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Nevada Gold & Casinos (NYSEMKT:UWN)

Q4 2013 Earnings Call

July 29, 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

Operator

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

Harriet C. Fried

Good morning, everyone. With us today from Nevada Gold & Casinos 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. I would 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 conditions. The company's earnings release contains non-GAAP financial measures 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

Thanks, Harriet. Good morning, and thank you, everybody, for joining our call this morning. The results we announced earlier clearly show the progress we've made in positioning Nevada Gold & Casinos over the last year. As you know, we took many steps to improve the operating performance of our asset portfolio, reduce our cost structure and sharpen the company's business focus. All of these actions contributed to our strong showing for the year. And we generated $5.8 million in adjusted EBITDA from continuing operations, which was above the target we have set, and also, reduced our outstanding debt by $2.3 million.

I'd like to walk you through a bit of our operations with a little bit of an overview. First of all, I'll start with Washington. Those of you who have been following us for a while know that we have 8 locations in the greater Seattle area and 2 locations in the south eastern part of the state referred to as the Tri-Cities. Altogether, we are the largest single operator in each of those 2 markets.

Our Seattle properties experienced some seasonality with our first and second fiscal quarters being the weakest, and the third and fourth being the strongest, which you can kind of see from the financial pattern reflected in our financial statements. The seasonality is primarily driven by weather, and the revenue variance between the best and worst quarters can range between 10% and 15%.

The climate in Seattle being rainy and overcast oftentimes helps the card rooms, but in December periods, June to September, when the weather turns sunny and warm, there are many outdoor entertainment opportunities that keep customers busy and out of card rooms. By contrast the Tri-Cities market, which represented about 23% of our Washington revenues in the last fiscal year, doesn't experience the same seasonality as the weather patterns there are pretty consistently normal. The Seattle seasonality contributed beneficially, obviously, to the strong fourth quarter that we just posted.

Our operating cost model in Washington is very labor and capacity cost intensive, with these costs accounting for almost 75% of our expenses. With the remaining 25% or so being relatively variable based on volume. This creates significant leverage for revenue to flow through the EBITDA, which unfortunately is a double-edged sword, so fluctuations in revenue, up or down, tend to flow through the EBITDA at a 50% to 60% rate. So there's an even greater fluctuation in our seasonal EBITDA as revenues vary and the flow-through is significant.

During 2013, we reviewed each of our locations and implemented some repositioning: changing the mix of games; modifying our marketing strategy; upgrading some of the physical facilities with remodeled restaurants, bathrooms, casino floor layouts; all of these efforts have paid off and we have adjusted EBITDA in Washington improving over 10% in the fourth quarter to $2.2 million, and for the full year, the adjusted EBITDA from Washington rose more than 20% to $7.9 million. The staff in Washington has done a great job of maximizing the efficiency of the operation out there, and portfolio is in very good shape. We're pleased with the overall operations, and we'll be focusing primarily on further opportunities to trim cost, while at the same time driving incremental revenue.

As I noted earlier, our largest cost components are labor and capacity, and each of these increase annually. For example: CPI clauses in our leases and increases in the minimum wage in Washington, which is currently about $9 an hour and one of the highest state minimum wages. Since our revenues are derived from card games, and obviously, isn't practical to pass along these 2% and 3% cost increases to our pricing, but I can't change the table minimum to $5.15, so we need to be much more creative in managing our business on a going-forward basis to address the ever-increasing cost structure.

Turning to South Dakota. When we held our third quarter conference call in March, I mentioned that we're also in the midst of the strategic review of Nevada Gold & Casinos South Dakota slot machine route operation which we acquired in the beginning of 2012. Our goal at the time was to review the locations, assess their profitability and make sure everything was operating as well as possible before the summer tourism season began. After completing that review, we decided to close one of our locations in June that we operated and didn't contribute to our bottom line results. There was another location that was closed by the owner for unrelated reasons to the slot route.

As we announced at the time, we believe that a portion of the revenues from those locations, which were both downtown and the main street of Deadwood, will likely be captured by other locations we operate nearby. In total, we expect these closures to have a modest positive impact as revenues will probably not all be washed, but due to the cost savings, we expect to contribute an additional $120,000 to adjusted EBITDA for 2014 by the virtue that we no longer have the operating expenses on those locations.

Additionally, with the closure of the location that's operated by us, we are no longer in direct competition with our customers in the market, and we expect that will yield benefits going forward, both in terms of our current relationships and/or potential expansion opportunities.

Our South Dakota properties experienced significant seasonality. The first and second fiscal quarters are the strongest, and the third and fourth are the weakest, the opposite of Washington, which was one of the attractions of that business.

South Dakota's seasonality is primarily driven by tourism and somewhat by weather. But the revenue variance between the best and worst quarters here can be as high as 50%. In fiscal 2013, our best revenue quarter was $3.3 million, and our worst was $1.8 million. The peak tourist season versus the harsh winter.

Now our operating cost model in South Dakota is also very different in Washington, and that labor is a very small component, and almost 80% of our costs are variable with revenue. This minimizes the operating leverage for revenue flow-through to EBITDA. So consequently in South Dakota, fluctuations in revenue, up or down, flow-through EBITDA is only 20% to 30% rate. This high-variable cost component makes it difficult during our soft quarters; and in strong quarters, although we do better, the high variable cost percentage consumes a large portion of those incremental revenues before we get flow-through to EBITDA.

In South Dakota going forward, we're continually looking for route expansions and opportunities in Deadwood; preferably off the main street where we have a significant concentration now. Any new business, or even existing business with available space, we are targeting for potential expansion. We also intend to become more proactive in the Deadwood business community as the success of Deadwood itself as a tourism destination is vital to our success.

Now let me move on to the corporate and administrative side. First, an update on our cost reduction initiative that we announced last year. Our newest design to save about $750,000 annually, all of those have been implemented and have had the intended impact. We've been using the company's cash flow to pay down debt and strengthen our balance sheet, and as I mentioned earlier, in fiscal 2013, we reduced our total debt obligations by $2.3 million. As we continue to generate positive cash flow from operations, we'll keep paying down debt to improve financial flexibility for future growth. We have just begun the process of refinancing our debt, with the intention of extending our maturities and reducing rates. With the completion of the full year of operations of our current asset portfolio, we are now at much better position to approach lenders and have the meaningful discussion about refinancing on much more favorable terms.

On the social gaming site, our social gaming initiatives Gold Star Slots, which has been available on Facebook, will soon -- and by soon I'm hoping within a week, will be available in the Apple store for a free download through iPhones and iPads, which will give us some much needed mobile functionality. This will enable us to reach a broader mobile gaming user base while we continue to explore avenues to integrate this initiative with our brick and mortar locations. At this point, it is not a meaningful part of our overall business, either in terms of revenue or cost, but we are hopeful that we will find a way to monetize this in some meaningful way that will contribute to our overall cash flows.

On the acquisition and expansion front, we continue to search for practical growth opportunities. We're primarily interested in 2 different types: property acquisitions or management contracts.

Management contracts generally have a shorter time frame, but also don't require much capital. Within our management team, we have decades of experience in the industry, so we have a good network of people who present us all the time with opportunities that we've been evaluating a variety of different options.

On the acquisition side, we're probably looking at opportunities priced under $20 million because of our ability to finance. We're looking to acquire things at a reasonable multiple of the expected cash flow and that are immediately accretive to earnings. Obviously, those aren't easy to find, but we do think there are pockets of opportunity especially in Nevada, simply because of the number of locations here versus other jurisdictions.

We are also actively exploring management and consulting opportunities, especially when they could lead to a strategic relationship or to a potential acquisition later. But as I mentioned in the past, we're looking for practical growth opportunities only. And we'll carefully evaluate the size, costs and potential synergies to make sure that any acquisition we make advances the prospects of the company and improves shareholder value.

I appreciate your patience as I've gone on a little longer than usual, but I hope it has been informative and highlighting what we are doing in our intended future direction.

At this point, I'll ask Jim to take you through the details of the quarter's financial performance.

James J. Kohn

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

For the fourth quarter, net revenues from continuing operations were $16.5 million, compared to $16.6 million in the 2012 quarter. Washington Gold contributed $14.2 million, while South Dakota Gold contributed $2.3 million of the revenues.

For the 2012 -- excuse me, for the 2013 quarter, total operating expenses were $15.5 million compared to $22.4 million in 2012. The 2012 period included $6.3 million of valuation allowances unrelated to ongoing operations.

Operating income from continuing operations was $1.1 million for the current-year quarter, compared to an operating loss of $5.9 million in last year's fourth quarter, which, again, included the valuation allowances.

Net income from continuing operations was $500,000, or $0.03 per diluted share, compared to a net loss of $4.3 million in the 2012 period due to the $4.2 million after-tax impact of the noncash valuation allowances.

For the full fiscal year 2013, which included a full 12 months of revenues from South Dakota, net revenues increased to $65.9 million, compared to $55.6 million in fiscal year 2012.

Operating expenses were $63.5 million, compared to $63.6 million in fiscal 2012, which included $8.5 million of valuation allowances in 2012.

Operating income from continuing operations for the current year was $2.4 million, compared to a loss of $8 million in fiscal 2012, which included the valuation allowances mentioned above.

Net income from continuing operations for the current year was $0.1 million, compared to a loss of $6.4 million in fiscal year '12, which included the $5.6 million after-tax impact of the noncash valuation allowances mentioned.

Turning to our balance sheet. As Mike said, we have taken steps throughout the year to strengthen our balance sheet. To that end, on a year-to-date net basis, we have reduced our consolidated debt balance by $2.3 million, while increasing our cash position by more than $1.5 million. As of April 30, 2013, we had $6.7 million in cash and cash equivalents, which excluded restricted cash of $1.3 million.

Operator, we are now ready to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] It appears our first question comes from Jeff Moore [ph], private investor.

Unknown Attendee

I had a question about the capitalized development costs that are still on the books. Looks like it's about $57,000 worth of them. What are those consisting of? And what can you tell us about that?

Michael P. Shaunnessy

Those costs are directly related to our Gold Star Slots that we are developing. The social gaming, that is all that's included in that number at this point in time.

Unknown Attendee

Okay. And also, on your food and restaurant expenses, I noticed these were up like 20%, was that mostly due to the minimum wage increase in Washington? Or were there other costs associated with that?

James J. Kohn

The cost increases are related, not only to the minimum wage increases, but there were a high increase in the FICA taxes paid on the part of the company. The main reason behind that is the regulators in Washington came in and did an audit of the MPs, as far as their tip income. They found out the employees were not filing tip income properly, although the company had provided and done every effort that we could from a policy standpoint and procedural standpoint. And as a result, employees are reporting significant increase in the tips, therefore, impacting the FICA tax that the employee and employer are paying.

Operator

Our next question comes from David Lupkey [ph] with J.P. Turner.

Unknown Analyst

I didn't get a chance to go through the full 10-K, but I did see something on April 8. You tentatively sold the property near Black Hawk. Can you give me some info on that? And I'm wondering why they were not in the press release.

James J. Kohn

It is a option to sell the vacant land. Go ahead, Mike.

Michael P. Shaunnessy

Yes, we actually entered into an option agreement with the land developer up there who is interested in doing a larger development, including this partial as part of that. The reason there wasn't anything significantly released is other than an option agreement for which the option is paying us half of the annual property taxes, it's pretty much a de minimus thing unless it ultimately gets exercised and closed on.

Unknown Analyst

Any time, expected timeline on that?

James J. Kohn

We've got a couple of years under the option. It's a 1-year option, it's got renewals. It's one of those we're hopeful. If it happens great, if it doesn't, we will explore other opportunities and monetize that asset. As you know, security on the books at the moment is at $1.1 million value, which was the value placed on the most recent appraisal. Along the mountain side, you'd get to walk out in the snow out there for the winter.

Operator

[Operator Instructions] And it appears we have a follow-up question from Jeff Moore, private investor.

Unknown Attendee

You guys we're talking about refinancing your debt, can you also give me guidances to your -- kind of what interest rate you guys are you looking for, and some of the terms that you're -- hopefully might get?

Michael P. Shaunnessy

We're pretty early in the discussions at this point. I'd hate to try and pick a number because they really are preliminary. We've had good substitute conversations about the company's current status, the solidity of this cash flow generation performance. And I think, obviously, a much, much better position today than when they current that package, together a couple of years ago. Given the way the markets are improving and interest rates are going, other than saying I want to extend maturities and significantly decrease the interest rate, I'd really hate to peg a particular number at this point. But I would say significant. I'm talking hundreds of basis points, not some minimal modification. We hope they're recovered from several years ago.

Unknown Attendee

Okay, that's good to hear.

Michael P. Shaunnessy

I just have to convince the bank to agree with that.

Operator

And it appears we have no further questions in the queue at this time. I would now like to turn the call -- conference back over to Mr. Shaunnessy for any additional closing remarks.

Michael P. Shaunnessy

Well, thanks again, all of you, for joining us this morning. To sum up, we had a very nice year in 2013, we think we have most of our operations in pretty good shape now on a going-forward basis. With the combination of good operations and hopefully, some new investment opportunities, we have the potential to have an even better 2014. Hope you're all enjoying your summer, and we look forward to talking to you again early soon as we report first quarter results. Thank you.

Operator

That does conclude today's conference. Thank you for your participation.

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