Great Canadian Gaming Corporation
TSX : GCD

Great Canadian Gaming Corporation

August 14, 2006 16:16 ET

Great Canadian Reports Second Quarter 2006 Results: Continued EBITDA Improvement and Expense Reductions

RICHMOND, BRITISH COLUMBIA--(CCNMatthews - Aug. 14, 2006) - Great Canadian Gaming Corporation (TSX:GCD) (the "Company") announces its financial results for the three month period ended June 30, 2006.

SECOND QUARTER 2006 HIGHLIGHTS

- Revenues increase 35% year-over-year to $91.0 million;

- EBITDA(i) rises to $19.6 million;

- Net income of $6.6 million and fully diluted earnings per common share of $0.08 inclusive of $1.0 million, or $0.01 per diluted share, restructuring charge; and,

- Expense reduction initiatives implemented, expected to result in approximately $1.5 million of further savings in the 2006 third quarter when compared to the second quarter.



(in thousands, except per share data)
Three Months Ended
--------------------------------
June 30, March 31, June 30,
2006 2006 2005
--------------------------------
Revenues $ 91,001 $ 86,631 $ 67,513
EBITDA(i) $ 19,593 $ 17,123 $ 19,427
Net income $ 6,644 $ 1,436 $ 10,459
Earnings per common
share:
Basic $ 0.08 $ 0.02 $ 0.14
Diluted $ 0.08 $ 0.02 $ 0.14

(i) EBITDA is a non-generally accepted accounting principle measure.
See definition in the Disclaimer.


"Great Canadian's second quarter revenue growth and quarterly EBITDA increase reflect year-over-year gains at several properties, contributions from acquired properties, and a quarterly sequential improvement in operating margins," stated Ross J. McLeod, Chairman and CEO. "In addition, expense reduction initiatives have now begun in earnest. Growing revenues while reducing operating costs will support our primary near-term goal of improving operating margins across our entire portfolio of geographically diverse properties.

"Over the past several months, Great Canadian has implemented a range of preliminary expense reduction initiatives. In early July, the level of our headcount and spending reductions increased. The benefit of these most recent initiatives will be initially realized in the third quarter. Our primary focus to date has been on the creation of site level efficiencies, non-essential headcount reductions, and cutbacks in our marketing expenditures and corporate costs. The expense reductions effected thus far are expected to generate approximately $1.5 million in savings for the third quarter. These reductions will meaningfully improve operating margins, and represent a permanent change in our quarterly expense structure. While these initial savings are significant and will be reflected in our upcoming operating results, we continue to review opportunities to realize further cost savings."

Cost Reductions and Efficiency Improvements

In addition to initiatives implemented in the second quarter of 2006, the Company further implemented cost reduction and efficiency improvement initiatives subsequent to the quarter end. The goal of these initiatives is the improvement of both operating costs and EBITDA margins. These initiatives included headcount reductions, contract rationalization, and business process re-engineering. Management believes cost reductions and efficiency improvements implemented to date will result in approximately $1.5 million in savings in the third quarter of 2006 compared to the second quarter of 2006. The Company believes there are further opportunities to reduce non-essential costs at both the corporate and site levels. However, the full benefit of these initiatives will be realized over time and may require additional operating and capital expenditures in the short term in order to realize savings in the long term.

As a result of the ongoing expense reduction initiatives, the Company recorded a restructuring charge of $1.0 million, or $0.01 per diluted share, during the second quarter of 2006 for severance, stock based compensation and other obligations associated with departed employees. Great Canadian anticipates recording additional restructuring charges in the coming quarters related to the implementation of further cost reduction initiatives.

Revenues in the 2006 second quarter improved 35% year-over-year to $91.0 million and rose 5% on a quarterly sequential basis. The increase in revenues in the second quarter of 2006 compared to the prior year period is primarily due to revenue contributions from four properties that the Company acquired subsequent to Q2 2005, and the completion of expansion projects at three properties in the second half of 2005. The quarterly sequential increase in revenues can be attributed to increases of $1.9 million in gaming revenues, $1.7 million in racetrack revenues, $0.6 million in non-gaming revenues, and a reduction of $0.1 million in promotional allowances.

The quarterly sequential increase in gaming revenues resulted primarily from growth at River Rock Casino Resort (+3.6%), Casino Nova Scotia (+10.6%), Flamboro Downs (+16.3%) and the Washington State properties (+7.3%). These increases offset a downturn at the Boulevard Casino (-9.9%), which historically faces reduced demand during the late spring and summer. The Boulevard Casino's revenue decline can also be attributed to its low hold percentage during the quarter, and normalized customer activity following the period of additional demand that typically surrounds new property openings.

The quarterly sequential increase in racetrack revenues resulted primarily from the commencement of the live racing season at Hastings Racecourse and the opening of a new TBC simulcast location at River Rock Casino Resort. The quarterly sequential increase in non-gaming revenues is primarily due to higher hotel revenues at the River Rock property and an increase in food and beverage sales at Hastings Racecourse.

EBITDA for the second quarter of 2006 rose to $19.6 million, a 1% and 14% increase compared with EBITDA in the second quarter of 2005 and first quarter of 2006, respectively. The 22% EBITDA margin (EBITDA divided by revenues) in the second quarter of 2006 compared with the 29% EBITDA margin recorded in the same period last year reflects lower margins associated with businesses acquired or expanded subsequent to the end of the second quarter of 2005, and higher corporate costs.

As a result of the Company's progress in managing expenses and the 5% quarterly sequential revenue improvement, the second quarter 2006 EBITDA margin of 22% rose over the 2006 first quarter level of 20%. Human resource costs in the second quarter of 2006 increased $0.8 million from the first quarter of 2006, and represented 49% of revenues compared with 50% of revenues in the first quarter of 2006. The increase in human resource costs was due primarily to seasonal increases in staffing at some of our properties offset in part by a decrease in payroll related accruals. For the six months ended June 30, 2006, human resource costs increased by $30.4 million to $87.9 million, compared to the same period in 2005. This increase is primarily due to the expansions and acquisitions in 2005, which carried higher labour costs relative to revenues when compared to pure casino operations, and an increase in head office staffing to manage the growth.

EBITDA in the second quarter of 2006 also benefited from the Company's focus on improving hospitality margins. Food and beverage EBITDA margins at River Rock and Boulevard improved to 11% in the second quarter of 2006, compared to 9% in the first quarter of 2006. Hotel EBITDA margin improved to 42% in the second quarter of 2006, compared to 36% in the first quarter of 2006.

Marketing and promotion, occupancy cost, operating supplies, and general and administration expenses increased $1.1 million in the second quarter of 2006 compared to the first quarter of 2006. This increase is due primarily to an increase in net amounts spent by the British Columbia Lottery Corporation ("BCLC") from the BCLC Marketing Trust Account and promotional costs associated with the start of the Hastings Racecourse race season. These expenses for the six months ended June 2006 more than doubled compared to the same period in 2005, primarily due to the expansions at existing properties and acquisitions completed in 2005.

Great Canadian generated net income of $6.6 million in the second quarter of 2006 compared to net income of $1.4 million in the first quarter of 2006, and $10.5 million in the second quarter of 2005. Fully diluted earnings per share were $0.08 for the second quarter of 2006 compared to $0.02 in the first quarter of 2006, and $0.14 in the second quarter of 2005.

Amortization expense increased in the second quarter of 2006 and for the six months ended June 30, 2006 compared to the same periods in 2005. The increase can be attributed to additions to property, plant and equipment and intangible assets from acquired businesses and from capital expansion projects in 2005.

Stock-based compensation expense for the second quarter of 2006 increased to $1.5 million or $0.02 per diluted share, reflecting option grants by the Company subsequent to the second quarter of 2005. Stock-based compensation declined on a quarterly sequential basis reflecting the voluntary forfeiture of stock options by several Company executives.

The Company recorded a loss on impairment of investments and long-lived assets of $2.2 million, or $0.02 per diluted share, related to non-cash write-downs of non-core investments and assets.

There was a non-cash foreign exchange loss of $1.9 million, or $0.01 per diluted share, in the second quarter of 2006 due to the transfer of surplus cash from the Company's Washington State operations to the parent company, which triggered partial recognition of the cumulative foreign currency translation amount.

An income tax recovery in the second quarter of 2006 of $1.8 million, or $0.02 per diluted share, reflects a $5.2 million reduction in future income taxes resulting from statutorily enacted reductions in corporate income tax rates.

Total assets decreased to $910.8 million at June 30, 2006 compared to $918.7 million at December 31, 2005. The Company received net proceeds of $79.7 million from a private placement equity issue during the first quarter of 2006 the proceeds of which were used to repay the outstanding balance under the credit facility.

The Company also completed several development projects during the second quarter. On June 1, 2006, the Company re-launched Casino Nova Scotia with upgraded slot technology and significantly improved food, beverage and entertainment facilities. The Company's community gaming centre in Dawson Creek, Chances, opened in early July. The new facility houses 123 slot machines, two electronic blackjack tables, off-track horse wagering terminals, lottery products, a full-service lounge, traditional paper bingo and 60 touch-screen bingo terminals. Construction on Boulevard Casino's show theatre continues according to schedule, and is expected to be substantially completed during the third quarter of 2006.

Mr. McLeod continued, "Great Canadian's commitment to bolster its senior management team is visible in today's appointment of Milton Woensdregt as Chief Financial Officer, subject to regulatory approval. Mr. Woensdregt has a history of success in other highly regulated industries, and both his public company experience and senior leadership will be invaluable assets to our executive team. The hiring process for a new Chief Operating Officer is nearing conclusion. I am currently interviewing from a shortlist of candidates, all of whom possess strong gaming or hospitality industry backgrounds. I am also pleased that our outgoing Chief Financial Officer, Howard Hum, will remain with Great Canadian, and that we will continue to benefit from his expertise.

"We are committed to creating shareholder value by driving further revenue and EBITDA growth across our portfolio of properties through acquisitions of new properties and expansions at existing facilities that would generate improved returns on invested capital. In addition, with a strong and growing revenue base, we are also focused on identifying additional cost reduction and efficiency improvement opportunities which, when combined with similar measures that have already been implemented, can further benefit operating margins."

ABOUT GREAT CANADIAN GAMING CORPORATION

Great Canadian is a multi-jurisdictional gaming and entertainment operator with facilities in British Columbia, Ontario, Nova Scotia and Washington State. Great Canadian operates fourteen casinos, five thoroughbred or standardbred racecourses, a community gaming centre, a hotel, a show theatre, and various food and beverage facilities. Further information is available on the Company's website, www.gcgaming.com.

Please refer to the Interim Consolidated Financial Statements and Management's Discussion and Analysis at www.gcgaming.com (available on August 14, 2006) or www.sedar.com (available on August 15, 2006) for detailed financial information and analysis.

The Company will host a conference call for investors and analysts on Monday, August 14, 2006 at 5:00 PM Eastern Daylight Time, or 2:00 PM Pacific Daylight Time, to review the the financial results for the period ended June 30, 2006. To participate in the conference call, please dial 416-695-5259 or toll free at 1-877-888-4605. Questions will be reserved for institutional investors and analysts.

ON BEHALF OF

GREAT CANADIAN GAMING CORPORATION

Howard S. Hum, CA, Chief Financial Officer



GREAT CANADIAN GAMING CORPORATION
Interim Consolidated Balance Sheets
(Unaudited - Prepared by Management)
(In thousands, except for share and per share information)
--------------------------------------------------------------------
June 30, December 31,
2006 2005
----------------------
ASSETS

CURRENT
Cash and cash equivalents $ 41,751 $ 69,812
Restricted cash 7,474 6,598
Accounts receivable 8,820 13,098
Due from Provincial Gaming Corporations,
current 37,404 35,353
Promissory notes receivable, current 823 1,329
Income taxes receivable 10,115 4,533
Future income taxes 1,180 1,875
Prepaids, deposits and other assets 13,967 7,708
--------------------------------------------------------------------
121,534 140,306
Due from Provincial Gaming Corporations 258,281 253,485
Property, plant and equipment 290,171 283,071
Promissory notes receivable and
other assets 11,534 8,544
Intangible assets 191,935 195,767
Goodwill 37,355 37,497
--------------------------------------------------------------------
$910,810 $918,670
--------------------------------------------------------------------
LIABILITIES

CURRENT
Gaming revenues payable $ 9,011 $ 10,030
Accounts payable and accrued liabilities 58,800 56,854
Income taxes payable 1,804 3,694
Deferred credit and other liabilities,
current 829 -
Long-term debt, current 42,376 3,252
--------------------------------------------------------------------
112,820 73,830
Long-term debt 303,408 438,279
Future income taxes 79,249 82,123
Deferred credit and other liabilities 3,456 5,385
--------------------------------------------------------------------
498,933 599,617
--------------------------------------------------------------------
Non-controlling interests 45 733

SHAREHOLDERS' EQUITY

Share capital and other equity 332,694 247,727
Cumulative foreign currency translation (6,698) (7,163)
Retained earnings 85,836 77,756
--------------------------------------------------------------------
411,832 318,320
--------------------------------------------------------------------
$910,810 $918,670
--------------------------------------------------------------------
--------------------------------------------------------------------

Summary statement - Readers should refer to the complete interim
consolidated financial statements


GREAT CANADIAN GAMING CORPORATION
Interim Consolidated Statements of Income
(Unaudited - Prepared by Management)
(In thousands, except for share and per share information)
---------------------------------------------------------------------
Three months Six months
ended June, ended June,
2006 2005 2006 2005
--------------------------------------------
REVENUES $ 91,001 $ 67,513 $ 177,632 $ 119,659

EXPENSES
Human resources 44,336 32,005 87,907 57,549
General and
administration 8,537 4,854 16,460 7,741
Operating supplies 6,637 4,027 13,083 7,079
Occupancy costs 7,940 4,194 16,642 6,988
Marketing and promotion 3,958 3,006 6,824 4,291
Amortization 6,287 2,136 12,714 3,603
Stock-based compensation 1,499 1,185 3,693 1,906
Restructuring costs 994 - 2,596 -
---------------------------------------------------------------------
80,188 51,407 159,919 89,157
---------------------------------------------------------------------
INCOME FROM OPERATIONS 10,813 16,106 17,713 30,502

Impairment of
investments and
long-lived assets (2,214) (98) (2,286) 39
Interest and financing,
net (4,224) (1,804) (9,561) (2,869)
Accretive income 2,714 1,778 5,366 3,202
Foreign exchange (loss)
gain (1,851) (60) (1,696) 84
---------------------------------------------------------------------
INCOME BEFORE INCOME
TAXES 5,238 15,922 9,536 30,958
Income taxes (1,832) 5,135 746 10,933
---------------------------------------------------------------------
INCOME BEFORE
NON-CONTROLLING INTERESTS 7,070 10,787 8,790 20,025

Non-controlling interests 426 328 710 307
---------------------------------------------------------------------
NET INCOME $ 6,644 $ 10,459 $ 8,080 $ 19,718
---------------------------------------------------------------------
---------------------------------------------------------------------

Certain of the prior period's comparative figures have been
reclassified to conform to the current period's presentation.

Summary statement - Readers should refer to the complete interim
consolidated financial statements


GREAT CANADIAN GAMING CORPORATION
Interim Consolidated Statements of Cash Flows
(Unaudited - Prepared by Management)
(In thousands, except for share and per share information)
---------------------------------------------------------------------
Three months Six months
ended June, ended June,
2006 2005 2006 2005
--------------------------------------------
Cash Flows from Operating
Activities
Net income $ 6,644 $ 10,459 $ 8,080 $ 19,718
Adjustments to
reconcile net
income to net
cash provided by
operating
activities:
Amortization 6,287 2,136 12,714 3,603
Impairment of
investments and
long-lived assets 2,214 98 2,286 (39)
Accretive income (2,714) (1,778) (5,366) (3,202)
Stock-based compensation
and non-cash
restructuring costs 1,997 1,185 4,741 1,906
FDC qualified operating
expenses, net of discount 45 (200) (228) (2,561)
Foreign exchange loss
(gain) 1,851 60 1,696 (84)
Other activities 642 360 959 1,878
Future income taxes 73 (184) (2,068) (184)
Changes in non-cash
operating working
capital (10,645) 4,750 (12,023) (4,315)
---------------------------------------------------------------------
Net cash provided by
operating activities 6,394 16,886 10,791 16,720
---------------------------------------------------------------------

Cash Flows from Financing
Activities
Proceeds from long-term
debt - 162,708 - 176,244
Repayment of long-term
debt (52,564) (178) (95,747) (636)
Deferred financing
costs - (616) (1,350) (616)
Common shares issued
for cash, net of
issuance costs 311 2,013 80,073 65,911
---------------------------------------------------------------------
Net cash (used in)
provided by
financing activities (52,253) 163,927 (17,024) 240,903
---------------------------------------------------------------------
Cash Flows from Investing
Activities
Restricted cash (2,390) (3,509) (876) (4,570)
Investment in and
advances to equity
investees - (221) - (221)
Funds received from
Provincial Gaming
Corporations 9,876 4,301 21,903 8,008
Purchase of
property, plant and
equipment,
net of related
accounts payable (15,046) (46,109) (39,971) (77,219)
Advance on
acquisition of
Georgian Downs - (48,124) - (48,124)
Acquisitions, net of
cash acquired (1,100) (86,220) (1,100) (120,725)
River Rock prepaid
lease - - - (9,262)
Promissory notes and
other assets (1,746) 209 (1,595) (5,556)
---------------------------------------------------------------------
Net cash used in
investing
activities (10,406) (179,673) (21,639) (257,669)
---------------------------------------------------------------------
Effect of foreign
exchange on cash
and cash
equivalents (376) 27 (189) 158
---------------------------------------------------------------------

Net Cash (Outflow)
Inflow (56,641) 1,167 (28,061) 112
Cash and cash
equivalents,
Beginning of the
period 98,392 37,891 69,812 38,946
---------------------------------------------------------------------
Cash and cash
equivalents, End of
the period $ 41,751 $ 39,058 $ 41,751 $ 39,058
---------------------------------------------------------------------

Certain of the prior period's comparative figures have been
reclassified to conform to the current period's presentation.

Summary statement - Readers should refer to the complete interim
consolidated financial statements


DISCLAIMER

This news release contains forward-looking statements which reflect management's current expectations regarding the Company's objectives, plans, goals, strategies, future growth, results of operations, performance and business prospects and opportunities. These forward-looking statements are not guarantees, but only predictions. Although the Company believes that these statements are based on information and assumptions which are current, reasonable and complete, these statements are necessarily subject to a number of factors that could cause actual results to vary significantly from current expectations. Such differences may be caused by factors which include, but are not limited to, ongoing requirements to comply with financial covenants associated with credit facilities, limited terms of operational service agreements with gaming regulators, pending and proposed legislative or regulatory developments, competition from established competitors and new entrants in the gaming business, dependence on key personnel, no assurance that systems, procedures and controls will be adequate to support expanding operations, potential undisclosed liabilities and capital expenditures associated with acquisitions, negative connotations linked to the gaming industry, First Nations claims with respect to public lands on which we conduct our operations, impact of legal proceedings, impact of smoking bans, interest and exchange rate fluctuations, non-realization of cost reductions and synergies, acceptance and demand for new products and services, fluctuations in operating results and general economic conditions. The Company cautions that this list of factors is not exhaustive. These factors and other risks and uncertainties are discussed in the Company's materials filed with the Canadian securities regulatory authorities from time to time, including in the "Risks Factors" section of the Company's Annual Information Form for fiscal 2005, or as identified in the Company's disclosure record on www.sedar.com. The forward-looking statements included in this news release are made only as of the date of this news release and the Company does not undertake to publicly update these forward-looking statements to reflect new information, future events or otherwise.

The Company has included EBITDA figures in this news release. EBITDA, a non-GAAP earnings measure, means Earnings Before Interest and financing expense (net of interest income), Taxes, Depreciation and Amortization, stock-based compensation, restructuring costs, impairment of investments and long-lived assets, accretive income, foreign exchange gain (loss) and non-controlling interests. EBITDA is derived from the consolidated statement of income, and is computed as revenues, less human resources, general and administration, marketing and promotion, occupancy costs and operating supplies. Readers are cautioned that this definition is not a recognized measure under Canadian GAAP, does not have a standardized meaning prescribed by GAAP, and should not be construed to be an alternative to net income determined in accordance with GAAP or as an indicator of performance or liquidity or cash flows. The Company's method of calculating this measure may differ from methods used by other entities and accordingly our measure may not be comparable to similarly titled measures used by other entities. The Company uses this earnings measure because it believes it provides useful information to both management and investors with respect to the operating and financial performance of the Company.

Contact Information

  • Great Canadian Gaming Corporation - For investor enquiries
    Mr. Thomas Bell
    Vice-President, Corporate Development & Investor Relations
    (604) 303-1000
    (604) 279-8605 (FAX)
    or
    Jaffoni & Collins Incorporated - For investor enquiries
    Mr. Richard Land or Mr. David Jacoby
    (212) 835-8500
    GCD@jcir.com
    or
    Great Canadian Gaming Corporation - For media enquiries
    Mr. Howard Blank
    Vice-President, Media & Entertainment
    (604) 303-1000
    (604) 279-8605 (FAX)
    www.gcgaming.com