Full House Resorts, Inc.

Good day and welcome to the Full House Resorts Third Quarter Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Louis Fanger, Chief Financial Officer of Full House Resorts. You may begin.

Thank you and good afternoon, everyone. Welcome to our Third Quarter Earnings Call. 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'd 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 a 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, as well as all of our SEC filings. And with that all said, are you ready to go, Dan? I guess so. Okay.

Hi. That's Dan Lee, I'm the CEO. Well, like the headline said, revenues are up 12.6% over the prior year's third quarter. Now, last year, we had just reopened from the closure periods. And so there were some things that weren't fully open yet, like table games in some markets and so on. And so now being fully open is the main thing that's caused the revenues to be up. Operating income was up some from last year's third quarter, and last year's third quarter was very strong. Now, last year we also didn't have, we had not yet ramped up all of our expenses. And so the fact that our operating income was up over the third quarter of last year is a good sign. And it's up, I don't know, I haven't calculated that, but I guess 7% or 8%. Our net income was down a little, and that's the interest on the funding for Chamonix, which is a casino we have under construction in Cripple Creek. We borrowed that money in February, and it's basically sitting in a restricted account for construction. We're still early in the construction process. We're spending about a million dollars a week at this point. And so the amount of interest expense that's capitalized is still quite small. As we move ahead each quarter, that will get to be a bigger number until we open. And so the impact that interest expense will have on the year-over-year comparisons will go down in the next few quarters as we put more into the project and capitalize more interest. Our adjusted EBITDA, which makes adjustments for all that stuff, was up to $13.6 million from 12.5. So, again, a good quarter. The construction of Chamonix continues. I was there last week. It's getting pretty exciting. The foundations are largely in, and the steel is supposed to arrive in the next three weeks, and we will start going vertical. The first tower will top out in April. and the third tower will top out in August, and the second tower is in between. So in the next few months, like all this construction, it usually seems like nothing's going on at first when, in fact, you're moving utilities, which is kind of a big deal in some cases. In this case, we closed to a street and an alley, and there were storm sewers and things underneath those streets. Well, you need to relocate those because you don't want to – something like a storm sewer to be underneath your building, because if something happens to it, you can't get to it. And so all that got relocated, then putting in the foundations, a lot of work, and then very quickly it'll go up, and then it feels like nothing's happening again, when in fact there's lots of stuff happening inside, because you have electricians and plumbers putting in all the stuff inside the building, and then the drywall, and then at the last few months, it all comes together with the carpeting and the wallpaper. And at this point, and there's some language in here that we're pretty careful about, that we are seeking from city council that permission to move back the opening date. We're not sure we're going to make December of 2022, which is in what's in the development agreement. We probably could, but then we'd be incurring some overtime, and then that creates budget issues on the other side. So we're pretty comfortable that we will get that permission. And frankly, whether we open in December or April doesn't make a whole lot of difference. That's the slow period of the year in Cripple Creek. And so we think we're going to be a little bit later than we had originally envisioned. Don't think it changes much on the income side. We are also at this point, the hard dollar construction costs are more than we anticipated. A lot of things moving around. I think if you talk to anybody involved with the construction, they're facing the same challenges. The material costs are all over the place with the supply chain issues that are out there and the tariffs. We had tariffs on steel, for example, so you'd have to get the steel within the U.S., The steel companies charged a premium for their steel because they didn't have to compete. Now the tariffs are off with Europe, but we've already ordered our steels. That doesn't help us. And lumber has been all over the place. And then the unemployment rate is low, so the subcontractors have had difficulty finding people. At this point, though, we're getting quite a bit of the risk is out of it. About a third of our hard dollar construction companies is bids we've received that we've accepted from subcontractors. About another third are bids that we've received that we think we can negotiate and value engineer some down. So it kind of is a cap on what we think on that schedule of work. And about a third of the work has not yet been put out to bid. Based on where we are today, we're probably higher than our original estimates, but we don't want to quantify that until we have a little more of the risk out. I don't want to swing at this twice. We want to make one adjustment. We are very comfortable that we have more than enough money to finish this, so it's not a financing issue. But at some point, when we have greater certainty, we will indicate what that is and make adjustments to the restricted payment account accordingly. Now, on the flip side, the recent numbers in Colorado are very encouraging. In the month of September, for example, our income was flat. Our revenue was flat. And that's actually, I think, good given that we have no parking. All the surface parking lots at Bronco Billy's has been using for 25 years and now taken up with our construction, and so we are trying to do valet parking from our front door. All of our competition has convenient self-parking, and we don't at the moment, and yet we had flat revenues. The market, and we're probably the second highest revenue casino in the market, the market was up 16%. So some of our competition is up more than 16%. Now, what changed, and this is September this year versus September last year, what changed year over year? Two things. One is lost limits went away several months ago, and one of our competitors opened a 100-room hotel that's kind of a Hampton Inn quality hotel. And so the basis by which we are building Chamonix is was that the elimination of lost limits and creation of hotel rooms would bring more people to town and boost revenues. And that certainly seems to have been the case in September. But if you look over at Blackhawk and Central City, they were up 38% in the month of September. And the thing that changed there is, again, lost limits. They tended to have a higher-end clientele because the Ameristar Hotel is pretty high-end, amongst others. And then Monarch opened their 500-room hotel six months ago. It opened in stages several months ago, but it was not open a year ago in September. It was open this year in September. And so, again, that showed that building a quality hotel can drive visitation. So in the overall picture, we're very confident in this. We did not want to go through... and kind of eviscerate the quality of the hotel when we realized this was going to cost us somewhat more than we had originally envisioned. Instead, we're focused on building the quality hotel that we've always said it would be. And if it costs a little bit more, we're pretty confident we're still going to get a very good return on investment. So I think that addresses Chamonix. And then there are two other development opportunities out there. Let me first address the quarter, and then I'll get back to those. The details in the quarter, in Mississippi, we had 6.5 million of EBDIT, essentially flat with last year. That's despite Hurricane Ida, which closed us for several key days this year. As it came through, we didn't have any significant damage from Ida, but it did force us to close for a few days, and a lot of our customers from the west did have damage, so it was difficult to get to us in some cases. Nevertheless, we achieved flat with last year, and on a nine-month basis, we're at $23 million, which would be the best, headed for the best year the property's ever had. In Indiana, we were 3.8 versus 2.1 million, but 2.1 million of that was the sale of free play. The state has a progressive tax rate, and you're allowed to exclude from your gaming taxes a set amount of free play each year. Since we're in the lowest taxed here, it makes sense for us to transfer that to parties that are in the highest taxed here. So every year for several years, we have, quote, sold our free play to to competitors that are in the higher tax tier, and that's permitted under the state law. And that was $2.1 million in the quarter. Now, we had exactly the same $2.1 million last year from the sale of free play, but it fell in the fourth quarter, not in the third quarter. And so we had one of those companies show up willing to pay it to us in the third quarter. We didn't see any reason to wait until the fourth quarter, so we took their money.