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Nevada Gold & Casinos (NYSEMKT:UWN)

Q3 2013 Earnings Call

March 12, 2013 11:00 am ET

Executives

Harriet C. Fried - Senior Vice President - New York Office

Michael P. Shaunnessy - Chief Executive Officer and President

James J. Kohn - Chief Financial Officer, Principal Accounting Officer, Executive Vice President, Secretary and Treasurer

Analysts

Vincent Staunton - WEDBUSH

Operator

Good day, and welcome to the Nevada Gold & Casinos Incorporated Third Quarter Fiscal 2013 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Harriet Fried. Please go ahead.

Harriet C. Fried

Good morning, everyone, and thank you for joining Nevada Gold's conference call. With us today from management are Michael Shaunnessy, President and Chief Executive Officer; and Jim Kohn, Executive Vice President and Chief Financial Officer. Before we begin, I'd like to remind you that today's webcast and call will be archived on the company's website at www.nevadagold.com.

I'd also like to remind everyone that part of today's call includes forward-looking statements. These statements are not guarantees of future performance and therefore, undue reliance should not be placed on them. The company undertakes no obligation to update these forward-looking statements. We refer all of you to the company's filings with the SEC for a more detailed discussion of the risks that can impact the company's future operating results and financial condition.

The company's earnings release contains non-GAAP financial measures within the measure -- excuse me, within the meaning of regulation G promulgated by the SEC. Included in this morning's release is a reconciliation of these non-GAAP financial measures to the comparable financial measures calculated in accordance with GAAP. With that introduction, I'd now like to turn the call over to Mike Shaunnessy Go ahead, please, Mike.

Michael P. Shaunnessy

Thank you, Harriet. Good morning, everyone. Thanks for joining our call. It's great to be talking to you all again. For those of you who don't know, I joined Nevada Gold & Casinos at the beginning of December from MGM Resorts International, where I was Executive Vice President of Operations, and I've been in the industry about 30 years in various operations and finance positions, and believe my experience in the past is a great fit for Nevada Gold and its business plan going forward.

When we spoke in December, just after I joined the company, I outlined 2 broad goals. The first, to deliver consistent positive performance at our properties in Washington and South Dakota, 2 markets where we are already established as a significant participant. And second, to concentrate on practical growth opportunities, whether they be acquisitions or management contracts or other things that may come down the line. Today, I'd like to update you on those goals as well as give you a sense of some our other priorities.

Starting with our current portfolio, the financial results for the past quarter clearly show the strong cash flow potential of Nevada Gold's current portfolio. For the first time, we have a full trailing 12 month financial picture that I think clearly demonstrates the strength of our assets. Adjusted EBITDA totaled $5.6 million over that trailing 12 month period, and we expect to build on this solid foundation. In my first 4 months with the company, I've been visiting or reviewing the operations in all the properties in our portfolio. And we've undertaken some repositioning of several of our operations in the Washington Gold Casinos and identified places where we can fine tune our business, change the mix of games we offer, enhance some of our marketing efficiencies and we've already seen some improved results from a couple of specific properties there, and we'll be continuing our efforts in the coming months.

We are also in the midst of a strategic review of our South Dakota slot machine route operation and in making sure everything there is operating as smoothly as possible. In total, we have 950 slots in the route, the vast majority, in fact most all of which, we acquired in January of 2012. So now that we have a full year of operations behind us, it's an excellent time to review each of the route locations, assess their profitability and do some fine tuning where necessary. In addition, as we begin to move into the more active spring and summer months for tourism and gaming in South Dakota, we want to be sure we're operating in top efficiency and maximizing the route's potential.

Based on the company's performance to date this year, our outlook for the remainder of the fiscal 2013, I'm happy to say we're in a good position to meet the previously stated goal of generating $5 million plus in adjusted EBITDA. So we're in a good position as we move into the fourth quarter of our fiscal year.

Bringing you up to date on a couple of other activities, the cost reduction program that we announced last year in December, okay, designed to save Nevada Gold more than $750,000 annually has been fully implemented at this point, and we expect to realize that $750,000 on an annualized run rate going forward on a relatively permanent basis. Part of the cost reduction plan was to relocate our offices from Houston to Las Vegas and we are literally in the final stages of doing that as we talk. At our next quarterly conference call, Jim and I will be both talking to you from Las Vegas rather than Houston. Nevada Gold already had an office there, but we've now expanded our footprint, and this whole position is better for both efficiencies and future opportunities.

Another of our goals is to increase or use our cash flow to pay down debt to strengthen our balance sheet. So far this fiscal year, we reduced our debt by approximately $1.8 million and we will continue to use our generated positive cash flow to do the same thing on a going-forward basis. In addition, the improved cash flow gives us more flexibility for future growth. As I mentioned before, we are looking for investment opportunities, but in a prudent and disciplined fashion. You can be sure we won't do a deal of for the sake of doing one, and we'll carefully evaluate the size, the cost, the central synergies, to make sure that it truly advances the goals of Nevada Gold.

One more item of note, a few weeks ago, we launched our social gaming site, Gold Star Slots, a free-to-play casino app that's on Facebook. Social gaming is going to become a significant technology innovation in our industry, and having the site up and running now positions us on the front end of that trend. Gold Star Slots, like most of them out there, simply lets players play popular slot games for fun and ideally helps us to build our brand and introduce those same players to our bricks and mortar properties. It's still early, but we've seen a decent response to date, and as things develop, we're going to keep you updated on what's happening in that space.

Again, with that high level overview, I'll ask Jim to run through the details of the quarter's financial performance. Jim?

James J. Kohn

Thank you, Mike. I will go over the consolidated financial results for our continuing operations. As a reminder, in addition to acquiring the Deadwood, South Dakota route -- slot route operation in January 2012, we completed the sale of the Colorado Grande Casino in May 2012. As a result, the Colorado Grande's results have been reclassified as discontinued operations.

For the quarter, net revenues from continuing operations were $16.2 million, a 20% increase over last year. Washington Gold contributed $14.4 million to revenues, while South Dakota Gold, contributed $1.8 million. Operating expenses were $15.3 million compared to $13.2 million for the third quarter of 2012, primarily reflecting increased higher casino expenses due to the addition of the South Dakota slot route operation in January of 2012. Income before income tax expense from continuing operations was $557,000 compared to a loss of $131,000 in the third quarter of fiscal 2012.

The effective tax rate for the third quarter was 57.7%. The rate for this period is high when compared to the federal statutory rate of 34%, primarily due to tax expense of $100,000 related to the write-off of deferred tax assets that corresponded to stock options that expired or were forfeited. Excluding the impact of the write-off, our effective tax rate would have been 31.1%. Our net income for the quarter, including discontinued operations was $235,000, or $0.01 per diluted share, compared to a net loss of $288,000, or a negative $0.01 per diluted share in the third quarter of fiscal 2012.

Adjusted EBITDA from continuing operations was $1.6 million compared to $800,000 in the prior year period. The improvement is primarily attributable to the addition of the South Dakota Gold, reduced promotional allowances at our Washington Gold properties and implementation of the cost reduction plan announced in December of last year.

Turning to our balance sheet, you'll recall that we have been taking steps to strengthen our balance sheet. To that end, on a year-to-date basis -- net basis, we have reduced our consolidated debt by $1.8 million, while increasing our cash position, excluding restricted cash, by $1.6 million. As of January 31, 2013, we had $6.8 million in cash and cash equivalents, which excludes the restricted cash of $1.4 million. Operator, with that, I will turn it over to you to open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we do have a question from Frank Grimaldi [ph], private investor.

Unknown Attendee

Jim, I have a question regarding the casino expenses and the food and beverage expenses. In relation to the revenue of both items, the ratio has gone up. And can you tell me what you're going to be doing about it and...

James J. Kohn

What has happened is, in the prior year, we recorded revenues for nonalcoholic complimentary drinks. Starting fiscal year 2013, we discontinued that. We are no longer recording revenues for nonalcoholic complimentary drinks. As a result, our cost has remained relatively flat, whereas our revenues have gone down. The net effect on the bottom line is 0, but it's -- from a standpoint of not recording the revenues, we are therefore, not paying sales tax on that.

Michael P. Shaunnessy

Yes, the core -- the offset part of that is in the promotional allowances. You will see they have gone down significantly, as well. So you don't have the revenue being recorded on the food and beverage line item, but you also don't have the comps being deducted on the promo line. The actual cost of the product is still reflected in the food and beverage costs. So when you look at that cost-to-sales ratio, it looks different, but it's not a change in our business pattern. It's just a change in accounting practice.

Unknown Attendee

How about the casino revenue versus the casino expenses? That has changed too, actually gone about 50% to 53%, 55%.

Michael P. Shaunnessy

It's just a matter of cost. We don't have a real good answer for that one. Part of it is the full embodiment of the South Dakota slot route. And part of our route agreement there, we have some fixed rental payments and then we have some rental payments that -- or not really rental payments, but a revenue share that is based on a percent of revenue, coupled with the licensing fees on an annual basis. Going forward, I expect them to be a little bit more consistent, but we had to get through a year worth of year-over-year comparability to really be able to give you a real good answer to that question.

James J. Kohn

And that is correct, Mike. The net flow-through on a regular basis on average of our contracts in South Dakota is a 64% to the location operators and 36% to us, as compared to Washington, would have been a higher -- a better ratio for us. But as Mike has indicated, we really only have not even a full year here of the South Dakota, just a little bit over 1 year.

Michael P. Shaunnessy

And that 64-36 is the aggregate across 20 locations and about 5 of them have the same revenue split. The other 15 have different ones. So depending upon where the revenue is being generated per location, we'll have an impact on that revenue cost-to-sales mix.

Unknown Attendee

Do you have any update on the legislature regarding slots in Washington?

Michael P. Shaunnessy

There really is no activity in that regard in Washington. I mean, it continues to be talked about, but there's nothing moving forward or even proposed in the legislature at this time.

Operator

And next, our question comes from James Ide [ph], private investor.

Unknown Attendee

First of all, congratulations. I think you guys are making some great headway on the first goal you mentioned of the consistent profitable performance. It's really starting to show up here and with over $1 million of EBITDA for 4 quarters straight. So great job there. My question is really -- kind of centers around sort of the EBITDA and revenue disclosures in general. It would be really helpful if we could see by either by segment or by property, and I know you do some of that in your filings that are coming later, but a little bit of comment on the revenue changes. It sounds like there was a pretty big change in South Dakota this quarter, relative to the last couple of quarters. So a little bit of commentary there on the disclosures. And I know a couple of years ago, you were reporting until fiscal 2013 began, you broke out Washington I, Washington II, Washington III and South Dakota, and it was kind of nice to see those differences in trends among those. And then beginning in fiscal 2013, you started putting Washington all in one entity. I guess what I'm getting to, is it would be nice to know what your target EBITDA margins are for those different operations, the card rooms in Washington, the South Dakota slots, and how do those play into your overall corporate EBITDA margins, now running around 10%? Is the steady-state EBITDA margin for this business as it exists going forward around 10% or will your cost reductions bring that up a little bit? And what are the EBITDA margin targets among those properties? So kind of a broad question that really gets down to peeling back the revenue, and EBITDA and target EBITDA margin percent by quarter. So I don't know if there's -- you could comment maybe on the revenue movements in the Washington and South Dakota properties this quarter. And then what the plans are for fiscal '14 in terms of breaking out the operations a little bit more for disclosure.

Michael P. Shaunnessy

Easy answer to that one, Jim [ph]. I kind of agree with most of your observation there. And I think going forward, we will probably adopt a process where we do with really 2 segments for disclosure a little bit more discussion than we have done in the past, one of them being Washington, and the other being South Dakota. I'm hesitant and not inclined to break Washington out into the 3 pieces based on how we acquired the assets, and the principal reason is because we operate the Washington casinos as a single functional business unit. And sometimes, it makes -- I don't want us to be focused on trying to maximize the individual pieces at the risk of sacrificing the aggregate overall performance. So then I would make a decision for Washington Gold III to make that one appear better, that may be a negative to Washington Gold I or II. So by having them all in the same and also from a management standpoint, from all of our operations people, it makes us focused on the production of cash flow from the entirety of the asset, rather than getting hung up on the individual performance of the component pieces. However, having said that, Washington and South Dakota are very different business models. And as the previous question kind of highlighted, when you just look at a single number of whether its revenue and cost and you don't see those 2 pieces broken out, it doesn't give you the clarity and the transparency that I'd like to see. I, of course, have the individual numbers, but you as investors don't get to see that transparency and I think it's appropriate that you do get to see that. It will give you a better understanding of our business as well if you see Washington and you see South Dakota. Because besides the margins and the EBITDA flow-through being somewhat different, the seasonality impact there is also very different and that kind of gets lost in the consolidated financial numbers.

James J. Kohn

Great. If I can add to that, 2 things: One of the reasons why not to break out the individual Washington properties is the administrative is all done consolidated wise. So I would not want to go through the process of trying to allocate to Washington I, II or III. It would not necessarily make sense. Number two, in regards to your question of South Dakota this quarter versus other previous quarters, this is the winter months in South Dakota. It's a very seasonal business. Winter is without a doubt, the low end, whereas summer is the high end. And then you have the 2, spring and fall, being the shoulders. One of the reasons that when we acquired South Dakota was a benefit when we looked at it, was it was offset seasonally with the Washington properties, which the spring is their strength and then the summer months are their weaker months. So from that perspective, I understand your questions as far as segmentation, and Mike and I will take a look at it to identify what further information we can give going forward.

Unknown Attendee

Great. And then just one follow-on to this is you've mentioned that you're kind of holding to the $5 million annual number for which is, as I said before, it's great that things are settling down in steady state. That kind of implies that you're pretty much at, given the businesses that you have now, you're fairly close to your run rate, subject to a couple of corporate cost reductions. Is that a fair assessment, that there's not a whole lot of low hanging fruit here left from an EBITDA overall, EBITDA margin improvement standpoint?

Michael P. Shaunnessy

I'd agree with that observation, Jim [ph]. At least nothing that would be material at this point. Most of it has already been put into place in this kind of in that run rate. So $100,000 here and there, but nothing significant.

Operator

And next, our question will come from Vincent Staunton from WEDBUSH.

Vincent Staunton - WEDBUSH

Given your current cost of debt, do you see any opportunities for any type of refinancing?

Michael P. Shaunnessy

We haven't explored it yet, but it is a possibility, particularly now that we have a much cleaner balance sheet, and have now a years' worth of operations of our current asset portfolio under our belts. We are in a much better position to have that conversation. Clearly something below blended cost of 11% would be nice.

James J. Kohn

Our situation is that our Wells Fargo debt become -- matures in October of 2014, so realistically, no later than the end of this calendar year, we're probably going to need to be discussing refinancing anyways. So...

Michael P. Shaunnessy

And I'm sure they would love to reduce our rates.

James J. Kohn

The obvious reduction is to try and get a payoff of the Rogers loan, which we are doing on a regular monthly basis.

Vincent Staunton - WEDBUSH

Do you think, given the current interest rate environment, you can get substantially lower interest rate?

James J. Kohn

We're at 9.75 [ph].

Michael P. Shaunnessy

How about if I just say lower rather than put the substantially word on there?

Vincent Staunton - WEDBUSH

Okay. That's fine. And can you comment what your acquisition strategy is going to be or what type of assets you're looking at?

Michael P. Shaunnessy

I really don't have a tremendously narrow scope of what we're looking at. Obviously, it has to be something of an appropriate size for us to digest and be able to acquire and finance. Given the current cost to capital, the value proposition also has to be there. So we are looking at a few things. I mean, one of the most attractive, obviously, although they're not that easy to come by, is some type of management contract that is not very capital intensive.

Operator

Next question will come from James Knoll [ph], private investor.

Unknown Attendee

Gentlemen, a question, in Florida, there's a gaming boat that recently had started up and then rapidly ended its operations because of a lack of a gaming operator. Have you folks been approached to possibly get involved with that?

Michael P. Shaunnessy

No, we haven't.

Unknown Attendee

I think it's called Black Diamond. You were involved in that market at one time in the past.

Michael P. Shaunnessy

Yes, we were. We haven't looked at that one in particular, but we'll definitely reach out to them. Thanks for the suggestion.

Unknown Attendee

Yes, it was reported on several gaming bulletin boards that they were looking for an operator and apparently, their first operator that they had on board bailed out in a hurry. Not -- no reasons given. And their boat is sitting there waiting to be relaunched.

Michael P. Shaunnessy

Well, one of the challenges in some of the management contract opportunities, although I just mentioned, they would be attractive, it doesn't necessarily do us a service as a company to get involved as the management company in an operation that really doesn't have a potentially successful business plan. So I know -- I don't know anything in background for this Florida attempt, but some of those cruise boats have had difficulty in the past just because the market isn't what it was a decade ago. And some of them get in at too high a price and consequently, have a very difficult time of generating positive cash flow.

Operator

[Operator Instructions] And at this time, we have no further questions in the queue. I'd like to turn the call back over to Mr. Shaunnessy for any additional or closing remarks.

Michael P. Shaunnessy

Well, thank you all for joining us again this morning. Glad we had a chance to go over what I hope going forward, will continue to be clean operating quarters for Nevada Gold. As I mentioned earlier, most of the balance sheet, stuff from the past is cleaned up. So we now have a much, I think, clearer visibility of the cash flow generation potential of our assets. And we're pretty optimistic of the future going forward. As I said, we'll be very cautious and prudent about any potential acquisitions. As one of the investors noted to me in the past, with an effective cost of our financing, at the moment running around 10%, 11%, that's a pretty decent use of our cash flow in the interim until we find an opportunity that generates something far in excess of that. So we look forward to ending our fiscal year on a kind of similar note, and look forward to talking to in a few months from Las Vegas. Thank you, all, for joining us. Have a great day.

Operator

That does conclude our conference for today. Thank you for your participation. You may now disconnect.

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