Online Poker Report

Station Casinos: 4 Forces are Impeding the Growth of Online Gambling In New Jersey

Green Valley Station Casino

Ultimate Poker parent company Station Casinos recently hosted an earnings call that offered a variety of insights into the company’s performance to date in the regulated online gambling markets of New Jersey and Nevada.

Highlights follow. OPR also transcribed the call; read the complete transcript here.

Sports beating pace but poker and casino lagging

Marc Falcone, Chief Financial Officer of Station Casinos, told a tale of two worlds when it comes to Station’s experience with regulated online gambling.

The first world: Regulated online casino and poker offerings in New Jersey and Nevada, which Falcone admitted have “gotten off to a slower than anticipated start,” although Station is “still optimistic that there is opportunity for growth.”

The second world: Regulated mobile sports betting in Nevada, which Station operates through SportsConnection. There Falcone had glowing remarks, noting that “sign-ups and revenue generated from Sports Connection during 2013 exceeded our expectations, and Sports Connection was a driving factor in achieving our strongest year of sports wins in company history.”

The four forces impeding New Jersey online gambling

Falcone drilled down into the four factors Station believes are hampering the performance of online gambling in New Jersey:

  • Consumer awareness: Internal research shows that “a very low percentage of the residents are even aware that online gaming is now legal in New Jersey,” Falcone claimed.
  • Geolocation: Falcone characterized the process as “complex,” “new” and one that Station will “continue to improve.”
  • Banking: Blocked transactions by credit card companies are “a meaningful impediment to delivering currency to the sites,” said Falcone.
  • Unregulated competition: The presence of unregulated gambling sites in NJ and NV cuts into the market, said Falcone, who argued that “there are potential players in both Nevada and New Jersey that continue to game on these illegal sites.”

Note that none of these factors are unique to Station.

Updates for Ultimate coming soon

The online gambling products at Ultimate Poker and UCasino are set to receive an upgrade, per Falcone’s comments: “Ultimate Gaming is making progress on expanding our player content, adding more feature upgrades and enhancements to our current platform, as well as adding additional platforms to enhance our customers’ playing experience.”

Falcone did not dive in to the nature of these upgrades nor address how they would be distributed between the company’s poker and casino platforms.

As far as a timeline, Falcone indicated that he expected “many of these new offerings to be available in the upcoming months,” but offered no specific delivery targets.

Nevada / Delaware agreement important as a precedent

Falcone offered general praise for the liquidity-sharing agreement between Nevada and Delaware, saying that “the Delaware – Nevada compact is particularly important for setting a precedent in how these agreements will look and the benefits that can be achieved across multiple states, or in this case, Delaware and Nevada.”

But Falcone was less sanguine on the immediate impact of the deal.

“On the margin we think it’ll be helpful,” Falcone said in response to a question, “but I don’t think it’ll change things too much at least with Nevada and Delaware pooling liquidity. More substantial opportunity, for example, would be pooling the liquidity across Nevada and New Jersey state lines at this point.”

Complete transcript of the Station Casinos Q4 2013 Earnings Call

Station Casinos March 12, 2014 – 4:30 PM Eastern Fourth Quarter 2013 Earnings Call [29:36]

Operator: Greetings and welcome to the Station Casinos Fourth Quarter 2013 Earnings Conference Call. At this time all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press *0 on your telephone keypad. I would now like to turn the conference over to your host, Marc Falcone, Chief Financial Officer of Station Casinos. Thank you. You may now begin.

Marc Falcone: Thank you very much. Good afternoon, everyone. Welcome to Station Casinos Fourth Quarter Informative 2013 Full Year Earnings Call. Joining me on the call today is Tom Friel, Executive Vice President and Chief Financial Officer of the Graton Resort and Casino.

Our call today will include forward-looking statements under the Safe Harbor Provisions of the Federal Securities Laws. Developments and our results may differ from those projected. The risks and uncertainties related to these statements are detailed in our filings with the SEC. During this call we’ll also discuss non-gap financial measures. For definitions and complete reconciliation of these figures to gap, please refer to the financial tables in our earnings press release in Form 8-K which were filed this afternoon prior to the call.

Also please note that this call is being recorded. For reference, the adjusted EBITDAM numbers outlined in my comments today exclude the impact from Fertitta Interactive in both years. I would like to start off today’s call with some highlights of our accomplishments over the past year.

First, we achieved our highest full year adjusted EBITDAM since 2008 at $385 million, or 11% growth over 2012, our second consecutive year of double-digit EBITDAM growth. Our focused effort on operational efficiencies continues to pay dividends with a 230 basis point improvement in our EBITDAM margin, reaching almost 31% for the full year of 2013.

In November, we successfully completed construction and opened the Graton Resort and Casino to large and enthusiastic crowds. The property continues to gain momentum with each passing week.

In April, our majority owned subsidiary, Fertitta Interactive, made history as the first company to launch real-money online poker in the United States, which was followed by a successful launch in New Jersey for full scale online gaming in late November.

Lastly, we closed on a $2.5 billion debt financing which provided us with increased investment flexibility and a streamlined organizational structure. Just two weeks ago, we completed a repricing on the largest portion of that debt, a $1.6 billion term loan with a 75 basis point reduction in interest costs. Overall, 2013 was a very exciting year for Station Casinos, particularly with our core Las Vegas business and the inherent financial and operating leverage that should exist in the business model going forward. I will now provide an overview of our operating results.

Revenues for the full year of 2013 grew 2.6% to $1.3 billion. As many of you are already aware, it was a soft gaming revenue environment in Las Vegas during 2013. However, the foundation of our business remains strong as we recorded increases in all of our core volume indicators during the year. Boarding pass sign-ups, visitation to our casino floor, sports mobile sign-ups, occupancy in our hotels, and total covers at our restaurants all increased on a year-over-year basis.

The revenue challenge was primarily created by our guests’ ability or willingness to spend well at our properties. We believe the implementation of the payroll tax in January 2013, and the realization of reduced work hours and higher health care costs as a result of the Affordable Care Act had a negative impact on our guests’ wallet.

Despite the challenging revenue environment, we generated an 11% increase in EBITDAM to $385 million, while our same-store Las Vegas operations increased a solid 6.2% for the year. Our tireless focus on managing the operating costs of our business contributed to the increase in EBITDAM, resulting in an operating margin of 30.6%, or a 230 basis point improvement over 2012, and a 400 basis improvement compared to 2011.

During the fourth quarter, consolidated net revenues were up 8.3% to $328 million, while adjusted EBITDAM grew 28% to $109 million. This quarter’s results benefited from a one-time development fee of $8.2 million from Graton, as well as $6.5 million in management fees for the first 57 days of operation from the Graton facility. Same-store Las Vegas EBITDAM was up 11.2% for the fourth quarter.

We experienced some encouraging spending trends from our guests during the fourth quarter as well, with increases in hotel average daily rate, and average checks in our restaurants compared to the prior year’s fourth quarter. As I stated earlier, we received the $8.2 million development fee from Graton in November. Excluding the development fee, net revenues and adjusted EBITDAM would have been up 5.6% and 18.3%, respectively, while our EBITDAM margin was 31.5%, or a 330 basis point improvement compared to the fourth quarter of 2012. We continue to keep a close eye on the key indicators that should drive further improvement of the Las Vegas economy.

The Las Vegas strip continues to show signs of a positive recovery. Visitor volume and occupied room nights were relatively flat, however they remain at all-time highs.

Additional spend from customers was achieved on the Las Vegas strip as reflected by increases in ADR and gaming revenue, as well as the ongoing growth in food and beverage, and entertainment. We believe that continued improvement on the Las Vegas strip is important to the overall improvement in the local economy.

Meanwhile, population in the Las Vegas Valley continued to grow modestly in 2013, as evidenced by additional electric meter hookups and and a record number of children enrolled in the Clark County School District. Looking at 2014, we would anticipate that the favorable population trends should continue. The economy added an impressive 26,000 jobs in 2013, and 67,000 jobs since the trough. With new job growth in the economy as an important metric, and also believe that an improvement in total earnings is a key component to the recovery which incorporates both the change in wage rates and the impact of part-time employees. The total earnings growth in 2013 was 2.8%.

Unfortunately, the restatement of the 2% payroll tax in January was a significant offset to the increase in weekly earnings. For the second year in a row now, housing prices have increased. Existing home prices were up 20% during 2013, and they’ve now increased 67% from the trough. Residents have now regained more than $20 billion in lost equity in their homes since the trough. An improvement in housing prices has helped residents regain confidence about their financial nest eggs, which is also a big positive for the local economy.

Throughout 2013, we also continue to see an increase in taxable retail sales, which are up 20% or $5.6 billion since the trough. We believe this is a sign that consumers are spending additional dollars in our economy. We estimate that over $8 billion in capital was recently invested or is currently being invested in Las Vegas Area projects, the highest amount since the 2007-2008 time frame.

The shops at Summerlin which are located directly adjacent to our Red Rock facility restarted construction during 2013 and is anticipated to be completed by the fourth quarter of 2014. The shops will be a 1.5 million square foot development with 125 tenants. We believe this development and the additional traffic it will drive to the area should be very beneficial for Red Rock. In anticipation of this, we are currently upgrading our Red Rock facility with new restaurants and amenities in order to capture the additional traffic generated by this development.

Now turning to the Graton Resort and Casino. As I mentioned earlier, Graton opened to enthusiastic crowds on November 5 and continues to drive interest as Northern California’s premier casino resort. We now have over 500,000 names in the Graton Rewards database, and we are gaining momentum with increasing visitation from those guests through our marketing initiatives. Guests’ response to the property has been overwhelmingly positive, and our expectations are for continued growth throughout 2014 and the next several years. For the first 57 days of operation, Station Casinos generated $6.5 million in management fees in addition to the one-time development fee of the $8.2 million. Now moving on to our mobile and online businesses.

Station Casinos is one of only a few gaming companies that provides mobile sports wagering in Las Vegas via our Sports Connection mobile application. Sign-ups and revenue generated from Sports Connection during 2013 exceeded our expectations, and Sports Connection was a driving factor in achieving our strongest year of sports wins in company history.

In addition, Station Casinos currently owns 57% of our subsidiary Fertitta Interactive. Fertitta Interactive through its subsidiary Ultimate Gaming launched real-money online poker in Nevada and full scale real-money online gaming in New Jersey during 2013. Although online gaming in both markets has gotten off to a slower than anticipated start, we are still optimistic that there is opportunity for growth.

Highlights of a few areas where we see opportunity are as follows.

First, we have conducted extensive polling of New Jersey residents and the results show a very low percentage of the residents are even aware that online gaming is now legal in New Jersey. Second, regulations require several complex steps to prove the guest player is physically located in New Jersey. This is a new process for online and we continue to work to improve the geolocation process for our customers. Third, payment processing is still limited with credit card transactions, particularly Visa, which continues to deny online gaming transactions, therefore creating a meaningful impediment to delivering currency to the sites. And fourth, the ability to game on illegal sites still exists and we believe there are potential players in both Nevada and New Jersey that continue to game on these illegal sites.

Overall, we believe improved customer awareness, a more simplified geolocation process, additional payment options, and the closure of the illegal sites could all have a positive impact on online gaming revenues in the future. In addition, Ultimate Gaming is making progress on expanding our player content, adding more feature upgrades and enhancements to our current platform, as well as adding additional platforms to enhance our customers’ playing experience. We anticipate many of these new offerings to be available in the upcoming months. Lastly, as we always do, we’ll conclude with some balance sheet and housekeeping items.

Capital expenditures in 2013 were $86 million. We estimate capital expenditures of approximately $110 million to $120 million for 2014 which includes the previously discussed enhancements at Red Rock. Our outstanding principal balance of a long term debt as of December 31 was $2.16 billion on a consolidated basis which excludes the $110 million nonrecourse land loan. As of December 31 our consolidated leverage ratio net of excess cash was 5.1x including the pro forma impact of Graton Resort and Casino and excluding the non-recourse land loan. We have now paid down over $330 million of debt and reduced our leverage ratio by over three turns since the completion of restructuring in June 2011. And we anticipate making our annual cash flow suite payment in April which we expect to be approximately $50 million. Our interest coverage ratio was 3.1x as of December 31. Consolidated cash was approximately $138 million. As I touched upon earlier, we were in the market two weeks ago to reprice our $1.6 billion term loan. We were successfully able to reduce our interest rate by 75 basis points which will contribute nearly $12 million in annual interest expense savings.

Now for our conclusion.

During 2013 we accomplished all of our goals that were outlined last March. Those goals included to drive additional operating performance from our core properties, successfully open the Graton Resort and Casino on time and on budget, make further progress on our North Fork project, launch our real-money online poker offerings in the state of Nevada and exploit additional opportunities in that marketplace, and lastly, further delever our balance sheet through increases in free cash flow. For 2014, our primary goals remain consistent with those of 2013. We plan to continue to focus on driving revenue and increasing margins at our core Las Vegas properties. We will continue to grow both revenues and margins at Graton, we will work to optimize the performance of Ultimate Gaming, and finally, we remain focused on deleveraging our balance sheet even further.

Operator, this concludes our prepared remarks for today. We are now ready to take questions from the participants on the call.

Operator: Thank you. If you do have a question at this time, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in question queue. You may press *2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions.

Our first question comes from James Keeler from Bank of America.

James Keeler: Hey guys, how are you doing?

Marc Falcone: Hey James, how are you?

James Keeler: Good. I guess just starting with the locals market and the current environment. Your commentary sounded slightly more positive than it’s been, which is good to hear. Can you maybe give us some color on the gaming side, on the top line, what you’re seeing with visitation and spend per visit? Are you starting to see any of the broader improvements in the economy starting to show up on the casino floor?

Marc Falcone: James, I would say that we really have not seen any material improvement from what we have experienced the last couple of quarters. It’s still a flat revenue environment overall. We’re still seeing good increases in visitation, but we’re not seeing the spend per visitation we would like given the broader improvements in the overall economy.

James Keeler: With that said, obviously you’re still driving EBITDA growth. Where you stand now, is there more you think you can do on the cost side, or have you done everything you think you can do?

Marc Falcone: I think there are always opportunities to run the business better everyday. We’re constantly working hard to find those opportunities and we would expect that we’ll continue to focus on the expense side of the business in anticipation of getting some revenue improvement in this market. The key here is the operating leverage that this business model currently has in place. We think our cost structure is obviously – we worked very hard the last couple of years to get it where it is. As I said, there is always opportunity to continue to improve cost. But with a little bit of revenue growth, you can see already the operating leverage we had, specifically in the fourth quarter, I would say flattish revenues to an 11% EBITDA growth on a same-store basis. That’s inherent of what could potentially be with 2%, 3%, 4% revenue growth as the significant operating leverage for this business to achieve when we do get some revenue recovery here in the marketplace.

James Keeler: Very good. How about on the promotional side? Just from looking at your results and Boyd’s results, you look at the two in combination, it seems like the promotional environment is relatively benign. I know even a normal promotional market is pretty promotional, but what are the trends there?

Marc Falcone: I would say that the promotional environment has been fairly stable over the last couple of quarters, There are periods of time and certain operators where we do experience some irrational promotional activity, but for the most part it’s been pretty stable the last couple of quarters across the market segment.

James Keeler: That’s helpful. Just switching gears to Graton. I’m guessing you don’t want to give a lot of guidance, but maybe we could just go over some numbers and you can tell me if my math is right. If you guys did $6.5 million of management fees in 57 days, that implies just over $40 million of annualized management fees, which is $260-ish million of EBITDAM? Is that math right?

Marc Falcone: I think your math is right on the what the annualized management fees would imply based on the first 57 days. At this point we’re not going to comment on the EBITDA ranges or performance of Graton. Graton will report it’s full-year results in a couple of weeks. I think we’ll at that time take the opportunity probably to answer more questions more specifically about Graton’s EBITDA and what that implies for management fees and other things that will be important to that particular credit.

James Keeler: Okay. Understood. On the capital spending side, and forgive me if I missed it, can you just talk about the spending at Red Rock, and then any other [xx] [18:05] by just going up a little bit over where those increases – Where is the capital being outdated this year at Station?

Marc Falcone: We did give-or-take $80 million of capital last year. Excluding the improvements that we’re going to put into Red Rock, that’s probably the ongoing capital budget that you should anticipate. In the $80 – $85 million range is what we think is the best range for maintenance capital. We’ll be putting out a press release in the next couple of weeks that will detail what we’re going to be doing at Red Rock and what are some of the new amenities and restaurants and other things that we’ll be doing at the property. You’ll be able to see that the difference basically between the two, our current maintenance capital and what we’re projecting for capital, the majority of that difference is going to come with the investment at Red Rock.

James Keeler: Very good. I appreciate the update on the cash flow sweep on the loan. By my calculation, you would still have additional free cash flow beyond that. Any color on what the plans might be for excess free cash flow that the company generates in 2014?

Marc Falcone: Right now, like I said, the primary focus is still to pay down the debt and deleverage the company further. By any stretch of the matter in the gaming business, it’s been an outstanding deleveraging story in gaming overall. That’s the continued focus for excess cash flow right now.

James Keeler: Great. Thanks.

Operator: Thank you. Our next question comes from Thomas Allen from Morgan Stanley.

Thomas Allen:Hey guys. On the online gaming front, Delaware and Nevada obviously signed a compact for interstate play. A.) What are the chances that that actually happens? B.) How do you think that could impact the market?

Marc Falcone: Hey Thomas, how are you doing? We think the Delaware – Nevada compact is particularly important for setting a precedent in how these agreements will look and the benefits that can be achieved across multiple states, or in this case, Delaware and Nevada. I think the fact of the matter is that Nevada’s a small market, Delaware’s a small market: you add one plus one, you’re going to get a small market. On the margin we think it’ll be helpful, but I don’t think it’ll change things too much at least with Nevada and Delaware pooling liquidity. More substantial opportunity, for example, would be pooling the liquidity across Nevada and New Jersey state lines at this point.

Nonetheless, the fact that we did get a compact agreed upon is encouraging news for the industry overall.

Thomas Allen: Okay. On your on-ground business. I just noticed that your promotional allowances as a percentage of revenue have been down every quarter year-over-year for the past five quarters, and was down about half a percentage point in 2013. Is that just from the more benign marketing environment, or are there other things at play there? How much lower do you think that could go?

Marc Falcone: I just think we’ve gotten smarter as a company and we’ve gotten smarter as an industry on the promotional activity that exists. We’ve been very diligent on maximizing our marketing dollars to getting the response out of our customers. From that standpoint, we’ve been diligent and disciplined, and it’s something we look at every day. That should continue going forward. What you’re seeing is the representation of what I think the market is looking at.

Thomas Allen:So you think there’s room for that to continue to go down for years to come?

Marc Falcone: It can’t go down forever. I think it’s more balanced than it has been. We’re measuring the effectiveness of our marketing dollars, and you’re seeing that through the reduction in the promotional allowance.

Thomas Allen: Okay. Thank you very much.

Marc Falcone: Okay. Thank you.

Operator: Thank you. Our next question comes from Susan Berliner from J.P. Morgan.

Susan Berliner: Hi, good afternoon. Can we start with Graton? A couple of questions on Graton with regards to what do they still owe you, and can we expect that in 2014?

Marc Falcone: I’m going to let Tom Friel answer that question.

Tom Friel: Hey, Sue. Of the receivable that Station has with the tribe, approximately $17 million of it got paid right after the turn of the calendar into January, so the total receivable that’s left is approximately $46 million. As we have stated previously, we would anticipate through a couple of different means that that would be paid back to Station at some point during 2014.

Susan Berliner: Okay. Can you talk about where the people are coming from? Is it the general vicinity you expected? How much more can you penetrate in that whole area?

Tom Friel: The people are coming from where we thought they would come from, which is throughout that whole area. Obviously, the people that are closer to the facility come more often than the

people that are a little further away, but it’s really as we would anticipate. In terms of how much more can we get, there are 6.7 million people that live within two hours of that place. As we continue to grow the database and as we continue to have time to market to those people, we anticipate that we will reach many of them. From our perspective we’re just beginning to reach into a lot of those people.

Marc Falcone: Susan, we’re just scratching the surface right now. You got to understand the property’s operating for roughly 90 days and we’re just starting to really dig in on our marketing initiatives and understand more about our customers. I think we see a significant amount of upside as this property continues to grow and as we penetrate deeper into the broader San Francisco marketplace.

Susan Berliner:Gotcha. Any update on North Fork?

Marc Falcone: There’s nothing new to report on North Fork. As you’re aware, there was a signature referendum that was successful. There will be a ballot initiative to overturn the approval of the compact this November. At this point, we’re evaluating our legal position with respect to our next steps with North Fork.

Susan Berliner: Okay. Two other questions from me. What’s included in management fees? Is that development fee included in that $27.5 million?

Marc Falcone: On the income statement? Yes, it is.

Susan Berliner: Okay. You’ve obviously accomplished a lot. Graton’s open now. I know you’ve been working a lot on online. What other growth potential opportunities are out there?

Marc Falcone: We’re always looking at different opportunities, whether it be here in the locals market or in other jurisdictions. The fact of the matter is that this Las Vegas locals market is one of the best gaming markets in the country. In terms of evaluating growth opportunities, we see plenty of opportunities right here in Las Vegas, particularly given the stable environment that it is relative to other regional markets. But if we find something compelling, as we look at different opportunities all the time, then we’ll take a look if it makes financial sense to us.

Susan Berliner:Gotcha. Thank you so much. Marc Falcone: Thank you, Susan.

Operator: Thank you. Our next question comes from John Maxwell from Jefferies.

John Maxwell: Good afternoon, guys. Tom, on the advances left from Graton, does that turn cash pay now? Obviously, it’s not going to be much, but you’re getting paid a pretty good rate. I didn’t know if it was still picking or not.

Tom Friel: It will turn into cash pay after we reported the first quarter for Graton. Once we report the first quarter of Graton, which will be in May, it will trip into cash pay.

John Maxwell: Okay. As you said, you can get paid back the balance of it from excess cash flow at Graton. Is that how that gets repaid?

Tom Friel: It’s some combination of either excess cash flow, or there’s still approximately $48 million that’s left in the interest reserve at Graton. The interest payments that’s we’ve made at Graton post-opening we’ve made from operating cash, although when the interest reserve got funded it funded 20 months’ worth of interest. We constructed the building in 15 months. Some of it had to do with timing as well, but as a result of that there’s about $48 million that’s left in the interest reserve that ultimately can be used to repay the Station debt. There’s just a bunch of hurdles and time frames that we have to get through in the credit agreement to ultimately get there.

John Maxwell: Perfect. Marc, on North Fork, did you say you have to wait until the vote in November? Or is that something that’s happening, but you’re not sure whether that really matters or not?

Marc Falcone: We certainly think it matters. We’re evaluating different courses of action to take prior to and after the referendum at this point. I think the referendum’s going to take place. We have not stated any public position or view on the referendum and we don’t intend to right now.

John Maxwell:Perfect. That’s all I had. Congrats, guys.

Marc Falcone: Thanks, John.

Operator: Thank you. Once again, if you do have a question please press *1 at this time. Our next question comes from Kevin Kline from Goldman Sachs.

Kevin Kline: Hi. Good afternoon. Thanks for taking the questions.

Marc Falcone: Sure, Kevin. How are you?

Kevin Kline: Good. How are you? A question as far as operating performance, whether we look at Henderson or North Las Vegas. Could you give us any general sense – has any region of Las Vegas seen better performance, or has it just been broad based strength?

Marc Falcone: I’d say it’s largely broad based strength across all of the Las Vegas Valley, and that’s how we run our business.

Kevin Kline: Okay. All my other questions have been asked and answered. Thanks.

Marc Falcone: Thanks, Kevin.

Operator: Thank you. Our computer has no further questions. I’d like to turn the call back over to our speakers for closing comments.

Marc Falcone: Thank you, everyone. We’ll look forward to speaking with you after our first quarter results.

Operator: Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

Photo: Jeffrey J Coleman /

Station Casinos: 4 Forces are Impeding the Growth of Online Gambling In New Jersey
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Chris Grove
Chris Grove - Chris is the publisher of Grove also serves as a consultant to various stakeholders in the regulated market for online gambling in the United States.