RiverNorth Opportunities Fund, Inc.
Q3 2008 Earnings Call Transcript

Published: 24 Nov 2008

[Operator:]

Welcome to the third quarter 2008 Riviera Holdings Corporation Earnings Call. Today we have Mr. Bill Westerman, Chairman and CEO of Riviera Holdings Corporation and Mr. Bob Vannucci, President and Chief Operating Officer of Riviera Las Vegas; Mr. Phil Simons, Chief Financial Officer and Treasurer of Riviera Holdings Corporation, and Mr. Nick Polcino, General Manager of Riviera Black Hawk. Once the company has made its comments, we will open up the lines for questions. Information that Riviera Holdings Corporation presents on this call may contain forward-looking statements as that term is defined in Section 27A of the Securities 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, projection, or anticipate and similar words, and they 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 Riviera, increases in energy costs, economic and political instability, disruptions affecting expansion and modernization, objectives and timetable, onerous regulatory requirements, physically burdensome 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 from anticipated results. Performance or achievements expressed or implied by the forward-looking statements. Riviera does not intent to update its forward-looking statements even though Riviera’s situation or plans may change in the future, unless applicable law requires us to do so. Mr. Westerman, please go ahead sir.

[Bill Westerman:]

Thank you, operator and thank you everyone for joining us today for Riviera Holdings Corporations third quarter 2008 earnings call. For today’s call, Phil will discuss our third quarter and nine months consolidated results. Bob, will review Riviera’s Las Vegas operations. And I will go over Riviera Black Hawk’s operations. At that point, I will wrap up with some closing comments and entertain questions. Now, I will turn the call over to Phil, who will discuss our consolidated results.

[Phil Simons:]

Thank you, Bill. For the three months ended September 30th, 2008, consolidated net revenues were $40.2 million a decrease of $12.2 million or 23% from $52.4 million the same period in 2007. For the nine months period ended September 30th, 2008, consolidated net revenues were $133.8 million a decrease of $24.3 million or 15% from a $158.1 million for the comparable period in 2007. The company’s adjusted EBITDA for the third quarter of 2008, declined by $5.9 million or 58% to $4.4 million from $10.3 million for the same period in 2007. Adjusted EBITDA for the first nine months of 2008, declined by $12.6 million or 35% to $23.5 million from 36.1 million for the comparable period 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 from adjusted EBITDA such as equity based compensation cost, in merger acquisition and development cost and includes costs such as Sarbanes Oxley Act compliance cost. The company recorded a net loss of $3.5 million and a net loss of $18.3 million for the quarters ended September 30th, 2008 and 2007 respectively. The company recorded net income of $826,000 and net loss of $12.1 million for the nine months ended September 30th, 2008 and 2007 respectively. Net loss for the third quarter of 2008 included a $615,000 unrealized gain on derivatives. Net loss for the third quarter of 2007, included a $7.5 million unrealized loss on derivatives and a one-time charge of $12.9 million for retiring our 11% notes in July of 2007. Net income for the nine months of 2008, included a $1.6 million unrealized gains on derivatives and net loss for the nine months of 2007 included a $6.6 million unrealized loss on derivatives. As is pointed in previous calls, we’re required to account for the change in the cost of terminating our interest rate swap agreement, which caused the unrealized gains and losses on derivatives. This mandatory accounting treatment distorts our real financial performance. The balance of our interest rate swap derivative which is reflected as a long-term liability on our financial statement was $11.7 million as of September 30th. Due to the significant fluctuations in net interest rate swap derivative balance we recommend that you concentrate on adjusted EBITDA and/or operating income when analyzing the company’s performance. Capital expenditures for the nine months ended September 30th, 2008, were 21.3 million, comprised of 19.4 million for Las Vegas and 1.9 million for Black Hawk. We expect to make no significant capital investments in the fourth quarter. As of September 30th, 2008, the company had cash and cash equivalents of 20.5 million. During the quarter, we drilled 2.5 million against our revolving credit facility, which is the maximum amount we can borrow without being subject to consolidated the leverage ratio test set forth in our loan agreement. I want to point out that the consolidated leverage ratio test applies to our revolving credit facility, and not our $225 million term loan. Based on our current cash flow estimates, we have no intentions of borrowing additional funds against our revolving credit facility. I will now turn the call over to Bob, who will review the Las Vegas results.

[Bob Vannucci:]

Thank you, Phil. Our in-house convention business continues to hold strong, but we saw significant declines in the room block pick up of Citywide Conventions. Our aggressive marketing approach in both the leisure market segment started in late July and our gaming rewards program has generated positive results. The decline in demand continues to fuel room rate compression and drag down room rates. We will continue to adjust pricing strategies to remain competitive and maintain our customarily high occupancy levels. Four of five towers were remodeled as part of our upscale room remodeling program. This will add more than 200 rooms per day to our inventory, and we are cautiously optimistic that our aggressive marketing approach would generate additional sales and revenue from these new upscale rooms. In the third quarter, EBITDA was 2.9 million, a decline of 3.2 million or 52% from the same quarter in 2007. Third quarter net revenues of 30.2 million were down 7.7 million or 20% from the same quarter in 2007. We mitigated the decline in revenues by reducing third quarter operating expenses by 3.4 million or 10%, but could not overcome the decline in revenues. Third quarter hotel occupancy was 87%, down 6.8 points from the prior year. Convention rooms generated 46% of total room revenue and represented 35% of total rooms sold. Our revised strategies improved the performance of [leisure] rooms which declined 12,500 room nights compared to same quarter prior year. Most of the decline occurred prior to the effective date of our new program in late July. Gaming revenues declined by 3.1 million to 11.8 million for the quarter, due to the combined effect of the national economy and the interruptions created by the construction around us. For the nine months EBITDA declined 31.4% or 7.6 million, 16.6 million compared to the same period to prior year. Net revenues for the nine months were 101.2 million, down 15.4 million or 13% to prior year. Hotel occupancy of 84.4% was down 9.7 points from prior year. Convention rooms generated 42.7% of total room revenue and represented 40% of total rooms sold. Leisure rooms, declined by 62,100 room nights for the nine months. Gaming revenues of 39.3 million were down 8.3 million for the nine months. We are hopeful that our redirected strategies will improve revenues and combined with cost containments will increase our EBITDA going forward. As always, we will adjust our pricing strategies, operating costs to the market to insure the maximum performance on our property. Now, I will turn the call over to Bill.

[Bill Westerman:]

Thank you, Bob. For the three and nine months periods ended September 30th, 2008. Riviera Black Hawk’s net revenues decreased 4.4 million or 31% and 8.9 million or 21% respectively. Consistent with the last two quarters, revenue decreases at our Black Hawk property are attributable to the effects of the Colorado smoking ban, the weak economy and high fuel prices. Our economic conditions worsened through the third quarter. Our revenues declined even more significantly. Adjusted EBITDA for the third quarter was $2.5 million a decrease of 2.9 million or 55% from the prior year. For the nine months, EBITDA declined $5.2 million or 35% from the prior year. Since, joining us, Nick Polcino has made several operational adjustments which paved the way for significant labor and other operating cost reductions. Despite these cost cuts, Nick and his team continue to make service and quality improvements at the property. As other properties are spending more to attract new business, we continue to allocate our [marketing] dollars based on acceptable returns on investment. On Tuesday, Colorado voters approved the referendum to increase debt limits from $5 to $100. We made an increase in hours of operations from 18 to 24, and added roulette and craps to table games. These changes are subject to local approval and would go into effect, on July 1st, 2009. We’ve been analyzing ways to maximize the benefits of these potential changes. In closing, it was a very difficult quarter for Riviera Holdings Corporation. In response to these tough economic conditions, we aggressively cut labor and other operating costs throughout the organization. These changes helped us to retain profits and capital. While it is rather unfortunate to have to let go so many of our team members, I believe that we are employing the correct strategy to maximize income and cash from operations during these challenging times. And in response to our reduction in EBITDA we have suspended our room innovation project after completing the renovations in four of our five towers as Bob told you and spending $18.7 million on the project in 2007 and 2008. Once the economic conditions improve and we have built up our cash reserves, we plan to complete the remainder of this project at a cost of approximately $4.3 million. We expect fourth quarter EBITDA to be down year-over-year, by a similar amount as our third quarter and for EBITDA to trend down year-over-year for the first half of next year, albeit by a smaller percentage. We also expect our cash balances to generally reflect corresponding downward trends. Operator, we'll now take questions.

[Operator:]

Thank you. (Operator Instructions). And we'll take our first question from Larry Klatzkin with Jefferies.

[Larry Klatzkin:]

Quick question. The new rules in Colorado, what does that mean to you and what you guys are going to do in response to it?

[Bill Westerman:]

Well, we don't know what we're going to do to maximize the benefit and we feel that it will be very beneficial in slot with the higher limits and probably extended hours in slots. With respect to table games, we have also considered them an amenity and we will have to reevaluate whether we aggressively are going go after table games or not.

[Larry Klatzkin:]

All right, you don’t think with the $100 tables and roulette and the craps that you could actually start making money on table games?

[Bill Westerman:]

We didn’t support the movement for the referendum. We saw little benefit in it. We think a lot of people got a lot of hype and a lot of hopes that’s going to save these multi-multi million dollar projects where they’ve invested a lot of money, and we hope they’re right. But as far as we’re concerned, we’re going to very cautiously see what – we love the Colorado, we love Black Hawk, we love the $5 limit and we love the slot market. We’ve paid back our entire investment in Black Hawk doing that. And we recognize that some of our competitors have other necessities to recover their investment, and have very, very high expectations. We will observe it and where there is an opportunity, we will expand our table games and craps. But we – at this time, we’re not permitting to expanding table games at least till we see where things go, it will be July for us before anything happens. By then we’ll have a much better read as to what we may have to do to remain competitive in the market.

[Larry Klatzkin:]

But on the slot side, you think you could get profits up 10% by the higher limit?

[Bill Westerman:]

At this point in time and the way the market is, we’re not making any predictions. I think that higher limits will be beneficial in slots.

[Larry Klatzkin:]

And then they need a work over and you’re saying you don’t think that will all be done till July, those things that have to be done?

[Bill Westerman:]

The statewide referendum is subject to local decisions. So, Black Hawk, Central City and Cripple Creek will determine, either by their council men or by a referendum. We think it will just be by their council, whether or not they are going to do, whether they are going to take the limits to $50 or $100, or whether they are going to increase the hours. It is all up to them, but our own opinion is they are greedy enough to look for the tax revenue that they are going to accept what has been passed by the legislature. But they still have to do that and no matter what they do, it can’t go in to effect until July 1 of 2009.

[Larry Klatzkin:]

Okay. I didn’t know it was July 1. Okay. Cool, Bill at least you are always good to have good news. MGM said that they have Ford bookings on Convention for ’09 or better than they were a year ago. Are you seeing anything similar to that?

[Bob Vannucci:]

About the same. We are not seeing a huge increase in convention bookings. But it is about the same as prior years.

[Larry Klatzkin:]

All right and if they are seeing up and (inaudible) that’s actually maybe a little encouraging I mean.

[Bill Westerman:]

Well they are getting very aggressive on pricing. So the question is at what room rate are they getting those bookings.

[Larry Klatzkin:]

All right. All right, thank guys.

[Operator:]

We will take our next question from Andrew Berg with the Post Advisory Group.

[Andrew Berg:]

Hey, Bill. Bill, just a follow up to Larry’s question with respect to the new regulations, is this written under the statute that it can’t begin till July 1?

[Bill Westerman:]

There is a referendum provided that it would be July 1.

[Andrew Berg:]

Okay and is there a mandatory date by which the local, the local governments need to put it on the voters, the July 1 date.

[Bill Westerman:]

I don’t think there is any mandatory date. I think that at least in Black Hawk they are proceeding right away with the council to get this resolved. Nick is that correct.

[Nick Polcino:]

Yes, they told us, they will let us, we will have more information by January 1, but July 1st, date is the correct day the referendum will go into play.

[Bob Vannucci:]

Yes, even if they can announce January 1, and have them vote by late February which is probably an aggressive timeframe and it got passed at that point. You still can’t practically do anything until July.

[Bill Westerman:]

Yes, and I just don’t believe, they’d put into a vote. I think the council has lived up to the local entity government entity as to how they decide to go, I don’t think any of these council and any of the three cities are going to put it up for vote. I think they have just approved themselves and put their hand out to increase slots here.

[Andrew Berg:]

Sounds probably like the right train of thought. Appreciate it. Thank. you, guys.

[Operator:]

We will take our next question from [Bill Garrison] with [Ironworks Capital].

[Bill Garrison:]

Yes, thank you. I was wondering if you might be able to follow-up on convention outlook in 2009. I know in the press release you talked about experiencing a 9% increase in room rates this year, year-to-date on the convention business. With the remodeled rooms, offset by the competitive environment, do you think you will be able to realize the higher prices in the convention business in 2009?

[Bill Westerman:]

We’re not assuming that, we’re going to see flat pricing for next year. It’s an extremely competitive market now and we have some of the larger properties, dipping into our traditional market segments. So, it becomes very, very competitive. I don’t see pricing going down, but I certainly see it going up.

[Bill Garrison:]

Secondly, do you by chance have a cash flow from operations number for the third quarter?

[Phil Simons:]

Yes, hold on one second. The cash flow from operations is $7.2 million.

[Bill Garrison:]

For the third quarter?

[Phil Simons:]

Correct. It’s for the nine months ending.

[Bill Garrison:]

For the nine months.

[Phil Simons:]

Yes.

[Bill Garrison:]

Okay. And I guess I can back into it, but the CapEx amount in just the third quarter.

[Phil Simons:]

Yeah, you can back into it, the nine months number for cash flow, cash invested in investment activities is $18 million, which represents 16.3 million in Las Vegas and 1.6 million in Black Hawk. Just back out the last quarter and you can get the quarterly.

[Bill Garrison:]

Okay. And I guess lastly as again I look to 2009 pretty much just anticipate kind of normal maintenance CapEx spending.

[Phil Simons:]

Right now, we are planning guidance for 2009, is only emergency CapEx in the first six months that is something mandatory from the health department or the fire department. But very nominal and then assuming that the situations, the market changes or as markets stabilize we would expect to spend maybe about a $1 million a month in the last six months. But that would be subject to building up our cash reserves. But as far as the capital budget for 2009 is basically, the instructions are if you are not going to shut the doors because you don't get it then don't waste your time asking for it.

[Bill Garrison:]

Okay. Very good. Thank you.

[Phil Simons:]

Now, we are used to surviving, we've survived for 53 years and we have a healthy cash position and we have a very excellent financial package of loans. 7.5%, slightly less than 7.5%, and we’re going to do everything to make sure we do not have to go hat in hand to the banks to refinance our credits.

[Bill Garrison:]

Okay, thanks. Thanks for the answers.

[Operator:]

And our next question will come from Amine Hassani with Natixis.

[Amine Hassani:]

Thank you. I just needed a clarification, as far as maintenance CapEx, what is, how much is required?

[Phil Simons:]

There is nothing required in the loan docks but roughly about 3 million between the two properties.

[Bill Westerman:]

Yes. We’ve spent a lot of money in the two properties in the last few years and we are in a very, very good shape. So we can get to 2009 with a very nominal maintenance CapEx.

[Amine Hassani:]

Okay, so that expense was about $3 million for the full year?

[Bill Westerman:]

And I’d say that’s probably what we would need. We’ve had years when we spent less than that.

[Phil Simons:]

But there is nothing in the loan documents that requires us to spend a minimum.

[Amine Hassani:]

Okay, great, and also I was wondering that Bill, if you can talk about trends in October, was it bad as September or was it a little bit better?

[Bill Westerman:]

We usually don't bring – I'm looking at my lawyer, he's shaking his head. On advice of our counsel, we usually don’t go and give any information in the conference call. That is not in the press release and that would be considered something, I would actually have to put a 8-K on if I answer to your question.

[Amine Hassani:]

No problem, thank you.

[Operator:]

Our next question comes from John Frank with Harvard Management.

[John Frank:]

Yes, thanks for taking my question. In Vegas, it appears that you started to aggressively compete on pricing late July. And your quote and the release, indicates that you saw a significant up tick in occupancy rates. So can you kind of speak like a month by month comparison, July relative to the next two months what occupancy levels were and if we can start there that would be great?

[Bill Westerman:]

I will ask Bob to do that. He has it around the top of his head I know.

[Bob Vannucci:]

July we ran approximately 70% occupancy and we increased that to about 87%.

[John Frank:]

In the final? And can you speak to maybe EBITDA by month if possible what was the – at the property.

[Bill Westerman:]

At the property Bob can yes. Go.

[Bob Vannucci:]

I don’t have it. I got to go through it.

[Bill Westerman:]

I will tell you. We will take another question and get back to you. So Bob gives you the correct information.

[John Frank:]

That’s fine. That’s all I had to ask. Thank you.

[Bob Vannucci:]

Okay. No, Okay. But we would like – if you can call in later and Bill could give that to you okay.

[John Frank:]

That’s fine.

[Operator:]

And our next question comes from Roy Smolarz with Dominick & Dominick.

[Roy Smolarz:]

Thank you. With regard to the 7.5% very favorable new credit facility, Bill can you comment on what it would take in terms of additional erosion of revenue and profitability and other financial tests that would threaten the existing covenants of that new credit facility?

[Bill Westerman:]

The only thing that threatens – of significance that would threaten that facility is a default interest payment there are no other tests that apply. I mean obviously if we refuse to give them information of the standard boilerplate positive covenants. But they are no ratio tests, there is no, cash tests, there is nothing in the term loan other than paying the interest.

[Roy Smolarz:]

Okay. Thank you and my second question relates to your very specific reference to vigorous control of your expenses during these difficult times. To what extent is the management competition for fiscal 2008, going to reflect any downward change from ’07?

[Bill Westerman:]

No, there will be no incentives and no ESOP payments in 2008. We have not cut pay salaries and we have cut a lot of management vehicle at the property levels. However, you got a real – our corporate staff consists of four executives and three administrative assistants. So, where the savings have come have been at some of this, lot of the salary levels in both properties.

[Roy Smolarz:]

Thank you.

[Bob Vannucci:]

I have got the answer to the EBITDA question. We did $337,000 EBITDA in July, 1.6 million EBITDA in August and approximately $980,000 in EBITDA in September. That’s just for Las Vegas.

[Operator:]

We will take our next question from [Brian Lynch]. (Operator Instructions)

[Brian Lynch:]

Hi, guys. Can you remind me of the dollar amount you said you will – what was your cash balance like after the draw on your kind of facility?

[Phil Simons:]

$20.5 million is the cash and cash equivalent. That doesn’t include the $2.8 million we have in restricted cash.

[Brian Lynch:]

Okay. And what do you think your minimum Cage cash is?

[Phil Simons:]

In Las Vegas our calculation we have to do for gaming, shows that we have about $1.6 million in the Cage. We also have to put money in our ticket redemption kiosks and ATM. So, we carry about $2.1 million balance in Las Vegas and about a $1.8 million balance in Black Hawk. It’s pretty much the minimum. The minimum in Black Hawk is about a $1.3 million plus we have about eight kiosks that will drop that down to five but combined its about $4.4 million to $4.5 million.

[Brian Lynch:]

Okay. And could you remind us and how the construction projects around you have been affecting your business. And perhaps particularly if Fountain Blue was not able to draw on or finish this project, how would then completing certain parts of the project affect your property? Would they – you know have to make sure your property is fully accessible?

[Bob Vannucci:]

Let me answer that in two phases, first as far as the construction impacting us. We have construction starting at the Venetian. And from the Venetian all the way down to the Riviera with the Encore and everything else. Our side of the street basically is under siege and then right next door you have the construction going on it at the Fountain Blue. Across the street obviously had all the implosions and different construction projects going on there which have affected traffic flows. It further (inaudible) walk in traffic. As far as the opening of the Fountain Blue we could believe that that will create a tremendous amount of walk by traffic which we can pick off and bring into our building. We don't have to have the pricing structures the projects that have multi-billion dollar projects, so we can offer a lot of good services and food to our customers and at a much more reasonable price. I think your question was what would happen if the Fountain Blue weren't completed?

[Brian Lynch:]

Correct and is it inhibiting the access to your existing construction. How is it affecting access to the casino?

[Bob Vannucci:]

The impact is pretty much over now. They are very, very close to stopping as a building. The amount of construction vehicles has gone down dramatically on Riviera Boulevard. So that part of the impact for its access is pretty much over. They’ll be starting on the interior of the buildings now, and the casino portion of the building. So we don’t think will impact us as greatly. And the Encore will be opening up soon, so this side of the street should be much more comfortable for pedestrians to walk on.

[Brian Lynch:]

All right, thanks guys. That’s all I have.

[Operator:]

And there are no more questions at this time.

[Bill Westerman:]

Okay, thank you. As always, we welcome your visit to the Riviera Las Vegas and the Riviera Black Hawk. Those of you who expressed some concerns about maintenance CapEx, I invite you to come and see the excellent shape that both our properties are being maintained in, and will continue to be maintained in throughout next year. So, thank you for your interest in Riviera, and we look forward to discussing our year end earnings with you. Thanks again.

[Operator:]

This concludes today’s conference. We thank you for you participation. Have a nice day.