Full House Resorts, Inc.

Greetings and welcome to the Full House Resorts second quarter earnings call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. As a reminder, this conference is being recorded today, Thursday, August 6, 2020. I would now like to turn the conference over to Mr. Louis Fanger, CFO, Full House Resorts.

Please go ahead. Thank you, and good afternoon, everyone. Welcome to our second quarter earnings call. Apologize for doing it during the trading day. We usually go after market, as you know, but it is a packed day today with... and a couple of our peers going aftermarket. But as always, before we begin, we remind you that today's conference call may contain forward-looking statements that we're making under the safe harbor provision of federal security laws. I would also like to remind you that the company's actual results could differ materially from the anticipated results in these forward-looking statements. Please see today's press release under the caption, forward-looking statements for the discussion of risks that may affect our results. Also, we may make reference to non-GAAP measures such as adjusted EBITDA. For reconciliation of those measures, please see our website, as well as the various press releases that we issue. And lastly, we're also broadcasting this conference call at fullhouseresorts.com, where you can find today's earnings release, the 8K, as well as all of our SEC filings. And with that said, we're ready to go, Dan.

Okay. Thanks. It's odd to say this. It was actually an extremely good quarter. It's odd to say that because we were closed for over half of it. And we took the unusual step of releasing our June numbers because, frankly, the quarter numbers are not very relevant. And last year, of course, we were open. Every property was open for the full quarter. And this year, all of our properties were closed for at least half the quarter. and even the June numbers, you have to bear in mind that Bronco Billy's and Rising Star were only open for half the month of June. And I think the phrase how unusual this is, I mean, we have five casinos in different parts of the country and they're each different and, you know, we were small but we're pretty diverse and sure, you'll have your challenges like you could have a hurricane in the Gulf Coast and it could knock that casino out for A week or if there's damage, it might be a month or two. Or if there's a calamity, it might be a year or two. But it's one place. We've had the Ohio River flood and shut down the road going into rising sun for a week or two at a time. We've had forest fires in Colorado that have shut down the road that leads to Cripple Creek. There are snowstorms sometimes in Colorado. There are snowstorms sometimes at Tahoe. but you never have something that shuts everything down at once for three months and so this was really an unprecedented situation and I'm sure much of the economy could say that and I hope and think that the worst is behind us. Now as we went, as we were closed for three months, we only kept a handful of employees and we put a lot of work into thinking about how we should reopen and how we could be more efficient and how we could be better with our marketing and so on. Really took a page out of it earlier time in Lewis and my career when we were at Pinnacle and Katrina and Rita shut down La Berge and the properties in Mississippi, Louisiana. And we got focused on how do we open more efficient. And when we did reopen after a couple of months, we were significantly more efficient than we were when we closed. So it's kind of a good opportunity to take a fresh start, get rid of the sacred cows, and reexamine everything, and we did that. So just to put this in perspective, now the Silver Slipper was open in May, so it was open for the full month of June, but it only has half its slot machines. And when you go to every other slot machine, or worse than that. He had to be six feet apart. Sometimes that meant every third slot machine was open. And the table games were not operating as many as we used to. Our table minimums are higher and the number of people at each table are limited and so on. And yet it did almost the same casino revenues as it did in the prior year. It was off 3% in the month of June. The payroll was 22% lower. The marketing expenses were 13% lower. and as a result, the EBDIT was 28% higher. Million seven, which is, is that the best month in its history? Certainly one of the best months. That was the best month. Best month in its 14-year history and despite having half its slot machines closed. Bronco Billy's was only open for half the month. Again, it was only using half its slot machines. None of it's table games. Colorado has not approved table games out of concern that the chips might transmit disease. And table games are a pretty small part of our business. Despite being open only half the month, our casino revenues were 75% of what they were in the prior year, June, which means that our win per day was up quite a bit. Our payroll for the period we were open was down about 11%. Our marketing expenses were down 52%. Part of that was we weren't exactly sure when we'd open, so it was hard to advertise, and all of a sudden they said, okay, you can open, you open. But EBDIT was almost double what it was last year for the month, and that's despite only being open two weeks this year. Rising Star, similarly, it was only open half the month. It's operating with only about 40% of its slot machines, about half of its table games. So its revenues were down 39%, but remember, it was closed half the month. Okay, so its revenues per day were actually up, and its revenues per slot machine per day were up a lot. The payroll at Rising Star, for the period of time it was open, is about half of what it was last year. Marketing expenses are off over 80% from what they were last year. And so the EBDIT was up 33%, despite only being open half the month. A little more challenged in northern Nevada for issues I'll talk about in a minute. But they were open 90% of the month. And it's got most of the slot machines, but still off from last year. Less than half its table games open. Casino revenues fell 31%. And since it was open most of the month, casino revenues are down on a revenue per day basis. Payroll is down 40%. Marketing expenses down 50%. So we made 80% of what we made last year, despite pretty soft revenues. Overall, our operating properties, the EBITDA margin in June was up nine points over the prior year. And that's despite carrying an entire month of utility costs and real estate taxes and rent and so on, with only half a month of operations at Bronco Billings and Rising Star. and I will tell you those trends have continued through July and into early August, roughly speaking. I mean, July was a very strong month as well. Now, why is this? A couple of things. One is we opened conservatively, like we talked about. Second, it proved an adage that I've always said to our GMs, never forget that people gamble, not slot machines. And so... If you add 10% more slot machines, you will not add 10% to your revenues. But if you add 10% more people in the place, you will. And so how can you do the same revenues with half the slot machines? Well, walk into any casino, very rarely will you see every slot machine occupied. And so all we're doing is kind of forcing people as to which slot machines they go to. But casinos generally don't run more than 50% occupancy at their slot machines, even on and I think, well, LaBerge, which runs very high volumes, and Lake Charles on New Year's Eve at peak time might get to 70% or 75%. But in normal operations, nobody is above 50% occupancy at the slot machines. So the fact that you had to shut down a bunch of slot machines doesn't really hurt you as much as you might think. And in fact, a little bit of a wake-up call. We don't actually need as many slot machines as we have, but slot machines are expensive. and so the casino actually looks better and feels better if you remove some slot machines. So we are doing that in some cases just to not have dead machines sitting on the floor but maintain that social distancing. Then, you know, why are people coming out and gambling? Well, a few things. Certainly people are hesitant to fly. Air travel in the country is down sharply. Yeah, it just doesn't feel safe getting on a crowded plane, even if people are wearing masks. And there's almost always somebody who doesn't want to wear a mask. And so people are hesitant to fly. And certainly that's one of the challenges Las Vegas has. People are hesitant to fly here. and so I think to some extent our customers are, you know, like people in Colorado do come to Las Vegas. It's ranked third or fourth of states in terms of visitation to Las Vegas and, you know, at the moment they don't want to fly so they gamble closer to home and I think that's helping us in a few places and I think that hesitation to fly is going to be there until a vaccine is out, proven effective, widely distributed and That may be a year before we get back to the type of air travel we used to have. And maybe to some extent we never get back to where we used to have because you find out that the casino close to home has the same slot machines and the same games. And second, a lot of the competing entertainment isn't there. There's no movie theaters. You can't go to movie theaters. In some states you can't go to bars or there's a limitation on bars. There haven't been and aren't likely to be for a while live sporting events. Can't go to hockey games and football games and so on. You couldn't even watch them on TV until recently. Now you can watch them on TV, so I guess we have some competition coming there. Concerts, you can't go to concerts. Can't go to live theatrical events. You can't go to a crowded restaurant to the extent that that was kind of fun. And I think people realize that We can take our casinos and socially distance the slot machines, and it's a safe environment, and we're pretty careful about that. Bronco Billy's, for example, is a very creative setup, and we take your temperature when you come in. We have a big post-it that we put right on the slot machine on the face of it that says it's been cleaned. You really can't play it with that thing sitting in front of you, so you remove it, you play the machine, and if you change machines, our employees notice, hey, here's an empty machine that doesn't have that card on it, so it needs to be disinfected. So we disinfect it, and the next person sits down. And so it is a type of entertainment that you can be reasonably comfortable that you're socially distant from other people. And now, obviously, there's a lot of stuff that we normally do that we can't do. We're not sponsoring concerts. We're not sponsoring giveaways where everybody has to be in a crowd. We're not sponsoring VIP events where everybody is in the same room. We have tournaments that use the Konami system can be played at machines that are spaced throughout the building. But to the extent if you don't have the Konami system and it was your practice to try to put everybody at one bank of machines for a tournament, you're not allowed to do that today. And so I think we're benefiting from a lack of competition, and I think we're going to benefit from that for a while. I will tell you, within our database, The older clientele in each casino measures it a little differently. But if you say 60 and over or 65 and over, the revenue that we're seeing from that group is off and off like 20 to 35%. But that is more than offset by younger people who are new to us that we've never seen before or are coming more often or gambling more or staying longer. and so there's a whole new segment there that we're trying to get to know and get to know us and I think when there's a vaccine the older people will come back and so I think that's the main thing. Certainly the stimulus money has probably been a help but it's also a hindrance because it's been a little more challenging for us to get employees back sometimes. and people cite about how generous unemployment is, but if you remember, when you're on unemployment, you don't have health insurance and you've got to pay for your own health insurance. And health insurance is pretty expensive. I don't think people realize how much companies actually pay for their health insurance. And so if you net that out, even that extra $600, it wasn't like you were getting rich on unemployment. certainly our customers were better off with it. And now it's kind of up in the air what's going to happen. My guess is they'll figure out something. There'll be some compromise. But nobody was really getting rich on the stimulus money. I think it was a help for us. But I think if it goes away, we will still be fine. And I think it's not likely to just go away in a one fell swoop. The Now, we're going to remain cautious on expenses, you know, remain cautious on the payroll, on the number of employees, the hours of operations, you know, and that sort of thing, because who knows? You know, things could turn around, and I think it's important to be cautious. Marketing, we're smarter, it's more targeted, and using the Konami system, which we just installed at two of our five properties, so and we already had it at one of them. So it's only our two smallest properties that don't have the Konami system yet, which is pretty helpful. And operating hours, and we're really examining it pretty carefully so that we're not operating restaurants that are empty. We're not running, for example, we used to run the ferry at Rising Star 15 hours a day, seven days a week. Now we don't operate it at all on Monday and Tuesday. We only operate at one shift on the other days and we charge, if you're not in our program, which helps offset some of the operating costs. So we're looking at every single thing. This helped us get rid of some sacred cows, for example. There was a buffet at Rising Star that cost us over $2 million a year to operate, and everybody said that's the key to the place. Nobody would be here except for the buffet. Well, at the moment, Indiana doesn't allow you to operate a buffet, so we do not have a buffet. And guess what? We still have gamblers in the casino. So that sacred cow has been killed. and 49 Cent Breakfast that we had in Colorado. It's been there 25 years. And I'd walk into this little coffee shop and see the same local people there every time I was there having breakfast for 49 cents and none of them looked like gamblers. But if you talked about getting rid of the 49 cent breakfast, everybody was afraid to do it because it was kind of been there for 25 years. It was part of the reason for our success. We don't have it at the moment. You can only have half the seats. We said, you know what? It's a small coffee shop to begin with. Forget about the 49-cent breakfast. And you know what? We're doing fine. So I think the 49-cent breakfast is history. We used to allow people to redeem their points for cash. Taking that away, you can redeem your points for pre-play. And the number of employees. I mean, how many times you'd be going through the property and they'd say, well, you know, that restaurant needs this many employees. We need this many people in the cage and so on. And this has caused us to re-examine that. And we found out that some of those employees concepts are just not true, that you can operate that restaurant with fewer people and so on. Liquidity, we're still sitting on about $30 million of cash. About $10 million of that is used in operations on a daily basis. We're still being cautious. It's possible with the spikes around the country, we can end up closing again. I think it's very possible we'd end up closing one place. I think I think it's unlikely we'd end up closing all of them, but that's going to depend on what happens with the number of people getting sick and so on. As last time, it cost us $5 million in the first month we were closed with the severance we paid to people, and then thereafter it cost us about $3 million a month, which includes our interest expense to our lenders and so on and so forth. And so we want to be careful to preserve our liquidity because it's still a very uncertain world. On the mobile sports betting, the second one opened. As you know, we have six agreements. We get a percentage of the revenues under each of those agreements. Two of the six are now open, which is Churchill Downs in Indiana and Smarkets in Colorado. We think the other four will probably all open in the third quarter. Honestly, they have not opened as fast as we hoped. But we know they're all trying to be open for football season, which is a very large part of the betting activity. And so we think they're all likely to open in the quarter we're now in, at which point we get a minimum of $7 million a year of our participation in their revenues. And we're a very small company. It'd be lovely if we could spin that off into some sort of entity and take it public at at the valuations that Tillman Fertitta has gotten and that Rush Street Gaming is getting and that DraftKings has. But it should nevertheless show up in a valuation of our company because we're in that business. And if they allow internet gaming in the states we operate, we intend to participate in that. And I think they probably will and we will participate in it. So we have those aspects in our company. It's actually a pretty significant chunk of our company. We're just too small to spin it off into a separate entity and realize that valuation. Debt covenants, we have two issues with our existing debt. One is we were limited to $5 million of additional indebtedness. We took out $5.6 million of PPP loans. Now, those loans are only at 1% interest, and normally under GAAP, if you have a deeply discounted loan, You would do this kind of present value evaluation. So maybe it should go on the books for under $5 million and we're okay in the covenant. We also believe that we are spending that money in the way that would entitle us to forgiveness. Of course, until we actually seek and receive forgiveness, it's still debt. But if we have any portion of it forgiven, then it's probably under $5 million in total indebtedness. Just to make it very clear, we're asking our lenders to allow that basket to exclude the PPP loan. And the other thing is there is a test that's done at the end of each quarter where your total indebtedness cannot be more than X times your trailing 12-month EBIT. Well, we were closed for three months, so we flunked that quarter at the end of March. We flunked that test at the end of June. will probably flunk it at the end of September. We have a shot at meeting it at the end of the year, but that means we're in constant discussion with our lenders. They obviously want to be paid for waiving that covenant, and we're negotiating on what that payment should be. Last quarter was half a million dollars, and it could be a little more this time, but probably something acceptable. and we're not alone. I think every casino company is going through that same process and we're confident we're going to get there soon and in fact we have some draft documents going back and forth but just be aware that we obviously have to deal with our lenders on a daily basis in a situation like this. Because we had kind of a fresh start thinking about the company We chose to take two write-offs that ended up in the quarter. One was in Fallon. We originally had planned to add office space to the outside of the building, popping the building out and building offices there. Years ago, there was a big office building out in front of the building we got rid of so it improved the visibility and improved parking. We took the management team and stuck them in a construction trailer at the back of the property, and then we kept putting off building the new offices because we had other Capital Needs that really affected the customer experience, and this really wouldn't affect the customer experience. Well, you can't have offices and temporary trailers forever. The zoning wouldn't allow it, among other things. But we got looking at it and saying, well, we really had too much management at this property for what it is. It's a very small property, and why do we have all these people in these offices and this trailer anyway? So when we went to reopen, we kind of right-sized the management team, which meant we didn't need that many offices. And we also realized that the win per slot machine per day on the property is pretty low, and maybe we didn't need that many slot machines. So we're going to the very far back of the casino where the slot machines are least productive, and just putting up some walls and creating a small office area, which would be enough to accommodate the reduced executive staff we have. It'll be pretty similar to the small offices we have in Tahoe. and so we didn't have a need to build that new office building. Well, we had capitalized the rent on the trailer and the design costs on the office and so we wrote that off in the quarter. And then in the cost of building out those offices is something like $25,000 because we're not adding to the building so it's pretty inexpensive. And then in New Mexico, you'll recall that the New Mexico Racing Commission had put out a request for proposals a couple of years ago for the last licensed for a racetrack in New Mexico. And then with that racetrack, you'll have to have a casino. We had taken out options on land and put in a proposal. The consultant for the Racing Commission had deemed ours the best on just about every measure. But there was a change of administration, a change of the Racing Commission, and they seem to have abandoned the process. It hasn't come up in the last several meetings, and it doesn't look like they're going to do anything. So we did not renew our options on the land that we had outside of Clovis, New Mexico, and there was a couple hundred thousand dollars of previous deposits that we wrote off. And so that kind of cleans house. I told everybody if there's anything else we should write off, this is the quarter to do it, and nobody came up with anything. So I think we got it pretty clean at this point. And in Waukegan, we are still in the race. They are planning to award the license The legislation actually says by the end of October, but there is a pretty easy process for them to give themselves more time if they want to. So they may, given the circumstances. But we think we have a shot at that. And if so, we will probably do it in a project finance way with a partner. It's a pretty big project relative to the size of our company. And so we've been talking with some potential partners who would be good partners for that. and that's where we stand with Waukegan. It's a very good opportunity. We think you can make a lot of money there. We've put together a proposal that we think is the best of the three proposals. Obviously, when the Gaming Commission starts looking carefully at it, they're going to ask us how we can pay for it. And so we want to have a partner who can say this is how they're going to pay for it and this is how we're going to do it. And I think if we can answer that question, then we clearly have the best proposal in Waukegan and hopefully we can do something there that's a win for the state, a win for the city and profitable for our shareholders. So that's what Keegan. We also have expansions in various stages of planning and entitlement in Colorado for a hotel and meeting space and so on, which was we had started construction on the parking garage and stopped it. That's part of how we have the cash we have. And in Mississippi, where we have sought for a couple years now the entitlements to build another hotel tower that would go out over the Gulf of Mexico, which is pretty complex because of all the environmental stuff and state approvals that are needed. And we've made pretty good progress on that. And so when we started the process, we said this will take years, and here we are a couple years later, and it's not too far down the road that we could build that. But nevertheless, at the moment, both of those are on hold. We want to see how the economy develops, see if our business continues to be as strong as it is currently. What do the financial markets do? Do the financial markets differentiate between regional casino companies like ours that are doing well and those that have a lot of casinos, their bread and butter is based on meetings and conventions, nightclubs, shows. all flying there. Those are all things that don't work in a pandemic economy. And so I think there should be a distinction between regional gaming and kind of destination gaming in terms of the risks and the vitality of the business, at least near term. Now, some companies have some of both. They're going to do really well in the regional markets and suffer in the destination markets. But but it's unclear yet whether the financial market's gonna make that distinction. And so in the meantime, given the uncertainties out there, we're still conserving liquidity, but we do have quite a few growth opportunities that we could undertake if we get to a better world. Get everything loose?