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Isle of Capri Casinos (NASDAQ:ISLE)

Q4 2013 Earnings Call

June 06, 2013 10:00 am ET

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

Susan Berliner - JP Morgan Chase & Co, Research Division

Justin T. Sebastiano - Brean Capital LLC, Research Division

James Kayler - BofA Merrill Lynch, Research Division

David Hargreaves - Sterne Agee & Leach Inc., Research Division

Operator

Ladies and gentlemen, thank you so much for standing by, and welcome to the Isle of Capri Casinos Fourth Quarter and Year-End Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded and will be made available for replay. I'd now like to turn the call over to Jill Alexander.

Jill Alexander

Good morning. 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; Dale Black, Chief Financial Officer; and Arnold Block, Chief Operating Officer. With that, I'll turn the call over to Virginia McDowell.

Virginia M. McDowell

Thank you, Jill, and good morning, everybody. The investment community is certainly aware of the trends in the regional gaming companies over the first 4 months of the year, which impacted our fourth quarter. If you filter out the noise in our results, which include the closure of our property in Davenport for flooding in April, as well as an extra week in our fourth quarter in fiscal 2012, our performance was generally in line with our peer group. We are still working on finding the right balance for our marketing reinvestment in Cape Girardeau. While our customers continue to tell us how much they're enjoying our flagship Isle, we are finding that we're experiencing a longer ramp for the property similar to what our competitors have experienced with comparable new facilities. While we are not pleased with the EBITDA performance, we have made a number of changes with regards [indiscernible] operating results.

As outlined in the press release, fiscal 2013 was a year where we continued to make significant progress on our efforts to improve our portfolio and physical plans, including new restaurants, hotel renovations, rebranding and strategic asset sales. This process will continue into our new fiscal year, most notably with the complete renovation of our casino floor in Boonville, a project that is scheduled for completion by the end of June.

We are excited about the opening of our flagship, Lady Luck, at the Nemacolin Woodlands Resort on July 1 pending the approval of the Pennsylvania Gaming Control Board. The addition of a casino to the impressive array of amenities at the award-winning resort is generally a great -- is generating a great deal of excitement at the property, and we're looking forward to welcoming our new team members. Nemacolin is one of only 6 resorts in the world to have both Forbes-Mobil 5 Star and AAA 5 Diamond ratings for both lodging and dining. We are also looking forward to continuing to work with our partner, Tower Investments, in Philadelphia on the process of competing for the remaining gaming license in the city. The Provence will be a $700 million entertainment resort located close to the Philadelphia Convention Center and featuring a wide range of amenities.

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

Dale R. Black

Thank you, Virginia. Good morning, everyone. While I think the press release lays out our financial performance, I'll admit it's sort of complicated to analyze. As we mentioned in the release, we had the extra 14th week in the quarter last year and almost $9 million of insurance proceeds in last year's quarter, which impact the comparability, and we had goodwill and valuation charges that impacted both year results. The tables in the back of the press release, I think, explain everything -- lay everything out pretty well, except that they don't quite explain the impact of the extra week, which we've attempted to do.

Net revenues, excluding the insurance recoveries last year, declined from $282.4 million to $268 million, and consolidated EBITDA decreased from $69.8 million to $59.1 million. Our adjusted income per share, which normalizes the effect of nonrecurring and unusual items, was $0.24 compared to $0.39 in the prior period. The extra week last year is estimated to have an approximately $18 million impact on revenue and a $5 million impact on consolidated adjusted EBITDA or approximately $0.13 a share. We recorded in the fourth quarter of this year goodwill valuation charges related to our Natchez and Lula properties, which affected GAAP EPS. And additionally, we reported approximately $2.2 million write-off of deferred finance costs associated with our old term loan, which was terminated as part of our recent financing. Our debt at the end of the year is approximately $1.16 billion, which includes $155 million outstanding on our revolver, our new 5 7/8% notes at $350 million, the 7.75% senior notes at $300 million and the 8.875% sub notes at $350 million with approximately $4 million of other debt.

At this time, we'll open the call up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Susan Berliner.

Susan Berliner - JP Morgan Chase & Co, Research Division

I wanted to start, I guess, just with the consumer. Can you talk about, I guess, the patterns during the quarter, if you saw any improvement throughout the quarter with either their spend or their visitation?

Dale R. Black

I mean, I think what we've seen is relatively consistent. We did see a slight uptick through the quarter in spend per visit from the rated players. We didn't -- visitation among retail players was down. Visitation among rated players was flat to down just slightly, but they did pick up their spend per trip a little bit.

Susan Berliner - JP Morgan Chase & Co, Research Division

Okay. And then, I guess, just with you guys are going to have a lot of free cash flow after Nemacolin spend is complete. And I guess, can you talk about your appetite for acquisitions, as well as other notable redevelopments within your portfolio?

Dale R. Black

I think we always look at what's on the market and evaluate our -- what we think things are worth and go after the ones that we think are appropriate. We don't -- obviously, we don't win them all in -- or -- in -- we are somewhat limited in how aggressive we can be still because of where we are. So I think if you look at our capital allocation, we're still looking to reduce debt and reduce our leverage on the company. But if the right opportunity was out there that we could fix something in, it was going to generate free cash flow immediately, we would look at it. Other than the potential for a project in Bettendorf that we talked about in the past, that's the largest of any sort of large-scale developments that may or may not happen somewhere down the line.

Susan Berliner - JP Morgan Chase & Co, Research Division

Great. And then my just -- my last question is, Dale, can you just go over where you stand versus your covenants and your -- and new bank line?

Dale R. Black

Sure. The bank line right now, we've got $150 million drawn on a $300 million revolver. We've got about $90 million of excess capacity, and our covenant leverage is around 6.4 or 6.5.

Operator

Next question from Tom O'Shea [ph].

Unknown Analyst

The $5 million you cited in EBITDA to one last weekend, is that an actual number? Is that you just looking at what you guys made that weekend and...

Dale R. Black

It's not a weekend, it's 7. It is an estimate of what a week in April was last year.

Unknown Analyst

No, but I mean, you know what the actual -- you know the actual number was this year. So I mean, are we pretty close to that or more or what?

Dale R. Black

We don't close the books on a weekly basis. I mean, we kind of looked at it on just -- you kind of -- if you divide it by 14 from last year, it would actually be a little more and we try to estimate conservatively.

Unknown Analyst

Yes, but I mean, I guess, what I'm trying to get to is, there's really no reason to look at last year, right, when we know what it is this year, so is it about that or is it more or is it a lot less or order of magnitude the same?

Dale R. Black

Well, if you modify out -- if you take that out, we're still down year-over-year.

Unknown Analyst

Yes, yes, okay. And then your uses for free cash flow, might you just buy back stock or...

Dale R. Black

I don't think that that's something that we would probably entertain until we got closer to 5x leverage.

Unknown Analyst

Okay. And just in terms -- there's been a lot of M&A in the sector, have you guys thought about possibly selling the company? Just because you traded at a lower multiple than your competitors so...

Virginia M. McDowell

As Dale had indicated, we're always looking to create value for shareholders, but that's not something that we're actively pursuing.

Operator

The next question is from Justin Sebastiano.

Justin T. Sebastiano - Brean Capital LLC, Research Division

Can you maybe be a little bit more specific in Cape G as far as how are you going after your customer differently or how are you trying -- are you building the database? Are you widening your net? Or are you changing the way you're promoting to that market? How exactly do you think you're going to make the changes?

Virginia M. McDowell

Yes, Justin, all of the above. You know that when you're opening a property like this and you're ramping up, it's part art and part science. So I think that we're pretty good at the science part in terms of understanding our segmentation and so on and so forth. But the objective is, is to build the database quickly enough so that you can talk to these people. So you kind of have to get them in the front door, get them in the system and then shake out and see what they're worth, and I think that we did a good job of that in terms of introducing the property, looking at what the net should be in terms of geographic regions that we were marketing to. We did as we had indicated on the last call originally just look at the property from the organic demand and then kind of turn the marketing on. But quite frankly, we've probably turned the marketing on a little bit too much. So what we're doing right now is we're looking at the programs that work. We're looking at the ones that are most profitable, and we're looking at the best way to build the database going forward. And as we had indicated, this is consistent, this longer ramp is consistent, with what our competitors have seen at comparable facilities, so we're going to make sure that we get it right.

Justin T. Sebastiano - Brean Capital LLC, Research Division

Okay. And so the 30% year-over-year decline at Caruthersville on the EBITDA line, how much of that do you think was because of Cape G and how much was just external forces due to the economy and the local environment there?

Virginia M. McDowell

Yes, we had always -- we obviously know where the Caruthersville customers come from, and we had always anticipated that there would be some impact, obviously, from Cape opening. But I think because of the way that we were marketing and the way that we were incenting, that we probably drew some customers from Caruthersville, quite frankly, that were kicking the tire, which are customers that will probably go back to Caruthersville as their home casino as we rationalize the marketing spend.

Justin T. Sebastiano - Brean Capital LLC, Research Division

Got you, okay. And as far as the cost savings, you say you outline about $2 million a year in cost savings based on what you're working on there, but it looks, compared to this year, your guidance is up significantly. I assume, is that all because you expect to get some incentive compensation next year based on certain thresholds? Or where is that? Because if you x out share-based comp you're going from about $27 million up to, I guess, a range of -- or a guidance of $29 million, so it's an increase instead of kind of that savings that you were looking at.

Dale R. Black

Well, yes, there's 2 pieces of it. One, not all of those savings will be at corporate. I mean, that's kind of a cross. The other piece of it is, besides the incentive comp piece that we laid out, we also talked about the quarterly impact, but throughout the year we had pretty favorable insurance experience this past year. And frankly, it's a trend that I don't think can continue forever in our liability insurance and workers' comp stuff. So we've tried to be a little conservative in how we've planned for that going forward, too.

Justin T. Sebastiano - Brean Capital LLC, Research Division

Okay. And just lastly, Lake Charles, you're going to have a new competitor into that market mid-next year. How do you think that will impact the market? I mean, do you think Houston is underserved enough where Lake Charles can absorb a new competitor? Obviously, there'll be some cannibalization, but how underserved is Houston and how much will that maybe grow the market versus cannibalizing the existing players?

Dale R. Black

I think time will tell. Clearly, I don't think that the market can absorb it all without having any impact on the market. I do believe, particularly in normal times, that -- or I think we believe that the Houston market probably is underserved. How underserved it is, that distance away from the population, I think, remains the question. How many more people that would be gambling are going to make that trip over to Lake Charles on a weekend or on a night as opposed if it was in Houston? And I think that remains to be the big question there.

Operator

Our next question comes from James Kayler.

James Kayler - BofA Merrill Lynch, Research Division

I guess, first, you mentioned weather a couple of times in the press release. Obviously, we've seen that with a lot of other companies. You guys have a slightly different calendar quarter. Do you have any rough estimate for how much impact the weather may have had just on a comparison basis, year-over-year basis?

Dale R. Black

It's not really quantifiable with everything else that's been going -- I mean, obviously, Davenport was quantifiable to the extent that we were closed for 8 days. We kind of have a pretty good idea of what that cost is. But the other things, I think it's with everything else that we've mentioned, the tax -- payroll tax increases, the tax refund checks and so forth, it's really hard to kind of componentize and say, well, weather had this much of an impact. Other then kind of look at the days and the fact that while the winter probably was normal this year, it also was late. I mean, I know it's just here where we are, which is relatively the same geographic area as some of our casinos and everything. Well into March and April, we had 9 inch or 11 inches of snow the first weekend of the NCAA tournament, which was like the 17th or 18th of March, which is a little late.

James Kayler - BofA Merrill Lynch, Research Division

Sure. I guess, along the same lines, obviously, the payroll tax is a ongoing issue for a lot of companies, as well as you guys cited the sort of just the delay in the tax returns. I guess, once the tax return started to come in, did you see that reversal a little bit? I guess I'm getting -- I'm trying to get a sense for how much of the week that you saw...

Dale R. Black

No, we didn't actually. I think what we feel is that the delay was late enough that people find -- frankly, found other uses for that. The only anecdotal evidence we have is that, in Mississippi, we actually cash refund checks in our casinos. Last year, we cashed about $9.5 million in the first 4 months of the year, and this year, that number was down to less than $7.5 million.

James Kayler - BofA Merrill Lynch, Research Division

Got you. But it didn't necessarily catch up as time went by?

Dale R. Black

No, no.

James Kayler - BofA Merrill Lynch, Research Division

Okay. And I guess, just refocusing on Cape G. I saw in the local press that the GM was let go and you guys have a temporary GM. I guess, where do you stand with hiring a GM? And the bigger picture, you've given some guidance in the past about other properties we can look to, to think about margins. I think margins in the mid- to high-20s is where I kind of triangulated. Is that still a realistic assumption? And how long should we be thinking about to ramp there?

Dale R. Black

Well, we still think in the long term that -- that's right. I mean, we talked about it in the past. It takes 3 years, give or take, for these properties to really hit their stride. If you look back at Waterloo and Pompano, both -- they both did -- it is a build to get to that level. Obviously, we feel that we're building at a little bit, initially, slower pace than what we had hoped, but we are going there and we still think, in the long run, that this project still should perform in those levels. We've been open about 6 months, so we're still getting our feet wet, so to speak. We have, on a temporary basis, moved one of our other general managers down to Cape Girardeau while we're doing the search, and we are in the market right now and begun to search for a permanent GM and would hope to have him in sometime this summer.

Operator

The next question is from John Maxwell [ph].

Unknown Analyst

Dale or Virginia, could you remind me, do you have -- at this time, do you have any investment in the Provence project? And if that's selected, will you have an investment going forward in it?

Dale R. Black

What we've gone, John, is we've put up an LC for $25 million for half of the license fee. If the project is not picked, the LC gets canceled, it never gets drawn on. If it does get picked, we get paid back actually out of the permanent financing, so unless, at our option, we decide to roll it into the capital structure at some point in time. So the most we would have invested there is $25 million, and at our option, we don't have to have anything invested.

Unknown Analyst

Okay. And the -- I know it's kind of fluid, but the timing is still the end of the year. Is that when Pennsylvania is expected to select?

Virginia M. McDowell

That's what they've indicated at this point. So there's another round of essentially suitability hearings that have to occur, and they have said that they intend on making a choice by the end of the year.

Unknown Analyst

Okay. And then on a minor topic, Dale, the $900,000 severance that you talked about for, I guess, for Colorado, that wasn't added back in your...

Dale R. Black

No, that was not. And that wasn't just in Colorado, that was around the company.

Operator

Next question from David Hargreaves.

David Hargreaves - Sterne Agee & Leach Inc., Research Division

You folks have been doing a number of opportunistic renovations and I'm just wondering if the way the economy is persisting, if it's causing you to sort of change your philosophy on spending and development.

Virginia M. McDowell

No.

Dale R. Black

Not really. I mean, frankly, we've accomplished a lot of what we needed to, a lot of it, frankly, in the last several months. We are in the middle right now, as Virginia mentioned, of renovating our casino floor in Boonville, new layout, carpet, wallcoverings and things like that, which should be done in the next few weeks here. We really don't have a lot on the plate at this time beyond that. There will be things that come up from time to time that we think may -- will make some sense. But as of right now, we're relatively caught up.

Virginia M. McDowell

And most of the changes that we've made, and if you look at this in the aggregate in terms of the number of hotel rooms that we've done, restaurants, lounges, which I believe is somewhere around 14 that we have either done a major renovation to or added, these have been opportunistic, largely done through very targeted maintenance CapEx investments and have truly changed the customers' perceptions at these properties. So to the extent that we have the ability to continue to do that going forward, we will.

David Hargreaves - Sterne Agee & Leach Inc., Research Division

And with respect to promotions, are you just seeing customers unresponsive at this point? I think you said some are more effective than others. Is that free cash-type promotions? Or can you give us a sense of sort of what works and what doesn't for you?

Virginia M. McDowell

This is largely in Cape that we were talking about in terms of the promotions. And I think that the biggest issue that we had when we went back and kind of did a forensic analysis of this is layering. So we've put a lot of things out there to attract a lot of people, and people were essentially redeeming multiple awards, which obviously negatively impacted the profitability. So what we're going back in now is looking at who was redeeming what, which of those customers were the most profitable and just completely changing the way that we're targeting our marketing reinvestment.

Operator

Next question from Barry Jonas [ph].

Unknown Analyst

If you back out some of the company-specific noise, can you talk maybe a little bit about the progression of results throughout the quarter? Was -- do you see strength as the quarter progressed? And any early commentary on May would be helpful.

Dale R. Black

No, I mean, it was relatively consistent. I mean, if you just kind of look at the revenue trends across the industry, I mean, these businesses right now are pretty common in what you see in revenue trends kind of across the markets, okay, whether it's ours or others that we don't operate in. And then March was a little bit better month than February. And in April, I think, across the regional markets, same store. If you just add them all up, same-store revenues were probably down in the 4% to 5% range in April kind of across the markets. So I mean, I don't think that there's anything that was that materially different as we went from 1 month to the next.

Unknown Analyst

Got it. And any early commentary on May you can share?

Dale R. Black

I don't think we've seen a -- I mean, we haven't seen a tremendous change in consumer behavior or patterns, but I think that the May results for all to say should start coming out in a couple of days here.

Operator

That was our last question from the phones. There is a replay of today's call. The toll-free number is (866) 422-8156, passcode 4589. Thank you. That does conclude today's conference. You may disconnect at this time.

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