Isle of Capri's (ISLE) CEO Virginia McDowell on Q2 2015 Results - Earnings Call Transcript

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Isle of Capri Casinos, Inc. (NASDAQ:ISLE) Q2 2015 Results Earnings Conference Call December 2, 2014 11:00 AM ET

Executives

Jill Alexander - Senior Director, Corporate Communication

Virginia McDowell - President and CEO

Eric Hausler - Chief Financial Officer

Arnold Block - Chief Operating Officer

Analysts

Joe Simkins - Credit Suisse

Susan Berliner - JPMorgan

Ray Cheesman - Anfield Capital

John Maxwell - Jefferies

James Kayler - Bank of America Merrill Lynch

Kevin Coyne - Goldman Sachs

Operator

Ladies and gentlemen, thank you so much for standing by. Welcome to Isle of Capri Casinos Fiscal Year 2015 Second Quarter Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with analysts. Instructions will be given at that time. As a reminder, today’s conference is being recorded and will be made available for replay.

I will now turn the call over to Jill Alexander.

Jill Alexander

Good morning. All statements made during this call that relate to future results and events are forward-looking statements that are based on our current expectations. Actual results and events could differ materially from those projected in the forward-looking statements because of risks and uncertainties, which are discussed in our annual and quarterly SEC filings, and in the cautionary statement contained in our press release. We assume no obligation to update our forward-looking statements.

We are joined on the call today by Virginia McDowell, President and Chief Executive Officer; Eric Hausler, Chief Financial Officer; and Arnold Block, Chief Operating Officer.

With that, I’ll turn the call over to Virginia.

Virginia McDowell

Thank you, Jill, and good morning, everybody. We are pleased by our operating results for the second quarter for a number of reasons, which we have highlighted in our press release and which Eric will discuss in more detail later in the call.

I did want to take a moment however to highlight another second quarter metric that we hope represents the beginning of a trend. For the second consecutive quarter, we have seen an uptick in the play of our profitable retail customers up nearly 6%. We also saw 3% increase in our rated play as well, largely driven by a 5% increase in our A segment customers.

Since we have focused many of our restyled marketing programs and promotions on driving business in our top segments. We are pleased that our customers have responded and are engaged, and we are seeing an increase in visitation. Further evidence of this is the continued success of our Net Promoter customer service initiative, every one of our properties achieved increases in customer satisfaction.

What we are encouraged by however is the consumer spend in our lower database segments, where we saw 3% increase in our C segment and our lowest segment was flat. We are also encouraged in table play.

We have spent the last year rebuilding our business model and improving our properties based on customer research and input. We have strategically taken significant costs out of our business, which enabled us both to reinvest in our properties and continue to pay down debt.

In response to macroeconomic factors, we implemented a rigorous due diligence ROI review on expenses at all levels in all departments throughout the organization. This has become a part of the fabric of our culture and our strategic planning.

Our team across the company embraced the challenge for change and has worked enthusiastically to improve our business, so that we both create value for shareholders and increase the entertainment value for our customers.

We believe our operating results reflect the focus and dedication of our team to improve as indicated like quarter-over-quarter and year-over-year increase in market share across the enterprise.

But we are also hopeful that the improvement in the lower end of our database and the continued increase in retail play is assigned, if only an early one and a slight one of a rising tide.

And with that, I will turn it over to Eric.

Eric Hausler

Thanks, Virginia. Good morning, everyone. As we outlined in the press release, net revenues were $239 million, an increase of 3% from $232 million in the prior year. Nemacolin opened on July 1, 2013, so its results were included in both quarters.

Consolidated adjusted EBITDA was $43.6 million, up 17%. That is compared to $37 million in the prior year quarter. EBITDA margin for the quarter was 18.3%, up 217 basis points year-over-year.

Our flow through for the quarter was 87% as better revenue performance came through on a relatively flat cost structure due to the continued efforts on our profit improvement program. There were few items in the quarter that impacted our earnings and are excluded from consolidated adjusted EBITDA which we highlighted in the press release. These included $1.2 million favorable property tax settlement in Waterloo, where we contested our assessment. We also spent $3 million in expenses related to referendum Amendment 68 in Colorado.

In the prior year quarter, we had a litigation accrual reversal of $14.7 million which reduced operating expenses by $7.3 million and interest expense by $7.4 million. During the quarter, 10 of our properties generated increased net revenues driven by an improvement in the macro environment and more importantly the continued refinements we have made to our marketing programs.

10 of our properties reported an increase in EBITDA while 11 reported higher EBITDA margins. Five properties reported year-over-year EBITDA gains of greater than 25%, including Black Hawk, Vicksburg, Lula, Cape Girardeau and Caruthersville while Nemacolin cut its operating loss by nearly $1 million in the quarter.

Including non-recurring items, corporate and development expense was down 8.8% year-over-year as we continue to manage expenses here at St. Louis. Adjusting for the litigation reversal, in the prior year, interest expense was lower year-over-year primarily as a result of lower borrowings on our credit facility.

Adjusted income for share, adding back the Waterloo tax settlement in the Colorado referendum expense was $0.02 per share for the quarter, relative to an adjusted loss of $0.21 per share in the prior year. On a GAAP basis, we reported the loss of $0.03 per share on a continuing basis relative to GAAP income of $0.16 per share in the prior year.

We spent about $10 million in capital in fiscal 2Q almost all related to maintenance and equipment purchases. During the quarter, we opened and renovated the buffet at Lake Charles and re-carpeted the casinos at Waterloo and Pompano.

We expect to spend approximately $28 million to $31 million in maintenance capital throughout the remainder of fiscal ‘15, the uptick in maintenance capital in the back half of the fiscal year is largely because we expect to start renovating the South tower hotel at Bettendorf after the New Year.

At the end of the quarter, we had $1.03 million in total debt. Our revolver balance was $33 million relative to approximately $65 million at the end of our fiscal fourth quarter ‘14. During the quarter, we repaid approximately $22 million in revolver borrowings.

We also had $1 billion in bonds outstanding. Our gross leverage was less than six times based on adjusted EBITDA for the first time in the past six quarters. Our leverage for covenant purposes in our bank facility was six times and we had a $178 million in available capacity on our revolver.

On October 29th, we amended the definition of consolidated EBITDA in our credit facility to allow for the addback of the $2.3 million in severance we reported in the fiscal first quarter and a $4.1 million in expenses related to the Colorado referendum.

Had the amendment been in place at the end of our fiscal 2Q, our revolver capacity would have been approximately $45 million greater. Additionally, subsequent to the end of the quarter, the Pennsylvania Gaming Control Board made a decision with respect to the final gaming license in Philadelphia.

Our proposed project with Tower Entertainment was not chosen. As such the PGCB has returned our $25 million letter of credit that we had posted to secure our obligations. And we are in the process of unwinding our other agreements with Tower Entertainment.

Operator, at this time, we can open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Joe Simkins of Credit Suisse. Please go ahead.

Joe Simkins

Hey. Good morning, Virginia and Eric. Couple of questions. I guess the first one was, I guess, on one hand, we had some positive news in Colorado with Amendment 68 being defeated. On the other hand, I guess this means that Monarch is more than likely to go forward with their project in Black Hawk. So can you just talk through how you are thinking about the position in your property there longer term and what Monarch means for the market?

Virginia McDowell

Yeah. I mean, I will start but I’d like Arnie to jump in as well, since he is more intimately familiar with the market. We have always looked at the Monarch expansion as a positive for our property. I think that we discussed before that when you go up the mountain we kind of look at it in POD and if there is a concentration of properties it makes it more likely that customers are going to go to that area. We certainly saw that when Ameristar expanded and what we would call the second POD, kind of benefited significantly from that just because of the foot traffic between the properties. So we believe that this is a catalyst for the first POD, which we call ourselves which is kind of at the base of the mountain that you go up and it will actually be very helpful for us. Arnie, do you want to…?

Arnold Block

I think that’s exactly right. We do consider that foot traffic by POD to be very important, whether you are the first stop or the second or third. In August, Monarch did reopen their west side of their Casino with a new entry, the new pit and their new main casino bar and we have not felted -- not impacted us. And we think we complement one another in terms of our size and location.

Joe Simkins

Sure. That’s helpful. And then Virginia, you talked through some of the improvement in the retail spend from your customers. I guess how much of this is a function you think of share shifters assuming your peers, or a more kind of broad-based signal that the consumer is getting healthier?

Virginia McDowell

Well, as I mentioned, I mean if you look across the enterprise, we saw an enterprise increase in market share. So while we do believe that consumer spend is increasing and the customers getting a little bit more healthy, we also believe that we are being far more efficient in terms of our spend, certainly as evidenced by our flow through and that we are doing a good job of increasing visitation particularly on high end of the data base, which is resulting in a minor share.

Joe Simkins

And one final question, I guess, obviously, Philadelphia, unfortunately being going away, how are you guys thinking about extra low growth opportunities at this point versus [arena] [ph] growth continue to direct capital towards maintenance projects and within the existing portfolio?

Virginia McDowell

Yeah. Joe, we always keep our eyes open and look for opportunities. But I think if you look at our results, we’ve been very effective focusing internally and looking at opportunities for organic growth within the enterprise right now. So I think that that’s where our focus will continue to be, but we will always keep our eyes out for a good opportunity.

Joe Simkins

Thanks a lot.

Operator

Our next question comes from Susan Berliner of JPMorgan. Please go ahead.

Susan Berliner

Hi, good morning

Arnold Block

Good morning.

Susan Berliner

I wanted to start I guess. I know you talked about the improvement in the retail spend. Have you asked your customers at all if they are seeing or they are feeling better with the lower gas prices? I am trying to see if there is any correlation to the lower gas prices and spend.

Arnold Block

Hi, Sue. I don’t know if we necessarily see a direct correlation there. I know we’re asked that question when gas was $3, $4 a gallon as well. Certainly, I think it helps consumer sentiment, but I am not sure if there is necessarily a direct correlation.

I think the more important thing we are seeing is the unemployment rate in our key markets now is down. It’s about we calculate around the levels that it was in May or June of 2008. So we’ve pretty much roundtrip to the unemployment rate in our markets, which we think is a more positive sign for our customers.

Susan Berliner

Great, thanks. And then, Eric, I know you talked about the increase in maintenance in the second half of the year and you mentioned the Bettendorf Tower. What about -- I guess you had talked to, I guess, a couple of quarters ago about a potential future development in Bettendorf. Can you just talk about exactly what you’re thinking about for that property if you are thinking about moving it to a land-based?

Eric Hausler

Sure. We are continuing to look at moving into land-based. The project is -- we haven’t provided specific guidance on it. The project is pretty much fully scoped at this point. And we could go anytime in the spring if we choose to really what we’re doing. We are in the process of reworking some agreements up there, which will help us as we get a shovel in the ground.

Arnold Block

We will have more on that in the spring once we have the final drawings and plans.

Susan Berliner

Okay. So no update until the spring in terms of the actual potential scope of the project?

Arnold Block

No, we will have update there once we have it fully baked out.

Susan Berliner

Great. And then my last question just is with regards to the Golden Nugget opening. I am assuming it will be just before year end. Are you guys seeing anything interesting from a marketing perspective that they are doing prior to opening?

Arnold Block

The only real impact has to do with employees at this point. We have been preparing ourselves for their opening later this month for quite sometime. We have lost a number of employees. We did not have a retention program that Pinnacle did. And up until now, we have not seen any thing major other than the movement of some employees, which we considered to be in some cases positive because we’ve a lot of legacy employees at the property that have been looking for opportunities to get promoted and move up.

We’re prepared for their opening on several fronts, on marketing, retention of customers, our outdoor boards from Houston to Lake Charles. We’ll have some very salient messages and points along with everything else that we’re doing from the social media and electronic media in Houston.

So we think we’re prepared. We think we’re positioned. We think we know where we want to be in the market and how we compete in a comfortable familiar surrounding with not only the local market but some of those that come from Houston.

Susan Berliner

Great. Thanks so much.

Operator

Our next question comes from Ray Cheesman of Anfield Capital. Please go ahead.

Ray Cheesman

Thank you for taking the question. But -- I don’t know want to bring up the ghost of the Polar Vortex, but the new quarter has started off with some pretty bizarre weather going through a little bit earlier. I’m just wondering how the weather trends in November, which other people said were meaningful and how did they impact you guys?

Virginia McDowell

I think you’re absolutely right. The weather trends have been interesting. It is the start of our third quarter which is generally the quarter where we see the highest volatility as far as weather is concerned. We can’t do anything about weather. So what we basically do is focus on the programs and the marketing changes that we have made that when we are not impacted by weather, we can maximize our operating results.

Ray Cheesman

And then I wanted to say congratulations on gaining some traction with your efforts at Nemacolin. I’m wondering -- what you have to do to kind of get the things to rise above – get those lines across?

Eric Hausler

Well, we did have our first positive EBITDA month there in October.

Ray Cheesman

Good.

Eric Hausler

And we’re seeing a good trend there. We are coming into the seasonally slowest time of the year. So business levels, just from a seasonality standpoint, will fall off but we continue to be aggressive about growing our profitable revenues there. And every aspect of the business we’re constantly reviewing to make sure that the costs are in line with revenue levels but it’s taken some time to build the database there.

Ray Cheesman

And my last question revolves around Florida. Awful lot of noise going back and forth about the renewal, non-renewals of compacts and what the jurisdiction may think up in their legislature in the spring? Should I expect anything to happen at Florida or do you think that it’s a lot of noise going over?

Virginia McDowell

Well, the five-year exclusivity for table games for the Seminoles expires in mid 2015. So it’s our belief that although this is a very complex situation, this is certainly a catalyst for some type of action. We have been working [especially] with the existing casino interest in Florida to make sure that we continue to have seat at the table for any conversations that occur specifically as it relates to parity and tax rates and parity in game product.

The session starts in March. It’s a 60-day session. So I think you are going to continue to see a lot of activity and a lot of legislative conversations that are happening. But we believe that we are well-positioned to participate in those conversations.

Ray Cheesman

Eric, you are the numbers guy. If I gave you the same taxes and same tables, what could you do in that place?

Eric Hausler

It’s a pretty deep market. I’d like to give you a number, but the population demographics there, you can just tell by the results that we put up for the past couple of years with the materially higher tax rate and no table games. We like that Florida market a lot.

Ray Cheesman

Thanks for your guidance.

Operator

Our next question comes from John Maxwell of Jefferies. Please go ahead.

John Maxwell

Hi good morning. Arnie just wondering in Lake Charles other than competition, does the drop in energy prices affect that region at all? Or is it more natural gas and oil doesn’t affect the local economy as much?

Arnold Block

I think it does. I think gas prices or oil prices all have an impact. And we are seeing that especially from, I mean 60% of our market comes from Houston. So we are very dependent upon the drive-in business in Lake Charles as well as the strong local market that we have.

The other thing I didn’t mention earlier is that we have done a good bit of capital investment in our property there with the new Farmer’s Pick Buffet opening this past quarter, some new carpeting. And I think we’ve managed to take the care of the property and get ready for this battle as well.

John Maxwell

Okay. All right. Thanks. And then just lastly, Eric, once I guess the revolvers paid off, you don’t really have any other pre-payable debt, do you just build cash at that point? Or can you use it -- can you repurchase stock or any other uses of cash?

Eric Hausler

Certainly subject to the covenants in the existing bonds, we can use the cash subject to those restricted payments, debts, and things like that. As you know, we have bonds that become callable in March. And so we’ll take a look at that opportunistically if that’s an opportunity or not depending on where interest rates are or where the market is at that point.

But our cap structure -- we’ll start to have more flexibility in it as we roll into 2015. We’ve got a little ways to go to get through the revolver. But so far, we have been pretty aggressive about paying that down.

John Maxwell

All right. Great. That’s all I have. Thank you.

Operator

Our next question comes from James Kayler of Bank of America Merrill Lynch. Please go ahead.

James Kayler

Hey, guys. How are you doing?

Eric Hausler

Good morning.

James Kayler

Good morning. I guess I wanted to come back to your opening comments Virginia, about the database? I mean, it seems to me that increase in the low-end of the database, actually the first time in many, many quarters that you’ve seen that. I guess, when you said, you hear more color about order rates spend per visit -- visitation and if you’re seeing across the whole portfolio or just certain regions?

Eric Hausler

We’re pretty much seeing it across all portfolios. I think a lot of this has to do with optimizing our mail and how we’ve reinvested in some of these customers. And I think it’s important to note that we’ve also reduced labor by a 1.2 million year-over-year. So we have optimized mail, cut labor and kept our MPM scores high as Virginia mentioned at the beginning. So we’ve tried to balance labor along with good service, which has been one of our guiding principles for the last couple of years now.

James Kayler

All right. And in terms of the actual, I mean, it sounded like the actual spend at the lower-end was up in the quarter? I assume that that’s been a change from the recent direct?

Eric Hausler

No. I think, Virginia said that, the lower segment of the database was flat relative to being down in prior quarters in retail play, which is unrated was up for the second consecutive quarter.

James Kayler

Okay. Very good. Thank you.

Operator

Our next question comes from Kevin Coyne of Goldman Sachs. Please go ahead.

Kevin Coyne

All my questions have been asked and answered and nice quarter. Thank you.

Virginia McDowell

Thank you.

Eric Hausler

Thanks.

Operator

This concludes our question-and-answer session. I would now like to turn the conference back over to Virginia McDowell for any closing remarks.

Virginia McDowell

Thank you, Dan. No other remarks. We look forward to talking to everybody at the end of next quarter. Thank you.

Operator

To access the digital replay of this conference, you may dial 1 (877) 344-7529 or 1 (412) 317-0088 beginning at approximately 1:00 p.m. Eastern today. You will be prompted to enter a conference number which will be 10056661. Please record your name and company when joining. The replay will be available until December16, 2014. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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