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Howard Stutz

Herbst revenue jump goes up in smoke

16 August 2007

LAS VEGAS, Nevada -- Herbst Gaming boosted its revenue during the second quarter, thanks largely to the addition of three casinos in Primm.

However, tough anti-smoking laws covering grocery stores, convenience stores, restaurants and taverns continued to hurt revenue from the company's slot machine route operations.

Herbst Gaming, one of Nevada's largest slot route operators with 7,200 slot machines in 700 locations, reported a net loss of $1.35 million in quarter ended June 30, as opposed to net income of $11.3 million a year ago.

Overall, revenue generated by the company's 16 casinos in Nevada, Iowa and Missouri and its Nevada route operations was $231.6 million in the quarter, up 36.5 percent from $147 million in the same quarter a year ago.

However, revenue from the route operations was $71.7 million in quarter, down 21.3 percent from $87 million a year ago. Herbst executives blamed the smoking ban, passed by Nevada voters in November, as a reason customers were staying away from the route operations.

Herbst Gaming President Ed Herbst said during the company's conference call that several cost-cutting steps are being implemented to help the route operations, such as renegotiating many of the route contracts.

"We're going to absorb the changes and our route operations will rebound over the next several years," Herbst said.

Herbst Gaming Chief Financial Officer Mary Beth Higgins said the smoking ban completely changed the slot route industry.

"This permanently changed the economics in this business," Higgins said. "It is not a minor event. It is an industry-shifting event."

Brian Gordon, a partner in Applied Analysis, a Las Vegas-based financial consulting firm, said a softening in the Southern Nevada economy in recent months may also be hurting slot route operators.

Gordon said economic indicators, such as softness in the housing market and slowdowns in overall employment growth, may be affecting consumer spending patterns.

"The smoking ban has had an impact, but it seems other factors may be playing into the market as a whole," Gordon said.

The Primm casinos, acquired in April from MGM Mirage for $400 million, helped the company's efforts. Coupled with the company's four Northern Nevada casinos, purchased in January for $119 million, the Nevada casino operations generated $95.3 million in revenues, compared with $23.4 million during the same three months a year ago.

Herbst said he was pleased with the results the first full quarter the company has owned Primm Valley, Buffalo Bill's and Whiskey Pete's.

"These are three great properties and the strategy is to complete the integration and bring these acquisitions into the fold," Herbst said.