RiverNorth Opportunities Fund, Inc.
Q2 2008 Earnings Call Transcript

Published: 2 Sep 2008

[Operator:]

Welcome to the second quarter 2008 Riviera Holdings Corporation earnings conference call. (Operator Instructions) Today we have Bill Westerman, Chairman and CEO, Phil Simmons, Chief Financial Officer and Bob Vannucci, Chief Operating Officer of Riviera Las Vegas. Once the company has made its comments, we will open the call up for questions. Information that Riviera Holdings Corporation presents on this call may contain forward-looking statements as the term is defined in Section 27A of the Security Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. Forward-looking statements include the words may, aim, foresee, potential, should, would, could, likely, estimate, intend, plan, continue, believe, expect, projections, or anticipate and similar words. They also include all discussions about Riviera’s ongoing or future plans, objectives or expectations. Risks and uncertainties that could cause actual results to differ materially from the results anticipated in the forward-looking statements include among other factors uncertain hotel and casino market conditions, financing requirements, interest rates, proposals for the acquisition of The Riviera, increases in energy costs, economic and political instability, disruptions affecting expansion and modernization, objectives and time tables, regulatory requirements planned or unplanned, capital expenditures and other risks and uncertainties detailed from time-to-time in Riviera’s filings with the Securities and Exchange Commission. Forward-looking statements involve significant known and unknown risks, uncertainties and other factors that may cause Riviera’s actual results, performance or achievements to differ materially. Riviera does not intend to update its forward-looking statements even though Rivieria’s situation or plans may change in the future, unless applicable law requires it to do so.

[William L. Westerman:]

With me are Bob Vannucci, COO of Riviera Operating Corporation, Phil Simons, our Chief Financial Officer & Treasurer and Nick Polcino Black Hawk’s general manager. For today’s call Phil will discuss our consolidated financial results, Bob will discuss the Las Vegas operations, I will discuss Black Hawk’s operations, make some closing remarks and then we will entertain questions. I could equate 2008’s second quarter to a perfect storm with several negative factors converging at once on Las Vegas and Black Hawk. In Las Vegas, as expected we had a reduction in walk in traffic as most of our neighboring casinos were demolished and replaced with massive and destructive construction projects. In Black Hawk, also as expected, the market shrunk due to the smoking ban effective January 1, 2008. Then, unexpectedly, and to the detriment of both properties, the economic down turn accelerated and gas prices increased dramatically consequently consumer confidence dwindled and discretionary spending dissipated. Lastly, before Phil gives you the numbers, I want to say that we are very disappointed with our results and the entire Riviera team is focused on improving the company’s financial performance.

[Phillip B. Simons:]

For the three months ended June 30, 2008, consolidated net revenues were $45.6 million, a decrease of $8.1 million or 15% from $53.7 million for the three months ended June 30, 2007. For the six months ended June 30, 2008, consolidated net revenues were $93.6 million, a decrease of $12.1 million or 11.5% from $105.7 million for the six months ended June 30, 2007. The second quarter was very challenging. Revenues decreased at an accelerated pace with year-over-year decreases in all departments. Although our management team did an excellent job containing costs, we were unable to offset the decline in revenues especially in the casino and room operations which carry relatively high profit margins. The company’s adjusted EBITDA for the second quarter of 2008 declined by $4.4 million or 33% to $8.9 million from $13.3 million in 2007. Adjusted EBITDA for the first six months of 2008 declined by $6.5 million or 25% to $19.2 million from $25.7 million in 2007. The company uses adjusted EBITDA as a measure of operating performance and included in our earnings release is the reconciliation between net income and adjusted EBITDA. In addition to interest, taxes, depreciation and amortization, the company eliminates other costs such as equity based compensation and merger costs while including related costs associated with Sarbanes-Oxley compliance in adjusted EBITDA. The company reported net income of $10.1 million for the quarter ended June 30, 2008 compared with a net income of $3.6 million in 2007. For the six months ended June 30, 2008 net income was $4.3 million compared with $6.1 million in 2007. Net income included unrealized gains on derivatives of $9.3 million and $.8 million for the three and six months ended June 30, 2008 respectively. As explained in previous calls, we’re required to account for the change in costs in terminating our interest rate swap agreement which caused the unrealized gains on derivatives. This mandatory accounting treatment distorts our real financial performance. Moreover, we have no intention of prematurely terminating our interest rate swap agreement, therefore any gains or losses recorded will zero out when the loan matures in 2014. The cost of terminating the interest rate swap which is reflected as a long term liability on our financial statements was approximately $12.3 million as of June 30, 2008. We recommend that you concentrate on adjusted EBITDA and/or operating income when analyzing the company’s performance. Cash expenditures for capital projects for the six months ended June 30, 2008 were $10.0 million with $8.7 million in Las Vegas and $1.3 million in Black Hawk. We expect cash expenditures for capital projects for the remainder of 2008 to be $12.3 million in Las Vegas which includes $10 million for our room renovation project and $.5 million in Black Hawk. To conserve cash, we have put on hold all but the most critical capital projects and the completion of our room renovations in the Monaco and North Towers in Las Vegas which are presently in process. As of July 31, we had renovated 631 rooms in the Monaco Tower which represents 64% of the total rooms in the Monaco Tower and 208 rooms in the North Tower which represents 74% of the 280 rooms in the North Tower. We anticipate completing the Monaco Tower room renovation in mid October and the North Tower room renovation in mid August. As of June 30, 2008 the company had cash and cash equivalents of $23.3 million. I will now turn the call over to Bob who will discuss the Las Vegas results in more detail.

[Robert A. Vannucci:]

Our convention business continues to hold strong but our leisure market segments declined dramatically especially in the month of June. This is due to rate compression created by several four diamond properties reducing their rates below our rate tiers and two diamond properties reducing below their lowest historical rate levels. We have been forced to adjust our pricing strategies to remain competitive. In the second quarter, our second quarter EBTIDA was $6.2 million, a decline of $3.2 million from the same quarter in 2007. 56% of the overall decline in the quarter can be attributed to the month of June. Second quarter net revenues of $34.5 million were down $5.7 million or 14% to prior year. We compensated by reducing our second quarter operating expenses by $2.1 million or 6.4% but could not overcome the decline in revenues. Second quarter hotel occupancy based on available rooms was 84.6% down 10.6 points from prior year. We had a daily average of approximately 200 rooms under construction during that period. Convention rooms generated 48% of total room revenue and represented 43.1% of total rooms sold. Leisure rooms declined by 25,000 room nights or 33%. Gaming revenues declined by $3 million to $14.8 million for the quarter. For the six months, our EBITDA declined 24.4% or $4.4 million to $13.6 million compared to the same period prior year. 73% or our EBITDA decline is attributable to the second quarter. Net revenues for the six months were $71 million down $7.7 million or 10% to prior year. Hotel occupancy based on available rooms was 83% down 11.2 points from prior year. We had a daily average of approximately 100 rooms under construction during the six month period. Convention rooms generated 50% of total room revenue and represented 42.8% of total rooms sold. Leisure rooms for the six months declined 48,000 room nights or 31%. Gaming revenues $26.9 million were down $5.2 million for the six months. We are cautiously optimistic that our redirected strategies will help to recover revenues and EBITDA going forward. As always, we will adjust our pricing strategies and operating costs to the market to ensure the maximum performance of our property. Now, I’ll turn the call back over to Bill.

[William L. Westerman:]

For the three months and six months period ended June 30, 2008 Riviera Black Hawk’s net revenue decreased $2.4 million or 18% and $4.4 million or 16% respectively. Our decreases in revenue were the direct result of decreases in slot machine coin in. Slot machine revenues represent approximately 95% of total net revenues in Black Hawk. As we reported in our first quarter conference call, the decrease in the market are attributable to several factors, most importantly, the ban on smoking in Colorado casinos which went in to effect January 1st. Other factors included weather conditions, the deteriorating economy and high gas prices. Our Black Hawk property generated fair shares for the three months and six months ended June 30, 2008 of 116% and 120% respectively, down slightly from the 2007 periods. As we’ve said before, we define fair share as total coin in in the market divided by the number of slot machines in the market compared to our slot coin in and our number of slot machines. Although our coin in decreased more than the Black Hawk market and our fair share fell, we attribute this to our philosophy of focusing on return to our marketing dollars to maximize EBTIDA rather than to maximize revenue. Adjusted EBTIDA for the second quarter was $3.5 million, a decrease of $1.3 million or 28%. For the six months, EBTIDA declined $2.3 million or 23% to $7.4 million. The decrease were the result of the effects of the decrease in net revenues partially offset by a decrease in operating and marketing expenses. Even with these decreases in earnings, we generated a bit of margins of 32% and 33% for the three and six months ended June 30th respectively. Nick Polcino, our new General Manager continues to take steps to streamline the organization and improve efficiency in both the gaming and food and beverage operations and is focusing our marketing dollars where they will generate the greatest return. Before I turn this over for questions, I want to make a few closing remarks. I want to call your attention to the fact that even though our consolidated EBTIDA decreased by $6.5 million for the six months of 2008, our cash paid for interest on our debt decreased $4.5 million which helped to mitigate the decline in EBTIDA. As discussed in previous calls, the interest rate on our debt was reduced from 11% to roughly 7.5% with our new credit facility agreement which went in to effect in June of last year. Although we are maintaining tight control on all our discretionary expenses and putting off all but the most essential capital projects on hold, we are being careful not to do so to the detriment of our customer service, ambiance and maintenance. Even though they are consistent with the numbers reported by other gaming companies, I want to repeat that we find our decline in revenues and income unacceptable and we are adopting new and aggressive marketing programs to address the situation. I want to thank the many team members that have pitched in during these difficult times to position the Riviera for growth when the economy turns around. Our management team continues to focus on the basics and controlling costs to mitigate the reductions in revenue. Operator, we will now take questions. We have no questions at this time.

[William L. Westerman:]

That makes two times in a row nobody had any questions. Thank you. I personally think some of our results deserve some questions but as always, we will be glad to hear any comments you’d like to make later on. As always we welcome your visit to Riviera Las Vegas or Riviera Black Hawk. Thank you for the interest in Riviera and we look forward to discussing our third quarter earnings.