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Dover Downs Gaming & Entertainment, Inc. (NYSE:DDE)

Q1 2010 Earnings Call Transcript

April 29, 2010 9:30 am ET

Executives

Denis McGlynn – President and CEO

Tim Horne – CFO, SVP-Finance and Treasurer

Analysts

Dennis Forst [ph]

Brad Buehler [ph]

Operator

Good morning and thank you for standing by. At this time all participants are on listen-only. After the presentation we will conduct a question-and-answer session. (Operator Instructions)

I would like to inform participants that today's call is being recorded. If anyone has any objections you may disconnect at this time.

And I would also like to turn the call over to your conference host today, Mr. Denis McGlynn. Sir, you may begin.

Denis McGlynn

Thank you. Good morning, everyone, and welcome. Tim Horne, our CFO, is here; as are Ed Sutor, our Executive Vice President; and Klaus Belohoubek, our General Counsel.

Tim is going to read our forward-looking statement disclaimer and then we will get underway.

Tim Horne

In order to help you understand the company and its results we may make certain forward-looking statements. It is possible that the company's actual results might differ from any predictions we make today. Additional information regarding factors that could cause such differences appears in the company's SEC filings.

In the question-and-answer portion of today's call, we will only be responding to questions from analysts relating to historical information for the first quarter.

Denis McGlynn

Thanks, Tim. Well, blizzards and state taxes were the stories behind this quarter's results. This was the worst winter in decades in Delaware with several major storms interrupting business. And these storms were perfectly timed for maximum impact on our weekend revenues.

But for the impact of these storms, our revenues would have been in line with the previous year. And we found this encouraging under the current constraints of the economy and it once again validates our confidence in the amenities that we have added over the years to this site.

Unfortunately, the significant increase in slot taxes levied last year by the state once again impacted net earnings and Tim will have the rundown on that in his review of the financials in a moment.

Our plans to begin table game operations are progressing well. Construction is underway within our existing footprint to make room for 40 tables and related back-of-house facilities on the main floor of our casino.

We're centralizing our horse racing simulcast operations into the recently opened Sports Book just off the casino floor to make room for 12 poker tables and other back-of-house needs on the third floor of our grandstand structure.

We have also reopened our track view slots area on the fourth floor of the grandstand to accommodate 124 slot positions including six Shuffle Master electronic table games.

Currently, when completed, we expect to have 40 table games, 12 poker tables, and 2,800 slot machines including a total of seven electronic table games. Our plan is to open with table games in late June and have poker operational by mid-July.

We have hired our director of table games as well as our tables’ management staff, and the hiring and training of dealers has been underway since the beginning of this month. So at this time we are right on schedule.

On the legislative front here in Delaware, a bill authorizing additional casinos in the State remains tabled in the House where it lacks the required number of votes for passage. Our industry has remained united in opposition to this bill, and we have the support of a variety of Chambers of Commerce, business groups, and municipalities – and 69% of Delaware voters, according to a recent statewide poll. Naturally, we are monitoring this issue closely with the goal of defeating its passage.

Tim is going to run through the financials with you now. So, Tim, I will turn it over to you.

Tim Horne

Okay. Thanks, Denis. If you look at the first-quarter statement of earnings you will see our total net revenues at $56 million we are $3 million below the first quarter of '09, with the decline in gaming revenue somewhat offset by slightly higher other revenue. Gaming revenues, which consist of slot machine win, horse racing commissions, and some minor sports betting commissions, fell by 5.8% compared to last year to $51.6 million for the quarter.

Our slot win was down just over 6% compared to last year. The results were clearly impacted by a snowstorm in January and two very significant snowstorms in February, which we have estimated together cost us approximately $3.5 million in slot win for the quarter.

As evidence of the weather impact, our slot win for January and March were each down a couple percent, but February was down almost 13%. As Denis mentioned, if you factor out the effect of the snowstorms, we would likely have been looking at slot revenue that was flat to marginally higher compared to last year.

The weather will impact some of the demographic data for the quarter as well, as we saw the average number of trips for our patrons decrease slightly versus last year. But we did see the work per trip increase for the first time in some time.

We also continue to see an increase in the results from our local market and from our highest level customers.

As we have mentioned for the last several quarters, cost control remains something we are focused on. As a percent of our gaming revenues, our marketing spending for the quarter was down a few basis points compared with last year, and was down a few hundred thousand dollars on an absolute dollar basis.

Regarding our operating profits, the issue once again was the large tax increase that became effective on May 28, 2009, that served to increase our gaming tax rate to 43.5%. The impact of that change in the first quarter was approximately $3 million.

We also had a quarter of the new annual sports betting license fee; and that equates to almost $400,000 for the quarter. So in total, our taxes and fees were approximately $3.4 million higher this quarter than they would have otherwise been without last year's legislation.

In total and primarily related to that tax increase, our gaming margins were therefore compressed to 15%, which is a slight improvement from last quarter but obviously down from the first quarter of last year.

Other operating revenues, which are net of promotional allowances of just over $4 million for the quarter, consist of the cash portion of our hotel, food and beverage, and other ancillary businesses and they were up 4.2% compared to last year primarily from higher cash room revenue this year.

Our gross profit and margins for these other businesses also improved compared with the first quarter of '09.

Hotel occupancy was 72.7% for the quarter compared to 75.8 last year, with the same number of room nights available in both periods. We derived more than 28% of our slot win from hotel guests, which is higher than the 25% we had in the first quarter of last year and which can be explained by better players in the hotel, because the number of comped [ph] rooms during the quarter was actually lower than last year. Our win per room is still significantly in excess of a winning for a typical customer at more than $500.

Our pure cash rate for the quarter was $145. That compares to $152 last year. G&A expenses were almost identical to last year at $1.7 million. So our EBITDA was $6.9 million in the quarter compared to 10.8 million for the first quarter of last year, with the majority of the decline again representing the significant gaming tax increase from last May.

The lower slot win, which was largely weather-related, was offset to a small extent by slightly better results from all other activities. Interest expense in the quarter was $683,000, a little higher than the first quarter of '09 as, while our average borrowings are lower; rates were somewhat higher this year.

Our effective income tax rate was 47.6% compared to 40.9% for the first quarter of last year. The higher rate for this quarter reflects the necessary accounting treatment which requires us to adjust the previously booked tax benefit for stock grants in the periods that those grants actually vest. As most of our stock grants vest in the first quarter and the stock price has fallen since they were initially granted, the previously booked tax benefit for these grants has to be adjusted down, which obviously increases the effective tax rate. This is a first-quarter phenomenon and we expect that our effective rate for the year will be approximately 42%.

As you can see, our net earnings were 1,673 million or $0.05 per diluted share, compared to 4.2 million or $0.13 per diluted share last year. It's probably worth noting that the increased gaming taxes and fees represent approximately $0.06 per diluted share; and the income tax rate change is almost another penny.

Also attached is a March 31st balance sheet, the only significant change from year-end being that our total debt has decreased by $5.1 million to just under $90 million. Also attached is a cash flow statement for the quarter ended March 31.

Taking net earnings before depreciation and considering all other working capital changes, our operating cash flows were $4.2 million. That was reduced by just over $500,000 for capital expenditures so far, and we paid $968,000 in dividends. So as mentioned, we paid down $5.1 dollars of debt.

Operator, that concludes our prepared remarks, if you would please open it to questions.

Question-and-Answer Session

Operator

(Operator Instructions) One moment for the first question, please. Our first question does come from Dennis Forst [ph]. Your line is open.

Dennis Forst

Good morning, guys. How are you?

Denis McGlynn

Hi, Dennis.

Dennis Forst

I wanted to get a clarification on the taxes being paid now. You said 43% goes to the state. What percentage goes to the purses? And then you pay lease on your slots also. So can you sum those up for me today?

Tim Horne

Yeah we pay 43.5% to the state, Dennis. Excuse me, and then there is about another 1%-and-change that goes to the state for machine fees and the license fee. The purses get just short of 11%. It's roughly 10.8%. And the game fees, the vendor fees, and franchise fees for certain games have approximated 6.8% or so. So you are up just above the 62% number when you put those together.

Dennis Forst

Okay, then there is a sports betting fee. Is that a dollar amount or a percentage amount?

Tim Horne

That's a dollar amount. It is our share of $4 million on an annual basis. So if we are at 35% of market, we're 35% of the $4 million.

Dennis Forst

Okay. Does it even make sense to have sports betting with that type of overhead?

Tim Horne

Well, even if we did not have it, we would still have the luxury of paying that fee. So –

Dennis Forst

Well, that makes perfect sense.

Tim Horne

Yeah, sure it does.

Dennis Forst

Then the clarification again on the tables that are coming in. You said you're going to put in 40 tables, 28 gaming tables, 12 poker tables, and at the conclusion of all of that you will have 2,800 slot machines. Of which how many are those Table Masters?

Denis McGlynn

All right, here is the breakdown. We will have 40 table games, plus 12 poker tables.

Dennis Forst

Plus 12 poker? Okay.

Denis McGlynn

Right. If you want to look at games, the number will be 2,772. But because the electronic table games have multiple positions associated with them, the total number of positions goes up to – it's actually 2,803 positions.

Dennis Forst

Okay, so there's seven or eight of the Table Masters?

Denis McGlynn

There is six Shuffle Masters and then there is one roulette; I forget who the manufacturer is. Ed? I can't remember, but it has eight positions and the Shuffle Masters have five each.

Dennis Forst

Right, okay. Good. And then Tim, I missed the percentage of slot win from room guests this quarter.

Tim Horne

That was about 28%.

Dennis Forst

And versus 25 year ago?

Tim Horne

Yeah, just over 25% last year.

Dennis Forst

Okay. Good. That answers my questions. Thanks a lot.

Tim Horne

Thanks.

Operator

Steve Wieczynski, your line is open.

Brad Buehler

Hey, guys. This is actually Brad Buehler [ph] on the call for Steve. Wanted to see if you guys would be able to quantify in an EPS breakout the impact of the weather.

Tim Horne

Hard to do. Maybe I will let you do that, but if it is $3.5 million in win, and we had a 15% gaming margin, and you know our tax rate, you're probably talking about a penny.

Brad Buehler

Okay. That's good. And what kind of trends are you guys seeing here in April?

Tim Horne

We don't speak much about the going-forward quarter, but so far so good. I think minus the weather, things didn't look so bad in the first quarter; and not much has changed in April. So we are optimistic.

Brad Buehler

Okay. One last question. Do you guys have any marketing or advertising plans in the works to roll out in conjunction with the table game rollout?

Denis McGlynn

We do. It will be broad-based so that we can make sure everybody is aware of it.

Brad Buehler

Okay, that’s it for me, thanks.

Operator

(Operator Instructions) One moment for the next question. Your next question comes from Dennis Forst. Your line is open.

Dennis Forst

Yes, I figured I would throw in one more about coming slot machines in Maryland. I think Perryville opens sometime October, November. Is that going to impact your business? How much of your business comes from that area? And if so, what are you planning?

Denis McGlynn

We think we have seen an impact from that area as a result of Harrisburg opening up, because from the northern Baltimore area it is a shorter, more direct drive up to Penn's Harrisburg operation than it is to Dover. Having another facility in between northern Baltimore and Harrisburg I don't think is going to make a real impact on us. I think it is going to be very dramatic on Delaware Park.

Our crowd seems to be more oriented from Baltimore City south through Anne Arundel County [ph] and northern Virginia. So as a consequence we are not anticipating a huge impact from Penn National.

Dennis Forst

Okay, great. Thanks.

Operator

(Operator Instructions) One moment, gentlemen, at this time we show no further questions.

Denis McGlynn

All right. Well, thank you, everybody. We appreciate it and we look forward to talking to you after the second quarter.

Operator

Today's conference has ended. All participants may disconnect at this time.

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