Dover Downs Gaming & Entertainment, Inc. (NYSE:DDE)
Q4 2015 Earnings Conference Call
January 28, 2015 9:30 AM ET
Denis McGlynn - President, Chief Executive Officer and Director
Edward Sutor - Executive Vice President and Chief Operating Officer
Timothy Horne - Chief Financial Officer, Senior Vice President of Finance, Treasurer and Director
Klaus Belohoubek - Senior Vice President, General Counsel and Secretary
Anthony Chiarenza - Key Equity Investors, Inc.
Welcome and thank you all for standing by. At this time, all of our participants lines are in a listen-only mode until the question-and-answer session. [Operator Instructions] Today’s conference is being recorded. If you have any objections, you may disconnect at this time.
Now, I will turn the meeting over to our host, Mr. Denis McGlynn. Sir, you may now begin.
Thank you and good morning everyone. As usual, I’m joined by Ed Sutor, our Executive Vice President; Tim Horne, our CFO; and Klaus Belohoubek, our General Counsel. Tim is going to read our forward-looking statement disclaimer and then we will get started.
In order to help you understand the Company and its results, we may make certain forward-looking statements. It is possible the Company’s actual results might differ from any predictions we make today. Additional information regarding factors that could cause such differences appear in the Company’s SEC filings.
Thanks Tim. Well, we are happy to report improved results for 2015, which were facilitated by a number of factors. We were benefited by a full-year of expense reductions resulting from the State assuming a greater share of slot machine lease costs in mid-2014. We saw substantial savings from our ongoing energy conservation and waste recycling initiatives.
We also brought in-house retail operations that were formally contracted out to a third-party. This resulted in increased revenues and entailed a one-time six figure settlement involving unpaid back rent. The elimination of midweek overnight table games operations due to the States extraordinarily high table game tax rate reduced our exposure to losses in this segment.
Depreciation expense was also down considerably due to our inability to make capital reinvestments in our facilities because of the high gaming tax in Delaware. And unfortunately as you remember, we were forced to eliminate 72 jobs last year as we continue our chance to find ways to cope with increasing surrounding State competition and the overly burdensome gaming tax structure I just mentioned.
While we’re glad to see earnings improvement last year, we remain focused on the challenges to come mainly increased healthcare costs, costs associated with the mandatory minimum wage hike, increased municipal property taxes and utility fees and other general expense escalations.
Another challenge will be the significant new competition entering the market later this year in Maryland and in Pennsylvania in the next couple of years. This means our need for resources to maintain and rejuvenate our hotel and other amenities become even more urgent as customers compare us to new casinos and key leader markets.
Additionally, along with these new entrance due to the competitive environment will come intensified marketing and promotional activity by the existing casinos attempting to retain their customers. We will need marketing resources in order to remain successful as a competitor in Delaware. And to that end, legislation was introduced yesterday in the State Senate to once again attempt to restructure the distribution of gaming revenues between the State and Delaware’s three casinos.
Senate Bill 183 seeks to implement several recommendations from last year’s Lottery and Gaming Study Commission and to restructure various aspects of the Lottery Code relative to revenue sharing, license fees, iGaming products and incentives.
Changes would be phased-in over the course of the next four years in an effort to minimize any perceived negative impact on the State’s General Fund. We expect that without making these changes, the State will experience a significant long-term decline in contributions to the General Fund from its video lottery operations.
The bill allows us to add an Internet sports lottery product beginning with next year's NFL season and works to improve Internet gaming revenues by removing the disincentives to casinos, the market iGaming products by eliminating the State's first call on iGaming revenues.
With respect to table games, the need is clear that in order to increase our market share and rebuild our revenue base, fees and taxes cannot remain higher than in neighboring jurisdictions. To this end, the bill requires the elimination of the annual $3 million statewide table games license fee and reduction of the table games tax from 29.4% to 20% on January 1, 2017 and then to 15% on January 1, 2018.
And finally, the legislation costs for the phase-in of needed capital expenditure credits and marketing credits without which our revenue base will continue to erode. Passage of this legislation will go a long way towards restoring our competitiveness, protecting jobs and maintaining our ability to generate significant revenue for the State.
I am going to turn it over to Tim now for his review of the financials and then we will come back and take your questions.
Thanks Denis. If you look at the fourth quarter statement of earnings you will see our total net revenues of $46.1 million, which were up about 1% compared with the fourth quarter of last year. Gaming revenues consisting of slot win, table win and to a lesser extent horseracing, sports commissions and iGaming win decreased 2.3% compared to last year to just over $39 million.
Our slot win was down about 3% compared with last year though the large swings are gone and things have leveled off to somewhat, the market still remains extremely competitive. Our hold percent was down a little compared to last year, which contributed to the slot decline as well.
Our table game revenue was up slightly compared to last year from a slightly higher drop offset by a slightly lower hold percentage and we remain about one-third of the total Delaware table game market.
It really [indiscernible] any significant changes in the demographic trends for the fourth quarter with the average number of trips for our club players and the spend per trip essentially identical on the last year and our higher end play remaining strong.
Regarding operating profits, our gaming operating margins improved slightly compared with last year to about 5.6%, which allowed for consistent operating profits even with the lower revenue that is essentially from somewhat lower marketing cost and other expense savings during the quarter.
Other operating revenues which are net of promotional allowances of about $4.5 million consisted the cash portion of our hotel, food and beverage and other revenue streams. And they were pretty significantly higher than last year at just over $7 million. That increase was primarily from higher cash rooms revenue and higher cash food and beverage revenues compared to last year both of which were helped by having the NASCAR race weekend from our sister company in the fourth quarter this year as opposed to the third quarter of last year.
We also had retail sales from the outlets we began to operate internally this year as well. Those revenue increases lead to higher gross profit and margins for our non-gaming activities compared to the fourth quarter of last year.
Our hotel occupancy was about 84% for the quarter compared to about 80% last year and we still derive almost 40% of our casino revenue from our hotel guests, and that percent was up a little from last year. And our total win per room was higher than last year and remains well in excess of $500 for the quarter. So the hotel remains a critical piece of our competitive toolbox.
Our pure cash rate was $135 for the fourth quarter and that was down a little bit compared to last year. G&A expenses were down more than 6% compared to last year primarily from the lower pension, stock comp and legal expenses. So our EBITDA for the quarter was approximately $3.24 million versus $2.36 million for the fourth quarter of last year and that’s basically from the higher non-gaming profits and slightly lower marketing costs and other expenses offset by the lower slot win.
Interest expense was $223,000 lower than the fourth quarter last year from lower average borrowings as well as from lower rates this year. As you can see we had net earnings for the quarter of $768,000 or $0.02 per diluted share compared with the net loss of $516,000 or $0.02 per share last year.
On the attached balance sheet, the only significant change you will see is that our total debt was $31.5 million at the end of the year and was reduced by about $2 million this quarter. That debt remains classified as current year at the facility which we extended back in September currently expires on September 30, 2016.
Also attached is the cash flow statement for the year where you’ll see our operating cash was higher than last year from the slightly higher net earnings and also the timing of payments made to the State at the end of the year. We had $1.6 million of capital expenditures for the year, paid down about $7.5 million of debt.
That concludes our prepared remarks. Operator, if you please open it to questions.
Participants we will now begin the question-and-answer session. [Operator Instructions] We do have one question in queue and it comes from the line of Tony Chiarenza from Key Equity Investment. Tony, your line is now open for the Q&A.
Good morning. How are you?
Can you tell me just in terms of strategy this year in terms of getting the legislation through - obviously last year we had I guess the similar bill and obviously it failed. What’s the strategy this year to increase the probability of actually getting this bill passed and what can we do about it?
Well, the strategy is an odd word in this world; we live in down here in Delaware politics. A lot has to do with circumstances that we don't have much control over specifically the State budget situation. In the last couple of years there were significant deficits projected at this time of year and in fact if you go back a month ago there was a $150 million deficit projected for the current session.
However, the recent financial updates that occur periodically are now forecasting a $20 million surplus for the State budget. So that helps a lot. I think what also is coming to - I guess if there is a reality check that’s now pervasive down a Legislative Hall that something needs to be done and I think that was through last year as well and it just wasn't able to get done because of the budgetary situation, but after the number of years that we've been pursuing relief I think people have come to the conclusion that what we are asking for needs to be affected. How we affected and over what period of time I think is probably more the issue.
We’ve tried to make it as painless on the State as possible and that’s why we really phased-in the incremental changes over the course of four years. So that there is no major impact in any single fiscal year. So we hope it – I guess this is as close to a strategy as I can define for you, but we do have a number of people down in Legislative Hall were very supportive of this and we are hopeful that we can move the ball down the field this session.
That sounds great. Any other thoughts on CapEx or maintaining the number of people, or is there any change and as we already expect - continue to remain currently stable during the year?
Our plan right now is to probably increase our CapEx a little bit next year, there are couple of larger projects we need to do, one of which is to upgrade our casino management system. It’s critical that we update that, we’ve been putting that offer a few years, that’s’ our biggest marketing database, our biggest tool to reward customers, we have to upgrade that.
We are also investigating putting some new bonusing modules on some games on our floor, which could have a nice return on investment. So if we do those two projects, which I think we will then you’ll see higher CapEx than we had in 2015, but 2015s numbers are just not sustainable. We spent a $1.6 million last year just keeping things looking good, but none of those things were incremental to [Audio Dip].
End of Q&A
Okay. Well, thank you everybody and we’ll look forward to communicating again after the first quarter.
And that concludes today’s conference call. Thank you everyone for participating. You may now disconnect.
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