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Full House Resorts Inc. (NASDAQ:FLL)

Q4 2013 Results Earnings Conference Call

March 10, 2014 1:00 PM ET

Executives

Dan Foley - ICR, Investor Relations

Andre Hilliou - Chairman and CEO

Mark Miller - Chief Operating Officer

Deborah Pierce - Chief Financial Officer

Analysts

Justin Sebastiano - Brean Capital

Justin Ruiss - Sidoti

Operator

Please standby, we are about to begin. Good day. And welcome to the Full House Resorts Incorporated Fourth Quarter 2013 Earnings Conference Call. Today’s conference is being recorded.

At this time, I’d like to turn the call over to Dan Foley. You may begin.

Dan Foley

Thank you, Tim, and good morning. By now everyone should have access to our earnings announcement and Form 10-K, which was filed with the SEC. These may also be found on our website at www.fullhouseresorts.com under the Investor Relations section.

Before we begin our formal remarks, I would like to remind everyone that part of our discussion today may include forward-looking statements. These statements are not guarantees of future performance, and therefore, undue reliance should not be placed upon them.

We refer all of you to our recent filings with the SEC for a more detailed discussion of the risks that could impact the future operating results and financial condition of Full House Resorts.

I would now like to introduce Andre Hilliou, Chairman, Chief Executive Officer of Full House.

Andre Hilliou

Thank you, Dan. With me today on the call are Mark Miller, our Chief Operating Officer; and Deborah Pierce, our Chief Financial Officer, who will assist me in reviewing our fourth quarter and full year results.

The fourth quarter was a challenging quarter, as many of you on this call are aware regional gaming trends have been soft for some times. But couple with one of the worst winters, in the last several decades was affected just about every corner of the country.

We too set this trend as patrons, local and snowbirds, were forced to stay home for safety reasons due to the inclement weather and the trend continued and worsened in January and February.

We are of course not the only company to have been affected by this tough weather and while we don’t traditionally look to blame the weather while worst, we know that it has discernible impact in the fourth quarter.

As weather began normalizing in late February, we have seen revenues improved to a level more consistent with our internal expectations. Despite a challenging operating environment across all of our markets for all of 2013 and especially in the fourth quarter we do have several positive highlights to speak about.

First, the already mentioned, new 104 room hotel tower at Rising Star has been named the North Star tower opened on November 15, 2013 and increase our capacity by around 50%. While we opened the hotel during the slowest time of the year, weekend occupancy has been in excess of 90% most weekend since opening and we expect the hotel to ramp up as we move the seasonally stronger time of the year and as the marketing efforts matures.

Indiana continues to work with the casino industry to help offset the competitive situation created in Ohio. We received around $1 million in tax saving in 2013 and we will begin receiving additional tax savings of $2.5 million starting in July 2014.

We broke grounds on 142 hotel tower at the Silver Slipper on September 20, 2013, and expect delivery in the fourth quarter of this year and possibly early in the first quarter of next year.

For those of you who have not been to the property, it lies on one of the most beautiful stretchers of white sand beaches on the Gulf Coast. We firmly believe the addition of the hotel will greatly enhance the property ability to attract and retain customers.

Similarly to the hotel in Indiana for those looking to have relaxing vacations or day trip with all of the amenities at the finger tips, the hotel will provide the ultimate comfort and convenience.

And importantly, for Full House, we will capture additional play and non-gaming amenity and are increasing the length of our guest stay and capturing more valet share, especially during peak periods like the new years eve on the lack of hotel rooms, levied our ability to fully capitalize on customer demand.

Despite the current challenging environment, we expect our investment in this hotel, are just $125,000 a key to earn the solid double-digit returns on invested capital. We also believe that there are significant opportunities to grow operation in existing and regional casino market throughout United States. Our expansion efforts have and remained principally focused on growing and diversifying our business in regional markets.

In Kentucky, together with Keeneland Association we are currently pursuing potential gaming opportunities including the installation of instant racing machines at racetrack properties. The installation of instant racing machines at racetrack properties in Kentucky which have been operating in Kentucky on a limited basis have been challenged in the court.

On February 20, 2014, the Kentucky Supreme Court issued favorable ruling that the Kentucky House Commission acted within its authority wanted license the operation of pari-mutuel wagering on instant racing. It has been remanded back to the Supreme Court to determine its instant racing constitute the pari-mutuel form of wagering which is authorized by Kentucky Law.

On February 26, 2014, we entered into an exclusivity agreement with Keeneland Association, Inc. to own, manage and operate instant racing and, if authorized, traditional casino gaming at race track in Kentucky, subject to completion of definitive documents for each opportunity. In addition, the company and Keeneland Association, Inc. have entered into a letter of intent to provide us the exclusive option to purchase the horse racing permit related to the operation of the Thunder Ridge Raceway in Prestonsburg, Kentucky.

The purchase will be subject to the completion of definitive documentation and to the approval of the Kentucky Horse Racing Commission, including the approval to transfer the racing license to a to-be-constructed quarter horse racetrack near Corbin, Kentucky to be owned 75% by us and 25% by Keeneland Association, Inc. We continue to work with our partners at Keeneland to identify and pursue the most prudent profitable path to develop gaming facilities under the currency legal framework.

I will now turn the call over to Mark to go into more details about the financial results for the quarter. I will close later with a few additional comments. Mark?

Mark Miller

Thank you, Andre. Deborah and I will review our fourth quarter 2013 financial performance and condition before we respond to questions you may have. I will be discussing operations and financial results at our properties and Deborah will follow up with our consolidated financial results and financial position.

The Silver Slipper Casino generated $1.7 million in EBITDA in the quarter compared to $1.9 million last year. While the extreme weather event of late 2013 did not have a direct material impact on Silver Slipper, the weather spread to the south during January and February 2014 and indeed the Gulf Coast is on track to record one of the coldest, iciest and snowiest -- yet snowiest winters on record with snow falling offshore over the Gulf of Mexico near our property in early January.

To say it has been a tough winter would be an understatement. Snowbirds are not visiting in a usual numbers due to the extremely tough winter condition. The government shutdown and the budget sequestrations of 2013 did however have a significant impact on our fourth quarter results and are still ripping through the Gulf Coast markets.

More so than at our other property locations, the Silver Slipper has a high number of customers who are directly or indirectly employed by the government and many of them did not get made whole compensation checks, following the government shutdown and we definitely saw them tightening their gaming budgets.

Weather on the Gulf Coast has begun to return to normal in the last few weeks and with it, revenues have also normalized. We are hopeful the trend will continue.

The Rising Star Casino Resort generated $0.2 million loss in EBITDA in the quarter compared to $1.3 million EBITDA last year. Our properties continue to feel the effects of increased competition in Columbus and Cincinnati and a very aggressive promotional environment along with the aforementioned weather.

Market growth has continued to significantly under perform expectations throughout the fourth quarter and the severe weather in December result in effectively no market growth at all despite having two new competitors in our competitive set. All of these factors of course negatively impacted our revenue which declined 23% from the prior year period similar to our second and third quarter declines.

We have been able to control cost but not as rapidly as we would have liked due to the unexpectedly low market growth and extreme weather. Our leased onsite 104 room North Star hotel opened on November 15th to much fanfare and strong reviews and increased our room inventory by 50%.

The hotel continues to ramp but so far weekend occupancy has been very strong and over 90%. We expected as we move into the stronger season and better weather along with more aggressive hotel marketing programs, midweek occupancy will also improve.

In addition, we believe that we will be able to improve the gaming quality of our hotel customers. As stated, it has been a tough operating environment at Rising Star and the atrocious weather in December and into the first quarter has put us a little behind the curve.

Despite the increased competition, the property is well-positioned as an escape from the [slots in box style] (ph) offering of urban casino locations and will we believe continue to appeal to a large portion of our database, looking for an escape from the hustle and bustle of the urban center.

Over time, we believe a portion of our customers trying the new product in Ohio will migrate back to us. Suffice it to say, we are doing everything we can to mitigate the impacts of increased competition, and we firmly believe that the recent enhancements to the property, coupled with lower taxes and the adjustments we are making to our business model, will benefit us in the long run, and we look forward to making Rising Star a premier daytrip and destination resort in the Greater Cincinnati market and the entire region.

Weather in the region did begin improving in mid-February and revenues had return to levels closer to our internal expectations, and we have continued to see periods of unseasonably cold and snowy weather. Revenue at our Northern Nevada operations declined 5%, primarily due to continued weakness at our Stockman’s property at Fallon, Nevada. Fallon is primarily a government town due to its large naval aviation base and, as such, at the mercy of sequestration and government shutdown. EBITDA for the quarter declined $111,000 due to the aforementioned topline weakness.

As Buffalo Thunder, recorded management fees in the fourth quarter were $600,000, about the same as the prior year.

I will now turn the discussion over to Deb Pierce to discuss our quarterly results and liquidity. Deb?

Deborah Pierce

Thank you, Mark. For the fourth quarter 2013, the company recorded an operating loss of $1 million compared to an operating loss of $1.1 million in the prior year quarter. If we exclude last year’s unusual expenses, such as Silver Slipper Casino acquisition cost of $1.4 million and severance expense of $0.3 million, last year’s operating income would have been $600,000. This decline of $1.6 million from last year’s fourth quarter is largely the result of the $1.4 million decline in operating profits at Rising Start Casino Resort for the reasons previously described by Mark.

For the three months ended December 31, 2013, total revenue was $31.5 million, a 16% decrease from the prior year period, primarily due to the aforementioned economic, promotional, competitive, and weather-related issues. Operating expenses of $32.4 million in the fourth quarter of 2013 were down 16% or $6.2 million from the prior year period, due to the decline in the business volume but also largely due to strong cost containment initiatives put into place to deal with the challenging operating environment.

For the quarter, we incurred $1.7 million in interest expense compared to $1.9 million in the prior year quarter. The decrease was primarily related to the reduction in our overall debt to $57.5 million at December 31, 2013, from $68.8 million at the end of December 2012. Interest expense in the fourth quarter consisted of cash interest expense of approximately $1.2 million and amortization of debt cost of approximately $0.5 million.

For the fourth quarter in 2013 and for the year ended December 31, 2013, we generated tax benefit of $270,000 and $361,000 respectively. Our book income tax expense varies substantially from the 35% federal statutory rate because of state income taxes and also large permanent differences between book and tax. Our actual tax loss for 2013 was $5.7 million and we carried the loss back for refund of $2 million in tax, which we did receive earlier this month.

The company recorded a net loss for the fourth quarter 2013 of $2.3 million and $0.13 per share compared to a loss of $831,000 or $0.04 per share in the prior year period.

As of December 31, 2013, we have a cash balance of $14.9 million of which approximately $12 million is needed to fund operations and $57.5 million in long-term debt on our balance sheet along with $7.7 million capital lease obligation related to our 10-year lease for the new hotel tower at Rising Star Casino.

As of December 31, 2013, we have voluntarily prepaid $8.8 million in quarterly principal payment. The net required payment will not be due until October 2015. This continues our long-term policy of using excess cash to reduce debt ahead of schedules, reducing our interest cost and maintaining a conservative balance sheet. Despite the extremely tough operating environment, our overall net leverage remained at a very reasonable three times.

Capital expenditures for the quarter were approximately $3.3 million, which includes about $1.8 million on our new Silver Slipper hotel project. We anticipate spending approximately $6.9 million on our 2014 maintenance CapEx program and about $15.2 million in relation to the construction of the Silver Slipper hotel, about $5.2 million will be funded from cash with the remaining $10 million coming from our expanded First Lien debt facility.

With that, I will turn it back over to Andre for a few final comments before we open it up for questions.

Andre Hilliou

Thank you, Deborah. While the operating environment remains challenging, we continue to be focused on providing the best service to our customer. In this difficult operating environment, we have been very successful in containing overall costs with satisfying guest experience.

We do expect the environment to improve, especially in light of the tough weather. We are very excited about the opening of the new North Star Tower at our Rising Star property and Silver Slipper hotel project. Both of which should provide enormous leverage to its casino. In addition, we continue to look for growth opportunity and believe that our Kentucky Agreements position us well to generate substantial high return projects in the near future.

Thank you. And now we will open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we will take our first question from Justin Sebastiano with Brean Capital.

Justin Sebastiano - Brean Capital

Thanks. Good afternoon, guys.

Andre Hilliou

Hello, Justin.

Justin Sebastiano - Brean Capital

I know there is bad weather every year but how much of the decline in EBITDA at Rising Star can be distributed to maybe severe winter weather that was considered abnormal for 4Q?

Mark Miller

Justin, we have done an analysis on the -- it was really December -- the bad weather in the early part of December. Roughly, we estimate and I think, it’s a very conservative estimate to put together by the project team. But we estimate that it was somewhere in the neighborhood of $3,000 to $4,000 of EBITDA was directly related to bad weather in the early part of December.

Justin Sebastiano - Brean Capital

Okay. And if what’s your non-conservative estimate?

Mark Miller

Well, the non-conservative estimate is obviously higher than that, Justin…

Justin Sebastiano - Brean Capital

Okay. Thanks

Mark Miller

… but I don’t think we have a number for you.

Justin Sebastiano - Brean Capital

Okay.

Mark Miller

I think the real problem in the fourth quarter and I tried to highlight this in my comments is that there just was no market growth very, very limited market growth throughout the fourth quarter in our market in Rising Star.

So even the growth rate in October and November was very low, whether that was the government shutdown and sequestration, whether it was bad weather, whatever those things might be, I think it’s pretty easy to isolate in December to the weather, but the market just grew extremely slowly, if at all, during the fourth quarter of 2013 and despite the fact that we had two new competitors in the market.

Justin Sebastiano - Brean Capital

Okay. How is Miami Valley Gaming racino hurt Rising Star there, Can you quantify or if not, can you say how does that compare to your internal expectation? I know it’s only about couple of weeks but maybe how it’s impacting January and February as well?

Mark Miller

I would tell you Justin, I think, it’s because the weather has been so bad especially in January and February, it’s been almost impossible to isolate what the impact at Miami Valley has been. I’m sure they’ve had an impact but we just -- we really haven’t been able to tell because the business has been so negatively impacted by bad weather.

Justin Sebastiano - Brean Capital

Okay. Okay. Have the snowbirds come back to Silver Slipper here in March?

Mark Miller

I think, Justin that they’ve just started arriving in the last week or so. Anecdotally I talked to one when I was down there recently. And he basically just told me that he delayed this trip by couple of weeks because of bad weather and because of concerns over the condition of the roads. That’s obviously just one person anecdotally but I think that’s what we’ve seen.

Justin Sebastiano - Brean Capital

Okay. Okay. And Andre, onto Kentucky, when do you expect the circuit court in Kentucky to determine if instant racing constitute pari-mutuel form of wagering?

Andre Hilliou

Justin, I don’t think at this stage, we really cannot provide more information that we have in our press release. But as situation progresses, we really would provide more information, Justin.

Justin Sebastiano - Brean Capital

I mean, is there -- do you know if they are on a timeline now? Is there like a set, sort of like how the legislation has an open window for a session. Is there a session of the circuit court has to have (indiscernible)

Andre Hilliou

I don’t think anyone has been able to tell what to do at the circuit court judging these companies in the beginning of the republic. So I wouldn’t -- we wouldn’t speculate on that.

Justin Sebastiano - Brean Capital

Okay. Do you guys plan on putting instant racing machines like Keeneland and Red Mile?

Andre Hilliou

Justin, I mean, as we’ve said Justin, we have to be very careful what we’re saying. We’ve put information there on the press release and as the situation progresses, we’ll provide more information but for the time being, Justin, we’re just going to stick to what we put in the press release.

Justin Sebastiano - Brean Capital

Okay. Okay.

Andre Hilliou

Don’t think I’m not blaming you for asking.

Justin Sebastiano - Brean Capital

Then I’ll stop bugging you on Kentucky.

Andre Hilliou

That’s okay. You can bug us Justin, that’s fine.

Operator

(Operator Instructions) We’ll take our next question from Justin Ruiss with Sidoti.

Justin Ruiss - Sidoti

Hey good morning, good afternoon actually. Andre, Deborah, Mark, I had sort of quick question, just on the prospects out there. I guess, one of the concerns now is seeing a lot of competition rise up. And you don’t have to be specific with this answer but are there markets or areas around the country that you’re mapping out at this point that maybe the competition isn’t as robust as some of the other areas. Has anything really caught your attention?

Andre Hilliou

We really tend to provide that kind of info but I’m going the give you the answer that we’ve been giving to everyone for the last two years. All market and not the same and they have properties in those markets that we’re looking at. At the end of the day, the properties that we are looking at purchasers are purchasing, have to stand on their own and there are some out there. So we got to be careful what we say but at the end of day we are always looking at the market and there are things that we like today, there are things that we like yesterday.

Justin Ruiss - Sidoti

Got you. Then I won’t bug you on that one either.

Andre Hilliou

Go ahead. All right. Thank you, Justin.

Operator

And at this time, there are no other questions in queue. I'll turn it back to our presenters for any closing remarks.

Andre Hilliou

Well, we like to thank everyone for being with us today. With that, that we will end the call and we wish all of you a great rest of the week and a beautiful weather. Thank you.

Operator

And that does conclude today's conference call. We appreciate your participation.

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