Full House Resorts Inc. Q3 2008 (Qtr End 09/30/08) Earnings Call Transcript

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Full House Resorts Inc. (NYSEMKT:FLL) Q3 2008 Earnings Call November 13, 2008 11:00 AM ET


William Schmitt – Integrated Corporate Relations

Andre Hilliou - CEO

Mark Miller –CFO


Justin Sebastiano - Morgan Joseph & Co

Nicholas Danna - Sterne, Agee & Leach


Good day, ladies and gentlemen and welcome to the Full House Resorts third quarter earnings conference call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions) This conference is being recorded today, Thursday, November 13, 2008.

I would now like to turn the conference over to Bill Schmitt of ICR.

William Schmitt

Thank you, Michaela, and good morning. By now everyone should have access to our earnings announcement and Form 10-Q which were filed last night. [inaudible] may also be found on our website at FullHouseResorts.com under the Investor Relations section. Before we begin our formal remarks, I need 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, CEO of Full House Resorts.

Andre Hilliou

Thank you, Bill. Here with me today is Mark Miller, our CFO, who will discuss the financial results for the quarter. First I want to talk to you about the recent construction progress at FireKeepers Casino in Battle Creek, Michigan. In late September, the final piece of structural iron was installed on top of the casino. Last week we announced another construction milestone had been reached as the building structure for the casino has been enclosed ahead of schedule which will enable winter construction to proceed at the site.

In addition, the covered parking garage construction should start the week of Thanksgiving as planned. We invite you to go to our website, www.FullHouseResorts.com where you can clink on the link on the front page that will take you to a live webcam at the casino construction. We remain on schedule and on budget and we are still projecting a grand opening of FireKeepers Casino in the summer of 2009.

As most of you know, Full House owns 50% of the joint venture GEM which oversees and manages on behalf of the FireKeepers Developmental Authority for construction and opening of the facility. GEM will receive a management fee of 26% of the profits for 7 years commencing at opening. The hiring of key management personnel is proceeding well, led by General Manager Bruce McKee and CFO Ann Kennedy. We believe a strong management team is taking shape at FireKeepers.

To sum up, we are very pleased with the progress of the project and we are looking forward to next year’s grand opening with great anticipation. We continue to work on growing our business to acquisition and believe the current market environment coupled with a strong balance sheet positions us well in what we consider to be a buyer’s market. As I always stress, we are seeking casinos that could be purchased with prudent and accretive multiples are either market leaders or in position to become one. We continue searching for the right property while remaining patient. . [inaudible] We recognize that our financial resources will be stronger starting next year after the casino opens. As a result, our number one focus continues to be making sure that the casino opens on time and as successfully as possible.

[inaudible] in July we announced that the Board of Directors authorized a share repurchase program whereby the company can repurchase up to $1 million worth of shares. On October 14 the company’s Board of Directors authorized a repurchase of an additional $1 million of the company’s common stock and extended the expiration of the program to April 30, 2009. In October we had the ability to buy a large number of shares at what we considered to be a favorable price. We took that opportunity which we believe will yield substantial EPS growth when the FireKeepers Casino opens next year.

We continue to re-evaluate acquisition, debt repayment, and share purchases to the best prudent use of the cash resources that we have available to us. Mark will update you a little later on this call where we stand on the stock repurchase plan and our current liability situation.

I will now turn the call over to Mark, our CFO, to go into more detail about the financial results for the quarter and then I will close with a few additional comments.

Mark Miller

Thank you, Andre. I’ll review a few highlights of our financial performance and condition for this quarter and then as Andre indicated, we’ll be happy to respond to questions you may have.

For the three months ended September 30, 2008, we had income from continuing operations before income taxes of approximately $915,000 compared to approximately $488,000 in the prior year period. Net income was approximately $540,000 compared with approximately $605,000 in the third quarter of 2007. However, the prior year net income included income from discontinued operations of approximately $84,000 from the Holiday Inn in Fallon which we sold earlier this year.

For the third quarter ended September 30, 2008, earnings per share was $0.03, the same as in the prior year period, both periods based on fully diluted common shares outstanding of approximately 19.3 million shares.

Stockman’s Casino contributed approximately $2.4 million in revenue for the three month period ended September 30, 2008. This was down 7% from Stockman’s prior year period, primarily due to an overall weak Northern Nevada economy. During the first two months of the quarter, Churchill County slot market was down 3% and our market share was lower, we believe as the result of a temporary reduction in the slot machines on the casino floor.

Our market share has been gradually rebuilding over the past four months as we have restored the number of slot machines back to normal levels. In August our market share was 37.1%, slightly ahead of last year’s [inaudible] and substantially ahead of our 22% share of slot units in the county.

EBITDA for Stockman’s was approximately $800,000 for the third quarter compared to approximately $1 million in the third quarter of 2007. As you will recall in late 2007 and January of this year, we completed renovations of our café and steakhouse at Stockman’s. Food and beverage revenues have held up pretty well as a result for the first half of the year; however, in mid Q3 we began to see some substantial weakness in food and beverage activity which we believe is in line with general economic trends.

Our cost containment measures at Stockman’s are beginning to take hold in the casino and G&A segments, but higher food and beverage costs, again in line with general economic trends, partially offset our efforts. SG&A expenses on a company-wide basis rose slightly from $1.4 million last year to $1.5 million during the third quarter this year. the increase is primarily due to increased payroll and travel related expenses as part of our management agreement obligations at FireKeepers. It should be noted that our cash expenses for GEM are being shared on a 50-50 basis between us and our partner, [RAM].

Stock-based non-cash compensation in the quarter was $224,000 and we expect that this will be a reasonable run rate for the remainder of this year, then it is expected to begin dropping off next year.

Equity and net income from Harrington Raceway and Casino was up 34% from the prior year period in the third quarter. As noted in previous calls, we restructured our management agreement in Delaware to provide us with a guaranteed minimum 8% increase over 2007 cash flows of approximately $4.1 million. The restructuring provides us with insulation from competitive pressures affecting Delaware: the weak economy, and also protects us from the impact of the recently enacted gaming tax increase in Delaware.

Quarterly results differ from the guaranteed amount due to the timing of cash payments in the prior year. We expect 2008 annual results to be modestly higher than 8% greater than 2007 due to the timing of year-end cash payments. For the nine-month period ended September 30, these management fees are up approximately 15%. We are also guaranteed a minimum 5% annual increase each year for 2009, 2010, and through August of 2011.

During the third quarter 2008 we recognized unrealized gains on notes receivable of $137,000, a little lower than we expected and compared with a loss of approximately $209,000 last year. Please keep in mind that these adjustments to fair value are non-cash and as we have stated in our previous calls, the fair market valuation of our tribal receivables remains subject to some volatility as timing estimates change.

However, as long as FireKeepers remains on schedule and on budget, we expect lower volatility going forward. I would refer you to the somewhat extensive disclosures we have in our 10-Q we just filed to better understand the nature of these items which are significant to our financial results.

Our interest expense in the third quarter of 2008 fell approximately $200,000 compared to prior quarter due to our reduction of debt during this year driven primarily by the sale of the Holiday Inn Express in the first quarter of 2008. Earnings per share for the quarter was $0.03, equal to the same period last year. Both quarters’ results are based on approximately 19.3 million shares outstanding. We had approximately $6.6 million in cash on hand at the end of the third quarter of 2008.

Debt as of September 30 including current maturities and accrued interest stood at approximately $6.9 million with only about $221,000 of required principal payments over the next 12 months. Of the $6.9 million in debt, approximately $3 million is an obligation of GEM and will only partially be satisfied from Full House’s share of future GEM earnings and cash flow. Availability under our loan facility at the end of the quarter stood at $5.3 million.

Since the end of September, we made an additional voluntary payment on our revolving credit line of approximately $600,000 and as of November 7 we had approximately $5.8 million in cash and $6 million in availability on our revolving credit line.

In July, we announced the Board of Directors had authorized a share repurchase program whereby the company can repurchase up to $1 million worth of shares. On October 14 the company’s Board of Directors authorized the repurchase of an additional $1 million of the company’s common stock and extended the expiration of the repurchase program to April 30, 2009.

Through November 7, the company had purchased 810,000 shares of common stock at a weighted average cost of approximately $1.28 per share for a total cost of $1,061,850, including transaction costs. So that leaves us with a little over $900,000 left in authorizations from the Board.

Management continues to evaluate acquisitions, debt repayment, and share purchases to best utilize our cash resources.

With that I’m going to turn it back over to Andre for a few comments before we open it up to questions.

Thank you, Mark. Before we turn you over to questions, just to sum up, even in spite of a very difficult last six months from a micro economic standpoint, we are very happy with the progress that we have made in 2008. FireKeepers Casino construction continues on time and budget and we look forward to being ready to hit the ground running when the facility opens next year. In addition, we are guaranteed equity income growth at Harrington Raceway and Casino to August 2011 at a time when resources are coming under pressure from increased taxation and competition as well as a challenging economy.

At Stockman’s we continue to manage the business carefully and to implement more effective marketing programs and cost containment measures to maximize profitability at the casino. Despite the weakness in Nevada, we continue to believe that the casino is poised to maintain our market leadership position. Long term our goal is to own [inaudible] casinos. We will of course remain disciplined and patient in the face of this economy and with excess cash, availability on our revolving credit facility, and modest debt repayment requirement, we are well positioned for any future growth opportunities.

Thank you for your time today and I will now open up the call for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Justin Sebastiano with Morgan Joseph.

Justin Sebastiano - Morgan Joseph & Co

As far as just some housekeeping, travel expense, that should fall I guess after FireKeepers opens or do you think you’ll have to go to the property as often as you have been going since the development?

Mark Miller

It will definitely fall after the casino opens. Andre is spending quite a bit of time there. We’re making sure that we’ve got all hands on deck so between now and opening we’re going to spend a lot of time there but after opening I think it will start to drop off.

Justin Sebastiano - Morgan Joseph & Co

So SG&A should be able to come down late ’09 and going into 2010?

Mark Miller

Yes, to some extent. Remembering that those costs are GEM expenses and we’re only bearing half of them. The travel is not a huge number right now.

Justin Sebastiano - Morgan Joseph & Co

Then I get the hirings, the personnel hirings at FireKeepers... I know the GM I guess is on your payroll but the guys that you are looking to hire now, is that all going on the tribe’s payroll?

Mark Miller

That’s correct, it’s all part of the FDA but remember that we didn’t have a GM on our books last year so GEM has GM payroll expense this year that it did not have. That’s probably the most significant expense that’s being borne this year by GEM that was not being borne last year.

Justin Sebastiano - Morgan Joseph & Co

And then as far as naval activity in Fallon, is there any visibility there? Are you seeing... Do you have a schedule or do you have...

Mark Miller

No, we don’t get a schedule. We don’t have people who have contacts on the base and we get some intelligence on what the naval activity is going to be. There is a large group there now. They’ve been there since the very end of October and we expect them to be there for another week or so. [inaudible]

I think the challenge right now is I think people are adjusting their multiples. I’m not sure that they’ve come to the five that you mentioned, but we are seeing some rationalization of expectations. The biggest question right now is what is the actual EBITDA run rate of a particular property and to the extent that we are seeing downward trends in EBITDA, where is it really going to land, what is a fair benchmark for the property’s EBITDA?


Your next question comes from Nick Danna with Sterne Agee.

Nicholas Danna - Sterne, Agee & Leach

[inaudible] group of gaming companies that meet expectations in the third quarter. Question on Fallon. When we look at the margin on the food and beverage, is that just because the food and beverage revenues fell off more than you would have thought, or using that more as a promotional tool now to get people in the door?

Mark Miller

We have definitely seen more weakness in food and beverage revenues in the back half of Q3 then we had in the first half of the year. That’s one thing, so revenue activity, I think we’re seeing customers being more careful about how much they spend, becoming a bit more price sensitive. We have done a little bit in terms of being more aggressive with food as a marketing program but I would say that’s not a big issue for us in Q3. We have held our prices. We’ve tried to hold our pricing. We’ve seen some increase in costs and to that extent I think we’re trying to use our food as a marketing. If we were just a regular commercial food operation or restaurant operation, I think we would have needed to increase pricing. Does that make sense?

Nicholas Danna - Sterne, Agee & Leach

Sure. Then as you think about capital allocation, obviously you made the decision to buy back a decent chunk of stock given where the stock trades today. At what point do you sort of forego acquisition opportunities based on the level of stock buybacks and/or debt pay downs? I mean, you bought back about $1 million of stock. If you buy back another $1 million or $2 million, at what point do you have to say then you can’t do an acquisition until FireKeepers comes online?

Mark Miller

Andre and I discuss this all the time, Nick, and of course we are generating cash flow so that number changes almost weekly, but I think that Andre and I both recognize that if we do any more substantial stock buybacks in the next 2 or 3 months then we probably have foreclosed most of the opportunities that we have been looking at until next summer or until next fall, after the FireKeepers opens.

I think we can do a little bit here and there and still keep those opportunities available to us, but if we were to spend $1 million or more in the next two or three months then I think we’d probably have to sit on the sidelines from an acquisition perspective for a little while.

Nicholas Danna - Sterne, Agee & Leach

But at the same time acknowledging that even if you signed a deal tomorrow, it probably wouldn’t close for 6 to 9 months.

Mark Miller

It really depends on where that deal is, but that is definitely something that we think about. There are opportunities that we are looking at that might not even close until after FireKeepers opens, so we’re getting that close to the FireKeepers opening, that is something that we are definitely factoring into our thinking. But there are other opportunities that we are looking at that could potentially be done much faster than that.

Nicholas Danna - Sterne, Agee & Leach

Sure, I guess Nevada because you’re already there and licensed and operating would be much quicker than somewhere else.

Andre Hilliou

We are very careful about location of capital, understanding as well that if we buy property, it will have a long-term impact on the stock as well, so we’re pretty careful but we are looking at different horizons.

Nicholas Danna - Sterne, Agee & Leach

And the last one on Stockman’s, do you see, is it sort of sustainably down or do you see I guess November is a bit of an aberration with the naval folks there, but generally, are things continuing to get worse or have they sort of stabilized at these lower levels?

Mark Miller

I think when you’re looking at Churchill County in Fallon, a very small market, so it’s very volatile month to month. But when you look at it over a rolling three months or a rolling six months. We’re seeing some leveling out and the decline in the market is really not that great. I think Churchill County is down 1% or 2% for the last 12 months. It’s a little bit more than that if you look at 3 months or 6 months, but it’s not huge. So we think the county is, while it’s down, it’s not growing as it had previously. We think it’s leveled out to some degree and we’re all now kind of trying to figure out how to compete and grow our businesses in that environment.

Nicholas Danna - Sterne, Agee & Leach

And the last one, with the slots that were offline, were you changing out slots or doing construction or what was going up there?

Mark Miller

We were changing out some slots and truthfully we reduced the number of slot machines by about 10 or 12 and we really didn’t think it would have any impact at all because we’re not at capacity most of the time. It does seem to have had some impact so we’re pushing the slot count back up closer to the 260 number and as we’re doing that we are seeing some impact on our market share. We were a little bit surprised by it and we’re not absolutely sure that’s the only thing that was going on with our market share but it’s the only thing that we’ve been able to correlate our performance to, so it’s not a big deal and we are... I think we have most of it resolved at this point but it was mainly related to eliminating some old coin machines.


At this time I’d like to turn the call back over to management for any closing remarks.

Andre Hilliou

We’d like to thank everyone for their participation on the call today and for this report as we continue approaching gross on behalf of our shareholders. With that we will end the call and wish all of you a great rest of the day. Thank you.


Ladies and gentlemen, this concludes the Full House Resorts third quarter earnings conference call. If you’d like to listen to a replay of today’s conference please dial 303-590-3000 or 800-405-2236 and enter the access code of 11120923#. Thank you for your participation and you may now disconnect.

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