Full House Resorts, Inc.
Q2 2013 Earnings Call Transcript

Published: 9 Aug 2013

[Operator:]

Good day everyone and welcome to the Full House Resorts Incorporated second quarter 2013 earnings conference call. Today’s call is being recorded. At this time, I would like to turn things over to Mr. William Smith of ICR. Please go ahead.

[William Schidmt:]

Thank you, Sarah and good morning. By now everyone should have access to our earnings announcement and Form 10-Q, which was 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 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 Hilliou:]

Thank you, Bill and good morning everyone. With me today on the call are Mark Miller, our Chief Operating Officer; and Deborah Pierce, our Chief Financial Officer, who will assist me in reviewing our second quarter results. Overall, our properties continued to perform well in the second quarter of 2013 despite additional competition at the Rising Star Casino and as we know, a stagnant economy. First, our Silver Slipper Casino performed as expected and consistent with prior year results in the second quarter, despite weak regional revenues. This is the third quarter Silver Slipper’s results are included since we closed on the acquisition on October 1, 2012. The cost reduction and marketing program discipline we put in place at the beginning of the year are continuing to yield improved results. As indicated in the press release and in our 10-Q, we have received a commitment from our first lien lenders for $10 million of additional first lien borrowings under very favorable terms. We expect to close on the financing and issue a notice to proceed on the 142-room hotel with a total all-inclusive budget of around $17.5 million sometime within the next 30 days. This hotel is a much needed amenity for our customers at the Silver Slipper and continues to be a significant part of the reason we acquired the Silver Slipper last October. We are very excited about this important step forward and while we have not finalized all terms with the contracting parties, we are much closer and expect to move forward in the very near future. More on this from Deb in a few minutes. Our Rising Star Casino Resort continued to feel the effects of increased competition in Columbus and Cincinnati, with revenue approximately 20% less than the prior-year period. However, we knew when we purchased the property that competition would eventually impact results. Overall market growth has been weaker than expected as the new properties have entered the Ohio market and a fierce marketing war has broken out among some of our competitors. Our property management team has continued to proactively manage their cost structure and marketing strategies, focusing on a profitable customer segment in response to this new capacity in the market and what is, in our opinion, irrational marketing. As a result, despite a $4.5 million decline in revenue, EBITDA only declined by $1 million. We continue to evaluate the impact of the new competition in Ohio and will make additional adjustments to our cost structure and marketing strategy as needed. On a positive note, we expect that the anticipated fourth quarter opening of the 104 third-party hotel at Rising Star will provide us with a boost going forward. We are currently running at capacity. Our Northern Nevada operations continue to perform well. EBITDA for the quarter was up 16% due to improved results at our Grand Lodge Casino. Overall, we are pleased with the performance of our properties and our team members, as we generated adjusted EBITDA of $4.4 million for the quarter compared to $2.9 million in the prior-year period. I will now turn the call over to Mark who will go into more detail about the financial results for the quarter and I will close later with a few additional comments.

[Mark Miller:]

Thank you, Andre. Deborah and I will review a few highlights of our second quarter 2013 financial performance and condition before we respond to questions you may have. I will be discussing operations and financial results at our properties and Deborah will follow up with our consolidated financial results and financial position. In the second quarter of 2013, our Silver Slipper Casino generated revenue of $13.4 million and adjusted EBITDA of $2.5 million. These results are about what we expected, consistent with results generated in the same quarter last year, prior to our acquisition, and reflect the same weak revenue trends that were experienced in most regional markets. Results in the quarter were positively impacted by a focused effort on profitable marketing programs and cost reductions, which have been implemented by General Manager John Ferrucci and his management team earlier this year. A heightened promotional environment continues in our competitive set, but we are working hard to stay focused on our most profitable customer segments, keeping a lid on costs and watching for an improved revenue environment. As most of you know, this property does extremely well without a much needed hotel. We are looking forward to completion of our planned 142-room hotel approximately 12 months after construction commences, and expect that the hotel will allow us to capture a greater share of our existing customer base’s spend by extending their stays as well as enabling us to attract customers who currently are staying at our competitors’ properties. Rising Star generated revenue of $17.8 million in the second quarter of 2013 compared to $22.3 million in the prior-year period, primarily due to the increased competition from Ohio and as Andre indicated, an extremely aggressive marketing effort by some of our competitors. However, despite the $4.5 million decline in revenue, adjusted EBITDA for the second quarter of 2013 was $1.8 million versus $2.8 million in the prior-year quarter due to continued successful cost containment and lower gaming taxes due to new legislation that allows a certain amount of free play to be tax-free. During the quarter we realized approximately $600,000 to 700,000 of savings from the recently passed gaming tax reduction. We anticipate that going forward our savings from the deductibility of free play will be approximately $200,000 to $300,000 per quarter. In addition to this tax savings, we currently believe we will qualify for an additional $2.5 million in annual tax savings starting in Q3 of next year. These two tax reductions will go a long way towards helping us adjust our cost structure. As we’ve said before, we were well aware of the impending competition from Ohio when we purchased Rising Star in 2011, and that was reflected in the discounted purchase price we paid. We continue to assess the impact of the new competitors and are making adjustments in our operating and marketing models as we move forward. Our 190-room hotel continued to run near capacity during Q2, maintaining our confidence that the new 104-room hotel scheduled to open at the end of this year will make a positive contribution to our results next year. Our Northern Nevada operations, consisting of Stockman’s and Grand Lodge Casinos, contributed approximately $5.2 million in revenue and adjusted EBITDA of $1.1 million for the three-month period ended June 30, 2013, versus revenue of $5.2 million and adjusted EBITDA of $1 million in the prior-year period. Adjusted EBITDA improved for the quarter due to stronger results at our Grand Lodge Casino where we are continuing to benefit from a lower cost structure and modestly improved revenues. Buffalo Thunder recorded management fees in the second quarter of $0.3 million, reflecting the base fee plus a small amount of success fees. I will now turn the discussion over to Debbie Pierce to discuss our quarterly results and liquidity. Deb?

[Deborah Pierce:]

Thank you Mark. For the second quarter ended June 30, 2013, the company recorded net income loss of near break-even and $0.00 earnings per share compared to net income of $0.7 million or earnings per share of $0.04 in the prior-year period. Excluding the $400,000 gain on the sale of our interest in Gaming Entertainment Michigan, otherwise known as GEM, and the associated FireKeepers Management contract and Silver Slipper acquisition costs, earnings per share would have been $0.03 for the prior-year quarter. Second quarter 2013 and 2012 results were both based on weighted average common shares outstanding of approximately 18.7 million. For the three months ended June 30, 2013, total revenue was $36.7 million, a 32% increase from the prior year period, primarily due to a $13.4 million addition to revenue from Silver Slipper, which was purchased on October 1, 2012, and partially offset by a $4.5 million decrease in Rising Star revenue. Operating expenses of $34.7 million in the second quarter of 2013 were up 29%, or $7.8 million from the prior-year period primarily due to the addition of the Silver Slipper, and then partially offset by $4 million in operating expense reductions at Rising Star. As Andre mentioned earlier, adjusted EBITDA was approximately $4.4 million versus $2.9 million in the second quarter of last year. Our interest expense increased in the second quarter of 2013 as a result of the Silver Slipper Casino acquisition. For the quarter, we had $1.9 million in interest expense, compared to no interest expense in the prior year quarter. You will recall that we used the proceeds from our sale of GEM at the end of Q1 last year to retire all of our then outstanding debt and therefore we were debt-free in Q2 of last year and leading up to the acquisition of Silver Slipper on October 1. Interest expense in the second quarter of 2013 consisted of cash interest expense of approximately $1.4 million and amortization of debt costs of approximately $0.5 million. Our effective income tax rate for the second quarter of 2013 was 134% versus an effective rate of 49% in the prior-year. I refer you to our 10-Q for a more complete discussion of our tax rates. The higher tax rate in the current year is primarily due to state tax expense and also limitations on the deductibility of restricted stock compensation. State tax expense is typically high as a result of the non-deductibility of gaming taxes in Indiana. As of June 30, we had a cash balance of $22.8 million, of which approximately $15 million is needed to fund operations. Our expected future cash requirements include funding approximately $7.5 million of the construction costs for the 140-room hotel at Silver Slipper. Approximately $300,000 has been spent to date leaving our remaining cash contribution for that project at approximately $7.2 million. As Andre and Mark previously mentioned, we have received a commitment for a $10 million loan with very favorable terms from our First Lien Lender. The terms and conditions of the commitment, subject to completion of loan documentation, are; the First Lien Credit Agreement will be increased by $10 million dollars; the interest rate on the entire outstanding first lien borrowings will be lowered by 1%; the maturity date will be extended to June 29, 2016; and certain financial ratio covenants will be revised to accommodate the additional extension of credit. We expect these changes in the interest rate and term of the loan will reduce our interest expense and amortization of finance costs starting in the third quarter. We are very excited about this development, which is evidence of the continued confidence of our lenders and their support for this important development project at Silver Slipper. It is important to note that we have not yet closed on this additional debt capacity and have not yet finalized construction contracts or issued a notice to proceed for the construction to commence. We believe that we will be in a position to do so sometime within the next 30 days, but it is not a done deal yet. We currently have $66.3 million in outstanding debt on our balance sheet. On June 3 we elected to pre-pay the July 1 and the Oct 1 2013 principal debt payments of $1,250,000 each. Our next scheduled amortization payment will be on January 1, 2014. We continue to have $5 million of availability on our undrawn line of credit. Capital expenditures for the quarter were approximately $1.1 million; year to date we have spent $2.3 million. We continue to anticipate spending approximately $6 million in our 2013 CapEx program, including a new casino management system at the Grand Lodge, but excluding the Silver Slipper Hotel. With that I will turn it back over to Andre for a few final comments before we open it up for questions.

[Andre Hilliou:]

Thank you, Deborah. Our management teams continue to proactively focus our marketing efforts; on profitable customer segments; containing costs and performing expertly during this challenging period. Our strategy to position the company to primarily a local-oriented casino company remains intact and strong. We believe we are well-positioned for the future as we continue to look for additional casino assets and management opportunities that match our operational criteria and would create long-term shareholder value. Thank you and I will now open up the call for questions.

[Operator:]

Thank you. (Operator Instructions) We’ll take our first question today from Justin Sebastiano of Brean Capital.

[Justin Sebastiano:]

Thanks. Good morning everyone.

[Mark Miller:]

Good morning, Justin.

[Justin Sebastiano:]

As far as the new hotel at Rising Star that’s going to open at the end of this year, what are your expectations for incremental EBITDA out of that?

[Mark Miller:]

Well Justin, we haven’t publicly given a forecast for what we believe, but let me just answer the question a little bit more generally. Under the 90-room hotel there now runs – still runs in the high 90s in occupancy throughout Q2 despite of the competition in Ohio. So on weekends and during peak periods of time, we are still room constrained without any significant hotel marketing or sales effort at all. So we believe that we’re going to be able to fill those 104-rooms most of the time, both as combination of our existing customers and existing demand, as well as having a more, robust if you will, hotel sales and marketing group sales, trying to leverage the golf course from a hotel business perspective. And so this is up, more than 50% increase in our room capacity. And so we believe the contribution will be significant.

[Justin Sebastiano:]

Okay. And then what sort of impact if any, do you expect from the Miami Valley Gaming racino that should open I guess near Dayton in December?

[Mark Miller:]

Well Dayton is a significant market for us. And we get a good chunk of business from Dayton. Dayton has been impacted to some degree by Columbus already. So there is going to be increased competition. There is no question about that, but we think that as we are able to position the property with more room inventory and draw people there to spend the night, then we’re going to be able to defend our position. But it is new competition, and we will have to asses and make adjustments, but one of our big constrains right now is we just simply don’t have enough room capacity.

[Justin Sebastiano:]

Okay. And then maybe give your thoughts on if there is any possibility of the legislature or the Gaming Commission allowing the boats in Indiana to move on to land – their gaming on to land, and if so, is that something you would pursue pretty quickly, or what are your thoughts on that as far as the benefit that maybe that would help little incremental EBITDA for you guys over there at Rising Star?

[Andre Hilliou:]

I’m going to take that question, Justin.

[Justin Sebastiano:]

Sure.

[Andre Hilliou:]

At the end of the day, it’s very, very hard to predict legislators as you know, but we are going to work on that this year and we think it’s going to be make the property much more competitive. We already have the pavilion before the casino, and it would be very equalized and somewhat inexpensive and you have be planning expensive. But it would be easy for us to bring the casino inland in the existing provision, that would make property much more exciting, and of course much more inexpensive to run. A boat on the edge of the Ohio River, it’s not expensive to run. It would be savings and more excitement for our customers. So when and if available, surely we’ll try to do that as quickly as we can.

[Justin Sebastiano:]

Okay. And maybe Andre, you could answer this. As far as Kentucky, I know that the oral arguments are going to start or scheduled for August 21 about instant racing and the legality of those games. When do you expect to actually get a ruling from that, and if the ruling was found that they are in fact legal, will you pursue that project with Keeneland?

[Andre Hilliou:]

Well Justin, we have a preliminary partnership with Keeneland. The detail has been subject to further negotiation, and of course we’re working with legislation of instant racing in the State of Kentucky, and trying to guess when the Supreme Court will render it ruling, it’s hard to do. We know that we will be in front of the Supreme Court, the last week of the month of August. So until frankly we hear from the Gaming Commission Justin, we’re going to try to be – not to make any comment on any kind of clause. If there is a positive ruling, we surely will Keeneland and I would be in instant racing in the State of Kentucky.

[Justin Sebastiano:]

Okay. And then I want to make sure my calculation is correct, but from the new lower rate from the add-ons (inaudible) is that actually lower your interest expense even if you pack on that additional $10 million. Is that correct that your interest expense should actually come down?

[Deborah Pierce:]

Yes, it really should because of the fact that we’re getting 1% less on the current amounts that we have outstanding which is $46.3 million.

[Justin Sebastiano:]

Yes, okay.

[Deborah Pierce:]

They’ll go down there, but then of course as we draw on the line and spend than $10 million, we’ll be paying interest on the $10 million.

[Justin Sebastiano:]

Sure, okay.

[Deborah Pierce:]

In that way, we will be reducing our interest expense because loan [ph] would be able to amortize our financing costs over a longer period because of the extension of the loan.

[Justin Sebastiano:]

Got you. Okay. And if I could just lastly, and this is just again a housekeeping, for stock-based comp, I mean is that been totally exhausted now or I know that you did add another 50,000 shares put on in the beginning of the year but – is that pretty much zero now that?

[Mark Miller:]

It’s not zero, Justin because there is a little bit left to be amortized, but the bulk of it has been recognized. If you look in the 10-Q, the footnote is pretty specific about what the forward-looking amortization or run off is on the stock comp and – so it is not a lot left.

[Justin Sebastiano:]

Okay. All right, thanks guys.

[Mark Miller:]

Thank you, Justin.

[Operator:]

Moving on we’ll hear from Justin Ruiss of Sidoti.

[Justin Ruiss:]

Good morning.

[Andre Hilliou:]

Good morning.

[Mark Miller:]

Hi Justin.

[Justin Ruiss:]

I just had a quick question when I came through the hotel Rising Star that’s being completed, just in terms of competition where – I guess what you had said is mostly your competitors earlier in Cincinnati and then Ohio region, and I know that area is pretty much saturated, but adding the hotel at this point, are you leveling the playing field when it comes to mostly other competitors or is that hotel going to be some more of a draw – I’m not too familiar with many of those casinos, so I don’t know if all of them have lodging space source there, just kind of really, really regional?

[Mark Miller:]

Well not all of them have lodging Justin, but some of them do. In particular the Indiana competitors have a larger hotel than we have. And we are driving from that one hour to two hour sort of range. And I’ve said this before, a lot of customers have the capability to drive home at night, but don’t want to. It’s more comfortable. It’s more convenient for them to be able to spend the night and extend their stay, and of course extent the amount of time that we have their play on the casino floor. And right now with the 190-rooms we’re turning a lot of people away, especially on weekends. And so those people are either leaving early and going home, or they’re finding accommodations somewhere else. The competition in Ohio, some of them – for the most part they don’t have hotel rooms at this stage of the game. And so while our hotel rooms are a bit of a competitive advantage for us, having another 104-rooms is going to allow us to accommodate a lot more people who actually want to come to Rising Star, but simply can’t because there aren’t accommodations for them. So I think the answer to your question is a little bit above but...

[Justin Ruiss:]

All right. That’s actually all I had. Thank you very much.

[Mark Miller:]

Thanks, Justin.

[Operator:]

(Operator Instructions) We’ll hear next from Bruce Baughman of Franklin Templeton.

[Bruce Baughman:]

Good morning.

[Andre Hilliou:]

Good morning.

[Mark Miller:]

Good morning, Bruce.

[Bruce Baughman:]

Just a point of clarification. One of the bullets, it’s repeated down in the copy, it mentions $66.3 million in outstanding debt on its balance sheet – on Full House Resorts balance sheet. Is that debt or liability that’s not on the balance sheet?

[Mark Miller:]

No.

[Bruce Baughman:]

Okay. Thanks.

[Mark Miller:]

No, that’s a balance sheet language is probably redundant, but no.

[Bruce Baughman:]

Okay. Very good, thank you.

[Mark Miller:]

Thanks, Bruce.

[Operator:]

And we’ll talk our next question from Richard Patelli [ph].

[Richard Patelli:]

Yes. I own 3,000 shares of Full House Resorts. And I am quite a few years now, I paid $4.16 and so on. They are sitting at $2.73 now, down another $0.14 today. Just wondering what you have future, do you see with this stocks going back up?

[Mark Miller:]

Well Richard, we don’t procrastinate on the stock price, but I think we’ve laid out what we think the growth opportunities are for the business. We’re excited about the hotel in Rising Star. We’re excited about the hotel at Silver Slipper, both of which we think will generate shareholder value over the long-term. And beyond that we don’t really have any comment on what the current stock price is.

[Richard Patelli:]

Okay. That’s all I really wanted to know. All right. Thank you very much.

[Operator:]

(Operator Instructions) And it appears, we have no further questions today. I’ll turn the conference back over to management for any additional or closing remarks.

[Andre Hilliou:]

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

[Operator:]

Ladies and gentlemen, that does conclude today’s conference. Again we do thank you all for joining us.