Station Casinos’ iGaming Take: Bullish on Sports, Social; Bearish on Poker, Casino

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Ultimate Poker co-owner Station Casinos held its 3Q14 earnings call this week. And, judging from what little executives had to say about their online business, the outlook for Ultimate’s future has failed to improve.

Full transcript of the call follows below (audio available here).

But first, a quick rundown of the salient points from the call for those following the iGaming side of Station.

iGaming points of note from the 3Q14 Stations call

  • Station CFO Marc Falcone spent only a few seconds discussing the closure of Ultimate in NJ, referring to the regulated online gambling market as a “considerable disappointment.”
  • Falcone’s sole comment on Ultimate’s Nevada online poker site will sound to some quite similar to a death warrant: “We continue to operate in Nevada and we’ll carefully observe the viability of the business in Nevada. We’ve made some obviously appropriate cost reductions in the platform and we’re going to continue to look at how the Nevada market operates.”
  • But Falcone’s tone was markedly brighter when discussing the company’s mobile sports betting product in Nevada, where Falcone said is ” very encouraged by the number of signups and the growth we have in that area. We have seen very positive results continue into this years, and we would expect further growth as we add more functionality to both to the mobile device as well as to other areas within our sports business overall.”
  • In terms of Station’s recent deal with myVEGAS, Falcone said it was “fairly early” but that Station has “gotten a very favorable response from their customers as well as our customers. That’s a relationship that we will continue to expand. We’re very encouraged, as I said, by the initial results we’ve seen with that relationship.”

Transcript of Station Casinos Q3 Call – November 12, 2014

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Station Casinos November 12, 2014 – 1: 30 PM Eastern Third Quarter 2014 Earnings Call [25: 39]

Opening remarks

Operator:   Greetings and welcome to the Station Casinos Third Quarter 2014 Earning 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. As a reminder, this conference is being recorded. I would now turn the conference over to Mr. Marc Falcone, Executive Vice President and Chief Financial Officer for Station Casinos. Thank you Mr. Falcone, you may now begin.

Marc Falcone:   Thank you, Manny. Good morning everyone, and welcome to Station Casinos Third Quarter 2014 Earnings Conference 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 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 will also discuss non-gap financial measures. For definitions and a complete reconciliation of these figures to gap, please refer to the financial tables in our earnings press release and Form 8-K which were filed this morning prior to the call. Also, please note that this call is being recorded.

We were quite pleased with our third quarter operating performance despite the continued disappointment in the overall gaming revenue environment in Las Vegas, as year-to-date gaming revenues for the market are down approximately 1%. Our operations team continues to execute on all aspects of the business, allowing us to report our fourteenth consecutive quarter of year-over-year EBITDAM growth.

Overall, net revenues for the quarter were $311 million, an increase of 2.1% compared to the prior year period, while our same-store Las Vegas revenues increased 0.4% to $293 million despite a soft gaming environment and numerous restaurant closures related to our capital improvement plan. In fact, we experienced modest revenue growth across all major operating departments at our Las Vegas property.

In our view, the residents of Las Vegas have experienced very minimal growth in their discretionary income over the past few years, as wage growth has not kept up with the cost of living increases for necessities such as taxes, food, rent, household utilities, and medical care. At this point, it is difficult to pinpoint when the residents of Las Vegas will start to see an upgrowth in their discretionary income to step up their gaming budget.

EBITDAM for the quarter increased 11.6% to $90 million. Boosted by a mix of improvement in our Las Vegas portfolio, which grew same-store EBITDAM 4.5% to $81 million and the addition of the Graton Resort and Casino management fees. In our view, the continued growth in EBITDAM over the past fourteen quarters is quite an accomplishment, given that gaming revenues for the select sub-markets in Las Vegas have only increased 2% over that same time period. For comparison purposes, we at Station Casinos have increased same-store gaming revenues 7.5% over that same time frame while same-store EBITDAM has increased 23% over that period. Our total operating margin for the third quarter improved 245 basis points to 28.8%, while our same-store Las Vegas margins improved 110 basis points to 27.8%. Over the past fourteen quarters, operating margins in Las Vegas have increased 330 basis points.

We continue to make progress on our announced capital renovation improvement projects. At Red Rock on October 29 we opened our new Restaurant Row and Hearthstone Kitchen and Cellar restaurants. As a reminder, earlier this year we completed the renovation of T-Bone’s Chop House and opened the Mercadito Mexican Restaurant. With the completion of Hearthstone Kitchen and Cellar we have opened a significant portion of Restaurant Row which links five of our premier restaurants by a pedestrian walkway to create connectivity for guests to walk along.

Early next year Red Rock’s newly renovated Italian concept will join Mercadito Mexican Restaurant, Hearthstone Kitchen and Cellar, Lucile’s Smokehouse and Yardhouse to complete Restaurant Row. The new mall connector and addition parking were completed prior to the October 9 grand opening of the Mall at Downtown Summerlin, and we are also planning on opening our new Asian noodle bar concept in December. The balance of Red Rock’s capital projects should be completed in the first half of 2015. At Green Valley Ranch, the four new food offerings and bar concepts along with the renovated guest rooms, suites, spa, and banquet space, are all expected to be complete during the first half of 2015.

The climb of the Las Vegas economy continues to slowly improve. The Las Vegas strip continues to see improvements in visitation, hotel rates, food and beverage sales, and retail sales; however, domestic gaming revenues remain relatively flat. In the local economy, employment has grown at a steady pace of approximately 3% a year, and September employment is up to 879,000 jobs, a 10% increase from the trough of 800,000 jobs. The median existing home price is up 10.9% September year-to-date, and up 77% from the trough. Taxable sales are also steadily improving with a 9.6% increase year-to-date. We believe all of these indicators reflect stabilization of the Las Vegas economy and a foundation for future growth. However, we have not seen these economic improvements translate into additional gaming dollars from the local consumers at this point.

In our Native American division, our third quarter management fees from our two Native American-managed properties generated $10.7 million in revenue, an increase of $6.7 million, primarily driven by the addition of management fees from Graton Resort and Casino.

The Gun Lake Casino again performed well for the quarter, and our management fees from this property were up for the quarter and year-to-date compared to the same periods of last year.

I also want to provide a brief update on our North Fork project. As most of you know, Proposition 48 was defeated in last week’s state-wide election. Proposition 48 was placed on the ballot by a referendum paid for by competing tribes and their financial supporters to overturn the legislation approving the North Fork Compact. What that means is that for purposes of California law, the compact may not be valid. However, we and the tribe will continue to pursue other methods of obtaining a compact and the right to operate Class III gaming on a tribed land.

We’ll touch on our online business real briefly. As many of you are aware, Fertitta Interactive’s New Jersey online partner Trump Taj Mahal Associates filed for Chapter 11 Bankruptcy protection. Trump Taj Mahal breached their agreement with Fertitta Interactive, and as a result the agreement was terminated, and we withdrew from the New Jersey market in September. Needless to say, the online gaming market has been a considerable disappointment.

To cover some balance sheet and housekeeping items, capital expenditures in the quarter were $29 million for a year-to-date spend of $72 million. We estimate total capital and improvements of approximately $110 – $120 million for 2014, which includes our pro rata percentage of Fertitta Interactive. Our outstanding principal balance of long-term debt as of September 30 was $2.1 billion on a consolidated basis, which excludes the $113 million non-recourse land loan. As of September 30, our consolidated leverage net of excess cash was 5x including the pro forma impact of Graton Resort and Casino and excluding the non-recourse land loan. Interest coverage was a very strong 3.3x and year-to-date we have paid down $65 million of debt.

In conclusion, we remain focused on driving revenue. The lack of growth in discretionary income for our guests has made gaming revenue growth challenging. However, we continue to be optimistic that the steady progression in the Las Vegas key economic indicators will lead employers to feel more comfortable adding jobs and workers, and providing pay increases, which in turn should trickle down to discretionary income to their employees, who at the end of the day are Station Casinos’ guests. As the announced major projects on the Las Vegas strip begin construction and open, we expect additional jobs to be created which will provide more income into the economy. In addition, we continue to invest capital into our food and beverage offerings, hotels, and other non-gaming amenities as well as technology to help new guests and increased repeat visitation. Our relentless dedication to generating operating efficiencies is driven deeply into our company culture, and this success is reflected in our margins where we have experienced many consecutive quarters of year-over-year margin improvement and a considerable positive spread over our competitors in the market.

Operator, this concludes our prepared remarks and we’ll take questions from the participants on the call.

Question and answer

Operator:   Thank you. Ladies and Gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *2 if you’d 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 * keys.

Our first question is from James Keeler of Bank of America. Please go ahead.

James Keeler:   Hey Marc and Tom, how are you doing?

Marc Falcone:   Good morning, James.

Tom Friel:   Morning.

James Keeler:   I guess just to start off with, you gave some good commentary about what’s going on in the market and the economy, but have you seen any signs that the consumer is improving? Or is it just more of the same? I guess the follow on to that would be, what’s going on on the competitive side? Is the market pretty rational and just accepting the fact that there’s no really top line growth to be had?

Marc Falcone:   Yes. Let me direct the second question first on the promotional environment. We would characterize that environment as moderately elevated, and that’s pretty much how we would characterize the behavior of the overall landscape. That hasn’t really changed materially over the past quarter or two. With respect to the behavioral trends of our customers, we’re starting to see a slight improvement in their spending habits. Overall, the visitation to the properties across the portfolio is up. Spending is down, but we’re starting to hopefully see a smidgen of improvement with their spending behaviors.

James Keeler:   Is that the trend in visitation and spend? Have they been pretty consistent throughout the first nine months of the year? It sounds like you’ve maybe seen a slight improvement more recently.

Marc Falcone:   Yes, I would say that’s a fair characterization. We have seen little bit of improvement as we move through the year.

James Keeler:   Okay. That’s helpful. In terms of the capital that you guys are deploying in food and beverage of other amenities, I know it’s pretty early, but what kind of response are you seeing as you’re bringing on more amenities? Is it drawing in new guests or guests that haven’t been at the properties for some time?

Marc Falcone:   Yes. I would say we are very pleased. So far we’re very pleased with what we’ve seen in terms of response to upgraded food and beverage amenities for example. Both Mercadito Mexican Restaurant as well as the new Hearthstone which has only been open a couple weeks, we’ve seen very strong cover counts, very strong revenue production. We have also seen I would say a bit of a younger clientele coming to these restaurants. The benefit of that is we’re seeing some of that flow through to broadly across the casino floor in both slots and tables, but no doubt we’re very exciting and looking forward to finishing out the balance of these [?] [12:  42] projects to get the full benefit from that capital.

James Keeler:   All right. Switching gears to Graton. I know you guys will do a separate call on Graton, but I’m still trying to figure out the seasonality of Graton. Can you just give us a sense for how the property performs I guess versus recent performance and also what is your expectations?

Tom Friel:   Yes, James. We’re going to hold off on any specific comments related to Graton or seasonality until their conference call tomorrow morning which is at 9 a.m. Pacific Time.

James Keeler:   So there you go. I want to make sure —

Marc Falcone:   Tom and I will be able to address that more tomorrow.

James Keeler:   Okay. I’ll be there.

Marc Falcone:   All right.

James Keeler:   Just one last question. Obviously once these capital projects are done, and the business throws off quite a bit of free cash flow already and then will flow even more; can you just talk about priorities about use of free cash flow over the next year or two years?

Marc Falcone:   Yes. Like we’ve been doing, it’s a balance of amortization on the term loan. You know we have a 50% ECF payment which is in some forced amortization there. I think still we’ll be selective in deploying capital across other areas in the company, in other properties in the company, and then the balance will be reflected in probably a disciplined distribution to the equity holders.

James Keeler:   Very good. Thank you.

Marc Falcone:   Okay.

Operator:   Thank you. The next question is from Susan Berliner of J.P. Morgan. Please go ahead.

Susan Berliner:  Great, thank you. Hi, Marc.

Marc Falcone:   Hi, Sue. How are you?

Susan Berliner:  I’m good. I guess I just wanted to start with, I know use of the promotion environment was a little bit more active. Were you seeing any impact from SLS [?] [14:  42] opening?

Marc Falcone:   No. At this point we’ve been watching carefully the SLS property and their marketing activities, but I would say we’ve not felt any impact from their opening yet.

Susan Berliner:  I know you’re not going to give specific October – any commentary on traffic with the mall opening? Did you see a notable pickup from that?

Marc Falcone:   With respect to the mall, I think it’s a little early for us to be able to tell. Just so you have a reference point, only about 50% of the stores and restaurants over there are actually open, and they’re going to be staged opening from now until probably the end of the first quarter, early second quarter. Given it’s only been a couple weeks, it’s premature for us to have any observations that would shift our view of the impact on the mall.

Susan Berliner:  Okay. Just switching to North Fork, what are the next steps that you guys could do?

Marc Falcone:   Yes. I’m going to stick to the formal comments with respect to North Fork. We have a strategy I think we’re not quite able to disclose or complete, so I just want to keep to the prepared remarks with respects to our next steps with North Fork.

Susan Berliner:  Okay. Then can you talk about the strategy with online now, with what’s gone on in New Jersey?

Marc Falcone:   Yes. As you know, New Jersey’s now closed. We continue to operate in Nevada and we’ll carefully observe the viability of the business in Nevada. We’ve made some obviously appropriate cost reductions in the platform and we’re going to continue to look at how the Nevada market operates.

Susan Berliner:  Great. Lastly, with your leverage coming down a lot and more debt repayment, how should we think about what you guys think about in terms of potential acquisition, property acquisitions, or what other growth opportunities are there out there?

Marc Falcone:   Yes. If there are appropriate opportunities that fit strategically within our future approach, then we’ll obviously evaluate those. The benefit we have is not being compelled or forced to be irrational in pursuing growth or overpaying for assets or the like, so we’ll be very careful in evaluating those positions. I think we work very hard to position our balance sheet and have a balance sheet that provides us the flexibility to pursue those opportunities, but it’s going to be on a disciplined approach.

Susan Berliner:  Great. Thanks very much.

Operator:   Thank you. As a reminder Ladies and Gentlemen, it is *1 if you’d like to ask a question. The next question is from Adam Krejcik of Eilers Research. Please go ahead.

Adam Krejcik:  Hi guys, thanks for taking the question. On your mobile wagering sports connection, I just wondered if you could provide maybe an update on that business, what kind of pickup you’re seeing? Some of your peers in the market are doing quite a bit of handle now through mobile. I was wondering if there was any stats you could share on that business?

Then separately, you guys cut a partnership with Play Studios recently for social. I was wondering – I know it’s early, but if you’re seeing any kind of pickup benefit from that, what kind of potential uptake in foot traffic you might be seeing from that channel? Thanks a lot.

Marc Falcone:   Yes. Sure. On the sports side of the business. I’m not going to give you any specific statistics, but we continue to be very encouraged by the number of signups and the growth we have in that area. We have seen very positive results continue into this years, and we would expect further growth as we add more functionality to both to the mobile device as well as to other areas within our sports business overall. We think that’s a really good encouraging trend for the market overall. One area in gaming here in Las Vegas where we continue to see growth market wide is in the sports area.

With respect to the myVEGAS Play Studio deal, like you said, it is fairly early. We have gotten a very favorable response from their customers as well as our customers. That’s a relationship that we will continue to expand. We’re very encouraged, as I said, by the initial results we’ve seen with that relationship.

Adam Krejcik:  Got it. Very helpful. Thank you.

Operator:   Thank you. The next question is from David Hargreaves of Sterne Agee. Please go ahead.

David Hargreaves:  Hi. I might have missed it, but I don’t recall you guys mentioning the possibility or expectation of distributions previously. I’m just wondering should we take that to mean that you’re reaching a comfort level with the consolidated leverage that you have now?

Marc Falcone:   Yes. David, we are permitted under our credit facility to have certain levels of distribution. We’ve been on a quarterly basis doing this now for several quarters. I think it’s fair to say we are more comfortable with the leverage profile of the business, and we continue to see further deleveraging coming in the next several years. We will evaluate obviously the right balance between distributions and debt payment.

David Hargreaves:  Okay. With respect to the new restaurants, you mentioned a younger crowd coming in. I’m just wondering if there might be any broader trends, millennials versus other clientele that are worth calling out, if you’re seeing –

Marc Falcone:   I think it’s been well balanced from millennials all the way up to baby boomers in terms of the visitation patterns and the demographics of the new restaurant openings.

David Hargreaves:  What about in terms of their casino spend?

Marc Falcone:   Listen, again it’s a little bit early to be able to give you a more definitive response on that. The reality of it is we opened Mercadito in the middle of the summer, and we just opened Hearthstone two weeks ago, so we haven’t seen enough activity from those openings to really conclude the type of spend they’re contributing on the gaming floor. We have seen increased visitations to the gaming floor. We’re seeing periods of increased activity on the gaming floor, but it’s tough for us to evaluate which particular demographic is actually driving that trend.

David Hargreaves:  Okay. When we think about the metrics that have been proved a lot in the last couple years and what we’ve seen in terms of gaming revenue, has there been a change in route operations that have maybe been hampering the growth a little bit on the gaming revenue side or is there anything worth calling out that we might be missing in the neighborhoods?

Marc Falcone:   I don’t think there’s anything changed on routes, and I don’t think there’s anything that’s really changed in neighborhoods. I think economically the Las Vegas marketplace has been under a lot of pressure, as you know, from 2008 and clearly we’re seeing ongoing improvements across the board; but when you’re in a market where there’s been very little wage increases compounded by significant increases in these necessity costs that we discussed, that’s where you’re seeing pressure on the consumer and their spending behaviors. The local market here in Las Vegas is still the best performing market, or Las Vegas in general is one of the best performing markets in the country, particularly when compared against the regional market.

David Hargreaves:  For sure. Now when I think about the construction projects which are reviving and pretty substantial, I’m wondering if what I’m hearing from you is just a certain amount of conservatism or maybe I’m getting a little too excited about the impact that we’d expect from the construction being resumed, again [?] [23:  27] the arenas that are getting built?

Marc Falcone:   We think all of the construction activity should be a continued positive. I mean, we’re getting very close to I think the peak jobs in the market where 900,000 – we’re getting close to that number. We should exceed that number with these additional construction projects. We do definitely see lots of upside in the business both from spending and other areas of growth relative to the 2007 peak. Like we said, we’re cautiously optimistic about the future. We’d like to see improved spending on the gaming side, but all the indicators would suggest that’s still on the come for us.

David Hargreaves:  Right on. Thanks, man.

Marc Falcone:   Okay.

Operator:   Thank you. The next question is from John Maxwell with Jefferies. Please go ahead.

John Maxwell:  Hey, Marc. Just quickly, Caesar’s talked on their call about The LINQ assets and that they’re going after more of the local customers as well. Are you seeing any of that at this point?

Marc Falcone:   I can’t – I mean, that’s a weird topic question, but I don’t think we’ve seen any impact. Obviously The LINQ is going to have their opportunity to attract people that live here to go see it and go down and visit The LINQ, but we haven’t seen it impact our business.

John Maxwell:  Okay. So all the money that Station advanced to Graton has been repaid to date?

Marc Falcone:   That’s correct.

John Maxwell:  How much was the distribution in the quarter?

Marc Falcone:   Let me call you back offline, John. I don’t have that in front of me.

John Maxwell:  Sure. That’s it. Everything else was asked and answered. Congrats for another good quarter.

Marc Falcone:   Thanks very much, John.

Operator:   Thank you. I will now return the conference over to management for any additional or closing remarks.

Marc Falcone:   That’s it. I hope everyone has a good holiday season. We’ll talk to you in 2015.

End of Audio [25:  39]

- 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.
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