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Dover Downs Gaming & Entertainment (NYSE:DDE)

Q1 2013 Earnings Call

April 25, 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

Analysts

Justin Ruiss - Sidoti & Company, LLC

Operator

Welcome, and thank you for standing by. [Operator Instructions] Today's call is being recorded. If you have any objection, you may disconnect at this time. I will now turn today's meeting over to your host, Mr. Denis McGlynn. Sir, you may begin.

Denis L. McGlynn

Thank you, operator. Welcome, everyone. As usual, we have Ed Sutor, our Executive Vice President here; along with Tim Horne, our CFO; and Klaus Belohoubek, our General Counsel. After Tim reads our forward-looking statement disclaimer, 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, clearly this was a disappointing quarter and I'm quite certain you're all familiar with Delaware's current competitive environment and our concerns with the state's gaming tax structure. The administration does recognize the jobs we support and the contribution we make to the general fund and doesn't want to jeopardize its revenue stream. Our discussions with state officials have been ongoing and will likely continue into June before specific alternatives emerge for consideration. It's important for everyone to know that this subject has our full attention.

Meanwhile, our operational focus remains on providing the first-class customer gaming and entertainment experience Dover Downs is known for. Our business analytics tell us we're very successful at retaining our best and most highly rated players, keeping our most loyal customers engaged has been and continues to be one of our key marketing goals. Also independent studies, continue to confirm our customer service, our facilities, our entertainment and our food and beverage operations are superior to the majority of our competitors, so we have a great package to offer to Mid-Atlantic gamers, and we intend to compete for our share of their business.

On a different front, Delaware continues on schedule towards becoming the first state in the U.S. to initiate online gaming. The response to the state's iGaming RFP was overwhelming with bids received from 14 platform, game content and service providers. Presentations to the State Lottery Office and gaming industry stakeholders have been completed and the primary platform provider will be selected, we believe, next Monday. Support service provider presentations are scheduled to get underway shortly thereafter. It's still the state's intention to have online gaming in Delaware up and running by the fall of this year and it's our expectation that we'll be able to offer online versions of popular games from multiple vendors, including most, if not all, of the video lottery and table games that you can find on our casino floor today.

One final comment before I turn it over to Tim. Our Herschel Walker Famous 34 restaurant venture in Athens, Georgia opened in February and has been extraordinarily well received. Reviews have been very complimentary and, as you'll hear from Tim in a minute, revenues from -- or form February and March were well above expectations. Now with a sufficient number of operating days under our belt, our team is refining operations based on what we've learned about local menu preferences, peak and slack time periods, price point elasticity and related metrics. Expenses and procedures are stabilizing, and we should have a good sense for the contribution capacity of this new venture during the quarter.

With that, I'll turn it over to Tim for his review of the financials. Tim?

Timothy R. Horne

Thanks, Denis. If you'll look at the first quarter statement of earnings, you'll see our total net revenues of $50.5 million were down just over 21% compared to the first quarter of 2012. That 21% decrease is identical to the decline we saw in the fourth quarter of last year. Gaming revenues consisting of slot machine and table game win and, to a lesser extent, horse racing and sports betting commissions, decreased 22.5% compared to last year to just over $45 million. Our slot win was down about 24% compared to the first quarter of 2012. There were, however, 2 fewer days this year with last year being a leap year and Easter falling in the first quarter this year and we are required to be closed on Easter Sunday. Weather was not a major issue in the quarter; though the favorably warm weather in the first quarter of last year probably impacted comparisons to some extent.

So on a comparable basis, the decline was perhaps more like 22%, which is almost identical to what we saw last quarter. Again, the added competition from the opening and subsequent expansion of Maryland Live! was the primary driver of the slot declines during the quarter. We continue to see the biggest impact from Maryland Live! in the Annapolis, Baltimore and Eastern D.C. markets, as expected. The average number of trips for our club players was identical to last year, while our spend per trip was down slightly.

Our higher end business is holding up better than the rest, which we also expected as about 11% of our customers account for almost 2/3 of our club win. Our table revenue was down about 15% compared to the first quarter of last year. Again, that would have been a couple of percentage points better with the same number of days in the period. Table game revenue was just under $6 million with a hold of just over 18% compared to a hold of just over 17% last year. We are just over 36% of the Delaware table game market now, and that's remained relatively consistent.

We believe the lost slot business and Maryland Live!'s electronic table games have impacted table business levels in Delaware to some extent, and we'll obviously continue to monitor this as Maryland rolls out live table games. Regarding our operating profits, our gaming margins were down to 6.9%, that decline is obviously from the impact of the lower slot win and also from lower table volumes during the quarter. Our gaming expenses outside of taxes and other legislated costs were down about $600,000 during the quarter. So at the end of the day, the problem remains that the all-in tax rates at the level we're currently paying simply don't work at these lower revenue levels. And as Denis mentioned, this is a message we continue to deliver to officials in our state.

Our other operating revenues, which are net of promotional allowances of about $5 million, consist of our cash sales for hotel, food and beverage and other miscellaneous revenues, and they were down $395,000. That decrease was primarily from lower cash food and beverage revenues from most outlets in the quarter related to the lower gaming volumes, offset by revenues from our Herschel's restaurant in Athens, which opened in February.

Resulting gross profit and margins for those non-gaming activities were both lower than the first quarter at 2012. The new Herschel's restaurant Denis referred to operated at a loss during the quarter, given the fairly significant start-up and training costs associated with its opening, but we expect that to change as we move forward into the second quarter.

Our hotel occupancy was just short of 84% for the quarter compared to about 89% last year. We derived more than 35% of our casino revenue from hotel guests and our total win per room is just over $500. So our hotel remains a valuable marketing tool for us.

Our pure cash rate was $133, which is down somewhat from last year, as a result of an increase in Internet room promotions during the quarter, which have increased and are beneficial, albeit at a slightly lower rate. So our EBITDA for the quarter was about $2.8 million versus $7.7 million for the first quarter of 2012. The effect of the lower slot win, as well as the lower table win and non-gaming profits offset by lower casino expenses resulted in the decrease.

Interest expense in the quarter was $402,000, which is $184,000 lower than last year from lower average borrowings and from lower rates compared to 2012. Our effective income tax rate may look odd. This is simply from a historically immaterial first quarter permanent tax difference related to stock-based compensation being magnified when our pretax profits are close to 0 as ours were in this quarter. We would expect our tax rate to normalize in the remaining quarters at around 42%. And you can see, we had a net loss in the quarter of $283,000 or $0.01 per diluted share compared with earnings of $2.3 million or $0.07 per share last year.

On the attached balance sheet, the only significant change you'll see is that our total debt was $56.5 million at March 31 and was reduced $2 million during the quarter. That concludes our prepared remarks. So operator, if you'd please open it to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Justin Ruiss.

Justin Ruiss - Sidoti & Company, LLC

I just had a few questions. I know you kept saying that Maryland Live! was probably the big competition in the quarter. Have you seen anything or heard anything about the Ohio region taking effect at all, or is that too far away?

Timothy R. Horne

That's too far away, Justin. No impact here from that.

Justin Ruiss - Sidoti & Company, LLC

Got you. And then just looking at CapEx, I mean is there any CapEx, is that getting kind of moved towards refurbishments for the property, or is it just maintenance, pretty much?

Timothy R. Horne

It's maintenance, just a little bit of refurbishments, both of those. There are some small equipment purchases that we made to become more efficient and better marketers, but this kind of $2 million annual neighborhood we've been operating in is necessary refurbishments.

Justin Ruiss - Sidoti & Company, LLC

Got you. And then in the prepared remarks, you mentioned for the lottery tax, June was when you'd be speaking again, or is that when you expected some resolvement?

Denis L. McGlynn

The legislature, Justin, goes out of session at the end of June and generally, the way the pattern in Delaware works, they update their fiscal projections for the fiscal year beginning July 1, starting in December and then monthly, through June. So these next 2 fiscal updates in May and June really need to be revealed so that the state understands what its fiscal picture looks like, and it will be within that context that we will be able to have a dialog with them about how much we can do to provide relief for this industry. So it's a work in progress. We have been having negotiations -- or discussions at this point and frequent communication with both of the lottery office and the administration for months now, and we're just keeping in touch with each other as these things need to unfold.

Operator

And we have no further questions in queue at this time.

Denis L. McGlynn

Well, thank you, everybody. We'll look forward to giving you an update after the second quarter.

Operator

Thank you for your participation on today's call. You may disconnect your line at this time.

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