Lakes Entertainment's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar.13.14 | About: Golden Entertainment, (GDEN)

Lakes Entertainment Inc. (LACO) Q4 2013 Results Earnings Conference Call March 13, 2014 2:00 PM ET

Executives

Tim Cope - Chief Financial Officer

Lyle Berman - Chairman and CEO

Analysts

Colin King - Kirr, Marbach Research & Company

Carl Hanson - Feltl

David Hargreaves - Sterne, Agee

Operator

Good day, ladies and gentlemen. And welcome to the Q4 2013 Lakes Entertainment Inc. Earnings Conference Call. My name is Whitney, and I'll be your operator for today. At this time, all participants are in listen only mode. Later, we will conduct a question-and-answer session. (Operator Instructions)

As a reminder, this call is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Tim Cope. Please proceed, sir.

Tim Cope

Thank you, Whitney. Good afternoon. And welcome to Lakes Entertainment's fourth quarter 2013 earnings conference call. On the call with me is Lyle Berman, Lakes' Chairman of the Board and Chief Executive Officer.

As we begin our prepared remarks, I would like to remind everyone that this call may contain forward-looking statements, including statements concerning business strategies and their intended results and similar statements concerning anticipated future events. These statements are subject to risks and uncertainties, including those risks described in our filings with the SEC and actual results may differ materially.

Lyle will begin our discussion today with a general overview and update on our casino projects. I'll then discuss the fourth quarter financial results and recent business events. And then, we'll conduct a question-and-answer session.

Now, I will turn the call over to Mr. Lyle Berman.

Lyle Berman

Thank you, Tim, and welcome everyone to Lakes' fourth quarter 2013 earnings call. First, I will discuss the fourth quarter operating results at our Rocky Gap Casino Resort. Rocky Gap is a AAA four diamond resort, that includes a casino, hotel, spa, four restaurants and the only Jack Nicklaus Signature golf course in Maryland.

The casino currently features 558 slot machines, 10 table games, three poker tables, casino center bar and a new hotel lobby bar and food outlet. Although, we have been pleased with the overall performance of Rocky Gap, since opening the gaming facility at this property in May of 2013.

Fourth quarter operating results in particular during the month of December were lower than expected due in part to difficult weather conditions. We did, however, make several changes of which we believe will enhance the property and operating results.

In the fourth quarter, we added live poker tables to the casino’s gaming mix. In addition, we completed the remodel of two of its restaurants, updated the menus and hired a new executive chef.

In December, we completed the meeting and event center space of approximately 13,000 square feet, which includes the new Allegheny Event Center, multiple breakout meeting rooms and an executive board room. The new space will allow the property to seek single group events of over 300 people that supports our focus on corporate group sales.

We recently signed an agreement with the Bonkerz Comedy Clubs to bring nationally recognized comedians to Rocky Gap twice each month. Bonkerz is an established club with more than 20 locations nationwide. Early results have been positive with the first three shows selling up.

We also increased the number of table games and begin offering Pai Gow poker and baccarat, and the Maryland Lottery and Gaming Control Agency recently approved their request to increase the number of video lottery terminals offered in Rocky Gap to 577. We anticipate the additional 19 machine will be installed in the second quarter of this year.

In addition, we received approval to add 150 additional surface parking spaces located in close proximity to the casino. This is a 25% increase in the overall number of parking spaces. These new spaces will provide additional convenient parking for our guests as part of our outstanding guest service at this property.

Construction of the additional spaces is expected to begin this spring and in early summer. We believe these changes had a continued emphasis on operating efficiencies will positively impact both top and bottomline operating results at Rocky Gap.

We have an investment that equates to an ownership of approximately 5% in the Dania Casino & Jai Alai located just south of Fort Lauderdale, Florida, which held the grand opening of its casino space last month. Along with the Jai Alai gain, the casino features 550 slot machines and 12 poker tables in the first phase at the master plan to expand the existing property into a full scale casino operation.

We continue to maintain a 10% ownership interest in Rock Ohio Ventures, 80% ownership in the Horseshoe Casino in Cleveland, the Horseshoe Casino in Cincinnati, Thistledown Racino and Turfway Park. The Horseshoe Casino in Cleveland features approximately 1900 slot machines, 89 table games, a 30-table poker room and multiple food and beverage outlets.

The Horseshoe Casino in Cincinnati features approximately 2000 slot machines, 87 table games and 31-table World Series of poker room, several food and beverage outlets and a parking structure. The Thistledown Racino in North Randall, Ohio, features its existing racetrack, 1100 video lottery terminals and new dining and nightlife options.

Turfway Park is a premier Thoroughbred horse racing track located in Florence Kentucky. We currently have cash and short-term investments in excess of $80 million. We are continually evaluating various business opportunities to determine the best course of action to add value for our shareholders.

With that, I'll turn the call back over to Tim to provide an overview of the financial results.

Tim Cope

Thank you, Lyle. Net loss for the fourth quarter of 2013 was $0.9 million compared to net earnings of $2 million for the fourth quarter of 2012. Loss from operations was $2.2 million for the fourth quarter of 2013 compared to a loss from operations of $1.9 million for the fourth quarter of 2012.

Basic and diluted loss per share was $0.03 for the fourth quarter of 2013 compared to basic and diluted earnings per share of $0.07 for the fourth quarter of 2012. Fourth quarter of 2013, net revenues were $11.4 million compared to prior year fourth quarter net revenues of $2.8 million.

Fourth quarter of 2013, net revenues were related to the operation of Rocky Gap Casino Resort. Lakes acquired this property on August 3, 2012 and gaming operations began on May 22, 2013. During the fourth quarter of 2012, net revenues of $1.4 million were related to the operation of Rocky Gap.

Also included in prior year fourth quarter net revenues were $1.4 million in management fees related to the management of the Red Hawk Casino, near Sacramento, California, owned by the Shingle Springs Band of Miwok Indians. There were no management fees earned during the fourth quarter of 2013 due to the August 29, 2013 termination of the management agreement for the Red Hawk Casino. During the fourth quarter of 2013, property operating expenses for Rocky Gap were $7.3 million, and primarily related to gaming operations, rooms, food and beverage and golf.

During the fourth quarter of 2012, property operating expenses for Rocky Gap were $0.8 million, and primarily related to rooms, food and beverage and golf. The increase in property operating expenses resulted primarily from the inclusion of gaming-related expenses in the current year quarter.

Gaming commenced in May 2013, therefore, there were no such expenses in the prior year fourth quarter. For the fourth quarter of 2013, selling, general and administrative expenses were $5.6 million compared to $3.1 million for the fourth quarter of 2012.

Included in these amounts were Lakes corporate selling, general and administrative expenses of $1.6 million and $1.9 million during the fourth quarters of 2013 and 2012, respectively. The decrease in Lakes corporate selling, general and administrative expenses was due primarily to decreases in professional fees and payroll and related expenses.

Rocky Gap selling, general and administrative expenses were $4 million and $1.2 million during the fourth quarters of 2013 and 2012, respectively. The increase in Rocky Gap selling, general and administrative expenses was due primarily to increases in marketing and advertising expenses, and payroll and related expenses related to the addition of gaming during May of 2013.

Depreciation and amortization was $0.8 million for the three months ended December 29, 2013 compared to $0.3 million for the three months ended December 30, 2012. The increase related to depreciation on Rocky Gap fixed assets.

During the fourth quarter of 2013, Lakes recognized a $1.7 million gain on modification of debt due to a reduction in the interest rate on its outstanding financing facility that was used to fund a portion of the Rocky Gap project. The company has existing net operating loss carryover forwards of approximately $72 million that are available to offset future taxable income.

In summary, we are pleased that we are able to recently open a new event center space and completed the remodel of the restaurants at Rocky Gap during the fourth quarter. We look forward to expanding our business with these new amenities, the new table games and the additional slot machines, along with a planned 150 additional parking spaces.

Although inclement weather has impacted Rocky Gap operations this winter, we are encouraged by the property’s results since the gaming space opened in May of 2013. We plan to invest approximately $4 million of additional capital in this property during 2014, including the addition of the new parking spaces, expansion of the fitness center, remodel of the golf push up, continuing room improvements and the addition of the retail outlet to help grow our business and satisfy our customer requests.

I'll now turn it back to Lyle to provide a company recap.

Lyle Berman

Thank you, Tim. We currently have the cash and short-term investments balance in excess of $80 million. We continue to maintain a $21 million investment in the Rock Ohio gaming properties as well as a 5% interest in the newly opened Dania Casino and Jai Alai.

In addition, our notes receivable due from the Jamul Indian Village, which is currently capped at $60 million, will become due and payable when and if a casino opens and any casino construction and development funds have been repaid. Once the casino opens, we will begin receiving a cash interest payment of 4.25% on our outstanding receivable. The Jamul Tribe is working with Penn National Gaming to develop a casino on the Tribe’s existing reservation. Penn previously announced that it has launched construction activities at the site. This note was written off our books in prior years.

In conclusion, we believe our overall assets have substantial value that are not fully reflected in our balance sheet and that when consider with our cash position gives us flexibility when considering new opportunities that will enhance shareholder value.

With that, now I will turn the call over to the operator for questions.

Question-and-Answer Session

(Operator Instructions) Our first question comes from the line of Colin King with Kirr, Marbach Research & Company. Please proceed.

Colin King - Kirr, Marbach Research & Company

Hey, guys. Thanks for taking my questions.

Tim Cope

Yes, sir.

Colin King - Kirr, Marbach Research & Company

Can you hear me?

Tim Cope

Yes, sir.

Colin King - Kirr, Marbach Research & Company

All right. Just curious on the recognition of that notes receivable that was previously written off, will that come back on to the balance sheet here in the next quarter or so, or will that be at the time that Penn actually open for casino?

Tim Cope

Well, welcome back on for sure until the casino opens that we would have to determine how collectible it is, but basically what would happen is we would recognize it as we were paid.

Colin King - Kirr, Marbach Research & Company

Okay. So as soon as the casino opens that’s when you guys will put that back on the balance sheet?

Tim Cope

Well, that’s when we again evaluate it, but again I think it’s probably related more to when we actually will receive payments and just to record the payments as received.

Colin King - Kirr, Marbach Research & Company

Okay, got you. And then just regarding the use of funds, what’s going to be the game plan there, will M&A be more of a focus or would you guys look at similar playbook to the Rocky Gap or you find a hotel, resort and then repurpose it into some kind of casino or I guess just what are the thoughts there?

Lyle Berman

I think it’s fair to say -- this is Lyle Berman talking, it’s kind of an open book. We are clearly looking to reinvest our assets in to enhance shareholder value. We are looking both within and without the gaming industry. And as soon as we find something that we think fits our needs, we certainly will announce it to the public. We have been continually looking every since we received the funds from the Shingle Springs buyout, but as yet, we have not found anything that reaches the level of disclosure.

Colin King - Kirr, Marbach Research & Company

Okay, great. Thanks guys. Appreciate the color.

Lyle Berman

Thank you.

Operator

Your next question comes from the line of Carl Hanson with Feltl. Please proceed.

Lyle Berman

Hello. Carl, are you there?

Carl Hanson - Feltl

Yes. I didn’t know she had my name or not. My hearing is not the best. Not a while Lyle answered quite a bit or you did on Jamul, but I was looking to see if we could find any status on the groundbreak -- beyond the groundbreaking and all I saw was the month old interview with the position. So do you know whether they impact still going ahead with the construction?

Lyle Berman

At this point Lakes, we know nothing more than what we read in the newspaper. So the last thing we read was that they were starting construction activities I think that was disclosed several months ago. I think we’ve further heard that they were planning to open sometime in early 2016 but other than that, Tim, do you have any more?

Tim Cope

No. That's the current public knowledge that we have as well, that’s expected plans right now.

Carl Hanson - Feltl

Certainly, you don't have any spy in the area taken a look?

Lyle Berman

No spy in the area, Carl.

Carl Hanson - Feltl

Then it didn’t look like you are borrowing all you could on the Rocky Gap loan is -- we obviously don't need to borrow it, but it is that if you wanted to, there is still availability under that loan or do you think you may wait and renew at a better rate when you have more history?

Lyle Berman

Well, we already did reduce the rate. I believe it's around 5.5% to 6%. We have on the Rocky Gap loan I think another $4 -- $3.5 million or $4.5 million we could draw. But in addition to that we do have a line of credit with the bank. Obviously, with the money and the bank earning, well, interest on our side we have no intend to borrowing any more money unless we have a documented use for it.

Carl Hanson - Feltl

I understand. Well, let’s hope we find some really good.

Lyle Berman

We will.

Carl Hanson - Feltl

Thank you.

Tim Cope

Thank you, Carl.

Operator

Your next question comes from the line of David Hargreaves with Sterne, Agee. Please proceed.

David Hargreaves - Sterne, Agee

Hi. There is a fair amount of capacity that slated for the State of Maryland in that area. I'm wondering if you have any sort of comment on whether that might have an impact on Rocky Gap?

Lyle Berman

Do you mean the two casinos that will -- that are going up in the Baltimore area?

David Hargreaves - Sterne, Agee

Yes sir.

Lyle Berman

The Baltimore area is two hour drive from our casino. We do get visitation from the Baltimore and Washington D.C. area for overnight stays but we do not get a day-trip market. So we don't believe those two casinos in any way will impact our results. Tim any further on that?

Timothy Cope

No. I would agree to that, in fact, I think the State of Maryland had engaged outside firm to do an economic study anticipate any impact to other casinos when the new property MGM got approved. And I think it back with approximately 1% or less effect on Rocky Gap operations.

David Hargreaves - Sterne, Agee

Excellent. And then with respect to Rock Ohio since you guys have a material interest there? I'm wondering if you have any thoughts on the turnaround process there, what's stager they are at what do you see happening with that?

Lyle Berman

Well, certainly, the results for the entire State of Ohio have been less than anticipated. Certainly, the ramp up period is taking a longer period of time, but still there is only four full blown casinos in the state. However, the ramp up is taking longer there. We know our partners are focused both on top and bottom line, topline in revenue, but certainly expense control that reengineered their business of course to match the revenues.

We’re not an active participant so sometimes we don’t know much more than what's going on in the public domain. But clearly, the ramp-up is taking really longer than we -- they anticipated and we.

David Hargreaves - Sterne, Agee

If we could draw from your experience, do you have any theories you’d be willing to share as to why the market hasn't lived up to expectations? I mean, we also did the same arithmetic where people gambling elsewhere or was there something different about their sources of income that we missed when we running the calculations? Anything you could offer?

Lyle Berman

The major disappointment to my knowledge has been that they are getting frequent visitation. They are getting the visitation that they anticipated. But the win per customer is substantially below what they were anticipating. Now I don’t know if that’s the economics of the region or if it goes deeper than that where they all have other places to go as well. But clearly, they're getting visitation but they are not getting win per customer. That also has a great deal to do with building your database. As your database grows, as you well know, they will market more heavily to the gaming customer.

What you get when the first casino is open in a new market, we get what we call Lucky Loser. Now they’re beyond that stage now. So the customer that come in now are more likely to be gaming-centric people.

David Hargreaves - Sterne, Agee

I appreciate your interest. Thank you.

Lyle Berman

Thank you, Dave.

Operator

(Operator Instructions) Your next question comes from the line of Steve Haberkorn, a stockholder. Please -- please proceed.

Unidentified Analyst

Hi Lyle, congratulations on the good quarter. Just was wondering if there’s any ballpark value or way that you put on the property in Ohio on the 8% or that’s completely….

Lyle Berman

The value we put on, I mean, we carried on our books on our investment which is about $21.5 million.

Unidentified Analyst

Right.

Lyle Berman

Other than that, that’s how we are carrying on the books and we don’t have any other formal valuation of it.

Unidentified Analyst

Okay. We’ll just be patient then. Keep up the good work. Thank you.

Operator

There are no further questions in the queue at this time.

Lyle Berman

Well, Tim and I thank you all for interest in the company. We’ll be having other conference call after the first quarter. And hopefully we’ll be able to announce some good news with our results at Rocky Gap and our efforts in looking for other adventures. Thank you.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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