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Executives

Jill Alexander - Senior Director of Corporate Communication

Virginia M. McDowell - Chief Executive Officer, President and Director

Dale R. Black - Chief Financial Officer, Principal Accounting Officer and Assistant Secretary

Analysts

Celeste Everett - Goldman Sachs Group Inc., Research Division

Brad J. Boyer - Stifel, Nicolaus & Co., Inc., Research Division

Chad Beynon - Macquarie Research

Carlo Santarelli - Deutsche Bank AG, Research Division

Ray Cheesman

Isle of Capri Casinos (ISLE) Q3 2013 Earnings Call February 20, 2013 1:30 PM ET

Operator

Ladies and gentlemen, thank you so much for standing by. Welcome to the Isle of Capri Casinos Third Quarter Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded and will be available for replay.

I would now turn the call over to Jill Alexander.

Jill Alexander

Good afternoon. All statements made during this call that relate to future results and events are forward-looking statements that are based on our current expectations. Actual results and events could differ materially from those projected in the forward-looking statements because of risks and uncertainties, which are discussed in our annual and quarterly SEC filings and in the cautionary statement contained in our press release. We assume no obligation to update our forward-looking statements.

We are joined on the call today by Virginia McDowell, President and Chief Executive Officer; and Dale Black, Chief Financial Officer. With that, I'll turn the call over to Virginia.

Virginia M. McDowell

Thank you, Jill, and good afternoon, everybody. At the Investor Day that we hosted shortly after we opened our exciting new property in Cape Girardeau last fall, we had the opportunity not only to tell but more importantly to show the members of the investment community how we have quietly, strategically and effectively been transforming our company over the past few years.

As a result of rethinking our business model by focusing on rightsizing our business, engaging our customers and employees, focusing on generating free cash flow and renewing our assets, we're now a stronger, cleaner and leaner company. We have monetized non-core assets, entered new markets opportunistically and invested in our properties in order to remain competitive and to extend the property life cycles.

We've opened our $135 million flagship Isle Casino in Cape Girardeau, and we're well underway in our construction of our flagship Lady Luck at the Nemacolin Woodlands Resort in Pennsylvania, and we've been selected as the operating partner for The Provence, a stunning $700 million upscale resort in Center City, Philadelphia, that will compete for the remaining gaming license in the city. Our hotel renovation project in Lake Charles is complete, as well as the rebranding and renovation of Lady Luck Vicksburg. We will continue to deploy capital on targeted projects across our existing portfolio.

In Cape, we are pleased with how the property is ramping up, as we have introduced our marketing programs after an initial period of evaluating the property's organic growth. Property continues to be very well received by our customers in Cape Girardeau business community, and we're pleased that we are attracting customers from Illinois, Kentucky, Tennessee and Arkansas, as well as Missouri. So while our results this quarter indicate that we faced the same economic headwinds that are being countered not only by our competitors but are also evident in the retail sector, we believe that operating results at most of our properties demonstrate the investments we've made in our asset base to renew our fleet are helping to improve profitability.

And with that, I'll turn the call over to Dale.

Dale R. Black

Thanks, Virginia. Good afternoon, everyone. Most of the financial results, obviously, are laid out in the press release, so I'm just going to briefly mention that our diluted loss per share from continuing operations was $0.03 this year compared to a loss of a $0.01 a year ago.

The current year quarter included just over $1 million of preopening and development costs, while last year's quarter only included $100,000 of the similar costs, also benefited from over $900,000 -- or almost $900,000 of insurance recoveries. Before the consideration of these items, the loss this year would have been at $0.01 on sort of an adjusted basis, and last year, without the benefit of the insurance proceeds, would have been a $0.03 loss, so the results actually flipped.

On to our balance sheet. At the end of the quarter, we had $67.8 million in cash and debt of $1.15 billion, consisting of $10 million revolver, $491 million on the term loan, $300 million of senior notes, $350 million of senior subordinated notes and then $4 million of other debt. Our debt decreased approximately $30 million during the quarter, and our cash capital expenditures were $34 million. Our leverage for covenant purposes at the end of the quarter is approximately 5.7x, and our borrowing capacity is $243 million. We capitalized interest in the quarter of approximately $800,000.

And then, just one thing about the future I want to point out. As we move into the fourth quarter here, I'll remind everyone that last year was a 14-week quarter because the extra week in the fiscal year came in the last quarter.

At this time, we can start taking questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Kevin Coyne with Goldman Sachs.

Celeste Everett - Goldman Sachs Group Inc., Research Division

You have Celeste Everett on for Kevin. Just to start off, wanted to ask about the M&A environment. Are you guys currently looking at any single assets? Or are there any particular markets that are more attractive to you?

Dale R. Black

We're well aware -- just about any time, if something comes on the market, we're at least notified or we usually find out ahead of it even. And like most people, there are certain ones we look at, certain things that we don't. I can't -- we tend to evaluate everything on a case-by-case basis. I can't tell you that there's any particular market that we're dying to get into, and other than Atlantic City, there's none that we're really just avoiding like a plague.

Celeste Everett - Goldman Sachs Group Inc., Research Division

Okay, great. And then moving to Philadelphia, on the agreement that you announced, can you give us some more details on the property and then also the structure? Will you have any sort of equity investment in that? And then, your thoughts on the timing from the Pennsylvania Gaming Control Board.

Dale R. Black

Well, what we understand is that the presentations to the Gaming Board will be this -- I believe, in April, this spring, and what they've said is they expect to issue the license by the end of this year. And there's a lot of details about the property in the press release. It's comparable to or more grand than most of the projects that have been submitted out there. Should be -- it's in the old Philadelphia Inquirer building. I think they're anticipating 120,000 square feet of gaming space. 3,300 slots, 150 tables is what they've put in their proposal. Our deal there is we would be the manager of the complex and receive a fee for managing. Our financial commitment is basically what we have up right now. We've put up $25 million in the form of a letter of credit, half the licensing fee. If the project wins the license, that $25 million is converted to a loan that we have the option of either having paid off when they get the permanent financing or rolling into a -- somewhere into the capital structure, if we make that choice at the time. We don't have any further financial obligation to the project, and we'll -- we wouldn't be a -- in the common equity structure that we could elect to roll the $25 million into one of the other pieces of the capital structure.

Celeste Everett - Goldman Sachs Group Inc., Research Division

Okay, great. And then finally, are there any updates on the Davenport property and the city's desire to purchase your...

Dale R. Black

No, we keep -- things keep moving along. Right now, the city isn't doing a lot of -- or is doing a lot of things sort of behind the scene to try to get everything planned out on their part, talking with the IR -- or the RDA, which is the not-for-profit up there. They've been looking for an operator, things like that. We -- you guys probably know as much as we do. I mean, it tends to be in the Quad Cities' papers 3 or 4x a week, and it's just sort of playing out.

Operator

Our next question is from Brad Boyer from Stifel.

Brad J. Boyer - Stifel, Nicolaus & Co., Inc., Research Division

Guys, I wanted to see if you could provide some color as to how much of your business at Cape G is being sourced by guests who may have otherwise gone to Caruthersville. I know you called out some weather issues at Caruthersville in the quarter, but it looks like there may be some overlap in those source markets.

Dale R. Black

There is a little bit. I think the bigger impact in the quarter was both in Caruthersville, and frankly, across Missouri, was there was some pretty bad weather right over New Year's weekend. And it really impacted volumes at all 4 of the Missouri properties and a little bit in Isle during that period of time, too. We had planned on some diminution in Caruthersville from the start. I would say right now, that's probably running -- it's a little bit too early to tell where it'll fall out, but it's probably running in the 5% to 10% range. Once you get to that -- it's about 90 miles between the 2 properties or 80, and once you get to sort of that halfway point or maybe even a little bit closer, we've known all along that Cape was going to be probably a little bit stronger draw just because of the facility.

Virginia M. McDowell

And one of the other things there that we've done is we wanted to see where we're going to be drawing the majority of the Cape customers from and where those markets were stronger. And we are now shifting where we're marketing the Caruthersville property, so we're making sure that the property is taking advantage of the entire geographic area that we've been drawing from.

Brad J. Boyer - Stifel, Nicolaus & Co., Inc., Research Division

Okay, great. And then second, you guys have done a great job, as you showed at the Investor Day, of reinvesting in your fleet, as you call it. I wanted to see if you could just outline any kind of specifics that you have in mind as you kind of look out over the next 6 to 12 months at some kind of projects that you're targeting in your existing fleet. That's all.

Dale R. Black

I mean, the biggest one that we've talked about publicly before and that we're still trying to scope out and get our arms around as to what works would be a -- to take the Bettendorf facility and to go land base with it, and that would be a sizable project. Right now, we're -- like I said, we're still evaluating our options as to what it would cost to build there and what kind of return we expect to get out of it to try to get everything rightsized. So we're not -- we're a ways away from having an announcement, if you will, but that's coming. But that's something we do that we have talked about.

Virginia M. McDowell

Yes, the other 3 things that we talked about at the investor presentation were the pavilion in Lake Charles. We just completed the hotel rooms there. They've been very, very well received, which, I think, you can see in the operating results from this quarter. And we've also talked about looking at hotel properties in Pompano and Kansas City. Kansas City, working with our landlord, the Kansas City Port Authority on some type of third-party development. We're actually working with them on an RFP process right now. And Pompano, we're currently doing a market study and looking at whether or not this is something we would be looking for third-party investment or we might do it ourselves.

Dale R. Black

Yes. So all of those are kind of bigger things that, like I said, are on the discussion plate. They're -- I wouldn't say that they're on the drawing...

Virginia M. McDowell

Not imminent.

Dale R. Black

Yes. But then on a -- kind of similar to what we've done at several of the other properties, we are planning on, over the next year or so, both Waterloo and Black Hawk, we're probably introducing the Farmer's Pick concept, and we're going to be doing very significant renovation and update to the casino floor in Boonville.

Operator

Our next question is from Chad Beynon with Macquarie.

Chad Beynon - Macquarie Research

First one, kind of wanted to go back to Cape Girardeau. You opened very strong from a margin perspective compared to, I think, what most people were thinking. Could you kind of talk about margins at this property? And should we expect to see kind of similar improvements, as we generally do with new regional gaming properties as they open? Or was this something that you kind of nailed it at the open and it was a quicker ramp from a margin perspective?

Dale R. Black

Well, I mean, the one thing that Virginia mentioned, in this quarter, there wasn't a lot of market -- we've opened up to try to test the organic demand in the market. And so throughout the -- early on, we opened it at that way. We just now, within kind of the last month or so, have started going into the database, sending out some more offers, both as a way of improving revenues and EBITDA, right? I mean, now that we've kind of found out where our customer base is coming from, it will ramp up. I think we've said that when this property is matured, which is going to take a while, that we pointed people to the fact that Boonville and Waterloo are 2 very good comps. They both run nice markets. I hesitate to say that there's nowhere a bit up from where we are now, but we opened it with a conscious effort to try to get our cost structure right and -- as we go along. So we are pleased with where the margins came out.

Chad Beynon - Macquarie Research

Okay. And then switching gears to online and social gaming. On the due diligence that you guys have done with your players in your market, is online gaming something that you think could actually broaden out your customer base? And then also, on social gaming, is that something that provides for another amenity to your frequent customers?

Virginia M. McDowell

I think we do a very, very good job in terms of our social platforms at this point as a communications tool. We're very, very active on both Facebook and Twitter at all of our properties. Initially, we were having some trouble trying to figure out how to monetize social media, but we've actually been very successful in driving customers through, whether it's offers for show tickets or buffets or hotel rooms. And it's something that we have found that our customers actually value tremendously. So not necessarily, if you're talking about like the social platforms like Facebook and gaming and so on and so forth at this point, but basically, just using social media as a communications tool. As to online gaming, we're kind of watching it unfold, along with you and everybody else in the United States. It doesn't look like it's moving at the federal level. It's obviously moving on a state-by-state level, but the states are having liquidity issues that we've discussed all along, in terms of why it might not be successful going on a state-by-state basis. As a matter of fact, I think I saw that Delaware was actually looking and entering an international pool in order to address the liquidity issue. So we're continuing to evaluate what our options would be. We continue, as you indicated, to do due diligence with potential partners, but it's not anything that we've gotten on the front burner in terms of anything that we would see significant impact from.

Chad Beynon - Macquarie Research

Okay. And maybe last one, since you have a January quarter end, could you talk about the pace of spend per visit throughout the quarter? And if you expected any or saw any impact from the payroll tax expiration?

Dale R. Black

We have. I mean, spend per visit actually has been held in there or has actually been a little bit better in terms of our trends since the first of the calendar year. We have noticed the same trends that some of the retailers have, with all the payroll tax increases and to some extent, income tax increases, coupled with the fact that the early filers for income tax, that whole process was delayed for a while this year because the forms weren't even ready. So we have noticed an impact, kind of the combination of those 3 things since the beginning of the calendar year.

Virginia M. McDowell

I think one of the significant things to look at for us is we're actually seeing growth in the upper levels of the database, which are the consumers that are probably less impacted by the payroll tax, gas prices, whatever else is impacting -- the headwinds that I mentioned. Where we're seeing the impact is in the lower end of the database and in our retail play. Now again, those are the customers that are probably going to be most impacted by these continuing issues that we have with the economy.

Operator

Our next question is from Carlo Santarelli from Deutsche Bank.

Carlo Santarelli - Deutsche Bank AG, Research Division

Virginia, I think, you basically answered my question previously. But if you wouldn't mind, could you guys maybe give us a better sense of, from a regional perspective, maybe where you're seeing a little bit more pressure stemming from some of the macro and payroll stuff that you just previously mentioned? Are you seeing any kind of differences across your portfolio and in the states you guys are operating?

Dale R. Black

Yes, I mean, we are -- I think the trend, though, is the same that it's been for the last couple of years. I mean, in our case, Mississippi -- to a certain extent Louisiana, but mostly in Mississippi is where we've noticed that, where you've had the higher unemployment for a long period of time. And generally a little bit different demographics anyway, just Missouri, Illinois -- not Illinois, Iowa, have held up reasonably well, and I think on a relative basis, the trends have been about the same. We're seeing the impact in most places, it's just more acute in probably Mississippi than it is anywhere else.

Operator

[Operator Instructions] Our next question is from Ray Cheesman of Anfield Capital.

Ray Cheesman

I was wondering, you guys have recently announced that you would financially support the organization working against additional Iowa facilities. If that passes, does it only impact Waterloo? And how much do you think it impacts Waterloo?

Virginia M. McDowell

I don't know that we've quantified what the impact would be. Certainly, we're not -- we wouldn't be the closest or the one that would be most impacted by this, but we do get some business from that market. One of the things that I have said when I have spoken at conferences across the United States is that Iowa has a pretty good model, at least in terms of the last round when they were evaluating whether or not they were going to issue new licenses. The Iowa Racing and Gaming Commission required that there be an economic impact statement submitted for any of the new licenses that took cannibalization into effect or what the impact would be. And we have every indication that to the extent that they're going to ask that this process be reopened again because I believe that the last time this happened was in, like, 2008, and they said that they wouldn't do it for about 3 years, to the extent that this is brought before the Iowa Racing and Gaming Commission again, I am confident that they will, once again, look at the impact of cannibalization before they decide whether or not they were going to issue any more licenses.

Ray Cheesman

Okay. And just as a follow-up, you guys have been terrific at redeploying your assets into stronger platforms. Once you complete the Iowa municipal sale, are the remainder of the assets, in your opinion, core assets that you'd be looking to hold long term and reinvest in? Or might there be something else, if somebody came forward and showed an interest in it, that you might think was nonstrategic?

Dale R. Black

I don't want to be smart aleck, but I think the short answer to that is, is that any of our assets could be had at the right price. I mean, obviously, there's markets that perform very well. But as a public company, you owe it to your shareholders, if somebody wants to come in and offer more than what you think is something's worth -- you couldn't say no to anything. But at this point in time, there's nothing that we're looking at where we're saying we're rushing out to get rid of one, either.

Operator

And that does conclude today's question-and-answer session. Today's call was recorded into a replay number. If you would like to listen to the recording, please dial (866) 495-6464 and use the passcode of 5425. That does conclude today's conference. Thank you for participating. You may disconnect at this time.

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