RiverNorth Opportunities Fund, Inc.
Q4 2007 Earnings Call Transcript

Published: 8 Mar 2008

[Operator:]

Welcome to the fourth quarter 2007 Riviera Holdings Corporation earnings conference call. Today we have Mr. Bill Westerman, Chairman and CEO, Mr. Mark Lefever, the Company’s Chief Financial Officer and President of Riviera Black Hawk and Mr. Bob Vannucci, Chief Operating Officer of Riviera Las Vegas. Once the Company has made its comments we will open up the call 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 in 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 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 these 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 cost, economic and political instability, disruptions affecting expansion and modernization, objectives and timetables, owners regulatory requirements, fiscally burdensome planned or unplanned Capital Expenditures and other risk 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 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 intend to update its forward-looking statements even though Riviera’s situation or plans may change in the future unless applicable law requires it to do so. Mr. Westerman, please go ahead sir.

[Bill Westerman:]

Thank you operator and thank you everyone for joining us for Riviera Holdings Corporation’s fourth quarter 2007 earnings call. With me are Bob Vannucci and Mark Lefever. After I discuss the general overview of Riviera Holdings Corporation, Mark will review the consolidated financials, Bob will discuss the Las Vegas operations and Mark will discuss Black Hawk operations. Then I will make some closing remarks and entertain questions. Our Company generated record adjusted EBITDA of $44.6 million for the 12 months ended December 31, 2007. Both properties performed very well and exceeded their respective goals. Our plan to invest in our properties with the excess cash that it became available as a result of our refinance in June have begun to prove that these conservative investments are the best use of funds available to the Company for the immediate future. A few of the projects that have been completed in the last year are as follows

[Mark Lefever:]

Thank you Bill and thank you everybody for joining us today. The net loss for the year ended December 31, 2007 was $18.3 million compared to a net loss of $335,000 in 2006. That significant increase in a net loss for 2007 is result of the Company’s refinancing of its $215 million debt in July. Included in this years net loss to the cash cost of $7.9 million for the call premium and non-cash charges of $5 million expect with the write-off at the previous debt. In addition we incurred $13.3 million in non-cash expense for the effects of accounting for our interest rates swap agreement with our current debt facility. These charges were partially offset by a reduction in interest expense of $2.6 million. For the year ended December 31, 2007 the Company’s net revenue was $205.5 million or $4.5 million ahead of the net revenues for 2006. Company wide we had increases in casino revenues of $2.9 million and a $3.2 million increase in room revenue in Las Vegas. These increases were all set slightly by a $1 million decrease in food and beverage revenue in Las Vegas. The decrease in food and beverage revenues in Vegas related primarily to the decrease in banquet revenues as a result of less convention groups with full banquet events in 2007. The Company’s adjusted EBITDA for the year ended December 31, 2007 was $44.6 million compared to $40.3 million in 2006 at 10.7% increase. The increase was the result of the increase in net revenues describe above, by holding cost constant for the year at both locations. Net loss for the three months ended December 31, 2007 was $6.1 million compared to a net loss of $1.6 million in 2006. In the fourth quarter of 2007 the Company recorded a non-cash charge as $6.6 million to reflect the change in the interest rate environment on our swap agreement. These items were offset by a $2.1 million decrease in net interest expense for the quarter. When we refinanced our debt we saw swap substantially all of our term loan, which would have had a floating libeler rate for a fixed libeler rate over the life of the agreement. This provides the Company with a very attractive fixed interest rate of approximately 7.5%. The loss on the effect of the derivative is a non-cash charge which reflects the amount of money the Company would have to pay at December 31, 2007 if the Company was to break its swap agreement at that time. The continued effects of this derivative will be record over the life of our term loan and depending on interest rates will result in significant swings and in either non-cash income or non-cash losses for the Company in any given quarter. However the loan remains in place until maturity, the expense will eventually net to zero. For the three months ended December 31, 2007. The Company’s net revenue was $47.4 million or $950,000 ahead of net revenues for the three months ended December ’06. The increase in net revenues was the result of the increase in entertainer revenues of $1 million in Las Vegas. The increase in entertainment revenue in Vegas is attributive to a show in our main show room in 2007, but not in the fourth quarter of 2006. The Company’s adjusted EBITDA for the fourth quarter of 2007 was $8.5 million compared to $8.4 million in 2006. A slight increase in primarily the result of the increases in revenues offset partially by an increase in GNA cost which reflected increases in employee benefits and health insurance and approvals for performance based bonuses in the quarter. The Company uses adjusted EBITDA as a measure of operating performance and included in our earnings release is a reconciliation between net loss and adjusted EBITDA. In addition to interest taxes, depreciation and amortization the Company eliminates other costs such as equity based compensation, the effects of our swap agreement, the lots and retirement of the bars and merger costs. Beginning in 2007 the Company had included costs related to [inaudible] actually in expenses in adjusted EBITDA. The 2006 period was restated for this presentation. At December 31, 2007 the Company had unrestricted cash of $28.8 million and the entire amount of our $20 million revolving line of credit available. Total Capital expenditures for the year were $14.7 million with $10.8 million related to Vegas and $3.9 million attributable to Black Hawk. We expect CapEx for 2008 to be $20 million with $17 million in Las Vegas and $3million in Black Hawk. Included in the 2007 Las Vegas CapEx is $1.5 million for our room renovation project. I will now turn the call over to Bob to discuss Vegas in more detail.

[Bob Vannucci:]

Thanks Mark. Our customers have reacted favorably to the upgrades we have made to our property. This will assist us in continuing to increase our room rates going forward. We are offering an upscale room product price position to the mid market and well below other upscale offerings in the market. Our strategies to focus on divisions that produce more favorable bottom line results continue to payoff. Marketing and operations have all been adjusted to meet these objectives. In 2007 for the full year , Las Vegas total revenues were a $151.5 million, an increase of $2.3 million or 1.5% over 2006. We were able to take 91% of the Evit revenue increase directly to the EBITDA line. Our EBITDA margin of 19.9% was up 1.1 points compared to prior year. Total room revenue was $56.7 million compared to $53.7 million in 2006, up $3 million or 5.5%. Convention GAAP occupied 33.7% of total rooms sold. Room revenue generated by conventions comprise 40.3% of our total room revenue. 15.5% of total room sold went to internet guests versus 11.5% in the prior year. Internet sales comprised 14.6% of our total room revenue versus 10.4% in 2006. Our hotel occupancy of 93% was eight tenths of the point higher than prior year. Cash ADR increased to $82.95, a gain of 7.7% or $5.90 compared to prior year. RevPar of 7705 was up $4.68 or 6.5%. Gaming revenues of $62.2 million were up $1 million or 1.7% versus prior year. All of the revenue increase was taken to the departmental bottom line which increased 5.1% or $1.2 million. We continue to realize in performance related to our strategies and judicious management of our resources. We believe that our upgraded room products and newly remodeled casino, teal products and new Race & Sports Book, Bar and Grill will help us continue to drive our ADR upward and achieve efficient gaming revenues that generate positive bottom line results. For the fourth quarter our total revenues increased $681,000 or 2%. 70% of the revenue increase went to the EBITDA line. Our EBITDA margin improved by 1.1 points to 17.3%. Total room revenue was $12.8 million, was flat with last year in spite of softness in the market attributed to winter storms and economic concerns. 25.7% of total rooms sold were occupied by convention guests. Convention room revenue comprised 31.8% of total room revenue. Internet sales comprised 19.7% of total rooms sold versus 14.1% in the prior year. Room revenue from Internet sales was 19.2% of total room revenue versus 12.9% in the same period last year. Hotel occupancy of 89.3% was 1.7 points higher than the same period prior year. Cash ADR increased to $82.14, a gain of 2.4% or $1.89 compared to fourth quarter of 2006. RevPar of $73.24 was up $3.23 or 4.6%. Departmental profits in rooms increased by 6.7% or $72,000. This confirms the effectiveness of our product upgrades and repositioning. Gaming revenues of $14.3 million were flat with prior year. Departmental profits in gaming however increased 13.3% or $669,000. This again is attributable to achieving the 100% cheno capacity, new slot equipment, as well as marketing and operational adjustments made throughout the course of the year. Now I will turn the call back to Mark to discuss Black Hawk results in more detail.

[Mark Lefever:]

For the year ended December 31, 2007 net revenue was $54 million or 4.3% increase over 2006. The increase primarily relates to the increase in slot revenues that’s the result of the higher hold percentage generated by an increase in the proportion of lower denomination slot machines in our facility and the entire marketplace. For the year ended December 31, 2007 EBITDA was $19.1 million, an increase of $2.3 million or 13.7% from 2006 and primarily a result of the effects of the increase in slot revenues while holding cost relatively constant during the year. Black Hawk property generated a fair share with respect to slot volumes for Black Hawk and the Central City market for the year of 138%. For the three months ended December 31, 2007 Black Hawk’s net revenue was $12.5 million, an increase of $273,000 or 2.2%. The increase in revenues was primarily offset by an increase of $345,000 in casino marketing efforts in the fourth quarter related to programs to gear up the property for the effects of the smoking ban in January of ’08. Our Black Hawk property generated a fair share with respect to slot volumes for Black Hawk and Central City market for the three months of 144%. This property continues to generate a very respectable return with an EBITDA margin for the fourth quarter and year of 32% and 35% respectively. With respect to the effects of the smoking ban, for the first three months of 2008, we have not seen a significant decrease in the visitation but we have seen a reduction in time spent on gaming devices as patrons are taking their smoking breaks in our outdoor patios which of course has reflected in a decrease in some our slot volumes. Finally last month Nick Polcino became our property's General Manager with the day-to-day property responsibilities. Nick comes to us with over 25 years of gaming experience and was most recently the assistant general manager of the property in Tunica. We welcome Nick’s attention to detail and experience to our Black Hawk team. I will now turn the call back over to Bill for some closing remarks.

[Bill Westerman:]

We are extremely with our results for 2007. Although as Mark explained we reported a net loss of $18 million with non-cash charges related to our re-financing and accounting for our swap arrangement, we’re in excess of that amount. We are concerned with the probability of additional non-cash charges accounting for swap agreement and a potential expansion of slot machines to race tracks in Colorado. The video lottery terminals VLT’s where proffers tracks -- they would have a significant impact on all the Casinos in Colorado. The Company now today has completed its formal strategic review process which commenced in May 2007 when we retained Jefferies & Company as financial advisor to assist us in exploring a range of potential strategic and financial alternatives in order to enhance share holder value and of course at this process the Company’s financial advisor exploit a sale of the entire Company contacting over 35 potential bidders over several months including Riv Acquisition Holdings and it’s affiliates. In deciding to terminate the strategic alternative process, we took into account the uncertainties that we would be faced by any potential buyer and attempting to complete a transaction. Due to among other things the deterioration in the credit markets, the potential cost of terminating the Company’s swap agreement due to the unprecedented drop in interest rates. The possibility of increased competitions in slot machines at Colorado racetracks and the impact of weak economy condition on the Company’s overall business. While the formal strategic review process did not result into entering into a transaction to sell the entire Company at the present time, we have and we will continue to review all opportunities and consider all proposals that we receive as well as other possible ways in which to maximize share holder value. We continue to have discussions with the Riv acquisition holding group regarding a possible sale of the Company. Although no agreements have been entertained into relating to such transaction nor can any assurance be given that an agreement will alternatively be entered into or entered into on what terms or price. Operator we will now take questions.

[Operator:]

The question-and-answer session will be conducted electronically. (Operator Instructions) We will go first to Bill Garrison with Ironworks Capital.

[Bill Garrison:]

Thank you, couple of modeling questions. On the 2008 CapEx budget I think you said $20 million, 1.5 of which was for the room renovations. That number seems a little higher than I have been expecting could you expand on where some of the incremental dollars have been.

[Mark Lefever:]

Sure in 2007 that was $1.5 million spent on the rooms renovation, that’s $20 million for 2008 we expect $13 million in renovation capital of that 20.

[Bill Garrison:]

Okay

[Mark Lefever:]

And that’s part of our announced plan of $25 million over 30 months about 8 months ago.

[Bill Garrison:]

Okay, alright that makes sense and would depreciation kind of run essentially in line with where was in 2007 or upper to that.

[Mark Lefever:]

Starts creeping up the little bit probably a couple of million by the end -- year-over-year.

[Bill Garrison:]

Okay and lastly just on the economic front, I was wondering if you could provide any comments on your visibility in the convention business in 2008 at this point of time.

[Bill Westerman:]

Well we ended up the fourth quarter of the year, we were a little bit behind in conventions but the market was down almost 12% in convention attendance. The indications this year looked pretty good for us and in the first couple of months we have done very well with our convention business and fully intend to end the quarter officially ahead of last year.

[Bill Garrison:]

Okay. And typically as you look to the back half of the year, typically are those conventions already booked at this point in time or is that --?

[Bill Westerman:]

No, most of our convention books a minimum of the year out, we do get about 20% of our convention business in the year for the year but the majority is booked at least one year out.

[Bill Garrison:]

Okay. And so in that regards you actually feel like your pretty sitting in the --?

[Bill Westerman:]

Yeah, we feel very confident that we will be able to equal last year’s performance if not exceed it.

[Bill Garrison:]

Okay. Thank you.

[Operator:]

Now we go next to Jane Pedreira with Lehman Brothers.

[Jane Pedreira:]

Hi, all of our questions have been asked and answered. Thank you.

[Operator:]

Now we will go to Louis Sarkes with Chasapeake Partners.

[Louis Sarkes:]

Hi, this is a question I think probably for you Mark. In the press release you talk about the strategic process, one of the reasons that you gave would be the cost of terminating your swap agreement. Could you explain that in those little bit better detail?

[Mark Lefever:]

Sure the amount that we have, our bank loan -- a change in control will trigger the bank to be able to put the loan. So at any point in time that that would happen, the swap would be have to be broken. So if that was to happen at December 31 that would have been a $13.3 million charge. If it was to happen as at the end of February, it probably would have been about $21 million.

[Louis Sarkes:]

Okay. And is there any way to track how the cost of that goes?

[Mark Lefever:]

It’s tied to the market but it’s present value, so as we get closer to the finish line of the loan, it starts to wind back down if the rates were to stay constant.

[Bill Westerman:]

And also the amount of the swap starts to wind down next year too.

[Louis Sarkes:]

Okay. Thank you.

[Operator:]

We’re back to Jane Pedreira with Lehman Brothers.

[Jane Pedreira:]

Hi, this is Monica [Hansky] calling in for Jane. Bob just a quick follow-up actually on that convention question. It sounds like you guys are pretty bullish on going forward in 2008 but just on the whole are you seeing any cancellations at all or net-net it, everything really does look good?

[Bob Vannucci:]

We got -- we have gotten some cancellations that were have been weather related and as you know storms beginning at the end of October of last year all the way through the first couple of months of this year have impacted air travel and for a variety of reasons for people not come, so we have seen some cancellations from that. We have been able to hold our convention business with minimal attrition in the first couple of months. Going forward I'm sure the economy and potential weather conditions are going to have some impact.

[Jane Pedreira:]

Okay. So those cancellations predominantly as sort of backward looking in terms of what you have seen already in Q1 but going forward -- Okay, thanks. I think that pretty much covers it. Thank you.

[Operator:]

Over to next, we go next to Dennis Farrell with Wachovia.

[Dennis Farrell:]

Good afternoon everyone. Quick question -- and now are two questions actually. One would be if you could just talk about the kind of in the polling with what you are seeing with the race tracks in Colorado and also what the potential process is for a legislative relief for minimum bedding and maybe some table game relief at least in Colorado as well.

[Bill Westerman:]

Well take them one at a time. the polling that’s going on at the Colorado Gaming Association is still confidential, but now to take your second question the process as we understand it, as if there is going to be a referendum placed on the ballet in November, it will have to be filed by April 25th. Our guess is it will be filed at April 25th above five minutes before the close of business. So we really won’t till then whether there is going to be a referendum filed with respect to the expansion of gaming to the racetracks. All of the intelligence we have indicates that there is a high probability that it will. With respect to the expansion of gaming this is -- our own Company’s position is very adamant. There is a much greater threat to the viability of gaming in Colorado to the expansion of racetracks and 100% of the effort to be devoted to fighting this issue which is critical we believe to all the properties in Colorado and we will be reluctant to see -- we’ll be more than reluctant. We will be very disconcerted if we see this effort diluted by another effort to expand the hours or the games or the limits and we think this is bad in anyway no matter what happens because ultimately it would open up the road for -- take us off the high road and fighting the gaming in the racetracks and we just hope that won’t happen but we are only one voice in the association, so we just -- our own opinion is we would really shoot ourselves in the foot to the property, the industry that they were to presume any increase or any change at this time.

[Dennis Farrell:]

So, just to be clear, so you are saying that the referendum for relief in potential black hawk could also be titled at expansive racetracks in Colorado or is that --?

[Bill Westerman:]

I don’t think there would ever be a combined referendum. If the gaming association or some of the members were to decide to go for a referendum, they would also have to file that by April 25th.

[Dennis Farrell:]

Okay and then last question in regards to business in Las Vegas may be if you could just provide some color about what you are seeing in regard to slot play in January and February.

[Bill Westerman:]

Our slot play is basically flat.

[Dennis Farrell:]

Okay

[Bill Westerman:]

We are not seeing any increases. I think it relates to and we were discussing this, this morning. Really the window booking window for FIT’s, it keeps shrinking. I guess the point now it’s almost in the week for the week. As a result you look at making critical decisions in your Company as to whether you reduce your run rates or maintain your rate integrity, what position is been to maintain our rate integrity we are not gong to reduce rates and try to compete with some of the lower end properties in the city. Now rates are very, very price positioned very carefully to be well below the premium properties in town but we don’t try to compete with the low end of the market which is a tendency that some properties try.

[Dennis Farrell:]

Thank you.

[Operator:]

We will go next to Scott Van der Bosch with Navigare Partners.

[Scott Van der Bosch:]

Yes just wondered if you could spend a little bit more on your comment about the effect of this whole convent in Colorado. You mentioned volumes were visitation was the same but that the players were kind of taking breaks and can you maybe elaborate on that a little bit?

[Bill Westerman:]

Sure, we had a control group, we have been looking at about a 100 and we tracked the play before and after, it’s about a little more than a 10% decrease in their volumes since the smoking took effect, the smoking ban and additionally we haven’t seen any significant new member signup related to these, all these non-smokers that are suppose to be running up the hill, so..

[Scott Van der Bosch:]

Okay, right, thank you.

[Operator:]

We will take a follow-up from Louis Sarcas.

[Louis Sarkes:]

Could you just give more in general the tone of business in Las Vegas. We understand from listening to others that January was a difficult month but we have heard it said the dwell by some of your competitors that February is better than January and March seems to be off to a pretty decent start, better than even February. Are you seeing the same trends?

[Bill Westerman:]

Yeah. I think January and February both in comparison to prior are going to be down. The main impact seems to be the FY team market. As I said earlier, we are just not – we are not getting the -- the booking window has shrunk dramatically and that is the tendency when people were trying to make up their mind whether they should travel or not. You compare that to air traffic volumes for the city which were down in every month in the last quarter last year last year and deploying passengers and I'm sure the results will be the same this year. So looking forward, I would say it’s -- you are going to see some declines in the quarter probably not too much improvement till the second half of the year.

[Louis Sarkes:]

Okay, thanks.

[Operator:]

There are no further questions at this time. So I will turn the call back over to Mr. Westerman for any additional or closing remarks.

[Bill Westerman:]

We look forward to seeing all of you at our shareholder meeting to be held Tuesday, May 13 in Las Vegas. As always we welcome your visit to the Riviera Las Vegas and Riviera Black Hawk and thank you for your interest in Riviera.

[Operator:]

Once again, that does conclude today’s conference call. We appreciate your participation. You may disconnect at this time.