ISLE missed consensus EBITDA projections but whisper numbers were lower. A little better cost management but same old top line sluggishness with no improvment post quarter end.
"In an environment plagued with low consumer confidence, our ongoing improvement initiatives are proving successful.... While we will continue to save where it makes sense, it is important to reaffirm our commitment to the long-term success of our business. We carefully evaluate making major changes to the customer experience which could negatively impact our business for years to come. Additionally, we completed the sale of a majority of our Blue Chip operating casino assets this week, completed our exit from the property in Grand Bahama last week, and expect to liquidate our remaining United Kingdom net assets before the end of our current fiscal year. We remain focused on exploring new domestic management and development opportunities."
ISLE reported revenues that were slightly above consensus and EBITDA that was below. However, after trading off 13% since Nov 20th, investors were clearly bracing themselves for more disappointing results. It sounds like most of the cost cutting efforts are complete and from now on it's really about being able to drive revenues. The news there isn't encouraging.
Some markets performed better than others:
- Colorado and Missouri benefited from regulatory reforms. The Caruthersville rebranding to Lady Luck and new initiatives in Kansas City also benefited results in those markets.
Other markets remained challenged:
- ISLE's facilities in Iowa were negatively impacted by new competition, Lake Charles was highly promotional and Florida continues to suffer from the uneven playing field between tribal and commercial properties.
2Q2010 CONF CALL
- The issues continue to be less consumer spend per visit and lower amount of high rollers
- Unemployment is a huge issue and many of the areas in which they operate have unemployment rates above the national average
- Continue to pursue management contracts and accretive tuck-in acquisitions
- Unusual items: $6.8MM receivable representing the recovery of some collectibles that had previously been written off; had a favorable impact from several state income tax audits.
- Debt: $54MM of R/C, $821MM on T/L, $357MM on bonds, $6MM of other
- Capitalized interest was less than $25k in the quarter
Q&A
- Iowa suffering from competitive issues and I-74 bridge is still out of commission mid week - which is when they suffer the most. Bridge construction is ongoing, originally it was supposed to last 3 months, now its more like 6 months
- Pompano: marketing promotion went south. Cost them $500k of EBITDA ... "too successful" with redemptions. Won't do anything with that property until there is some tax relief. There will be a special session in a few weeks but gaming won't be on the table.
- Colorado: Most of the increase has come from table games, while slot revenues are largely flat. Will continue to do what they can to remain competitive in that market. Hoping that ASCA's Blackhawk grows that market.
- Will not committ $50MM
- Exceeded expectations in paying down debt this year, how are they thinking about allocating the scarce FCF?
- ISLE's focus during the last several months is to preserve cash flow, pay down down, and stay within the limits of the credit facility. Longer term they know that there are some properties with deferred maintenance needs and some capital investment opportunities. When they are more comfortable that things have really stabilized or have started to improve that's when they will start investing more in their properties
- Thoughts on an equity deal?
- Have looked at every avenues available to them and over the next few years they will need to term out maturities (maturities in 2012 need to address that by 2011). Have and are considering all forms of capital including an equity raise to address the terming out of maturities
- Basically, they will be opportunistic
- Active in several discussion on several different fronts (re: developments) but greenfield opportunitites probably make less sense
- Pompano and Lake Charles were the primary drivers of heightened promotional spending. Houston had the highest RevPAR decline in the week leading into Thanksgiving... expect some weakness there as a feeder market
- Have been receiving payments from Pittsburg for the last 6 months (when they were looking to do a deal with the Penguins). They are owned $10MM, used a higher discount rate before because of collectibility issues
- State tax adjustements?
- Settled a liability in LA for less than what they had reserved for
- Got 2MM GBP for the sale of the UK assets
- Bahamas impact in 2H2010 should be neglible. There will be a little carryover into 3Q2010, just got out of the contract this month
- Normal tax rate = 37%
- Lake Charles: What are they doing at the property level to improve results?
- Changed the top three managers in the last month. Promoted from within (other properties)
- Stabilized margins? Ran at 17% last year which is closer to where they should be
- Colorado: Is ASCA really growing the market with their hotel?
- They are seeing some improvement from August, which was disappointing. Their hotel occupancy was in excess of 90%. Looking at opportunities to freshen the slot product to grow slot revenues
- Pompano: They are entering their strongest period now, but they aren't giving any guidance
- Had a timing change in corporate expense because they issued restricted stock three months earlier but tracking where they expected for the year
- Bank leverage calc: 3.7x
- How are trends in Nov?
- Haven't seen a whole lot of change in trends since the end of the quarter. Earlier commentary on spending per trip still holds. Don't expect to see much change for a while. Retail revenues is still off 12% (ex-Missouri)
- Because of the change in regulation in Missouri, there has been a migration to retail play because you no longer need to have a card - "ie be a rated player"
- Davenport: City would like someone to come in and make a significant investment in the market (Cumming Study indicated that someone would spend $150MM to build a land based property). They have no appetite, but if they find someone that does and wants to compensate ISLE than they wouldn't stand in their way
- Slot spending? Included in maintenance. They will spend $8-10MM in the balance of the year in slots. When will they decide what to spend in FY2011?
- Wouldn't expect a material increase in maintenance going into next year
- More opportunity to refresh floors in Blackhawk and Lake Charles
- Iowa: 4 proposals?
- Last IRGA meeting, spoke about doing tours of applicants properties in spring of 2010 and then making some sort of decision afterwards
- Big project in Biloxi? Still a priority when things recover?
- No it's third on the list after Black Hawk and Lake Charles
- Thinks that there is a healthy debate on what to do in Florida, and thinks that the compact will not get approved in current form
- Covenant is 7x now and drops to 6.75x in 6 months
