Nevada Gold & Casinos (UWN) CEO Michael Shaunnessy on Q4 2014 Results - Earnings Call Transcript

| About: Nevada Gold (UWN)

Nevada Gold & Casinos, Inc. (NYSEMKT:UWN)

Q4 2014 Results Earnings Conference Call

July 30, 2014, 04:30 PM ET

Executives

Kenneth Maciora - IR

Michael P. Shaunnessy - CEO and President

James J. Kohn - CFO, Principal Accounting Officer, EVP, Secretary and Treasurer

Analysts

Bobby Melnick - Terrier Partners

David Luebke - J.P. Turner & Company

Vincent Staunton - Wedbush

Operator

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

Kenneth Maciora

Good afternoon, everyone, and thank you for joining Nevada Gold & Casino's fiscal 2014 fourth quarter and year end 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 we 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 yesterday'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 Mr. Shaughnessy. Go ahead please, Mike.

Michael Shaunnessy

Thank you, Ken. Good afternoon, and thanks for taking the time to join us today. During the fourth quarter we generated over $1 million in pre-tax income an increase of $380,000 over the prior year.

Adjusted EBITDA improved by $140,000 and net interest expense declined $236,000. The debt refinancing we completed in December has begun to have a significant impact on our financial position. The reduction in interest rates, coupled with the reduction in total debt is providing substantial free cash flow and due to tax loss carryforwards, we are not paying current income taxes on these earnings.

These factors enabled us to pay the annual slot licensing fee of $1.3 million at June with cash on hand. In the two prior years, we were needed to borrow the funds necessary for this payment.

With the fourth quarter the company reported net revenues of $16 million compared to $16.5 million in the fourth quarter of fiscal 2013. Net revenues from Washington were $14.1 million, essentially even with the prior year, while South Dakota revenues declined $450,000 to $1.9 million.

In Washington our gaming drop volumes were up approximately 3%, primarily resulting from an increase in Dakota play, while average revenues were even with the prior year.

Our Washington operations contributed $2.3 million and adjusted EBITDA, a slide improvement from the prior year. As we closed out the challenging first quarter of fiscal 2015, the summer weather has been much nicer than we would like in this Seattle area but nevertheless our current volumes are slightly ahead of last year.

In South Dakota, the $450,000 revenue decline was primarily due to reduced capacity in the marketplace. But due to the high variable cost structure, our adjusted EBITDA only declined $64,000.

The summer launch have started well, and with 73% of our units located on Main Street, we are seeing improvements in revenue compared to last year despite the reduced number of units.

Corporate expenses during the quarter were $532,000 down from $677,000 in the prior year. On a consolidated basis, adjusted EBITDA improved to $1.9 million compared to $1.7 million in the fourth quarter of fiscal 2013.

As a result of our refinancing in December, interest expense for the quarter was only $157,000 compared to $393,000 last year.

These improvements resulted in income before taxes of $1 million compared to $663,000 in the prior year.

For fiscal year 2014, we reported income before taxes of 731,000. And on a pro forma basis, adjusting for the loss under debt extinguishment of $284,000 due to refinancing, and reducing net interest expense by approximately $600,000 to reflect our new financing terms.

On the pro forma basis, our pre-tax income would have been approximately $1.6 million and applying a 34% tax provision, pro forma net income and earnings per share would have been $1.1 million and $0.07 respectively.

With our refinancing completed this year, and our permanently reduced corporate overhead, along with the stable operating portfolio, we are beginning to generate strong free cash flow, consistent positive earnings which are sheltered from current taxes. We will use this cash flow to reduce debt as we continue to look for prudent growth opportunities.

And at this point, I'll ask Jim to take you through some of the details of year's performance. Jim?

James Kohn

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

For the fourth quarter of fiscal year 2014, net revenues from continuing operations were $16 million compared to $16.5 million in the 2013 quarter. Total operating expenses were $14.8 million compared to $15.5 million in 2013. And operating income from continuing operations was $1.3 million compared to $1.1 million in last year's fourth quarter.

Our net income from continuing operations was $646,000, compared to a net income of $452,000 in the 2013 quarter.

For the fiscal year 2014, net revenues from continuing operations were $62.8 compared to $65.9 million in the prior year. Total operating expenses were $60.5 million compared to $63.5 million in 2013.

Operating income from continuing operations was $2.3 million compared to $2.4 million. And net income from continuing operations was $448,000 compared to $129,000 in the prior year. Earnings per share from continuing operations were $0.03 compared to $0.01 in fiscal 2013.

Turning to our balance sheet and cash flow statement. At year end, our total long-term debt was $12,350,000 and we had $7.7 million in unrestricted cash as a result of generating over $1 million in positive cash flow during fiscal 2014.

With that, I will turn it over to the operator, to open for any calls and questions we may have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) It appears we have no questions at this time.

Michael Shaunnessy

That's rather unique, but I had to encourage people to gather their thoughts and not be afraid to ask any questions might be on their mind. So we'll give them another couple of minutes to think whether they may have any.

If nothing else I would like to highlight the fact that, one of the big changes going forward here in 2015 is a very, very dramatic decrease in our cost of debt which is going to dramatically decrease our interest expense and have a very positive impact on both our earnings generation and on our cash flow.

Operator

Our first question comes from Bobby Melnick of Terrier Partners.

Bobby Melnick - Terrier Partners

Hi, thanks for taking the call. Good afternoon.

Michael Shaunnessy

Good afternoon.

Bobby Melnick - Terrier Partners

I do want to ask about the operations so much because it seems like you guys have done a decent job getting your arms around that and the markets are what they are.

What I really wanted to do is, I'd like to hear your thoughts about some questions that you had on previous calls.

Michael Shaunnessy

Okay.

Bobby Melnick - Terrier Partners

And also know this is one of your large shareholders and on at least two of the last three calls, he's asked you about - politely about sort of critical mass and issues and how to address this company?

Michael Shaunnessy

Yes.

Bobby Melnick - Terrier Partners

You are a small company and while you've done a great job in attracting attractive stats, you still you don't really have a lot way of thought to certainly play with the big boys or even some of the larger regional players. And just doing a cursory glance at your financials, obviously on a pro forma basis and the normalize year you guys produced about $6 million or $8 million of property EBITDA which adjusted becomes sort of $4 million or $5 million when you back up the corporate.

And it's a meaningful portion of your expenses go towards paying for the overhead of the company which clearly don't need a lot more overhead, if you're doing, 1.5x or 2x or 3x the EBITDA you were doing.

The problem of course is how do you get there? And your valuation reflects that. In other words, at today's valuation closing including your $12 million of debt, the enterprise is valued at 6.6x to EBITDA for the trailing 12 months.

But if you would add back corporate which would disappear if you were to become part of a larger enterprise, trading at 4.4x, which is less than certainly you paid for your – less than your Washington property, above what you paid for the Washington properties and above – you paid 6x or 7x for the South Dakota property.

So if you would actually just take the multiple that you're currently value at, which is 6.6x and add in the $2.5 million corporate, you'd essentially come to a stock price that would be sort of right around $2 a share.

And I guess so, with that simple math, just for the question and a sort, why isn't that a better easier way for the shareholders which your predecessor tab that $1.5 many years ago to fund the current operations, a better way than sort of slashing around in difficult weather impacted markets, trying to wait for you to take your corporate around 2 or 1.8 near interest down or sort of maybe if you're fortunate and the markets recover and you get crappy weather and rains, then maybe you could get your property EBITDA up to $8 million or $9 million.

But again its such a difficult slough to get to where the shareholders end-up making any money versus if you were to be the Washington and South Dakota operations of a larger or merged entity, you'd get that overnight.

And I want to be clear here. I'm not imputing your management skills, your financial skills, your operational skills, I'm simply trying to look at a company that has $19 million equity valuation in the marketplace when nobody cares?

Michael Shaunnessy

You didn't need the qualifier, but thank you. I agree with everything you just said. And your observations are correct, there are point. And frankly they are focused. And has been my charge in the Board for the past year, because I articulated to them basically what you just stated in the form of your question.

Without more critical mass, decides the corporate overhead in being a public company given our current ability to generate operating EBITDA from our properties, we're not going to get a whole lot further.

You're right. We can trim in another $100,000 or two and may be I share with other 50 basis points on interest but at the end of the day that moves the stock price a couple of pennies.

So consequently our focus has been, I mean the active focus has been on looking for the types of opportunities that you described, whether it be an acquisition or more likely a merger, whether it's with a private company, or a public company and we have looked at both, whether it's with slightly smaller, equivalent size, or a bigger company and we've looked at all of the above and continued to do on a regular basis in a very active fashion.

Because to get the stock price up to a number that would make our Management and our Board of Directors and ultimately our stockholders happy, it's going to take something a little more significant then just doing a better job, doing what we're currently doing.

So I agree with your comments and as I said that is truly our sole primary focus at this time.

Bobby Melnick - Terrier Partners

Thank you very much.

Michael Shaunnessy

You're welcome. Thanks for the question.

Operator

Our next question comes from David Luebke of J.P. Turner & Company.

Michael Shaunnessy

How you're doing, David?

David Luebke - J.P. Turner & Company

Hi, I'm fine. This last conversation we've had for year and half that the last caller articulated.

In your press release you said that you look forward to strong earnings growth. We just heard a bunch of reasons why that's really not going to happen? I don't understand what's going on.

Michael Shaunnessy

Well I'm further ahead in my thinking currently than you are David. If you look at the year we just finished, and then we look at the year going forward. Earnings growth is going to be rather substantial by the mere fact that my interest expense is dramatically lower.

If I go out one more year, that's no longer the case. Now I'm not going to wait a year writing on the cartels of reduced interest expense and better earnings growth for 2015. I know that all the significant steps we could have taken, in improving the operations, reducing corporate overhead, refinance the debt, the big ones we've pretty much done.

So we can continue to improve in incremental steps but to take the next sizeable step that is meaningful in the stock price is going to require something, a little more dramatic and as you've said we've talked about this for over a year.

David Luebke - J.P. Turner & Company

1.5 year.

Michael Shaunnessy

1.5 year. And I guess I could, - we are diligently pursuing those opportunities and if you are aware of any that I have missed, please let me know because I also indicated in prior calls, we're not concerned about us being the acquiring company.

We're equally happy if we end up being acquired. And if we end up with two pubic companies and get rid of the overhead for one of them, it very quickly takes care of our critical mass issue, improves the overall leverage, reduces the corporate cost and translates into accredited earnings for both entities.

In a private company, we don't get that immediate synergy of saving duplicate corporate overhead, the cost of just being a public company. But the same management leverage still exists. We are actively looking in that fashion.

David Luebke - J.P. Turner & Company

You've been actively looking for 1.5 years and I have been suggesting to you in previous management for many years, this isn't happening.

Why don't you just sell everything and pay off the debt and split it up for the shareholders? If you'd have done that three, four years ago, look how much better we'd all be. I don't understand all this in action and you get on the conference call and talk about bad weather and too good weather and I just see the same old status co just talk, talk, talk about returning shareholder value, but it never happens.

Michael Shaunnessy

I really don't have a good response for that one David. I can't make things happen that don't happen.

David Luebke - J.P. Turner & Company

You can liquidate this company.

Michael Shaunnessy

Yeah, find me a buyer.

David Luebke - J.P. Turner & Company

Thank you. I will go to work on that. Thank you.

Michael Shaunnessy

In an attempt to find a potential merger partner particularly one that's larger, that's exactly what we are trying to do.

David Luebke - J.P. Turner & Company

Okay. In the mean time we're missing the best bow market of most of our lives.

Michael Shaunnessy

I understand that frustration.

David Luebke - J.P. Turner & Company

Okay. I thought you did 1.5 years ago too. But I'm done, over-and-out.

Michael Shaunnessy

Thanks, David.

Operator

(Operator Instructions) The next question will come from [John Power of Redwood Fund] (ph).

Unidentified Analyst

Good afternoon, gentlemen. I wanted to know if you could on a lighter note extend on your Internet strategy with the Gold Star Slots App that you created and have in the Apple store et cetera is – what is the kind of strategy and upside for that, or is it just a marketing tool?

Michael Shaunnessy

It maybe a lighter note but not necessarily a better one. Many of the companies in the gaming space as did we, kind of pursue this strategy of hoping out of foothold in the Internet space with the free play.

And one thing we've all come to learn is free play online gaming just is not that spectacular. You may have some opportunity for brand extension, I mean as David just noted in his questions, we are not big enough, we don't have enough critical mass, we only get the value for it.

So it does a little bit for us in marketing but reality is, it has not turned out the way the industry for the most part hoped it would, even in free play but as I'm sure you're aware, if you pay attention to at least the Poker stuff that has been legalized in several jurisdictions and the result there pretty dismal and way beyond – way below expectations.

Even in Lewes Delaware where they're doing some true online gaming, the numbers have not been remarkable and Delaware the first $3 million and revenue went to the state to reimburse them for cost. And so far the three operators in Delaware they do not have it legal but not yet made a nickel.

So it's there, but it's not something that we're going to be able to leverage into anything meaningful at the current time.

Unidentified Analyst

Yeah, understood. One follow-up question on slightly different subject. When you look at potential acquisitions of comparable type operations or companies or businesses, what would you say they are trading for on an EBITDA basis at this point in the cycle for your industry?

Michael Shaunnessy

A real general observation?

Unidentified Analyst

Yeah.

Michael Shaunnessy

6 to 7 if they are public and number of them we've been talking to and looking at are private, so I really can't say what they are trading at. But those are the kind of numbers of multiples that are - even the owners of private entities they are kind of thinking along those same terms.

Unidentified Analyst

Yeah, understood. Okay, very good. Thank you very much.

Michael Shaunnessy

The stress properties are somewhat different, for example. I could be looking at when – when actually and I guess the multiple is infinite, anything times zero is infinite, right?

Unidentified Analyst

No, no absolutely. Sounds, good. Hey, thank you.

Michael Shaunnessy

Thank you.

Operator

And the next question will come from Vincent Staunton of Wedbush.

Vincent Staunton - Wedbush

Hi guys.

Michael Shaunnessy

How you're doing?

Vincent Staunton - Wedbush

Good. What percent of your corporate overhead would you say is due to public company expenses and how much would be saved if you went private?

Michael Shaunnessy

Let's see, roughly, let's call it $2.4 million in corporate overhead. I'd say a $1 million of it is directly attributable to being public and the balance of it is payroll office space et cetera, et cetera that is a private company we'd still be in current standalone.

If we combine with our larger company probably 80% of the 2.4 could be saved. If it was already public and already had its own management and infrastructure.

Vincent Staunton - Wedbush

So you think your combination therefore makes more sense in going private?

Michael Shaunnessy

Yes. And the challenge with going private is I don't have a significant shareholder. So therefore the financing of going private transaction would be pretty owner risk.

Vincent Staunton - Wedbush

Okay. And also is there any update on the sale of the non-core asset the land?

Michael Shaunnessy

The only update would be that, its under an option and the auction or E extended their auction in April they exercised the auction for a one year extension on that auction.

Vincent Staunton - Wedbush

Okay.

Michael Shaunnessy

So, it is still hopefully but they haven't made significant progress in putting together in financial their development plan yet.

Vincent Staunton - Wedbush

Okay. Thanks very much.

Michael Shaunnessy

You're welcome.

Operator

It appears we have no further questions at this time.

Michael Shaunnessy

Thank you all for joining us today. I appreciate your time and attention. We continue to move forward and as I mentioned in couple of the questions, obviously our focus is on doing something that gives us a little bit more critical mass and a lot of this to drive significant earnings growth and therefore our stock price in the not few distant feature.

Thank you all again. Have a great rest of the day. And I look forward to talking to you at another 45 days or so when we'll be reporting our first quarter. Thank you.

Operator

And that concludes today's call. Thank you for your participation.

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