Daniel P. Foley - Senior Vice President of Gaming, Lodging, Leisure, Entertainment, Financial Services, Real Estate & Reits Andre M. Hilliou - Chairman, Chief Executive Officer and President Mark J. Miller - Chief Operating Officer, Executive Vice President, Director and Member of Regulatory Compliance Committee Deborah J.

Pierce - Chief Financial Officer and Principal Accounting Officer.

Chad Beynon - Macquarie Research Justin Ruiss - Sidoti & Company, LLC Howard Bryerman - PENN Capital Management Company, Inc..

Good day, and welcome to the Full House Resorts Inc. Second Quarter 2014 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Daniel Foley of ICR. You may begin..

Thank you, Taylor, and good morning. By now, everyone should have access to our earnings announcement and Form 10-Q, which was filed with the SEC. These may also be found on our website at www.fullhouseresorts.com under the Investor Relations section.

Before we begin our formal remarks, I would like 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, Chairman and Chief Executive Officer of Full House Resorts..

Thank you, Dan. With me today on the call are Mark Miller, our Chief Operating Officer; and Deborah Pierce, our Chief Financial Officer, who will assist me in reviewing our second quarter results.

As we discussed on our last call, the second quarter turned out to be another tough quarter, specifically due to the heightened competition and generally sluggish economic condition in our core operating region. Regional gaming trends continue to be soft, and new competition in Indiana remains fierce.

We believe that a critical saturation point with casino facilities in the Ohio/Indiana market has been reached given the lack of market growth. In addition, our core casino customer, aged 55 or older, continues to be very conservative with his spending. And we, along with many of our competitors, are feeling a dual pinch.

As with all tough operating environments, this too shall pass. We own fresh and exciting facilities and despite the headwinds, remain encouraged that we would be able to stem the tide by operating more efficiently and providing great customer experience long-term. In addition, some relief is on the way.

In Indiana, substantial new tax relief has arrived as the tax rate on our property rolled back $2.5 million per year starting on July 1 on top of the $800,000 in tax on free play that we saved during the 12 months ended July 30, 2014.

This along with significant cost reduction measures we've implemented during the second quarter should reduce the property cost structure by over $1 million per quarter starting in the third quarter. We continue to look forward for ways to further reduce costs at the vicinity in light of the lower-than-expected market growth.

We are working to expand our marketing reach now that we have an additional 104 rooms online. We believe that there is some room for improvement and continue to look for ways to improve the bottom line, while maintaining excellent service levels.

The new hotel tower at Rising Star, the North Star Tower, is performing admirably and occupancy is now running at around 90% while we are in the seasonally stronger demand period. Construction on the 142-room hotel tower had at the Silver Slipper continues and we expect delivery in the early 2015.

While construction was delayed a little due to more difficult-than-expected soil conditions, along with unusually cool weather, the first level is now up and off the ground. And we expect this infrastructure to begin going up in the very near future.

We firmly believe the addition of the hotel will greatly enhance the property ability to attract and retain customers.

Importantly, we will capture additional play and non-gaming amenity spend by increasing the length of our guests' stay and capturing more wallet share, especially during peak period like New Year's when the lack of hotel rooms limits our ability to fully capitalize on customer demand in the market.

As we have previously announced on June 23, 2014, we terminated the Interest Purchase Agreement on the basis of a mutual agreement, or in the alternative, inability to obtain financing for the purchase. The termination became effective immediately.

On June 25, 2014, Majestic Star notified us that it believes that the agreement remains in effect and disputes its termination. Additionally, Majestic Star has disputed the release of the $1.75 million held in escrow pursuant to the term of the agreement to us.

On July 28, 2014, Majestic Star notified us that the agreement is terminated and has demanded the release of the escrowed funds to Majestic Star. At this time, no lawsuit has been filed relating to the termination of the agreement.

For the year ended July 30, 2014, we have expensed $300,000 in project development costs related to these now terminated acquisitions. We continue to pursue opportunities to grow the company and improve shareholder value. In early July, we announced that we have partnered up to pursue 2 proposals in New York market.

While these opportunities are in the very early stage and may or may not come to fruition, they are example of our aggressive pursuit of projects that fit our management and operating ability and resources.

In Kentucky, we continue to work with Keeneland Association pursuing gaming opportunities, including the management of instant racing machine in Lexington and development of a property in Corbin, Kentucky catering to customers in the greater Knoxville, Tennessee area.

To refresh everyone's memory, on February 20, 2014, the Kentucky Supreme Court issued a favorable ruling that the Kentucky Horse Racing Commission acted within its authority when it licensed the operating -- the operation of pari-mutual wagering on instant racing.

It has been remanded back to the Circuit Court to determine if instant racing constitutes a pari-mutual form of wagering, which is authorized by Kentucky law. Last quarter, we entered into an exclusive agreement with Keeneland Association, Inc.

to own, manage and operate the instant racing in Kentucky, subject to completion of definitive documents for each opportunity. In addition, the company and Keeneland Association, Inc.

having entered into a letter of intent that provide us the exclusive options to purchase the horse racing permit related to the operation of Thunder Ridge Raceway in Prestonsburg, Kentucky.

The purchase would be subject to completion of definitive documentation and the approval of the Kentucky Horse Racing Commission, including the approval to transfer the racing license to a yet-to-be-constructed quarter horse racetrack near Corbin, Kentucky to be owned 75% by us and 25% by Keeneland Association, Inc.

We continue to work with our partners at Keeneland to identify and pursue the most prudent and profitable path, developing gaming facilities under the currently legal framework. I will now turn the call over to Mark to go into more detail about the financial results for the quarter and we'll close later with a few additional comments.

Mark?.

Thank you, Andre. Deborah and I will briefly review our second quarter 2014 financial performance and financial condition. I will be discussing operations and financial results at our properties, and Deborah will follow up with our consolidated financial results and financial position.

The Silver Slipper Casino generated $2.1 million in EBITDA in the quarter compared to $2.5 million last year. We continue to see sluggishness within our core customer base and overall market has continued to contract slightly.

The weather has returned to normal, however, revenues continue to be under pressure as local consumers are still recovering from the ripple effects of the government sequestration and shutdowns, and generally weak economic conditions along the Gulf Coast. With the weak revenue environment, we moved aggressively to control costs.

Total costs, exclusive of noncash depreciation for Silver Slipper declined by $600,000 during the quarter as the management team worked hard to mitigate the lower volumes we experienced. The Rising Star Casino Resort generated $200,000 in EBITDA in the quarter compared to $1.8 million last year.

Our property continued to feel the effects of increased competition in our Ohio markets and near 0 market growth. The market continues to significantly underperform expectations and the addition of a new competitor in May has again resulted in effectively no market growth despite having 4 new competitors enter our market within the last few quarters.

All of these factors negatively impacted our revenue, which declined 24% from the prior-year period. We have reduced our cost structure by $2.7 million over the same quarter a year ago, exclusive of depreciation and impairment, but not as rapidly as would've liked due to the unexpectedly low market growth.

As Andre previously mentioned, a further $2.5 million reduction in our annual gaming tax expense commenced on July 1 and the management team at Rising Star has been aggressively pursuing additional cost-reduction initiatives.

Additional cost control initiatives implemented in the second quarter, but not fully recognized during the quarter, are expected to yield an additional $0.5 million of benefit per quarter starting in the third quarter.

We are continuing to work on additional measures to improve profitability, now that we are getting a much clearer picture of where our revenue run rate is settling in at.

Our leased, on-site 104-room North Star hotel continues to ramp, and occupancy over the past couple of months have been running near 90% as we have entered the seasonally strong period of demand. As we ramp up our hotel marketing programs, we expect to see occupancy and revenue yield continue to improve.

As stated, it has been a tough operating environment at Rising Star. The new competition and surprisingly weak market growth has put us in a difficult position.

However, despite the increased competition, the property continues to attract a loyal customer base and we are repositioning our marketing and operating strategy to achieve our long-term profitability targets. Revenue at our northern Nevada operations declined $180,000 and EBITDA for the quarter declined $100,000 due to continued economic weakness.

Recent trends at our Grand Lodge property have been well ahead of last year as we enter the seasonally strong summer months when the majority of our EBITDA at that property is normally earned. Buffalo Thunder generated management fees in the second quarter of $300,000, in line with the prior year.

As previously announced, the Pueblo has decided to return to self-management following the completion of their financial restructuring and when our management contract expires on September 23. I will now turn the discussion over to Deb Pierce to discuss our quarterly results and liquidity.

Deb?.

Thank you, Mark. For the second quarter 2014, the company recorded an operating loss of $11.6 million compared to an operating income of $2 million in the prior-year quarter. This decline of $13.6 million is primarily related to a noncash $11.5 million impairment charge we recognized at the Rising Star property.

This noncash impairment charge was taken after we performed interim impairment assessments of goodwill and indefinite-lived intangible assets as of June 30, 2014.

We evaluated goodwill and indefinite-lived intangible assets for each of our properties and recognized a $1.6 million and a $9.9 million noncash impairment of Rising Star Resort's goodwill and gaming license, respectively.

In addition to the noncash impairment charge, the tough operating environment at both Rising Star and Silver Slipper as previously discussed by Mark, also contributed to the decline in the operating income.

For the 3 months ended June 30, 2014, net revenue was $31.3 million, a 14.7% decrease from the prior-year period, primarily due to the aforementioned economic, promotional and competitive related issues.

Operating expenses, excluding the impairment of $31.4 million in the second quarter of 2014 were down $9.5 million, or $3.3 million from the prior-year quarter due to the decline in business volume, but also largely due to strong cost-containment initiatives put in place at the property level as Mark discussed, along with substantial cost reduction measures put in place at the corporate level to deal with the challenging environment -- operating environment.

As Mark mentioned, further cost reductions at Rising Star inclusive of the gaming tax reduction are expected to result in a savings in excess of $1 million per quarter at Rising Star.

We've also set in place additional cost saving initiatives at the corporate level, which are expected to further reduce corporate G&A by approximately $0.5 million on an annual basis starting in the fourth quarter of 2014. For the quarter, we incurred $1.6 million in interest expense compared to $1.9 million in the prior-year quarter.

The decrease was related to a reduction in our overall debt to $59.5 million at June 30, 2014, from $63.8 million at the end of June 30, 2013, and also a 1% reduction in the interest rate on our first lien debt.

Interest expense in the second quarter of 2014 consisted of cash interest expense of approximately $1.2 million and amortization of debt costs of approximately $0.4 million. For the second quarter of 2014, we generated a tax benefit of $4.7 million or a benefit rate of 35.7%. Our taxable loss in the second quarter was $13.2 million.

The company recorded a net loss for the second quarter 2014 of $8.5 million or $0.45 loss per share, compared to a net loss of $42,000 and 0 earnings per share in the prior-year period.

Excluding the noncash impairment charge and the $0.3 million in acquisition expenses, both net of tax, the net loss for the second quarter of 2014 would have been $0.04 per common share.

As of June 30, 2014, we had a cash balance of $13 million and $59.5 million in long-term debt on our balance sheet, along with $7.3 million in capital lease obligation related to our 10-year lease of the new hotel tower at the Rising Star Casino.

On July 18, 2014, we entered into a second amendment for the First Lien Credit Agreement, which amended certain provisions of the agreement and which became effective as of June 30, 2014. The First Lien Second Amendment modifications included revisions of certain financial covenants as of June 30, and going forward through the term of the loan.

The amendment also extended the time period for draws against the $10 million term loan associated with Silver Slipper Casino Hotel to March 31, 2015, and over the next 9 months, the company plans to borrow on the previously approved $10 million loan.

The company also amended the second lien credit facility, which also modified certain covenants effective June 30, 2014, and the second lien facility will receive an upward adjustment of 1% on its interest through maturity.

The maximum total leverage ratio and the maximum first lien ratio vary according to the applicable period and the fixed charge coverage ratio remains constant. The ratios are outlined in the tables in Exhibit 10.1 of an 8-K that we filed on July 22.

Capital expenditures for the quarter were approximately $2.1 million, including about $1.4 million spent on our Silver Slipper Hotel project. As of July 31, we have approximately $14.5 million in cash and we have funded $5 million of our $7.7 million cash contribution to the Silver Slipper Hotel project.

We expect to begin drawing on the $10 million loan when we have expended the remaining $2.7 million in project costs and we should be doing that over the next 3 months. With that, I will turn it back over to Andre for a few final comments before we open it up for questions..

Thank you, Deborah. There is no question that the regional market environment remains challenging. However, we continue to be focused on improving profitability and providing the best service to our customers in this difficult operating environment. In addition, we have many exciting growth opportunities on the horizon.

Our new hotel tower at the Rising Star gives us an important tool to fight in an increasing competitive environment. In addition, much-needed tax relief is helping us to improve our operating efficiency, and we are hopeful that the state of Indiana will provide additional cost relief opportunities next year.

We have great confidence at our soon-to-be completed hotel tower at Silver Slipper will be a very strong addition to our property. And finally, we believe the opportunity in Kentucky is absolutely tremendous.

Looking at the demographic and the lack of gaming options around our proposed sites, we believe Kentucky provides us with great future growth potential. Thank you, and I will now open up the call for questions..

[Operator Instructions] And we'll go to our first question, which is Chad Beynon with Macquarie..

Regarding the new Rising Star tower, you talked about occupancy is kind of nearing the 90% range in the queue, it's at 77% for the quarter. So I'm guessing that kind of ramped sequentially throughout the quarter, and kind of now we're near 90%.

So could you -- I guess, firstly, could you talk about that delta? And then secondly, are you seeing new customers or are you seeing existing customers in your database maybe just coming more frequently or choosing to stay over versus before when they were just making day trips there? Any color would be helpful..

Yes, that 90% comment really is reflective of June and July, Chad, and early August, so the first part of the course. Certainly, April and May, occupancy was lower, particular on weekdays. Weekend occupancy has been pretty strong, pretty much from the get-go.

But midweek occupancy has definitely improved as we moved into the summer months, which we would've expected. In terms of who is in the rooms, it's mostly is customers who are in our database but were either infrequent or less frequent customers.

Customers, who in the past, we were unable to offer rooms during peak periods or when we had events, those kinds of things. So it has certainly allowed us to provide those customers with a better experience and to meet their needs during high demand time periods..

And then could you maybe talk a little bit about what you're seeing from a visitation versus spend per visit standpoint across your portfolio? And then also we've seen some healthy or improving numbers in July from the states who have reported gaming numbers thus far.

Do you think this is just a lapping of easy comps from last year, when some consumers were making bigger purchases? Or are you actually seeing maybe an improvement in terms of the value that consumers are seeing in regional gaming?.

I think what we're seeing in most of our markets, with the exception potentially of Lake Tahoe, is that participation continues to be weak. The number of people participating is still down to weak, but the spend per customer is relatively stable. Not growing, but relatively stable.

In the Lake Tahoe region where a lot of our customers are coming out of Northern California up to the North Shore of Lake Tahoe and tends to be a little bit higher revenue demographic, I think we're seeing increased health both in spend and participation. But that's a unique market, Chad..

And we'll take our next question from Justin Ruiss from Sidoti Equity Research..

Just had a quick question when it comes to promotional spending just throughout the rest of the year, if that is going to be picking up at all, just kind of looking at the marketing line and everything, and I want to see how, I guess, customer attraction will be for the rest of the year?.

We're not planning, Justin, in any of our markets to become, I think, more aggressive from a marketing perspective. I think that markets right now that we compete in from a promotional perspective have been relatively stable. I would say that many of our customer -- our competitors are still very aggressive.

But that environment had been in place for over 12 months, and we don't see any substantial change in it and we don't plan to become more aggressive..

Got you.

And then just with the competition for Rising Star, do you think that initial, I guess, that initial honeymoon period, this -- the new casino's out in Ohio, do you see that waning off and do you see traffic levels waning off there and possibly getting like a resurge back into Rising Star happening anytime soon?.

Well, I think we've seen the revenue stream at Rising Star stabilize over the last couple of months. So again, we're talking about primarily about June and July at a level which is less than we had originally anticipated. But that, I think, is mostly because the market is not growing.

Our market share has been stable but has been, for all practical purposes, no market growth, Justin. I think that in terms of customers, we're certainly are seeing some of our customers return to the property on a more frequent basis, but -- and I think the hotel is certainly helping us in that regard as getting us a tool to attract them back.

But I think that, that environment still remains very difficult because of the fact that the market is not growing and there's so much additional supply..

And we'll take our next question from Howard Bryerman with PENN Capital..

I have 2 questions for you kindly. The first is about the $10 million term loan being used both tap to build the hotel at Silver Slipper.

As of the most recent 10-Q, that facility remains undrawn, correct? So maybe you can give us just the time line as to how you'll anticipate drawing that and what your leverage will be after it's fully drawn?.

Well, I think the plan, as Debbie indicated, is that it'll probably take us about 3 more months, Howard, to complete our cash contribution for the project based on current projections from the contractor, after which we would begin drawing on the $10 million loan.

And we would expect that, that loan would get fully drawn sometime around the end of the first quarter next year. So 3 months more of us putting cash in, we've got about $2.7 million to go. And then over the last 6 months, we will draw the $10 million loan and we would expect it to be fully drawn at or near the end of the first quarter of 2015..

And how much availability is there on the existing revolver at this point? [indiscernible].

There's $3 million left on the existing revolver. But we don't have any -- [indiscernible] we don't currently have any plans to draw that, Howard..

Well, how will you fund the $2.7 million that you need?.

We're generating -- from current....

From current cash. It'll come from current cash plus the cash that we will be generating in EBITDA over the next 3 months..

Well, I'm looking -- I'm a little confused. I'm looking at your 10-Q right now and cash flow from operating activities for the first 6 months is $2.5 million less $3.8 million of CapEx. We're negative cash flow for the first 6 months. So cash flow from operations....

Well, we currently have, as you know, a $2.5 million tax savings at Rising Star, which we will be picking up the cash flow on that reduction in taxes during the last half of the year. And then we also expect -- first of all, we are also going into the strong months at our property in northern Nevada.

The Grand Lodge generates a substantial cash flow during the summer months. And we currently have cash right now, as I had mentioned earlier, of $14.5 million on our books.

And so we -- so between the cash that we already have on hand, plus the cash that we will be generating over the next 3 months, we will have -- we will not be able to -- we will not have to draw on our line..

Okay.

of the 4 -- just of the 14.9 -- of the $12.9 million or $13 million in cash, how much of that do you need for your cage or cages?.

We keep about $8 million in our cages..

Okay, all right. And then just my second question, kindly, is focused on the Kentucky opportunity.

Can you flush that out a little bit more for me kindly, in terms of can you give us a timeline as to when you intend to start the predevelopment phase of it, and moving forward into the development phase of it? I think on prior calls, you had mentioned that you would need a certain amount of capital in the predevelopment phase.

So I'm trying to overlap that with the other activities that are going on now. So if you can give us the timeline of Kentucky, including capital needs that would be really helpful..

Well, right now, Howard, we -- and we've discussed previously, we're working with Keeneland, first on re-exploring opportunities in Lexington, which we do not anticipate having to use any cash for or any capital requirement coming from Full House Resorts. The Lexington opportunity or opportunities is primarily a management contact.

And the -- us, along with Keeneland, are focused on getting something done in Lexington as quickly as possible, primarily because it can be done faster. And once we have that in hand, then we will begin to turn our attention to the second opportunity which we refer to as the Corbin opportunity.

That is the one that will ultimately require the company to contribute some capital. We don't currently have a timeline for when we will need that capital. I think we'll have a clearer picture on that once we fully understand what we want to do in Lexington. So I don't -- we don't have a timeline to provide you today.

But I do want to make it clear that the Lexington opportunities are our first priority and don't require any capital. And the Corbin opportunity -- I don't want to call the second priority because it certainly is important, but it can't be done as fast as Lexington so that's the reason Lexington is sort of first in line..

Okay.

So then just finally, to the extent any capital needs to be invested in Lexington that would come from Keeneland?.

That is correct..

Okay. Have you disclosed publicly what to expect out of that management contract in terms of revenue or fees or....

We have not..

And that concludes our question-and-answer session. I would now like to turn the conference back over to Andre Hilliou for any additional or closing remarks..

Well, we would like to thank everyone for being with us today. And with that, we will end the call and wish all of you a great rest of the week. Thank you..

And this concludes today's conference. Thank you for your participation..