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Dover Downs Gaming & Entertainment (NYSE:DDE)

Q4 2012 Earnings Call

January 24, 2013 9:30 am ET

Executives

Denis L. McGlynn - Chief Executive Officer, President, Director, Member of Executive Committee, Chief Executive Officer of Dover Motorsports Inc, President of Dover Motorsports Inc and Director of Dover Motorsports Inc

Timothy R. Horne - Chief Financial Officer, Principal Accounting Officer, Senior Vice President of Finance and Treasurer

Operator

Good morning, good afternoon, and thank you for standing by. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to hand the meeting over to Denis McGlynn. Please go ahead, your line is open.

Denis L. McGlynn

Thank you, and good morning, everyone, and welcome. Ed Sutor, our Executive Vice President, is here; along with Tim Horne, our CFO; and Klaus Belohoubek, our General Counsel. Tim's going to read our forward-looking statement disclaimer and then we'll get underway.

Timothy R. Horne

In order to help you understand the company and its results, we may make certain forward-looking statements. It is possible the company's actual results might differ from any predictions we make today. Additional information regarding factors that could cause such differences appear in the company's SEC filings.

Denis L. McGlynn

Thanks, Tim. Well, if you read our release, you know it has been a difficult quarter. We had an expanded Maryland Live! Casino, we had the continuing effects of the state's gaming tax rates and we had a brief shut down during Hurricane Sandy. All of which took their collective toll on earnings and gave us our first quarterly operating loss in more than 15 years.

As everyone knows, competition has changed the Mid-Atlantic marketing or operating environments significantly, and the company's performance this quarter, if nothing else, helps to demonstrate the need to revisit our state's gaming tax structure. Our legislature will be in session through the end of June, and our intention is to communicate our challenges to them and seek a reset of the revenue sharing model.

In light of the current challenges, we felt it's in the best interest of the company and its shareholders that we explore opportunities to leverage our company's expertise in the hospitality sector in the direction of new enterprises.

One small first step in this direction involves our opening of the first of what could be several Herschel's Famous 34 Pub & Grill restaurants in Athens, Georgia. This is a company-owned prototype restaurant, developed pursuant to the licensing agreement with former Heisman Trophy winner and NFL superstar Herschel Walker.

The restaurant will be located one block away from the campus of the University of Georgia where Herschel is still revered as the greatest Bulldog ever. We plan to open a week from tomorrow on February 1.

Since we've developed significant expertise in this area over the years by way of our numerous restaurant operations here at Dover Downs, we felt this would be a logical and conservative path to diversification. This first step gives us the opportunity to refine the concept if necessary and then consider additional stores, either company-owned or through franchising channels. We look forward to keeping you updated on our progress in the next quarter.

Finally, as you may know, Delaware legalized full internet gaming last year. The state has hired a consultant who will assist in the development of an RFP, which is expected to be issued in the next couple of weeks, with responses due 45 days thereafter. The state currently expects operations to begin at the end of the third quarter.

With that, I'll turn it over to Tim for financial review and then we'll take your questions after that.

Timothy R. Horne

Thanks, Denis. If you look at the fourth quarter statement of earnings, you'll see our total net revenues of $48.6 million. We're down just over 20% compared to the fourth quarter of 2011. Gaming revenues, consisting of slot machine and table game win and to a lesser extent, horse racing and sports betting commissions, decreased 21.4% compared to last year to just over $43 million.

Our slot win was down about 23% compared to the last year. Hurricane Sandy impacted revenues to some extent as it forced the closure of the casino for 2 days and accounted for a couple percentage points of the slot win decline. But obviously, the added competition from the opening and subsequent expansion of Maryland Live! was the primary driver of the slot declines during the quarter.

As expected, the areas that continue to be impacted most by Maryland Live! are the Annapolis and Eastern D.C. markets, as well as the lowest level of customers in our clubs as the decline during the quarter were lower for the top tiers of our player club.

The average number of trips and spend per trip for our club players were relatively consistent with last year, and we have noticed the much more aggressive promotional environment in the Delaware market recently. Our table game revenue was down about 10% compared with the fourth quarter of last year. Again, that would've been a couple percentage points better without the hurricane.

Table game revenue was more than $5 million for the quarter, and we had a hold of about 16.2% compared to about 16.4% last year. We were just over 34% of the Delaware table game win, which is the same as the fourth quarter of last year.

Regarding our operating profits, our gaming operating margins were down to 5.2%. The decline is obviously from the impact of the lower slot win and was obviously not helped by the hurricane. At the end of the day, the story here is that an all-in tax rate at the level we're currently paying simply does not work at these lower revenue levels, and as Denis mentioned, this is what we need to try and get addressed in the near term.

Other operating revenues, which are net of promotional allowances of approximately $4.7 million, consisted of cash portion of our hotel, food and beverage and other miscellaneous revenues, and they were down almost $1.3 million compared with last year. That decrease was primarily from lower food and beverage revenue, driven in part by the fact that the fall NASCAR race weekend fell in the third quarter this year compared to the fourth quarter last year, and we provide catering and other F&B services for that weekend. And it was also down from lower revenues at most other outlets, given the volume declines on the gaming side.

As a result, the gross profit and the margins for our non-gaming activities were both lower than the fourth quarter of last year, but they were both still fairly strong.

Our hotel occupancy was 81.3% for the quarter, compared to about 87% last year. We drive now 37% of our casino revenue from our hotel guests. Our total win per room is now $525. Our pure cash rate for the quarter was $138 per room. That's down somewhat from last year, largely as a result of the race weekend timing.

Our EBITDA for the quarter was just over $2 million versus $6.9 million for the fourth quarter of last year. The effect of the lower slot win, as well as lower table win and non-gaming profits, offset by slightly lower casino expenses resulted in a decrease. And again, the hurricane impacted this number as well.

Depreciation expense was down from last year as certain components from previous expansions are now fully depreciated. And our interest expense in the quarter was $388,000, which is $237,000 lower than the fourth quarter of last year from both lower average borrowings and lower rates compared to last year.

As you can see, we had a net loss in the quarter of $528,000 or $0.02 per diluted share compared to $2.1 million of earnings last year or $0.07 per share.

On the tax balance sheet, the only significant change you'll see is that our total debt was $58.5 million at the end of the year and was reduced by $10.5 million during the year.

On the attached cash flow statement for the year, you'll see our operating cash flows were about $13.2 million for the year. That's a little lower than last year, primarily from lower net income.

We had capital expenditures during the year of $2.6 million, paid $3.6 million in dividend. And as mentioned, we paid down $10.5 million of debt during the year.

Regarding our opening of the Herschel Walker's restaurant at the University of Georgia that Denis mentioned, our investment in this operation will be approximately $800,000, and we would expect cash returns of 20% to 30% as we stabilize. The hope here is obviously to have a successful opening at this facility and then replicate the model, either ourselves or via licensing arrangements.

Lastly, given the continued effect of the increased competition in our region, primarily from Maryland Live!, and its potential impact on our earnings and cash flows, our board considered it prudent to suspend the quarterly dividend at this time. This will continue to be evaluated as we work with the administration to arrive at a workable gaming tax model for the state.

That concludes our prepared remarks. Operator, if you'd please open it to questions.

Question-and-Answer Session

Operator

[Operator Instructions] We have no questions for the moment.

Denis L. McGlynn

All right, then I can say, thank you, everybody. We'll look forward to talking to you at the end of the first quarter. Thank you.

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