Nevada Gold & Casinos, Inc. (UWN)

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Nevada Gold & Casinos (UWN)

F2Q08 Earnings Call

December 10, 2007 9:00 am ET

Executives

Robert B. Sturges - Chief Executive Officer, Director

John Arnesen - President, Chief Operating Officer

James J. Kohn - Chief Financial Officer, Senior Vice President, Treasurer

Analysts

Michael Friedman - Noble Financial

Evan Greenberg - Meadowbrook Capital Management

Lawrence Klatzkin - Jefferies & Company

Nelson Obis - Winfield Capital

Presentation

Operator

Good day, everyone and welcome to the Nevada Gold & Casinos Incorporated second quarter 2008 conference call. Today’s call is being recorded. For opening remarks and introductions, I would like to turn the call over to Jim Kohn, President and Chief Executive Officer. Please go ahead, Mr. Kohn.

James J. Kohn

Okay. First off, I’d like to correct my title -- I am the Chief Financial Officer unless the Operator wants to give me a promotion, which I would gladly accept. Anyway, thank you, Operator. Good morning, everyone and welcome to the company’s second quarter 2008 conference call. With me today is Bob Sturges, our Chief Executive Officer; and John Arnesen, our President and Chief Operating Officer.

A webcast of today’s call will be archived on the company’s website at nevadagold.com. If you have not already received a copy of our press release, which was released Friday, you can review it on our website, www.nevadagold.com.

Before we begin, I would like to remind everyone that part of today’s call will include forward-looking statements. These statements are not guarantees of the future performance and therefore undue reliance should not be placed on them. We refer all of you to the company’s filings with the SEC for a more detailed discussion of the risks that can impact the company’s future operating results and financial condition.

With that, I would like to turn the call over to Bob Sturges.

Robert B. Sturges

Good morning, everyone, and thank you, Jim. Thank you very much for joining us today. We are happy to have the opportunity to speak with you about our second quarter results and our ongoing efforts to best position the company for the future.

We are speaking to you today from our new corporate offices here in Houston that we moved to on November 15th and we are happy to report that we can now begin saving approximately $20,000 per month on our office rental expense.

We are pleased with our financial performance in the second quarter, which Jim Kohn will detail in a few moments and which benefited from improvement at both Isle of Capri-Black Hawk and Cripple Creek, as well as from ongoing diligence on the expense front. That said, several of the most exciting developments with respect to our strategic efforts occurred after the quarter ended. These events include the announced sale of our 43% interest in Isle of Capri-Black Hawk for $64.6 million; the restructuring of our credit facility; and our agreement to acquire the Horizon Casino Hotel in Vicksburg, Mississippi.

Given that we hosted an intra-quarter call to discuss these significant events, I’ll not take a lot of time to recap each one here but I do think it’s worthwhile to reiterate that taken together, these steps leave Nevada Gold exceptionally well-positioned for the future, with a portfolio of projects that’s much more closely aligned with our growth and operating strategy.

We recognize that there are still other assets that need to be sold and we are working diligently to dispose of these assets and move forward with a portfolio that will return value to our shareholders. In that regard, we are still following up with some of the potential bidders that we had for our 260 acres in Black Hawk, our Pizza Hut interest we hope to dispose of this quarter, and we are negotiating the possible sale of our Sunrise investment with our partner.

As far as our other, our most important assets, we remain very excited about our agreement to purchase the Horizon Casino Hotel from Tropicana Entertainment for $35 million. This is slightly less than a six times trailing 12 month EBITDA multiple which, by the way, compares very favorably to the approximately eight times multiple we are selling our Isle interest for.

In addition to the purchase price, we intend to spend another $10 million for capital improvements, operating cash, and transaction costs.

As a reminder, this property is a 36,000 square foot riverboat permanently moored in a coffer dam in Vicksburg, Mississippi. It’s attached to a 117-room hotel with meeting space, a buffet restaurant, a fine dining restaurant, and a sports bar. We believe that this boat is very advantageously positioned in the market geographically and also that we’ll be able to bring our operating expertise to bear on improving the property’s performance, particularly since this will be our largest and most important operating property. We look forward to keeping you apprised on this front.

I would now like to turn the call over John Arnesen to briefly review the performance of our existing projects in the second quarter.

John Arnesen

Thanks, Bob. I would like to begin by reviewing the Isle of Capri performance. As you know, we are very pleased to see continued improvement at this property during the second quarter, which enables us to record $2 million in earnings from Isle of Capri-Black Hawk compared to $0.5 million in the second quarter of last year.

EBITDA of the property was $12.2 million versus $8.3 million last year, a 47% year-over-year improvement. Although net revenues were flat, operating expenses pertaining to payroll and marketing were significantly reduced due to technological enhancements and focused database markets.

Turning to Cripple Creek, we saw improvements in this property’s performance. As well, for the second quarter we recorded EBITDA of 288 compared to $118,000 in the second quarter of last year, a 144% increase year over year and year-to-date of $754,000 versus $278,000, 171% year-to-date EBITDA improvement. And I must say, all indicators show improvements, including drop, win, and operating costs.

The new management team continues to implement their marketing and operational strategies and we are very pleased with the results, resulting in improved revenues, operating efficiencies, overall customer experience, and the return of a significant number of former customers.

And with that, I’d like to turn it over to Jim for our financial review.

James J. Kohn

Thank you, John. Looking at the second quarter results, our net revenues came in at $1.9 million compared to $4.1 million a year ago. This change is largely impacted by the elimination of credit enhancement fees in the second quarter as a result of the River Rock Entertainment Authority buy-out of future credit enhancement fees from Dry Creek Casino LLC, of which we owned 69% last year.

Operating expenses decreased to $3.6 million from $7.2 million. The decrease is primarily the result of $3.5 million write-off of notes receivable and project development costs related to Native American gaming projects during the three months ended October 29, 2006.

With regard to the items below the operating line, earnings from unconsolidated stated affiliates, including our equity earnings from Isle of Capri-Black Hawk and our share of American Racing operating expenses, we recorded $2 million in the second quarter of fiscal 2008 as our share of the Isle joint venture earnings compared to $0.5 million in the second quarter of fiscal 2007.

As a reminder, the sale of American Racing was completed this past June and therefore, we did not report any results pertaining to American Racing during our second quarter this year, whereas last year’s results included a loss of $2.1 million from American Racing.

We will continue to report our equity and earnings of our Isle of Capri-Black Hawk interest until such time as our shareholders approve the transaction and we close with Isle. We anticipate the transaction to close no later than the end of our fiscal year.

Our interest expense continues to decline as we pay off our notes payable to the Isle of Capri for our 2005 acquisition of our Cripple Creek Colorado Grand property. In addition, this month we will pay off our debt pertaining to the furniture, fixture, and equipment at the Cripple Creek property, thus further reducing our debt and related interest expense. This will leave us with our senior credit facility of $34.5 million, which maturity date will be extended to June 30, 2010, once we close the Isle of Capri transaction. And once that transaction is completed, we will pay down approximately $39 million of that debt, leaving us with a balance of approximately $15.5 million.

With that, I would like to turn the conversation back to bob.

Robert B. Sturges

Before we open it up to questions, I would just like to reiterate that we are very encouraged by our progress and in particular by our exciting recent developments. Our financial and operating initiatives continue to bear fruit and we are excited to be moving forward with a portfolio of projects that’s better aligned with our strategic focus. We look forward to reporting to you on the Horizon Casino Hotel and we are pleased to have the financial flexibility we need not only to complete this acquisition but also to pursue similarly compelling acquisition opportunities in the future.

I would like to add that since we announced our Vicksburg agreement, we have seen significant increase in our pipeline of potential projects. I have always felt that the first acquisition would be the most challenging and that it would create very positive momentum for us as we look at additional acquisitions.

With that, I would like to now open the floor to questions and ask if you could limit your questions to one area and then remain, return to the queue so that everyone will have an opportunity to answer their questions in a timely manner. I’ll ask the operator to start the questions. Thank you very much.

Question-and-Answer Session

Operator

(Operator Instructions) We will take our first question from Michael Friedman at Noble Financial.

Michael Friedman - Noble Financial

Good morning. I wanted to focus in a little bit on the New York race tracks. You mentioned it earlier in your comments. It seems to be some of your former partners are publicly talking about some problems with the New York race tracks. What obligations, if any, on the guarantees does Nevada Gold currently have related to those race tracks?

James J. Kohn

Our responsibilities are very limited, if any at all. At this juncture, we still are supporting them from a general ledger accounting system. They are scheduled to wean themselves off of that at the end of this month. It will remain open for a few months as they close their audit year.

From an operational standpoint, that is all that we have from an involvement standpoint. From a financial standpoint, we do have a guarantee of $11 million to vest in, which is fully guaranteed or indemnified by both of the partners that currently bought our interest.

So from that perspective, we believe we are fully covered both operationally and financially and have no responsibilities related to that particular property.

Michael Friedman - Noble Financial

Great. Thanks. I’ll jump back in the queue.

Operator

We’ll take our next question from Evan Greenberg at Meadowbrook Capital Management.

Evan Greenberg - Meadowbrook Capital Management

A couple of things; number one, I wanted to know if you broke out the Cripple Creek performance in the quarterly report. It didn’t look like it.

James J. Kohn

We do not segregate that information out, although one could easily identify it, since it is our only operating property at this point in time. All of the revenues down to the net revenue line are Cripple Creek and the first four expense lines, which would be casino, food and beverage, marketing and advertising, and facility are all specifically related to the Cripple Creek property.

Evan Greenberg - Meadowbrook Capital Management

Okay. All right, great. Number two question had to do with the one-time write-down you took and it had to do with operating cash flow and EBITDA. It seemed like you pretty much -- the operating cash was about a negative $500,000 this quarter, somewhere around there. Is that the correct number?

James J. Kohn

I’m looking at the income statement. We did not have any write-offs this quarter. There were write-offs last year same quarter of $3.5 million related to a Native American project, but there were none this year. In fact, this quarter we had a slight gain of just short of $19,000 on the sale of our gold field resources, non-core asset.

As far as a cash flow standpoint, the cash flow for operating activities actually show a negative $2 million this year versus last year, a -- I shouldn’t say a loss but a use of $2 million versus last year a use of $568,000.

The main differences in that particular section are -- I’ll have to go to the back but mainly related to -- bear with me a second. It’s in our Q. It’s just operating use of cash, be it related to the Isle of Capri transaction and our changes in the receivables and accounts payables. We’re trying to pay down our debt. We’re trying to pay down our operating expenses and get everything in order.

Operator

We’ll take our next question from Larry Klatzkin at Jefferies.

Lawrence Klatzkin - Jefferies & Company

A question about Vicksburg; just your acquisition, in light of what’s going on there, I guess Ameristar is the dominant player in the market. It’s doing a major acquisition. I guess the place next to it, the old Isle of Capri, which is Diamond Jack’s, has now been renovated with new managers and there’s a new casino getting built on the other side of Vicksburg. I’m just wondering, in an increasingly competitive market, what do you guys plan to do with this property?

Robert B. Sturges

Well, we feel that this property has a geographic niche that is significant, in that most of the market in Vicksburg comes from the Jackson area. Our calculations show that about 70% of the existing market, we have a geographic advantage in the sense of the traffic flowing down interstate 20. People pass by and are apparently passing by at a greater rate than we expect them to be passing by once we take control of the property, but they pass by our exit, have another almost five miles to go to get to the competing properties.

It’s the only downtown located property and at this point, our calculations show that on a fair share basis -- that is, if you take the total revenues and divide it by the number of gaming positions, the fair share that Vicksburg should have, they are only performing at 55% of their fair share and I think that speaks to an opportunity to really grow that business in spite of the fact that there’s going to be increasing competition and that the market may not be growing that rapidly. We see a real opportunity there to add.

And you know, it’s similar to the situation we find ourselves in Cripple Creek, where we’ve been able to grow our market share, dramatically improve EBITDA results significantly year over year in a market that’s essentially been flat. So we are not -- we are not at all concerned. We think we are going to perform quite significantly well at the Vicksburg property and improve that EBITDA.

Lawrence Klatzkin - Jefferies & Company

Even with all the increasing competition that’s going on?

Robert B. Sturges

See, where the competition is coming is, as I said, down the road and we think we’re going to give people a reason to turn off at the exit that brings you to downtown Vicksburg, which is five miles earlier on the interstate than the other places, and think that we will -- if we give them a reason, and we’re going to improve that product. We’ve got $5 million to $6 million that we expect to be spending on capital improvements and this operation, unlike Columbia Sussex, it’s going to have our full focus and attention.

Lawrence Klatzkin - Jefferies & Company

All right. Just sometimes downtown casinos are a little tougher because people tend to go home to the suburbs at the end of the day.

John Arnesen

You know, one of the things that we were excited about there, we’ve had meetings with the mayor and he’s got a whole revitalization program. We’ve walked the streets down there and we’re going to work on the lighting, the synchronization of the traffic lights to really make an impact on that exit way.

But you’ve got a really vibrant convention center, relatively new; you have new theme parks -- I mean new parks going in, the military park there. That’s about 10 minutes from the property. You have two or three other museums that are coming into the area so I think there’s a lot of synergy there and opportunities to create synergy between the property and the region and as an entertainment venue that has a lot of other amenities and drawing cards beside the property that are not really being utilized now that we think it’s an opportunity for us. We’re already setting the groundwork to create that synergy and we’ve got some plans in place to do so.

So we think there’s a significant opportunity if you pool everything together.

Lawrence Klatzkin - Jefferies & Company

All right. Thank you, guys.

Operator

(Operator Instructions) We’ll go next to Dennis Forst at Keybanc.

Dennis Forst - Keybanc Capital Markets

Good morning. Can you just detail the math you did with your sale of the Black Hawk minority interest at eight times cash flow? You got $65 million for 43% and the cash flow on that property is about $50 million. Is that -- are those numbers generally correct?

James J. Kohn

No, the EBITDA on that property is in the 40s -- mid-40s. And when you start going through the enterprise value calculation, you have to keep in mind that there was about $198 million worth of debt on the property. So based upon the EBITDA that had -- actually was a little bit less than that on the trailing 12-month period and with the debt that was involved in it, we had a little bit over an eight times multiple based on a specific -- the information that we had at that point through September 2007.

Now as far as cash flow on it, I mean, that’s not how we calculated it. We based it upon the EBITDA and an enterprise value.

Dennis Forst - Keybanc Capital Markets

Okay. All right. I’ll redo my math. Thanks.

Operator

We’ll take our next question from Nelson Obis at Winfield Capital.

Nelson Obis - Winfield Capital

I’m just curious what the pro forma book value is on goodwill after the sale.

James J. Kohn

Well, the goodwill on our books right now is related to the Cripple Creek property. We have $5.4 million on our books as goodwill, almost 5.5. That will remain on our books because it’s related to Cripple Creek but this will just be a sale transaction. If you’re talking about the goodwill related to the acquisition of the horizon --

Nelson Obis - Winfield Capital

No, no, that -- I just wondered where the goodwill, the goodwill associated with Black Hawk. So what would be the pro forma book value then assuming you --

James J. Kohn

After Vicksburg? After the Vicksburg acquisition, Nelson?

Nelson Obis - Winfield Capital

I don’t know if you can look that far ahead, but just after the sale.

James J. Kohn

After the sale of Isle of Capri?

Nelson Obis - Winfield Capital

Yeah.

James J. Kohn

As far as goodwill on our books?

Nelson Obis - Winfield Capital

The book value.

James J. Kohn

The book value of the company? Approximately $65 million, rather than -- we currently are running at $74 million, if that’s what you mean, total assets.

Nelson Obis - Winfield Capital

No, no, book value.

James J. Kohn

The net book value? The net book value will be -- well, we’ll have approximately $64.5 million of assets and about $15.5 million worth of debt, so the book value will net out to approximately $49 million.

Nelson Obis - Winfield Capital

As compared to where is it right now?

James J. Kohn

Right now it’s sitting at 16.

Nelson Obis - Winfield Capital

All right. Well, you got another shot, it looks like. Thanks.

Operator

At this time, we have no further questions. I would like to turn the conference back over to Bob Sturges for any additional or closing remarks.

Robert B. Sturges

Thanks everyone for participating in today’s call. We’ll be looking forward to providing all of you with continuing updates as we move forward with our progress in growing our business. Thanks again to everyone for participating. Bye-bye.

Operator

Thank you. That does conclude today’s conference. You may disconnect at this time.

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