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Isle of Capri Casinos, Inc. (NASDAQ:ISLE)

Q3 2008 Earnings Call Transcript

March 3, 2009 11:00 am ET

Executives

James B. Perry – Executive Vice Chairman & Chief Executive Officer

Virginia M. McDowell – President & Chief Operating Officer

Dale R. Black – Senior Vice President & Chief Financial Officer

Analysts

Lawrence Klatzkin – Jefferies & Co.

Steven Wieczynski – Stifel Nicolaus & Company, Inc.

Dennis Forst – Keybanc Capital Markets

Justin Sebastiano – Morgan Joseph

David Hargreaves – Sterne, Agee

[Shabbat Badhani] – Claren Road Asset Management

Howard Bryerman – Evergreen Investments

Susan Berliner – JP Morgan

Operator

Ladies and gentlemen, thank you so much for standing by. Welcome to the Isle of Capri Casinos Incorporated third quarter conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions given at that time. As a reminder, today's conference is being recorded and will be made available for replay. Information regarding accessing the replay will be given at the end of today's conference.

Before we begin, I will read the safe harbor statement. This conference call could contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical facts. Such forward-looking statements are based upon the current belief and expectations of Isle of Capri Casinos’ management and are subject to risks and uncertainties, which could cause actual results to differ from the forward-looking statements.

These statements may be significantly impacted either positively or negatively by various factors including without limitation, licensing or other regulatory approvals, financing sources, development and construction activities, costs and delays, permits, weather, competition and business conditions in the gaming industry. Such risks are more fully discussed in Isle of Capri Casinos’ filings with the Securities and Exchange Commission. The information set forth herein should be considered in light of such risks.

Isle of Capri Casinos does not assume any obligation to update the information contained in this conference call. Also, this conference call could contain non-GAAP financial measures such as EBITDA. Following this call, a reconciliation of non-GAAP financial measures to GAAP financial measures will be posted on the Isle of Capri website.

We are joined on the call today by Jim Perry, Executive Vice Chairman and Chief Executive officer, Virginia McDowell, President and Chief Operating Officer, and Dale Black, Chief Financial Officer.

With that I would like to turn the call over to Virginia McDowell.

Virginia McDowell

Good morning. Thank you Stacey. Thank you everybody for joining us on our call. I'm going to get us started today with a few comments on the quarter and the trends that we're now seeing. Dale Black is going to go over a few financial items and then we'll open it for your questions.

As highlighted in our press release, there are two specific areas of our business in which we are particularly pleased. First, it's no surprise I'm sure that we're feeling the effects of weakened national economy on our operation as are nearly all gaming companies. But our cost cutting efforts of both our properties and our corporate office have enabled us to offset all, but $12 million of the $42 million net revenue decline for the first three quarters of the fiscal year.

This decrease in our operating expenses has been critical to our efforts to keep EBITDA as stable as possible year-over-year despite the economic pressures that led to about 9% decrease after we adjust our Biloxi insurance settlement and other one-time charges. Secondly, we've not let the global economic issues distract us from our strategic goal of strengthening our operations.

We've spent the past year clearly focused on improving our customer service and the overall experience of the guests at our properties, and I am certain that we are succeeding. In fact, we're succeeding at a pace even greater than we had hoped or expected. While we've experienced remarkable improvements within front line departments across the company, our positive guest feedback has already increased by 45%. It’s our belief that the improved experiences that we offer our customers have resulted in an increased share of wallet, while our lower cost bases facilitates higher flow through.

While some of the changes we have made were designed to stave off the effects of the economy, we also recognize that our customers are holding us to higher standard in their competition for the leisure dollars. By listening to our customers in responding to their needs we have been able to provide increased value through the delivery of a more targeted entertainment experience, and as such we continue to be optimistic about our market position as consumer confidence increases.

From a capital perspective, we've completed the exterior of our Lady Luck properties in Caruthersville and Marquette. We've completed the renovation of the Coral Reef hotel in Lula and nearly completed the renovation of the rooms at the end of Lake Charles and the interior of the Caruthersville pavilion. We are also in the process of designing the changes we've planned to make in Colorado following the passage of amendment 50, which enables us to increase our limits hours of operation and introduce new table games.

We did have a difficult quarter in Biloxi in Florida, that was partially balanced by a quarter in Waterloo where EBITDA increased by over 30%. Biloxi continues to be a highly promotional market dependent on costly drive-in business and we continue to lobby in Florida for the legislature to level the playing field and provide the paramutuals with the tools to effectively compete for the Seminole drive. It's our belief that their failure to do so will cost the taxpayers of the state potentially hundreds of millions of dollars in tax revenue.

So, what is perhaps most interesting to you is the trends we’ve seen in 2009. Despite continuing pressure on the economy that has been well documented by the media, our performance in January improved from November and December and that trend has continued in February. We've had some lively debates internally about the factors contributing to this trend, but we all agree that we are benefiting from incremental visits as a result of improving our operations and we certainly hope this trend continues.

These efforts are certainly helping us to deal with the difficulties in the short-term that more importantly we believe that we're making great strides in improving our market position for the longtime success of our business.

And with that, I will turn it over to Dale.

Dale Black

Thanks Virginia. Good morning everyone. Just a couple of comments I wanted to go through as it related to the results for the quarter and kind of clarify some things. As most of you are well aware, we recorded $92 million of income from our insurance settlement in the quarter. The business interruption portion of that income, or $60 million runs through the income statement as a component of revenue.

The remaining $32 million, which really relates to property refund or property proceeds back comes through as an expense reduction in operating expenses. And so it shows up in two different places. As I mentioned, a total of $92 million EBITDA impact after tax about $1.87 a share for the nine months.

From a capital standpoint, our capital expenditures in the third quarter were approximately $14 million, bringing us to 45 total for the year. Of the 45, we spent about $22 million on maintenance capital, about $23 million on project capital. And we expect our capital expenditures in the fourth quarter to be somewhere in the $20 million range. From a capitalization standpoint, we are very pleased that we successfully completed our tender offer with the proceeds on the insurance recently allowing us to retire over a $140 million worth of bonds for slightly over $80 million.

We detailed in the press release kind of the pro forma impact of the tender offer and a upcoming term loan paydown that we'll be making in a few days as facility impact that would have had on our January balance sheet if it had been completed at the end of this term.

This tender offer gives us increased financial flexibility going forward from a leverage standpoint as well as we expect it to result in over $10 million a year in interest savings. As of the end of the quarter, we have access to the full undrawn amount of our revolver, approximately $325 million, and I will make you aware that we do expect to record about a $57 million gain in the fourth quarter as a result of the tender offer.

And with that Stacey, we will start taking questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Larry Klatzkin with Jefferies. Please proceed.

Lawrence Klatzkin – Jefferies & Co.

Hey guys. Jim I hope you win your bet again.

James Perry

I didn't Lawrence.

Lawrence Klatzkin – Jefferies & Co.

A couple of questions, housekeeping, total debt and capitalized interest.

Dale Black

Well, total debt at the end of the quarter is $1.452 billion, at the pro form for the pay downs it's about $1.3 billion. Capitalized interest number, give me just a second here, and I'll look it up. If you got another question go ahead and then I'll come back to you.

Lawrence Klatzkin – Jefferies & Co

All right. This tax cut on repurchase of debt and discount. How is that going to affect you?

Dale Black

Well, we believe we'll be allowed to take advantage of that. My understanding of the law is that you get a five-year full deferral, and then after the end of the five years you will bring that gain into income over the next five years. But usually it stretches the tax consequences after 10 years.

Lawrence Klatzkin – Jefferies & Co

All right, you should be eligible. Good. As far as the 20 million CapEx, how much of that is for maintenance?

Dale Black

About 12 million of it's probably.

Lawrence Klatzkin – Jefferies & Co

All right, and for 2010, Dale what are you thinking for CapEx. I know it's a rough number.

Dale Black

Well. It is rough, we've talked in the past though our philosophy has not changed and essentially right now, virtually all project capital beyond what we already have ongoing has pretty much been put on hold and so we're looking at kind of normal amount of maintenance capital again probably in the $40 million range again going forward next year, and anything above that will be contingent on how the business looks at some point in time. We do have some projects that we think makes sense for us, but we're not going to start any of those until we have a little bit more visibility on both the economy and our performance.

Lawrence Klatzkin – Jefferies

All right and then…

Dale Black

And so you know that the capitalized interest in the third quarter was about 250,000.

Lawrence Klatzkin – Jefferies

All right. Not much. And then any other regulatory changes you guys are seeing in your markets?

Dale Black

Nothing other than any color that we talked about last quarter.

Lawrence Klatzkin – Jefferies

All right so smoking ban looks pretty clean in Iowa, no more threat there.

Virginia McDowell

No, not at this point.

Lawrence Klatzkin – Jefferies

All right and then I guess in Florida, what's your best I mean if they don’t do anything for you what do you turn to at this point? What's your turnover with the property?

James Perry

We have a beautiful piece of property over 230 acres, but when the interstate market rebounds, we have joining enough cash flow for the care and cost, if it's the highest and best use not a gaming facility, we will make sure that we maximize the cash that we can get out of that asset.

Lawrence Klatzkin – Jefferies

Thanks Jim. All right, and then as far as the Biloxi market goes, there has been no letup of the giveaways and everything? With the people coming down from the bad weather from New York and I mean from.

Virginia McDowell

Up here in Pompano.

Lawrence Klatzkin – Jefferies

In Biloxi, have you seen any letup of the giveaways at this point?

Virginia McDowell

In Biloxi, it's still a very highly competitive market. One thing that we did see in the quarter, Larry, was increased competition for heads and beds. So a lot of the properties really started steeply discounting their room rates, but we haven’t seen anything that would indicate that it's getting less competitive.

Lawrence Klatzkin – Jefferies & Co

All right, well thanks guys.

Virginia McDowell

Thank you.

Operator

Your next question comes from the line of Steven Wieczynski with Stifel Nicolaus. Please proceed.

Steven Wieczynski – Stifel Nicolaus & Company, Inc

Hi, good morning guys.

Virginia McDowell

Good morning.

Dale Black

Hi, Steve.

Steven Wieczynski – Stifel Nicolaus & Company, Inc

Dale, first in terms of corporate expense going-forward, is this $9 million range, $8 million range pretty sustainable going-forward?

Dale Black

Well, we have said for the last several quarters now that our goal is to be at $40 million or less, we do think we’re at a relatively -- it's going to fluctuate around a little bit depending on the expense from one quarter to the another, but somewhere in that range it's still where we think where we are, we maybe a tad below the $40 million, kind of on a run rate.

Steven Wieczynski – Stifel Nicolaus & Company, Inc

Okay, if I understood you correctly you said $10 million in terms of interest savings?

Dale Black

Yeah.

Steven Wieczynski – Stifel Nicolaus & Company, Inc

So that’s combined on those…

Dale Black

That’s the combination between getting rid of a $140 million worth of bonds and we’re going with the additional $35 million that we're taking down on the term loan.

Steven Wieczynski – Stifel Nicolaus & Company, Inc

Okay, but I mean the combined there together you're already looking at almost between the corporate and that you're almost $25 million in terms of a total saving on a yearly basis?

Dale Black

Maybe on our run rate, I think to get to that number, there is probably -- I am not sure how you are getting there, but there's probably some sort of one-time things in last year -- two years into this year’s comparison in corporate.

Steven Wieczynski – Stifel Nicolaus & Company, Inc

Virginia maybe if you could talk about what you’ve seen on the marketplace in terms of rated play versus unrated play?

Virginia McDowell

We started to see retail play improve a little bit in January as we saw our trends improve in January, and we're still down significantly year-over-year. We don't see a lot of tremendous changes in that at this point.

Steven Wieczynski – Stifel Nicolaus & Company, Inc

Okay, then last question in terms of just what you're seeing in terms of the United Kingdom at this point? Any offers? Anything you can say in terms of from that aspect?

Virginia McDowell

We're still working hard to extract ourselves from the United Kingdom. We actually are currently under an NDA that doesn't allow us to go into a lot of detail at this point, but we are working hard to stop our operations there by the end of this fiscal year.

Steven Wieczynski – Stifel Nicolaus & Company, Inc

Okay great thanks guys.

Virginia McDowell

Thank you.

Operator

Your next question comes from the line of Dennis Forst with Keybanc. Please proceed.

Dennis Forst – Keybanc Capital Markets

I just wanted to amplify on a couple of the questions that Steve asked. Actually, on the corporate expense, Dale, that $40 million goal, does that include both corporate and stock comp expense?

Dale Black

Yeah what shows up on the income statement in that line is everything including stock comp.

Dennis Forst – Keybanc Capital Markets

In the corporate line?

Dale Black

In the corporate line, yes.

Dennis Forst – Keybanc Capital Markets

Does that include all stock comp or only that to the extend part of corporate.

Dale Black

To the extent that there are stock comp out at the properties.

Dennis Forst – Keybanc Capital Markets

Which is a small amount?

Dale Black

Which is a small amount, it shows up in their results.

Dennis Forst – Keybanc Capital Markets

Okay. And the total stock comp was $1.4 million in the quarter that was dramatically lower than the first couple of quarters, was there an adjustment or is that just a?

Dale Black

What we had in the second quarter particularly there was some increase expense when we did the tender with the employees where we exchanged options for new restricted shares and it's kind of changed the amortization period on some of that stock awards.

Dennis Forst – Keybanc Capital Markets

Okay, so going forward stock comp expense somewhere in the mid-ones is reasonable.

Dale Black

Subject to future awards. What you are seeing right now is the burn off of what’s outstanding. Obviously some of those are going to eventually ill expense all of those and new ones would be awarded hopefully.

Dennis Forst – Keybanc Capital Markets

Okay, and then I want to ask Virginia about her comment about January being better. Can you give us a couple of examples where business was better, I noticed that Colorado was actually up year-over-year. Was that one of the markets that will do better?

Virginia McDowell

Colorado, the smoking ban anniversary.

Dennis Forst – Keybanc Capital Markets

Right.

Virginia McDowell

And if you look at our run rate for the quarter in November, if you look at our net revenues we were down about 11% in December, we were down about 9%. And in January we were down less than 4%, and of that that was really concentrated at only a couple of properties. We were actually seeing a pretty significant increase in revenue at several of our properties in January.

Dennis Forst – Keybanc Capital Markets

Which would those be?

Virginia McDowell

I would say we were up in Boonville, we were up in Caruthersville, we were up in Kansas City, we were up in Lake Charles, we were up in Natchez, we were up in Waterloo.

James Perry

Just to be clear, these are on our reporting periods not on the calendar months so the numbers we're using may differ a little bit from what you look at in the state results because of we use a four-five-four week to get to our capital.

Dennis Forst – Keybanc Capital Markets

Just a couple of questions on Colorado, you did anniversary the smoking ban. And the Blackhawk market was actually up in January, did you participate it that?

Virginia McDowell

The market share was up a little bit, we’re relatively flat.

Dennis Forst – Keybanc Capital Markets

But if the market was up and your market share was up, why would your revenues be flat?

Virginia McDowell

We’ve made some changes in Black Hawk to whole percentage. We actually lowered the PC on many of our games between Colorado Central Station and at Black Hawk.

Dale Black

I think the difference there, Dennis, you may be getting to is slightly, is the difference between our reporting month and the calendar month.

Dennis Forst – Keybanc Capital Markets

Okay. And then a broader question on Colorado is you're going to face Ameristar with their hotel later this year. What are your plans now to compete and hold market share?

Virginia McDowell

Well we are currently training, we've hired our training dealers in both [inaudible], so that we can fully take advantage of Amendment 50 in July. One other things that we're doing right now is looking at where our opportunities are in terms of spending capital property. What we do want to do everything that can to take immediate advantage of Amendment 50. We also don’t want to do anything that’s going to impact our ability to make the correct changes to that property. So, we're still evaluating what capital we're going to invest right now.

Dennis Forst – Keybanc Capital Markets

Okay, and the hiring of the dealers and the training that will probably weigh on margins at Black Hawk until July 1?

Virginia McDowell

Yes.

Dennis Forst – Keybanc Capital Markets

Okay good. Hey thanks a lot.

Virginia McDowell

Thank you.

Dale Black

You bet.

Operator

Your next question comes from the line of Justin Sebastiano with Morgan Joseph. Please proceed.

Justin Sebastiano – Morgan Joseph

Thanks. Based on the results we're seeing I guess can we assume that Pompano is just December to May business at this point?

Virginia McDowell

Well, there is some business beyond that, but not a lot.

Justin Sebastiano – Morgan Joseph

Okay, and then in Biloxi, Virginia, you gave a good answer as what was going on there. So I assume based on the EBITDA number that you guys posted you guys participated as well in the steep discounts to get the heads in the beds?

Virginia McDowell

Yes we did.

Justin Sebastiano – Morgan Joseph

Okay, you’re still participating in that in the fourth quarter?

Virginia McDowell

You really have to in order to be competitive in that market.

Justin Sebastiano – Morgan Joseph

Okay. And then I noticed Iowa was down year-over-year, but also month-over-month, is there any specific reason why maybe this quarter you kind of took a step.

Dale Black

Well, part it was the opening of the new facility in Rock Island where at least you’ve got the trial factor if nothing else where any time a new facility opens in the market people at least going to try it for probably 90 days or so. And we’re kind of still in that period quite frankly a little bit. We have recently held up pretty well there.

Justin Sebastiano – Morgan Joseph

Okay and how much cash do you guys need to run the company every quarter?

Dale Black

Well, we need somewhere probably between $65 million and $75 million bit just to run at a bare minimum. We usually keep a little more than that, but we actually have efforts right now to kind of make sure that the properties aren’t keeping anymore cash in the facility and they need to manage their business, because quite frankly I can’t earn as much on it as it costs me to have it.

Justin Sebastiano – Morgan Joseph

Okay and lastly you talked about the U.K., you are also assuming you could move away from the Bahamas as well as that in the plan to kind of get that off your books?

Virginia McDowell

Yes we've notified the Bahamian government that we're not going to be extending our lease beyond the end of May, which is where our current lease ends, but we did offer to work with them on a transitional bases for a couple of months after that if we can find another operator to take over the facility for us.

Justin Sebastiano – Morgan Joseph

So if you can’t find someone, though it’s game over?

Virginia McDowell

We will close.

Justin Sebastiano – Morgan Joseph

Okay so for modeling purposes we can take it out of fiscal 2010 numbers?

Virginia McDowell

Well except for the fact that if we help them in the transitional phase.

Justin Sebastiano – Morgan Joseph

Okay.

Virginia McDowell

That will go into fiscal '10.

Justin Sebastiano – Morgan Joseph

Okay. Last time you guys tried to get out of this, they gave great marketing spending dollars back to you or however they negotiated with you to keep you guys. Is there any chance of that happening again?

Virginia McDowell

No, the situation in the Bahamas has deteriorated since then. The Bahamian economy basically tracks with the economy in the United States, and they've also been negatively impacted by table games in Florida.

Justin Sebastiano – Morgan Joseph

Okay. All right thanks a lot guys.

Operator

Your next question comes from the line of David Hargreaves with Sterne, Agee. Please proceed.

David Hargreave – Sterne, Agee

Have you guys made anymore changes at the General Manager level and how is it trying to keep talent in this environment?

Virginia McDowell

We haven’t had any problems keeping talent in this environment except for one general manager who left quite frankly to go with one of our former senior staff members. We promoted from within and although we've moved a couple of people around as a result of that, nothing beyond that.

David Hargreaves – Sterne, Agee

In your range of promotions, do you have anything that sort of standing out as being particularly successful right now, be it cash back or direct mailings or something like that?

Virginia McDowell

No, I think that we're doing a much better job across the board quite frankly as far as our segmentation is concerned. We've really worked hard on that not only in the last quarter but over the last year to make sure that we are doing a much better job of communicating with customers that are more valuable to us and just in the process of getting feedback from them. We learn which promotions work and which don’t and that varies by market. So I think that all of our general managers and our marketing directors have done a really good job of understanding what it is that drives business in that particular market.

David Hargreave – Sterne, Agee

In the release you mentioned something about giving folks more time on the machines. What's the awareness arising for something like that and is that a trend that your competitors are working on as well?

Virginia McDowell

Well we’ve always believed that the value proportion is important and we've always believed that this management team has always believed that giving customers' time on devices is a big piece of that. What we did is we looked in our markets and those markets where we believe that we were significantly tighter than the rest of the market, we made a concerted effort to go in and so reduced our whole percentage on the majority of machines on the floor.

David Hargreaves – Sterne, Agee

How long does it take people to realize that that your machines are loose?

Virginia McDowell

It takes a while, I mean it takes while of them cycling and if you look at the normal amount of times that our customers can visit, it takes a few visits or maybe a quarter or a couple of quarters whatever it may be. But the word gets out pretty quickly and one of the things that we are planning on introducing over the next couple of months is an advertising campaign -- targeted advertising campaign that will help us not only reinforce that with our database customers, but allow our retail customers to get that message as well because when you increase the value proportion for the retail customers, it's actually very valuable to them since we don’t communicate with them from a marketing perspective.

David Hargreaves– Sterne, Agee

So from our perspective, can we think that this is potential future upside for you guys?

Virginia McDowell

Well I think anytime that you give customers better value, there is upside. I think that it's just part of our overall efforts to increase the entertainment experience for our customers.

David Hargreaves– Sterne, Agee

And when you mention that you are capturing additional wallet share. Do you think you're taking some share from Vegas right now?

Virginia McDowell

I think what you are seeing is in our regional market, if you look at our customers and you look at the average number of trips that they make in a year. If it's ten trips a year and we use to get four, I think we're getting five or six now, I think that that’s probably mostly coming at the expense of some of our competitors, but it may be visits to Las Vegas.

David Hargreaves– Sterne, Agee

And what does your slot purchasing budget look like this year versus past periods.

Virginia McDowell

We spend about $20 million. We will spend probably about $20 million in fiscal 09 on slot product.

Dale Black

We are still putting together our planning for our capital expenditures for next year, but I don’t think it will be anymore that that, let’s say that. It will probably be down a little bit next year. We have done a pretty good job though in accomplishing what we are doing, want to accomplish with the whole percentage, we’ve done a good job of doing that to the extent we can through conversion kits as opposed through new games. So, a fraction of the cost.

David Hargreaves– Sterne, Agee

But you are not cutting back meaningfully period-over-period?

Dale Black

Yeah, we will be, I just don’t have a number for you yet. We are still putting together our capital budget for fiscal 10.

David Hargreaves– Sterne, Agee

It doesn't have to be a number, but would you say you are cutting back by half or a quarter.

Virginia McDowell

We are still working on that number.

David Hargreaves– Sterne, Agee

All right, fair enough. Thank you very much.

Virginia McDowell

Thank you, David.

Operator

Your next question comes from the line of [Shabbat Badhani] with Claren Road Asset Management. Please proceed.

Shabbat Badhani – Claren Road Asset Management

Hi, good morning. I was just wondering if you could tell me what the post stacks cash proceeds were from the insurance settlement?

Dale Black

Well, the way it works out, is it right now there won’t be much of a cash impact of the taxes because of our tax position with the NOLs and everything.

Shabbat Badhani – Claren Road Asset Management

Okay, and then one other question was just as far as your tender offer goes next quarter, are you likely to add back the gain on all the extinguishment of debt to your EBITDA from your covenants?

Dale Black

In all honesty, we haven’t figured out the answer to that yet. We're still going through the discussions internally and then also with our lenders to kind of make sure we interpret the credit agreement correctly as we look at that.

Shabbat Badhani – Claren Road Asset Management

Got it. Okay, thank you.

Operator

Your next question comes from the line of Howard Bryerman with Evergreen Investments. Please proceed.

Howard Bryerman – Evergreen Investments

Yes thank you. Dale, in regards to and or Virginia, with regards to the value proposition have you cut whole percentages across the board and in all markets, and if so, going forward where you've done a great job holding markets margins in certain markets. How do we look at margin or margin pressure going forward?

Virginia McDowell

No we haven't, what we did is we specifically went into certain markets where we knew that our hold was above the market, and in those specific markets we loosen the slot machines in order to give our customers more time on device and most of our markets we're already competitive.

Howard Bryerman – Evergreen Investments

So which markets was whole based for, you discussed Black Hawk earlier I guess.

Virginia McDowell

Black Hawk and Colorado Central Station and also in Lula.

Howard Bryerman – Evergreen Investments

And that was it?

Virginia McDowell

In terms of going in and doing massive reductions of the PC. Now we've done spot reductions in our other markets as we’ve introduced new products to the floor.

Howard Bryerman – Evergreen Investments

Okay, but this isn’t as part of this See. Say. Smile. Program. This is something you intent to rollout.

Virginia McDowell

See. Say. Smile. is a courtesy program that we've rolled out across the company and that is at every property, but the value proportion we're talking about is something that you got to look at overall. If you look at our properties right now and this is one of the reasons why we believe that we are getting this incremental share of wallet. Despite the pressure on the national economy, we are giving better entertainment value across the Board at our properties, when you walk into an Isle property, you will find it’s cleaner, you will find that the employees are friendlier, we’ve done a good job in terms of our marketing programs so that we understand what actually drives incremental that we have gone through and we've had numerous focus groups with customers in every jurisdiction about food and made changes to food and menus that enhances the value proposition and in those jurisdictions where we were not competitive with whole percentage, we made targeted changes.

Howard Bryerman – Evergreen Investments

Okay, great. Does it differentiate brand strategy at this particular time given weakness in the economy still? Is still something that’s valuable?

Dale Black

We believe so, yes. It’s really between the markets. If you look at the markets that we operate in, certain operating profiles fit different markets and particularly in the smaller markets where we’ve looked at or where we have an asset, even in some larger markets where an asset is more appropriately in our mind, Lady Luck assets, if you will. The experience that we can deliver to match up with the way we’re looking at that brand. Obviously, the one thing that we’re a little disappointed and it’s because of the impact of the economy and everything else, we haven’t been able to roll that out on a physical sense as quickly as we had anticipated a year ago. I think we're doing a lot of that things operationally that are making the changes in those markets.

Howard Bryerman – Evergreen Investments

Okay. And then Dale just finally, what is the leverage ratio as of the last quarter?

Dale Black

If you calculated in accordance with our credit agreement, it's about 4.7 times.

Howard Bryerman – Evergreen Investments

And the leverage agreement is 7, what's the test on this?

Dale Black

It's over 7. It's 750 right now I think, and in accordance with the terms of the credit facility now with the way the EBITDA rolls through, it's about 4.7. If you factor in the debt retirement and look at that on pro forma basis, it would be under 4.5.

Howard Bryerman – Evergreen Investments

Okay and I believe the test included estimates for certain properties, is that rolled over?

Dale Black

Not any longer, no that anniversaried off last January or last April once we got through the opening period of some of the newer properties.

Howard Bryerman – Evergreen Investments

Okay. Sorry.

Dale Black

So for pretty much the last -- at least the last three quarters, it’s been kind of what you see is what you get.

Howard Bryerman – Evergreen Investments

Okay great, thank you very much.

Operator: Your next question comes from the line of Susan Berliner with JP Morgan. Please proceed.

Susan Berliner – JP Morgan

Thanks Dale, I think you've answered, I'd two questions, one was the covenant and then I just wanted to say I know you're not sure the gain on the exchange would be included. So, right now we're just including the insurance proceeds.

Dale Black

That’s correct.

Susan Berliner – JP Morgan

In the EBITDA.

Dale Black

That's correct. The gain is in the fourth quarter anyway.

Susan Berliner – JP Morgan

Okay.

Dale Black

The tender offer was completed in the fourth quarter anyway. And like I said, we're still kind of interpreting the credit agreement to see how that should be accounted for covenant purpose.

Susan Berliner – JP Morgan

Will that be in the 10-Q?

Dale Black

It won't be in this 10-Q, but like you said, it will be a fourth quarter event anyway, so it will be reported with next quarter's results.

Susan Berliner – JP Morgan

Great, thank you.

Operator

Your next question is a follow-up with Larry Klatzkin from Jefferies. Please proceed.

Lawrence Klatzkin – Jefferies & Co

Are you going to be adding table games in Colorado and taking out some slots, how are you working that?

Virginia McDowell

And we are definitely going to be adding table games whether or not we are going to be taking out slots at this point, we are still deliberating.

Lawrence Klatzkin – Jefferies & Co

So what should we put down for the mix in the second half of the calendar year?

Virginia McDowell

We are still working on that Larry.

Lawrence Klatzkin – Jefferies & Co

All right and do you guys.

Virginia McDowell

And quite frankly, based on the occupant, I meant now that the smoking ban has anniversaried out, we need to get a better idea or what occupancies are going settle into. Even if we did take some machines off the floor, it really wouldn’t impact at all that much.

Lawrence Klatzkin – Jefferies & Co

I realize that. And you guys have just done any analysis you can talk about, as far as what the effect might be of the new rules.

Virginia McDowell

No.

Lawrence Klatzkin – Jefferies & Co

All right. That was worth an ask.

Virginia McDowell

Nice charge.

Lawrence Klatzkin – Jefferies & Co

Hey I thought I'd throw it in there. Okay, thanks guys.

Operator

Your next follow up question comes from the line of Dennis Forst with Keybanc. Please proceed.

Dennis Forst – Keybanc Capital Markets

Wanted to ask about Florida and whether there is any movement in Tallahassee to level the playing field and how Alan's doing in that regard?

James Perry

Alan’s making a heroic effort. I am a firm believer that the coalition has hung together as best as it can, I've given a very diversed interest of the various parties down there. I have not seen anything in my visits with the legislator down there that gives an indication that will see a material change, but it doesn’t mean that we lose our hopes, and we won't continue to do our best making case, but I am not optimistic that we will see anything other than a confirmation of the current compact with trust.

Dennis Forst – Keybanc Capital Markets

Okay. I'm just trying to remember, Jim, you won the first round in the courts and then try for the state won the second round?

James Perry

Especially the situation is such that the, everybody agrees the compact has to go through a legislature for political purposes and not for legal purposes, and I believe that the legislature is working towards that end. The issue really comes down to what can they extract from the trial in terms of payments. Can they get more than the – the governor was originally able to get or will they get less, and will they be willing as part of that, since they are going to get that incremental money, to give some kind of tax relief to the paramutuals they currently have swapped. But there are many interest down there beyond just the paramutuals that are getting involved in this, and at any time you have as many people interested in this legislation as they are, very often that falls and a very simple bill gets past, but in this case, be the confirmation on the current agreement.

Dennis Forst – Keybanc Capital Markets

And they can change it by bills that they don’t have to change the constitution or put it up for the vote of the citizens?

James Perry

I think that they will take that position, but whether or not that happens, to make an argument as they would have to go back and get a confirmation vote, but that wont change the reality what we're going see for the next year.

Dennis Forst – Keybanc Capital Markets

Yeah okay. And then I just wanted to ask Dale about that leverage test sort of 4.7 times leverage. What's in the nominator, is that all $92 million of the …

Dale Black

Yeah…

Dennis Forst – Keybanc Capital Markets

Insurance.

Dale Black

Yes.

Dennis Forst – Keybanc Capital Markets

Okay so that will stay in for the next three quarters also?

Dale Black

Yes

Dennis Forst – Keybanc Capital Markets

And then as you said you are not sure whether the gain on the sale or the repurchase of the bonds whether that will be entered or not?

Dale Black

That’s correct

Dennis Forst – Keybanc Capital Markets

Okay, but as long as that $90 million is in there you seen to have a fair amount of cushion?

Dale Black

Yes, we said all along that one of the main reasons, or one of the reasons that we're looking to do the tender, it was a very good deal for us anyway, was it gave us a lot more flexibility for at least 12 months as we go through things. And beyond that even hopefully. So, for the next several quarters, at least we’ve given ourselves on plenty of breathing room.

Dennis Forst – Keybanc Capital Markets

Plenty of breathing room, yes I think you would be slightly underneath the leverage even without that $92 million?

Dale Black

Yeah, you are right.

Dennis Forst – Keybanc Capital Markets

Okay, good. Thanks a lot guys.

Operator

Your next question comes from the line of David Hargreaves with Sterne, Agee. Please proceed.

David Hargreaves – Sterne, Agee & Leach

Sorry for not being more organized, but I think in the press release, you guys say that you have about $325 million of borrowing capacity, and Dale I think in the past, you had expressed an interest in being opportunistic and looking for acquisition ideas out there, I am just wondering if that still your same thought process or if you think you want to hold off on doing something like that right now?

James Perry

This is Jim, David. We will continue to look at opportunities as they arise as long as they can improve the free cash flow of the company and keep us within our cover. We are not currently, actively pursuing any acquisition.

David Hargreaves – Sterne, Agee & Leach

But I think in the past you guys have made some comments about how you are hopeful that the stimulus package was going to be beneficial, and I'm just wondering in the final version, are you happy with it or is there anything embedded that makes you feel?

Dale Black

Well I think the one thing that’s obvious benefit to us is the tax deferral on these debt retirement things. I think the rest of it how it affects consumer spending and things like that, we will just have wait and see.

David Hargreaves – Sterne, Agee & Leach

All right that’s it from me. Thank you.

Operator

At this time I would like to turn the call back over to Virginia McDowell for closing remarks.

Virginia McDowell

Thank you all very much, and we will see you on next quarter. Have a great day.

Operator

We thank you for your participation in today's conference. To access the replay for this call you may dial 888-286-8010 or 617-801-6888 internationally with the replay passcode 40844088. The replay will be available approximately 1 hour. This concludes the presentation you may now disconnect and have a great day.

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