Golden Entertainment, Inc.
Q3 2013 Earnings Call Transcript

Published: 7 Nov 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the third quarter 2013 Lakes Entertainment Incorporated earnings conference call. My name is Celia, and I'll be your operator for today. (Operator Instructions) I would now like to turn the conference over to your host for today, Mr. Tim Cope, President and Chief Financial Officer. Please proceed, sir.

[Timothy Cope:]

Thank you, Celia. 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 the 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.

[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 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 have no further obligations or responsibilities with respects 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 included gaming operations at our Rocky Gap Casino Resort, which we purchased in August of 2012. Since this acquisition, we have added a gaming facility, which opened on May 2, 2013. Rocky Gap is a AAA, four 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 that 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 3-table poker room, which also adds additional gaming revenue. Finally, we are just putting the finishing touch and 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 bottomline 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 expect to be approximately $35 million. We continue to maintain a 10% ownership in Rock Ohio Ventures 80% ownership and 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 a new dining and nightlife 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.

[Timothy Cope:]

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 dilutive 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 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, an extinguishment of liabilities associated with contract acquisition cost related to the project with the Shingles Springs Tribe that were no longer old upon the termination of the management agreement 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 to Shingle Springs Tribe were considered fully impaired and were written down to zero, resulting in the 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 the 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 additional 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 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 included $1.3 million related to the write-down of land held for sale near Vicksburg, Mississippi to its agreed upon sale price, as well as $0.7 million related to cost associated with development plans for Rocky Gap, which were 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. The increase is related to depreciation on Rocky Gap fixed assets. The company has existing net operating loss carry forwards of approximately $57 million related to prior year's 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 with their the face value, the company expects a tax deduction of approximately $13 million. There was no income tax provision for the third quarter of 2013, because the company released the 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 the 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 a multiple flexible use meeting rooms. We look forward to expanding our business with this new immunity. We also recently amended our $17.5 million financing facility related 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 of the loan. Monthly principal and interest payments and the outstanding amount of financing facility will begin December 1, 2013, and continue for 84 moths. 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 anytime through December 31, 2018. I will now turn it back over to Lyle. To provide a company recap.

[Lyle Berman:]

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 that this $18.2 million will be worth approximately $25 million by the end of the year. As a result of our investment of Ohio properties, we indirectly own approximately 8% of the Cleveland and Cincinnati casino's and the Thistledown Racino's. Additionally, our note with Jamul Tribe, which is currently capped at $60 million will become due and payable, when and if our casino currently in the predevelopment 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, it gives us flexibility when considering new opportunities that will enhance shareholder value. I will now turn the call over to the operator for questions.

[Operator:]

(Operator Instructions) The first question comes from the line of Paul Stringler, Espinol.

[Paul Stringler:]

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?

[Lyle Berman:]

Just the $18.2 million will have grown to have a face value of $25 million by the end of the year. As a carries it 15% PIK interest.

[Paul Stringler:]

So if it's PIK interest, your stake in the Rock Ohio venture is not increasing now, you're just getting paid with more debt?

[Timothy Cope:]

That is correct, as are our partners.

[Paul Stringler:]

And then just on Rocky Gap, that there were some great numbers, so it looks like EBITDA came in at about $2.5 million for the quarter?

[Timothy Cope:]

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

[Paul Stringler:]

And just, I guess, when we think about this quarter versus sort of subsequent quarters, is this, as to say, a fair run rate or with the event center and maybe few wrap-up costs, can we expect margins to increase at Rocky Gap?

[Lyle Berman:]

I think obviously we think margins will increase, however, when we opened as in May, so we had June, July, August, September, October, 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 it's pretty much a downtime. So 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 quarter, but then I we'll ramping up and it should be equal or greater.

[Operator:]

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

[Carl Hanson:]

Tim, the $57 million loss carry forward, 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.

[Timothy Cope:]

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.

[Carl Hanson:]

In past years, I've seen it, I haven't seen it recently. 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 and still lined up at net zero, but the visibility would be there.

[Timothy Cope:]

It's a same concept. 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 the gross we don't put receivables on the balance sheet that aren't being of any value.

[Carl Hanson:]

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

[Lyle Berman:]

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

[Carl Hanson:]

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

[Timothy Cope:]

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 affectively a shutdown all of the sweepstakes, slot machines in the marketplace, which I am not sure, but I think is 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 casinos. So people have to park, walk outside to get to the casino, they are under construction with the park with a skyway that goes from the parking ramp directly into the casino, that should come on stream in the first quarter of next year and we think that will have a significant affect as well.

[Carl Hanson:]

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 bring something north of $100 million. Is that a realistic thought?

[Lyle Berman:]

No, don't believe it is. Right now, we put $18.2 million investment and that ha carries that PIK. We have an obligation, if called upon to put in $4 more million, 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, a value on it other than stating that that face value of our note would now $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. I know the Cleveland and Cincinnati are doing in the neighborhood of $20 million a month. I think they projected 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.

[Operator:]

Next question comes from the line of Tim O'Brien from DG Capital.

[Tim O'Brien:]

I guess just, first, you guys have 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 year options in buying back stock or issuing a dividend here? How high is that on your list of things that are contemplating?

[Timothy Cope:]

I would say 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 we look at them all together. As you are well aware, we only got the money in September or late August. So it's only been a couple of 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.

[Tim O'Brien:]

And how long you've been looking at sort of all these alternative business?

[Lyle Berman:]

We really just started that in the last 30 days 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, and it's in the bank, we are aggressively starting to look.

[Tim O'Brien:]

And any thoughts on whether this will be a gaming business or outside of gaming?

[Lyle Berman:]

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

[Tim O'Brien:]

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 and timing? And I believe you have some land there that might be sold to them?

[Lyle Berman:]

Yes, in addition to our $60 million note from the Tribe, we have a 100 acre that is contiguous to the reservation that we negotiated with Penn and gave them an option to buy 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 some time in the 2014 timeframe. I can't substantiate that other than that 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'll would probably get our entire payment back with interest or return.

[Tim O'Brien:]

On Rocky Gap, SG&A, I think Tim you mentioned, it came in up at $4.1 million for the quarter. I think that compares, if my numbers are right, at $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 sort of the run rate SG&A you would expect for Rocky Gap?

[Lyle Berman:]

That's above what we would expect to Rocky Gap. The big number in there is marketing of course. So the subject there somewhat flexible with 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.

[Tim O'Brien:]

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

[Timothy Cope:]

Slots were $180 and tables were $1,460.

[Operator:]

There's no further questions at this time. I'd like to turn the call back over to Mr. Berman and Mr. Cope for closing remarks. Please proceed.

[Lyle Berman:]

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. Good bye.

[Operator:]

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