to net income of $500,000 or earnings per share of $0.03 in the prior year period. Excluding Silver Slipper acquisition expenses of $1.4 million and severance costs of $300,000 in the fourth quarter of 2012, net income would've been $300,000 or approximately $0.02 per common share. There were no unusual transactions in Q4 of 2011. Fourth quarter 2012 and 2011 results were both based on weighted average common shares outstanding of approximately 18.7 million. In the fourth quarter of 2012, our recently acquired Silver Slipper Casino generated revenue of $12.9 million and adjusted EBITDA of $1.9 million. Adjusted EBITDA was lower than our internal expectations and prior year performance as a result of weak economic conditions and increased promotional activity by 2 of our key competitors. We are working with the management team on an aggressive plan to improve the financial performance of the property. Rising Star generated revenue of $19.1 million in the fourth quarter of 2012 compared to $21.7 million in the prior year period. And adjusted EBITDA for the quarter of 2012 was $1.3 million compared to EBITDA of $2.2 million in the prior year period, primarily due to a new casino opening in Columbus in October and significantly worse weather at the last week of December. We have estimated that the 4 snow days we experienced leading up to and including New Year's week versus last year's unseasonably good weather accounted for approximately $400,000 of the $900,000 year-over-year change in EBITDA, with the rest occurring primarily in October, following the October 1 opening of the new property in Columbus. EBITDA margin during the seasonably weak and very challenging quarter decreased to 6.7% versus 10% in the prior year period. Our Northern Nevada operations, consisting of Stockman's and Grand Lodge Casinos, contributed approximately $4.8 million in revenue and adjusted EBITDA of $600,000 for the 3-month period ended December 31 versus revenue of $5 million and adjusted EBITDA of $500,000 in the prior year period. Adjusted EBITDA improved for the quarter due to improved results in our Grand Lodge Casino, where we are benefiting from a lower cost structure. Buffalo Thunder recorded management fees in the fourth quarter of $600,000, reflecting the base fee plus approximately $300,000 in success fees as we exceeded incentive targets during the quarter. SG&A expenses of $12.8 million in the fourth quarter of 2012 were up from $8.5 million in the prior year period, primarily due to the addition of the Silver Slipper. Corporate SG&A was up approximately $500,000, primarily due to the severance costs of $300,000. Stock compensation expense for both the fourth quarter of 2012 and the prior year period was $300,000. As expected, our interest expense increased in the fourth quarter of 2012 as a result of the Silver Slipper Casino acquisition. For the quarter, we had $1.9 million in interest expense compared to $800,000 in the fourth quarter of 2011. This consists of cash interest expense of approximately $1.4 million and amortization of debt costs of approximately $500,000. As a reminder, in conjunction with the Silver Slipper closing, we funded $70 million of our $75 million credit facility, consisting of $50 million of first lien debt and $20 million of second lien debt. The effective interest rate on our debt, exclusive of the financing cost amortization, is approximately 8.1%. Our effective income tax rate for the fourth quarter of 2012 was 73% versus an effective rate of 74% in the prior year quarter. Last year's tax rate was due to an increase in the amount of income apportioned to Indiana. I'll refer you to our 10-K for a more complete discussion of our tax rates. Our actual rates will and do depend to a great extent on the amount of net income and the distribution of our income across our portfolio. Adjusted EBITDA came in at approximately $3.1 million versus $4.8 million in the fourth quarter of last year. We sold our GEM management contract interest at the end of the first quarter of 2012, and this accounts for the reduction in EBITDA contribution from our development segment. I will now turn the discussion over to Debbie Pierce to discuss liquidity and the balance sheet. Debbie?

[Deborah J. Pierce:]

Yes, thanks, Mark. As of December 31, we had a cash balance of $20.6 million, of which approximately $15 million is needed to fund operations. And we had $68.8 million in outstanding debt on our balance sheet. Last November, we prepaid our April 1, 2013, scheduled first lien amortization payment of approximately $1.3 million. Our next scheduled amortization payment will be on July 1. In February 2013, we successfully amended the Silver Slipper Casino land lease to extend its term to the year 2058 from its original termination date in 2028. The amendment also extended the deadline to exercise the $15.5 million option to purchase the land to 2027 from the original deadline of 2017. In exchange, we incurred additional rent of $2,500 per month, and we also agreed not to exercise the option to purchase until February 2019. This will provide us with greater financial flexibility as we continue to grow the company. Capital expenditures for the quarter were approximately $1 million, and we spent $2.9 million in CapEx in 2012. We currently anticipate spending $6 million to $6.5 million on our 2013 CapEx program. That would be exclusive of any potential expansion projects. We're pleased to report that our joint effort with Ohio County and the City of Rising Sun and its foundation for the development of a 104-room hotel is moving forward on schedule. And we're grateful to them for the partnership and the cooperation as we both work to protect and create jobs in the area. The hotel is expected to be completed in the fourth quarter of 2013. And with that, I'll turn things back over to Andre for a few final comments before we open up for questions.

[Andre M. Hilliou:]

Thank you, Deborah. We continue to achieve solid result in our properties and are proud to welcome the Silver Slipper team, our latest acquisition, into the Full House family. We accomplished a lot in 2012 and believe we are well positioned for long-term growth. We continue to seek additional casino assets and management opportunities that meet our criteria and create four our share -- create value for our shareholders. Thank you. And I would now open up the call for questions.

[Operator:]

[Operator Instructions] We'll take our first question from Mr. David Bain of Sterne Agee.

[David Bain:]

Guys, can you give a little bit more detail about your strategy in Kentucky?

[Andre M. Hilliou:]

David, it's way too early to talk about it now. We have not issued any press releases, so we really can't talk about it now.

[David Bain:]

Okay. And then given the impact you saw to the Rising Star from new competition in October, has that caused you to change your thesis on the -- since the opening with regard to your strategy or outlook there?

[Mark J. Miller:]

David, this is the third casino opening we faced in the last 9 months. And we -- it's been a -- the first 2 in Columbus, the pattern has been pretty consistent. Scioto Downs opened in June. We saw a little bit of the hit the first 30 days that we were -- that they were open, not very much actually. And then Hollywood opened their Columbus property in the 1st of October. And we definitely saw an impact on top line for the first 3 or 4 weeks of their opening. And then after that, it kind of settled back, not entirely, but it settled back. And the performance of the property, actually, we did pretty well in November and early part of December. With Cincinnati opening just a couple of days ago, we obviously don't have any quantifiable data yet, but our thesis on Cincinnati continues. I think we expect to see a hit. We expect probably seeing a hit for the next 30 to 45 days, but we really believe that the customers who will be most attracted to that property are not the same customers who are currently coming to Rising Star. So we believe that we'll see the same pattern. Within 30, 45 days, we think things will start to settle back and be consistent with prior performance.

[David Bain:]

Okay, that's helpful. And just last one, if I could. Trends in those markets, I think, for 4Q are pretty weak. I mean, have you seen it get a little bit worse in 1Q since the tax hikes and higher gas prices that are taking effect or is it about the same or any other thoughts?

[Mark J. Miller:]

I think, David, that it's been about the same. I mean, I think that, that, in our view, is the bigger issue is, is that we just are not seeing any improvement in economic conditions, continue to be weak across all the markets. And I think what we saw on the fourth quarter is pretty consistent with what we're seeing in the first quarter.

[Operator:]

We'll take our next call -- or excuse me, question from Justin Sebastiano with Brean Capital.

[Justin T. Sebastiano:]

Do you -- can you quantify -- I know it's pretty early, but I mean, as far as your models, can you quantify what you think Cinci is going to do to Rising Star now that you have, in fact, had Scioto Downs and Hollywood already open? Do you kind of have a clearer picture than your model now?

[Mark J. Miller:]

Well, we haven't -- as you know, Justin, we don't put out forecasts, and we're not prepared to start doing that right now. But I think that we expect Cincinnati, the impact, to be somewhat consistent with what we have seen out of Columbus for the first 30 days or so. I don't think we expect anything dramatically different one way or the other.

[Justin T. Sebastiano:]

Okay. And then has there been any weather impact in February on Rising Star?

[Mark J. Miller:]

A little bit in the very first part of February. In the first week or so of February, we did have some inclement weather.

[Andre M. Hilliou:]

And Justin, we are located between 2 properties. So when the weather is nice, people don't mind driving that beautiful ride on the Ohio River when the weather is a little challenging, they have 2 other properties that they can stop in. So weather has probably no precise impact on those than on some of our competitors.

[Justin T. Sebastiano:]

Got you, okay. And I guess, you got a decent table hold in January, otherwise the property of Hollywood have been down about 5%. Is that kind of consistent with what we're going to see in February or were there any table hold issues?

[Mark J. Miller:]

No, I think February was not -- was a fairly normal month, with the exception of the inclement weather the first part of the month. I think January and February, when you put the 2 months together, our management team there has done a really good job. They've done a great job of managing costs and adjusting to the challenged revenue environment. And we're pretty pleased with where we ended up for the first 2 months of the quarter. At this point, we're evaluating what's going to happen here with Cincinnati opening, and the management team will continue to make adjustments.

[Justin T. Sebastiano:]

Okay. And then I guess, Silver Slipper, is the promotional environment -- has that remained elevated? And also, I've been hearing that some of the snowbirds took a little bit longer to get back to that region than in years past. I mean, do you find that -- was that true? And if so, is there any reason behind that?

[Mark J. Miller:]

Let me do the snowbirds question first, and then I'll come back to the other one. The snowbirds did show up later than normal. And the management team there actually did an informal survey, and it was interesting because their reasons for coming late, and they probably came 3 to 4 weeks later than normal, was bad weather in the North and concern about their homes, and their ability to travel from the North to the South was the biggest reason. And the second biggest reason was concern over the general economic conditions. I think the election, the fiscal cliff, all of that stuff that was happening during the fourth quarter seems to have slowed them down. At this point, they appear to be there, and we're hopeful that maybe they'll stay a little bit longer than they normally do, but that is to be seen. But they definitely did show up later, and weather in the North and economic uncertainties seem to be the primary reasons. To your first question about the promotional activity around the Silver Slipper, its competitors, I think we may have seen a little bit of moderation from where it was in the fourth quarter, Justin. But we would still characterize it as elevated.

[Justin T. Sebastiano:]

Okay. And so does this change then your internal expectations for the year? Is there sort of a paradigm shift? Do you think this will just kind of smooth itself out as the year goes on?

[Mark J. Miller:]

Well, I think we -- I don't think we think that it's just naturally going to smooth itself out. I think we have sat down with the management team, made some adjustments to our marketing plan and our cost structure plan. The management team is currently working on that. I think we're concerned, like everybody else, that the economy has not improved like we had hoped it would. And as a result of that and what we see our competitors doing, we are making some adjustments.

[Justin T. Sebastiano:]

Okay. And then just lastly, for modeling purposes, in the EBITDA table in your press release, the adjusted EBITDA for corporate was a cost of $1.3 million. That's adding back stock-based comp and the severance. Is that $1.3 million a good run rate for fiscal '13, I guess, for Mark? And then for Andre, if you could just give an acquisition strategy update, kind of take us through what you guys are looking at, if it still is that sort of $10 million to $15 million EBITDA target or if you guys are taking on maybe some greenfields or kind of where you're headed at now.

[Mark J. Miller:]

On the corporate expense, Justin, I think that, that $1.3 million number that you have there, again, exclusive of the unusual items and the stock comp, is a pretty good run rate. And I'll let Andre answer the other question.

[Andre M. Hilliou:]

Justin, we really haven't changed our pattern. We are looking at properties where, frankly, we are not competing with everyone. That $10 million to $15 million EBITDA is what we are looking at. We are looking at management contract. And if the greenfield comps, that really fits what we are trying to do and who we are, we surely would look at it as well. So really, we haven't changed our outlook into acquisition in the last 2 to 3 years.

[Operator:]

We take our next question from Chad Beynon with Macquarie.

[Chad Beynon:]

First question here, just kind of big picture. Outside of the economy in general, we've consistently heard from your competitors that their top-tier loyalty segments are still playing pretty well. It's really the low-tier and kind of the retail play who are still needed to be induced with promotions. Is this kind of what you're seeing across the board? And any property color there would be helpful on rated play.

[Mark J. Miller:]

It is exactly what we're seeing, Chad. Participation rates continue to be very weak. But we are seeing increased win per participant, and I think that's primarily because the management teams, from a marketing perspective, have recognized the declining profitability and the declining participation at the low end of the scale and are focusing much more specifically on the higher-quality customers, the higher profit-generating customers. And so you are seeing some top line degradation from this lower-end group. But for those customers who are coming, we're seeing a higher spend. And I think that's acutely true at Rising Star and -- but to some extent, it's true across our entire portfolio.

[Chad Beynon:]

Switching to Silver Slipper, thanks for the update on the kind of the ongoing plans for the hotel. When your competitors in New Orleans has kind of finalized their schedule, and it looks like they're going to be opening up then on the West Bank in the fourth quarter of 2013. I wanted to ask if you guys have overlapping competition in Metairie or some of the other areas there and kind of how you think that will play out during that period when your competitor may have some additional hotel space.

[Mark J. Miller:]

I mean, I think that currently, there's not a huge overlap in our customer base and theirs. I'm sure that there is some, but it's not huge. I think that they probably have the same issue that we have, and that is that when people come, they just can't stay long enough to get the full value from them. And I suspect that their analysis is probably exactly the same as ours. In our opinion, we're not looking to dramatically expand the reach of our property in terms of who's coming to it. But we're looking to provide our existing customers with a more comfortable experience and the ability to stay longer when they do come. So I don't see their hotel expansion as a significant threat to or in any way they changing our thought process about a hotel at the Silver Slipper.

[Chad Beynon:]

Okay. And maybe one last one, switching to sequestration for a second. I know your Stockman’s property gets a decent amount of their business from the local Air Force base up there. When you speak with your GM who runs the property, who's in touch with his patrons, is he seeing anything that should change over the year with sequestration in terms of just the amount of people that are there, kind of spending patterns or employment, anything there that we should look out for?

[Mark J. Miller:]

Well, I don't think there's anything concrete yet that's manifested itself. There are obviously a lot of rumors and uncertainty at the Navy base and in the community of Fallon with regard to what the impact of that will be on training schedules and the number of people, Navy personnel who are coming and going to that property for training exercises. But at this point, the Navy does not publish a schedule of who they're bringing and when they're bringing them under any times or circumstances. And so we never know for 100% sure what the schedule is going to be, but I do -- but there's a lot of concern and uncertainty about it, and we will monitor it carefully. But at this point, we don't have any concrete information.

[Operator:]

[Operator Instructions] We'll take our next question from Paul Strigler of Esplanade.

[Paul Strigler:]

If I add back the $400,000 in EBITDA that you say you lost at Rising Sun for snow days, looks like we're still looking at a sub-10% EBITDA margin. Would you guys -- I mean, I guess, could you, maybe without giving specific guidance, at least directionally, help me think about sort of how to think about EBITDA margins for 2013? Will they be in a double-digit range? Should I keep the conservatism and keep them single-digit?

[Mark J. Miller:]

Thanks, Paul. It's a good question. I would just remind you that, that New Year's Eve week is not an average margin week. That is very -- it's a very concentrated, high-revenue period, and so margins are significantly better during the New Year's week. So from a -- that margin dilution, a big chunk of it, came in that last week of December. I think that our margins in the very high single digits, very low double digits, kind of where we've been running, is what we're targeting and is reflective of the comment I made earlier about focusing on the higher-worth customers and being really, really careful about how much marketing money we spend at the lower end of the value scale. But I think for conservative purposes, I would probably be modeling very, very high single digits or around 10%.

[Paul Strigler:]

Great. And then just a similar question for the Slipper. I mean, it looks like you came in at about 14.5% margins. Is that something you're comfortable with or do you think there's room for improvement there?

[Mark J. Miller:]

Well, on an annual basis, we would do better than that, Paul. The fourth quarter is a weak quarter at Silver Slipper. Seasonally, the first quarter is their best quarter, second quarter and the fourth quarter. So the fourth quarter margins are naturally lower than normal. So we would be looking for an annualized margin rate well into the early 20s.

[Operator:]

It appears there are no further questions at this time. I'd like to turn the conference back to management for any additional or closing remarks.

[Andre M. Hilliou:]

Thank you, Tiffany. We would like to thank everyone for being with us today. With that, we would end the call and wish all of you a great rest of the week. Thank you.

[Operator:]

That does conclude today's conference call. Thank you for your participation.