Isle of Capri Casinos F1Q10 (Qtr End 07/26/09) Earnings Call Transcript

Aug.26.09 | About: Isle of (ISLE)

Isle of Capri Casinos (NASDAQ:ISLE)

F1Q10 Earnings Call

August 26, 2010; 10:00 am ET

Executives

Jim Perry - Chairman & Chief Executive Officer

Virginia McDowell - President & Chief Operating Officer

Dale Black - Senior Vice President & Chief Financial Officer

Jill Haynes - Senior Director of Corporate Communications

Analysts

Larry Klatzkin - Unidentified Company

David Katz - Oppenheimer

Dennis Forst - KeyBanc

Steve Wieczynski - Stifel Nicolaus

John Maxwell - Jefferies & Co.

Steve Altebrando - Sidoti & Co.

Justin Sebastiano - Morgan Joseph

Susan Berliner - JP Morgan

Operator

Ladies and gentlemen, thank you so much for standing by. Welcome to the Isle of Capri Casinos first 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 call.

Jill Haynes

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 on 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 maybe 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. This 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, Chairman and Chief Executive Officer; Virginia McDowell, President and Chief Operating Officer; and Dale Black, Chief Financial Officer.

With that, I’d like to turn the call over to Chairman and CEO, Jim Perry.

Jim Perry

Thank you, Jill. Good morning and welcome to our first quarter call. Before I turn the call over to Virginia and Dale to respond your question, I just want to share some observations about our company and our industry. At Isle over the past few months, when asked about, how I feel about our company, I’ve stated that well, I am uncertain about our financial performance in the next 12 months to 18 months. I’m increasingly comfortable with our long term outlook.

Our internal measurements are good, customer satisfaction, employee satisfaction and operational improvement. With the exception of a few markets we have maintained or increased market share and when we saw revenue growth earlier this year, we generated significant flow through to EBITDA.

Our biggest operating challenge is consumer spending, that will recover and when it does we will be position to improve our cash flow and to the industry. Our industry is under going major changes. Over the next five years, we are likely to see the increase in supply out phase the increase in demand across the country. No longer will our industry be able to be successful just by building for expanding new facility.

There will be pockets of opportunity. Pennsylvania has proven that if the capital expend prudently, economic returns are possible. We are seeing capital discipline across our industry and this is Maryland. For examples, that the industry can pullback, when the return are not evident. I believe that Isle is in a good position to participate and to generate cash flows from investments where they are wise.

In closing, I comment about our Founder, Bernie Goldstein. I met Bernie at 1993 and joined Isle in 2007. He was a wonderful man, committed to building a great company. We at the Isle are committed to fulfilling his dream.

With that, I’ll turn it over to Virginia and Dale.

Dale Black

Derrick, at this time we open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Larry Klatzkin - [Unidentified Company]

Larry Klatzkin - Unidentified Company

A couple of questions; one, can you just give a little color on August, particularly in Colorado and how it’s been feeling since the law change and how it’s ramping up?

Virginia McDowell

I think Colorado is an evolving story, Larry. Obviously, we were pleased with the increase in revenues that we saw after the introduction of Amendment 50 in the beginning of the month, but there was a little exuberance there, a little tire kicking as it were as some people came up the mountain to see what was new.

We’re not seeing our trends in August, quite as strong as what we saw in July, but we’re still encouraged enough to be going through the process of adding some additional table games at Isle and Black Hawk to accommodate the demand.

Larry Klatzkin - Unidentified Company

The market was up 19 in July, were you guys up more than that?

Virginia McDowell

No, above that.

Larry Klatzkin - Unidentified Company

Then as far as some of the other markets, I mean have you seen any recovery in Lake Charles or in Bettendorf?

Virginia McDowell

We made some changes to our promotional spend in Lake Charles and we are more encouraged with the trends that we’re seeing in August than what we saw in June and July. What was your other question?

Larry Klatzkin - Unidentified Company

Bettendorf. When do you think that whole construction gets done?

Virginia McDowell

Bettendorf, we were very encouraged by the fact that the I-80 Bridge, which is about eight miles to the east of us, finally opened to two way traffic, mid-August. This is probably the biggest problem that we faced along with some ramp closures on the I-74 Bridge, which is closer to us. So we are more encouraged by what we’re seeing in August. We also have a pretty aggressive calendar at the Quad Cities Riverfront Convention Center in August that we’re benefiting from as well.

Larry Klatzkin - Unidentified Company

As far as what’s going on in Florida with the Indians, with you guys, the possible law changes. I assume Allan is still working as a resource and trying to help out there?

Virginia McDowell

Allan will always be part of us in one way or another and at this point, we’re just waiting to see what happens. We obviously have until the end of August. The governor has until the end of August to sign the agreement and negotiate a compact with the Seminoles. Depending upon which newspaper you pickup and read on any given day that’s either on track or there are potential issues. You’re can see that at the same time that we do.

Larry Klatzkin - Unidentified Company

Do you think there’s still a chance for a tax cut for you guys?

Virginia McDowell

Yes, if the agreement is negotiated as we hope it to be.

Larry Klatzkin - Unidentified Company

You would think 35% would be fair?

Virginia McDowell

It’s far better than 50%.

Larry Klatzkin - Unidentified Company

I guess anything is better than 50% that is true. As far as international goes, so for 2011 we should assume there are zero numbers for all your foreign stuff for 2011?

Dale Black

That’s correct.

Larry Klatzkin - Unidentified Company

Any more charges to be taken on those items?

Dale Black

I mean that’s predicting a little bit outcome of what might happen in the U.K. particularly with the Blue Chip assets, but nothing that we know of at this point.

Larry Klatzkin - Unidentified Company

Then the last question for Bettendorf, what kind of cost would you put the bridge effect would be to the latest quarter, that you reported? I mean, if that hadn’t been there, do you think you would have been flat? I mean, any feel for that?

Dale Black

Probably, I mean it’s tough to say. The other thing that you’ve got to look at too is that, last year in the first quarter Bettendorf benefited from the fact that Davenport was closed a few days with some flooding. So you almost have to look at the two Quad Cities properties together.

Virginia McDowell

You also have the impact of June.

Dale Black

So to try to bifurcate all of that and split it out is pretty tough.

Virginia McDowell

Yes, there’s a lot of noise in that market.

Operator

Your next question comes from David Katz - Oppenheimer.

David Katz - Oppenheimer

I’ve talk to a few people at the state and I guess had a couple of conversations with Dale about it. It’s not exactly clear to me, what happens, if this August, 31 deadlines comes and goes? Obviously, we’re all reading the same newspapers, but what interest would any of the parties have in not getting something done? So I guess that’s a two part question, yes? No, that was it. Why wouldn’t they get it done and what happens beyond the deadline?

Virginia McDowell

Well, it’s not really clear to any of us to be honest with you, but the issue is that the Seminoles at this point based on what we are reading, we’re obviously not party to these conversation. Are still trying to negotiate some changes on what the legislature has approved. They are specifically saying that, they’re not going to sign the compact. They and the governor are not going to sign the compact unless some changes are made.

The legislature has taken a position at this point that if those changes are substantive that they can go back into special session, call a special session and essentially reopen these negotiations again so that the legislature becomes comfortable with what they would actually be addressing as far as the compact is concerned.

David Katz - Oppenheimer

So it’s not a dead deal if the deadline comes and goes, we just need to rework some of rules then it becomes a bit more challenging, is that fair?

Dale Black

Not necessarily, it’s just extended. Nothing ever dies in politics, so…

Virginia McDowell

That you’re kind of an uncharted territory here, we’re just really waiting to see what happens along with everybody else.

David Katz - Oppenheimer

So one other quick one, if I may. Just going back to what Jim said in the introduction of the call. Looking at certain markets like Louisiana and perhaps Iowa and Mississippi for sure, should we be as we look at our models today, going back and maybe readjusting our expectations a little bit about sort of what the real revenue opportunity is out there.

To that end, do you do the same thing perhaps and readjust a lot of your promotional activities along with that? I mean, should we just be thinking more modestly on the revenue line going forward and trying to right-size our cost expectations to match up with that?

Dale Black

Everybody has got to draw to their own conclusions as to what they think these markets were going to do. I mean, I think to get not to speak for Jim, but to kind of get to his point is that, we’re comfortable with the things that we’re doing operationally. In most cases, they we’re taking advantage of the opportunities that were there, but we have said, even going back to last couple of quarters, we’ve kind of made the point that for us.

We’ve just about got the cost structure where we can get it. We were a little bit earlier than some of the other companies I think in adopting some of this stuff, so. Our future opportunity may not be for cost savings, may not be quite what some of the other guys still have left, but when the economy does turnaround and revenues due start to pick up, we’re confident that we’re going to get very good flow through on it.

Virginia McDowell

Just a couple of macro comments on that. What we are generally seeing is stable or increased volumes in most if not all of our markets. Our customers are still coming; in some cases we’re actually seeing an increase in our headcount, or patron headcount, but they are spending less.

We continue to struggle with generating retail revenue. We’ve told you over the last year, we’ve built very strong relationships with our database customers and our rated revenue, although we are seeing a little bit of a decrease has remained relatively constant, but we still struggle with our retail revenue with the exception of Missouri as a result of the referendum change there.

We have seen an increase in local unemployment rates at every single one of our properties. The decrease in gas prices year-over-year hurt some of our properties and helped some of our other properties, but I think as everybody struggles with the economy right now, what you’re seeing is an increase in promotional activity in many of our markets.

What we have done is we’ve made a concerted effort to resist the opportunity quite frankly to buy top line business. We have worked very hard to get our cost structure inline over the last year. We’ve worked very hard to build strong relationships with our customers. We’re not going to make short term decisions that quite frankly, give back some of that ground that we gained.

David Katz - Oppenheimer

That was the answer I was hoping for, one more, quick one if I may. We see a lot of also the expansion opportunities that are out there. Why not, now that perhaps the operation is on a little more solid ground, look at some of the new states like Ohio or Maryland or some other?

Why not look at those where you have a brand, a license and a reputation and some operating experience, and perhaps without using your capital, team up with some others that may value those assets? Perhaps look at some management agreements and some of those expansion markets out there and expand that way again without writing big checks.

Dale Black

We have one very new staff addition that’s…

David Katz - Oppenheimer

These things out, I bet.

Virginia McDowell

I’m going to give you Eric’s phone number.

Dale Black

No, we mentioned on our last call, even that there are areas like that it we think there may be some opportunities for us and we’re very aggressively pursuing things along those lines. The one thing know that everybody has to understand is that a lot of these situations right now are taking a long time to play out, because if it’s an existing place most of them are in some sort of financial complication or in bankruptcy or something like that and it’s a long drawn out process and you have to be pretty patient stay on top of things.

Then if it’s a newer jurisdiction, as we all know from being in this business for several years, they always take way longer to develop and get on board than what you think. For us the opportunities are in those areas, as you mentioned, where we could team up with somebody from a financial standpoint and use our operating skills. Right now we just don’t quite have the capacity to go out do a big Greenfield project on our own.

David Katz - Oppenheimer

It sounds like it’s in your in the thought process and you’ve got to find things for Eric do, so hopeful that.

Virginia McDowell

I think Eric will do just fine.

Operator

Your next question comes from Dennis Forst - KeyBanc.

Dennis Forst - KeyBanc

I had a couple, one, Virginia, could you clarify your comment about Lake Charles? You said you changed your promotional spend in August. Did that mean you got more aggressive to compete with L’Auberge or the opposite?

Virginia McDowell

No, we actually just reallocated the way that we were spending our marketing dollars. The Lake Charles market got a little bit upside down as it relates to free play and we participated in that in the early months in the quarter, but we adjusted that in July and if continued to adjust that in August.

Dennis Forst - KeyBanc

Adjusted exactly how?

Virginia McDowell

Down.

Dennis Forst - KeyBanc

Has Pinnacle change the way they’re spending there, too?

Virginia McDowell

It’s not as obvious as what Delta Downs has been doing.

Dennis Forst - KeyBanc

Then on the capital structure paragraph in the press release, Dale, I was curious you spent $2.7 million on maintenance CapEx in the quarter, yet you’re going to spend another $35 million through the remainder of the year. What is going to be $35 million of maintenance CapEx for the next nine months?

Dale Black

It’s just that I mean it’s an allocation of maintaining our slot product and keeping the properties up. You just maintain and from normal wear and care mainly.

Dennis Forst - KeyBanc

Does that mean replacing a certain amount of the slots throughout your system?

Dale Black

Yes. We’re still buying and replacing slot machines, maybe not quite to the same level we did last year, but we’ll still turnover a fair amount of our floor either through new games or conversion kits this year.

Dennis Forst - KeyBanc

When you say a fair amount of your floor, what type of a percentage are you talking about?

Virginia McDowell

It varies by market and what we are being very careful, Dennis, in doing is making sure that we’ve leveraged spend that we have allocated to slot capital as smart as we can. In some markets that means we’re going heavier into conversions as opposed to new units and in some markets, we have to put the new product on the floor in order to be competitive. So it’s difficult to sit there and give you an overall number.

Dennis Forst - KeyBanc

Then what about growth capital? I guess there was about $1.5 million in the first quarter probably related to one of the Lady Luck projects. What other kind of growth capital is going to be spent?

Dale Black

Well, there’s very little committed right now. I mean, we have talked in the past that there are some things out there, Colorado maybe some renovation capital in Lake Charles that we talked about at our fourth quarter call that we have on the drawing board, but we haven’t committed anything yet until we start to see signs of a little bit more recovery here.

Dennis Forst - KeyBanc

Then the last question is about corporate expense. It was $9.9 million, but then if you back out the once a year $2.2 million of incentive plan contributions and then $1.1 million of the non-cash stock comp, you’ve got about a $6.6 million base. Is that a fair number for the next three quarters?

Dale Black

No, I mean I think we’re still on target probably for $40 million for the year including stock comp somewhere in the neighborhood of $7 million. So in the middle 30s as far as cash corporate costs probably.

Dennis Forst - KeyBanc

Then that would be higher in future quarters than the current quarter?

Dale Black

Maybe a little bit, just depending on how stuff flows in.

Operator

Your next question comes from Steve Wieczynski - Stifel Nicolaus.

Steve Wieczynski - Stifel Nicolaus

Virginia, going back to your earlier point, I’m not sure if you can quantify this, but can you talk about the players that are coming through the door in terms of rated versus non-rated?

Virginia McDowell

If you look at the decrease in our rated play for the first quarter, we’re down a little over 3%. If you look at the decrease in our retail, we’re down a little over 8%. Now again, that varies by market, but you can clearly see that we’re having a much more significant impact in retail than in rated.

Dale Black

It’s more on spend rather than volume.

Steve Wieczynski - Stifel Nicolaus

Can you say, what was the biggest market decline?

Virginia McDowell

I think what you’ve got to look at in the first quarter are the properties that we’ve outlined that we had the biggest issues with. Bettendorf, as a result of the bridge issues, they continuing decline in the Biloxi market. Pompano, year-over-year because we hadn’t anniversaried on Blackjack yet, pressure in Lula, the tune of the market continues to decline significantly. We’re looking at significant increases in the unemployment rates in Mississippi, quite frankly up and down the Mississippi River and then Lake Charles.

Steve Wieczynski - Stifel Nicolaus

Then last question. Is it fair to say, I mean are you guys done with international markets at this point once you exit the U.K.?

Virginia McDowell

Yes.

Operator

Your next question comes from John Maxwell - Jefferies & Co.

John Maxwell - Jefferies & Co.

Virginia, I was wondering if you could touch a bit, I guess Iowa, there’s some news out about that potential new licenses. It doesn’t seems like the ones begin contemplated would bother Bettendorf. I guess just Waterloo property, there seems to be some potential competitors there. Could you just talk about, how you could keep them from opening, if you can?

Virginia McDowell

The Iowa Racing & Gaming Commission, I think has done a good job this time of recognizing, that the market is relatively saturated. They’re only going to be accepting applications from those counties where a referendum has already been passed and included in the submission has to be an impact indication of how other properties are going to be impacted, so they’re very, very conscious at this point about cannibalizing the existing casinos.

They are also based on the comments that I’ve read, very conscious of the fact that essentially they’re just continuing to divvy up the Iowa market, that they’re not really bringing customers for the most point in from other states. It appears at this point that the upper northwest corner of the state is really the only market at this point that shows some growth potential, which wouldn’t significantly cannibalize another property.

John Maxwell - Jefferies & Co.

Then Dale, do you have just the breakout in terms of the revolver in the term?

Dale Black

Sure. At the end of the quarter it was $93 million on the revolver, $823 million under the term loan, $357 million of the bonds and then $6 million of other for $1.279 billion.

Operator

Your next question comes from David Katz - Oppenheimer.

David Katz - Oppenheimer

Actually, that was it. I was looking for the revolver balance and I’m all set. Thanks.

Operator

Your next question comes from Steve Altebrando - Sidoti & Co.

Steve Altebrando - Sidoti & Co.

I apologize if I missed this bouncing on and off. May and June were pretty rough for you guys and really industry wide and then July…

Virginia McDowell

Wasn’t any better.

Steve Altebrando - Sidoti & Co.

It looks like on a same casino basis it was a little bit better. Is August companywide is it more like July or May/June?

Dale Black

We didn’t see that much of a difference frankly between the three months. If you’re starting to look year-over-year though and think about those comparisons, beginning in the middle of August last year was when we really saw our business start to decline when all the stimulus money filtered out of the economy. I heard somebody else yesterday talking about their business just fell off the map last year September 1 and things like that.

So we’re starting to get to the point to where that comparison year-over-year is starting to work itself out of the system.

Steve Altebrando - Sidoti & Co.

So it’s the comps more than anything. Okay, thanks, guys.

Operator

Your next question comes from Justin Sebastiano - Morgan Joseph.

Justin Sebastiano - Morgan Joseph

Virginia, you spoke about the tax rate going down possibly to 35% in Florida. It’s my understanding though that there was going to be a minimum tax. So you’re going to have to pay a certain level if 35% doesn’t bring it to that level. So what is that minimum?

Dale Black

It’s an aggregate number from the pari-mutuels.

Virginia McDowell

So whatever the contribution was last year.

Dale Black

Last year.

Virginia McDowell

Last fiscal year.

Dale Black

Last fiscal year, the pari-mutuels have to pay at least that much in taxes. Now the thing to take in mind there is that, there’s going to be two new pari-mutuel tracks or pari-mutuel operations coming this fall or this winter. So that whatever shortfall there is, would be split among the five casinos, not among three, and it’s evenly, not necessarily proportionate to your revenue.

So it’s not a casino-by-casino basis, it’s what the industry pays. So you don’t necessarily have to get all the revenue growth on your own to make up the difference in the tax.

Justin Sebastiano - Morgan Joseph

So is that going to be a year one post the tax decline minimum or is that going to basically be ongoing? You have to hit that minimum number every year, if that’s in the language?

Virginia McDowell

I think that’s ongoing.

Operator

Your final question comes from Susan Berliner - JP Morgan.

Susan Berliner - JP Morgan

Just, Dale, I was wondering if you could help us. Just remind us of the various add backs for the EBITDA or leverage calculation per the bank line?

Dale Black

Right now, the way it works, because it’s still going back in fact just a little bit going back is. If you take EBITDA as you calculate it right off the income statement, you get to add back, if you will, any losses from the U.K. operations because they’re unrestricted subs and then that’s really about it as far as adding things back, if you will and in the net debt is any of our cash over $65 million gets deducted from the net debt balance.

We have had some things that have obviously impacted EBITDA in the prior quarters with the insurance the gain from the debt buyback that we did earlier last year, but that’s in the numbers already.

Dale Black

Any non-cash charges get added back too like stock comp.

Operator

Ladies and gentlemen, this concludes the question-and-answer session at this time. I would like to offer some replay instructions for the call. If you would like to listen to a replay, please contact the toll-free number 1-888-286-8010. Again that number is 888-286-8010 and the access code is 94785123. Again the access code is 94785123.

Now I’d like to turn the call over to Dale and Virginia for closing remarks.

Virginia McDowell

Thank you, ladies and gentlemen and enjoy the rest of your summer.

Operator

Thank you for participating in today’s call. This concludes our presentation. You may now disconnect. Have a good day.

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