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Nevada Gold & Casinos (NYSEMKT:UWN)

Q2 2014 Earnings Call

December 23, 2013 4:30 pm ET

Executives

Kenneth Maciora - IR

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, and welcome to the Nevada Gold & Casinos, Inc. Second Quarter Fiscal 2014 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ken Maciora of Empire Relations Group. Please go ahead, sir.

Kenneth Maciora

Good afternoon, everyone, and thank you for joining Nevada Gold and Casino's Fiscal 2014 Second Quarter Financial Results 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 I begin, I would like to remind you that today's webcast and call will be archived on the company's website at www.nevadagold.com. If you have not already received a copy of today's press release or the 10-Q, they're available 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 Securities and Exchange Commission 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 meaning of Regulation G promulgated by the SEC. Included in this afternoon'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 over the call to Michael Shaunnessy, President and Chief Executive Officer of Nevada Gold. Go ahead, please, Mike.

Michael P. Shaunnessy

Thank you, Ken. Good afternoon, and thanks for joining our call today. The 5-year reducing revolving debt refinancing with Mutual of Omaha Bank that we announced today will provide substantial long-term benefits from [ph] the company. Not only did we significantly reduce our borrowing rate from an all-in effective rate of 12% down to about 6.5%, the revolver feature also provides us with some cash management flexibility. In addition, we used some excess cash to reduce our outstanding long-term debt by an additional $1.2 million. So with our new financing in place, our total long-term debt is now $12,750,000. With this new financing in place, our earnings will immediately benefit from reduced interest expense at an annual rate of approximately $700,000 or $0.03 a share. Our first pricing certificate under the new bank deal will be effective July 1, 2014. And based on our current pro forma calculations, our leverage ratio should be below 2.5x, further reducing the borrowing margin by another 50 basis points.

The operating results we reported today reflected a significant rebound in our Washington operations from the difficult first quarter. As you will recall, we had some unusually dry weather in June and July, which impacted our performance. This quarter, revenues were $13.4 million, up $400,000 or 3% compared to the prior year. And we are now moving into the 2 stronger quarters of our Washington operation. In South Dakota, we generated revenues of about $2.9 million, down 13% compared to the prior year. The South Dakota gaming market experienced an 8% decline during that same period, and our results reflect the market, as well as our previously announced reduction in units. However, as we move into the slower period of the year in South Dakota, our cost reduction should help to benefit our operating performance there.

Also, in South Dakota, the city of Deadwood, who within the last month has hired a destination marketing expert, Roger Brooks International, to provide a comprehensive study to address methods of elevating tourist visits to the market through improved marketing, branding and product development. As now that casino style of gaming is present in about 39 states, it is no longer the unique attractive draw for Deadwood that it was when it was first legalized in 1989. This process is set to begin in January, and we're optimistic that some positive suggestions will result. Also, in South Dakota, just last week, the South Dakota regulators approved a proposal by IGT to allow for multistate progressives in South Dakota. This will allow the properties there to offer bigger jackpots as other states enable similar legislation. Both of these initiatives reflect the favorable business environment in South Dakota and the realization by the community and the business operators there that some continual innovation is necessary in order to remain competitive in a changed environment.

On the social gaming front, we have amended our third-party agreements for cost and revenue sharing and that will positively impact our EBITDA to the tune of about $75,000 a year. Gold Star Slots continues to be available on Facebook and in the Apple Store, and the Android compatibility is expected sometime in early to mid-2014. We will also be launching just after the first of the year Gold Star Poker, which provides free poker play. We continue in our efforts to monetize this endeavor, but at least for now it remains fairly immaterial, except for the $75,000 in savings we expect to realize going forward. We continue to maintain tight controls in the cost side of our business, both at the corporate level and at our operating properties.

And on the acquisition front, we continue to actively seek practical growth opportunities, either through acquisitions or management contracts. Unfortunately, we haven't found the right fit yet. Pricing in some of the acquisitions has been a challenge, and we consequently will continue to be patient and make sure we find the right asset at the right price and on the right terms.

I appreciate you joining us today, and I'm delighted to be able to deliver such positive news on the debt refinancing. The actual terms couldn't have turned out any better. And with that, I'll turn it over to Jim, and he can walk us through the financial details for the quarter. Jim?

James J. Kohn

Thank you, Mike. I will go over our consolidated financial results for our continuing operations. As a reminder, we completed the sale of the Colorado Grande Casino in May 2012. As a result, Colorado Grande's results have been reclassified as discontinued operations for that fiscal year.

For the second quarter of fiscal year '14, net revenues from continuing operations were $16.3 million compared to $16.4 million in the 2013 quarter. Washington Gold contributed $13.4 million, while South Dakota Gold contributed $2.9 million. For the 2014 quarter, total operating expenses were $15.6 million compared to $16.7 million in 2013. The prior period expenses included approximately $1 million of onetime charges related to severance and other write-offs of impairments. Operating income from continuing operations was $739,000 compared to an operating loss of $309,000 in last year's second quarter. Net income from continuing operations was $221,000 or $0.01 per diluted share compared to a net loss of $681,000 or $0.04 per diluted share in the prior year.

For the 6-month period, net revenues from continuing operations were $32 million compared to $33.2 million in the prior year. Total operating expenses were $31.2 million compared to $32.8 million in 2013. The prior period expenses, including approximately $1 million of onetime charges. Operating income from continuing operations was $766,000 compared to $411,000, and net income from continuing operations was $5,000 on an annual basis compared to a net loss of $512,000 in the prior year.

Turning to our balance sheet. We used approximately $1.2 million of available cash, together with the proceeds of our new credit facility, to reduce long-term debt to $12,750,000 from $13,920,000 that was reflected on the balance sheet as of October 31.

With that, operator, we're now ready to open the call for any questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Jeff Moore [ph], a private investor.

Unknown Attendee

I was curious about the -- I was curious about your all's present view of the acquisition in Deadwood. Mr. Shaughnessy, if you were part of the management team when they were looking at the deal a couple of years ago, knowing what you know now, would you still be in favor of the acquisition or would you have passed on it? And for Jim, kind of what are your thoughts on it in retrospect?

Michael P. Shaunnessy

The easy answer is yes, I'm still in favor of it. If it was on the table today at the same price point, I'd probably do the same thing again. Realizing that anytime you do an acquisition, you kind of have to take the whole package, the good with the bad. So we had a couple of locations there that weren't performing great, which has kind of gone by the wayside. However, it's also enabled us to reduce the cost side of the equation, so that even on the current run rate multiple, it still ends up being as less than 5x EBITDA for that acquisition. The capital requirements have been minimal to date. The good news, I believe, is going forward, I mean, Deadwood, South Dakota has been a solid tourist attraction for decades, and I continue -- I expect that to continue. I was very thrilled when the business community and the city council leadership there kind of recognized we needed to do some new stuff, and I believe they are. I think it was like $50,000 they authorized to be expended for this Roger Brooks International group to take a look at things that the community can do to try and increase the desirability of Deadwood as a tourist attraction. And obviously, for us, the more people that end up in Deadwood, the better off we are because the uniqueness of just having slot machines is not what it was 20 years ago. And I guess with that, Jim is going to be hard pressed to describe...

James J. Kohn

I would say that the results are about where we expected them at this point in time. And as we had a look-and-see approach, we originally said we would take about a year's time to analyze the operations. As a result, as you are aware, in June of this year, we shut down the Bourbon Street, which was the one casino that we owned and operated. The revenues declined as a result of that. The number of slot machines that we were routing declined. But the net benefit of shutting that down was approximately a little over $100,000 annual anticipated bottom line benefit. So at this point in time, I agree with Mike. I believe that it's where we expected it to be overall.

Michael P. Shaunnessy

And one other comment. At the same time, I mean, Miss Kitty's closed shortly thereafter. But again, almost within a 30-, 60-day period, we kind of took the assets that were at those locations and we have moved them to 2 new locations that are now in the portfolio, the Deadwood Express and the Gold Country Inn, both of which are hotel properties rather than just stand-alone storefronts like the prior 2 were, which at least gives us a better upside ability for generating revenue because we have hotel guests in the facility. So all in all, I'm still optimistic that Deadwood gets better from here. I mean, it's a pretty solid base. There's very little downside risk and I think more upside potential. Even though the market was down 8%, a good chunk of that happened in the last month of our quarter because of an early snowstorm that I'm sure many of you saw in the news that decimated livestock and everything else in the area there and that kind of hurt the last month of our quarter.

Unknown Attendee

Okay, sounds good. And then my other question was regarding kind of the legislative funds in Washington State. Electronic scratch tickets, are those still something that is on the table up there? What are the other legislative happenings up there that might be pertinent to Nevada Gold?

Michael P. Shaunnessy

There isn't anything at the moment that is far enough along in consideration that I expect to see in the next 3 to 6 months, particularly on the gaming front because the Native American tribes up there have a pretty solid quarter in the market with gaming. And unless there is a need for additional budgetary revenue, a lot of the legislatures are hesitant to be too aggressive in proposing broadening of gaming regulations. We are looking at some stuff with the pull-tab machines but I don't expect it to be a monumental increase. But bit by bit, we're slowly making progress on some stuff, but again nothing is going to hit the floor anytime soon.

Operator

[Operator Instructions] We'll take our next question from Nelson Obus [ph], a private investor.

Unknown Attendee

Well, I was just listening to your comment about deal flow and how everybody wants more money than they -- than you feel that could be justified. The company -- first of all, congratulate you on refinancing your debt. That was a real wet blanket, so now you've got a little more maneuvering. But I'm just wondering from a strategic perspective, when you look at the microcap nature of the company and the balance sheet and the total lack of critical mass, there are a couple of options. Well, there's an option other than making an acquisition, which would be some kind of combination with another entity that lack the critical mass that you did so that together you have something that would be a little more substantive. So I'm just wondering from a strategic perspective, obviously, there's people's jobs involved, there's people's egos. But is that something that the company is actively looking at because, otherwise, you kind of try to imagine getting too much further along the line of being a substantive entity?

Michael P. Shaunnessy

It absolutely is something we're looking at. And not just looking, I mean, we're actively looking at that particular approach from a strategic standpoint.

Unknown Attendee

And then your problem is that -- I'm sorry, one of your problems is you really can't use your stock for -- I mean, at this discount to book, be crazy to use your stock. So then you're stuck with -- it just seems some kind of a combination makes more sense than a purchase on your -- well, it could under certain circumstances. Just want to make sure that you're looking at that alternative.

Michael P. Shaunnessy

Yes, we are. I mean, part of it was doing a refinancing to get our cost of capital in a more manageable ballpark. And clearly, strategically, it's either acquisition combination, something along those lines and we haven't ruled any of it out.

Operator

And our next question comes from Steve Licho [ph], a private investor.

Unknown Attendee

My question is on the rate itself on the new equity -- or I'm sorry, on the new financing. I think you said it was 6.5%. Is that a -- is there -- is that a floating rate? Or is there a floor, is there a cap on that rate? I had some trouble getting through the queue in the short time period so I wasn't able to do a full analysis on it, but I just kind of wanted to get an idea more on the rate itself kind of fluctuate. Is there a floor? Is there a cap? And then I guess, secondly, as of 10/31, the current portion of long-term debt, I think it's $2.37 million. Is that still residing on the balance sheet as the current portion of long-term debt? I'm not -- I'm kind of thinking like it's a subsequent event but I want to make sure to confirm that.

Michael P. Shaunnessy

Yes, let me handle the last part first because that's a very good, very complicated accounting technical question. The amount reflected on the October 31 balance sheet is a combination of the $1.6 million that will be due in principal payments under the Mutual of Omaha note over the course of the next year plus $1.2 million, actually, $1,170,000 that we just utilized in cash to retire the other outstanding debt. So technically kind of as of today, our current portion of long-term debt are the scheduled requirements under the mutual note, which Jim is looking at me strangely and I know why because I think there's only 3 quarters' worth in the current.

James J. Kohn

Right. Let me break it down a little, and sorry, make one correction. The long-term -- I mean, the current portion of long-term debt of $2.370 million comprises of 2 parts: $1,170,000 of cash that we used off of our balance sheet and paid down during the subsequent to the quarter and $1.2 million, which is due to Mutual of Omaha Bank lender because our first payment is not due until March. So we only have 3 quarterly payments of $400,000 each due to Mutual between now and October 31, 2014. Mike is correct in the fact that a total annual at a $400,000 rate would be $1.6 million, but we only have 3 quarters because of the first payment delay.

Michael P. Shaunnessy

On the rate side of your question, it's actually based on LIBOR, which obviously in flux, so it's a variable rate. And then it's LIBOR plus a margin. The high end of the margin is 5%, which is there currently through the July 1 date. It can drop down to lower spreads as our leverage ratio gets better.

James J. Kohn

In addition to that, we do have the amortization of the low in issuance cost on top of that, and we are required to fix a minimum of 50% of the debt outstanding -- any debt we have outstanding at any time as a fixed rate swap. So as the LIBOR floats and we make payments, our rate, if anything, it has a possibility of going up and down but we are anticipating that it would decline. We also have the opportunity through various means within the agreement to lower the interest rate as a result of meeting certain financial covenants and/or having deposits at the Mutual of Omaha Bank and other means by which we can lower -- if we have automatic payments being made to them, they lower the rate, et cetera. So the rate that's in that 6.5% at this point in time is on the high end of what the rate would most likely be.

Michael P. Shaunnessy

Yes, the 6.5% is kind of a blend of today's LIBOR rate of barely 25 basis points plus a 5% margin and then assuming 50% of the balance gets swapped and about another 1.25, 1.5 percentage cost and then the amortization of about $450,000 of loan financing cost. So all in blended is about 6.5%.

James J. Kohn

And it does not take into account any potential credits that we can earn by meeting certain covenants of the agreement.

Unknown Attendee

Okay. And then secondly, I guess, somewhat similar to what the previous caller said, the market capital stock itself, it's barely moving and this is one of the smaller market cap companies that I've ever seen that pays so much, in cash, director fees. I think it's about $26,000 a year to independent directors. If you look at Penn National Gaming, which is a $1 billion company, I believe they're paying only like $50,000 in cash per year. And it wouldn't be such a big deal, but so much of the management and the directors really don't have a large stake in the company. Now there's a lot of options, but in terms of pure beneficial ownership. I guess, I'm more or less saying that I'd like to see more management, more directors take a stake in the company and I think that would help investors see that management has skin in the game but maybe investors would have more skin in the game. It's sort of more of an editorializing as opposed to you don't have to necessarily answer that question. But I just feel that looking at the proxy, it doesn't appear that management and directors or -- have skin in the game.

Michael P. Shaunnessy

Duly noted and a subject we have discussed internally amongst ourselves as well. And the consensus is we share your feelings. Last quarter, after we released the earnings, there are at least 2 of us that went out and picked up 5,000 shares. You'd be surprised at how hard it is to buy stock in this company unless you're willing to pay any price under the sun.

Operator

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

Michael P. Shaunnessy

Okay. Thank you all for joining us today. With a strong operating performance behind us for this quarter and the new credit facility in place, we have a pretty solid foundation for producing some continuing improving earnings going forward. Thank you again for joining us. We hope you all have a great holiday season and look forward to talking to you soon. I wish you the best for 2014, and thanks again.

Operator

That concludes today's conference. Thank you for your participation.

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