Full House Resorts, Inc.

Good day, ladies and gentlemen, and welcome to the Full House Resorts Fourth 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 Fourth 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 Law's 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 a reconciliation of these measures. Please see our website as well as the various press releases that we issue. And lastly, we're broadcasting this conference call at fullhouseresorts.com, where you can find today's earnings release as well as all of our SEC filings. With all of that said, it was a strong fourth quarter. We did pre-announce our results, so I don't think earnings will be a surprise to anyone. Our actual results were within the range that we gave about a month and a half ago. I'll walk through those results in just a second, and then Dan will walk through Our broader strategy with his thoughts on Chamonix and Waukegan, including, by the way, our plans for a temporary casino that will open in Waukegan this year, this upcoming summer. Let's start first with the fourth quarter. It was a great fourth quarter with revenues up 13.1% from the fourth quarter of 2020. Adjusted EBITDA isn't a clean comparison between quarters. The fourth quarter of 2021 had $1.7 million of additional expenses related to corporate initiatives that weren't present in 2020 and that we don't expect to occur in 2022. And so adjusted EBITDA could have been even higher for the 2021 period. And then last year's, sorry, the 2020 fourth quarter also had the benefit of a $2.1 million free play sale in Indiana. We sell that free play every year, but during the 2021 period, it didn't occur until the fourth quarter. Hold on. We sell that free play every year, but during 2021, it did not occur in the fourth quarter. It occurred in the third quarter of 2021. And so that led to some timing differences on the income statement. If you're looking only at the fourth quarter, you'll notice it. But if you're looking at the full year period, it's obviously not an issue. For the full year, adjusted EBITDA is hovering right around $50 million. The actual EBITDA figure was $47.2 million. Keep in mind, it does include that corporate initiative that I mentioned. For the full year, that corporate initiative was about $2.1 million. And so if you add that back, it gets you above $49 million. And then keep in mind that our sports skins weren't up and running for the full 2021 period. And so that would take you over the top for the $50 million mark. Looking specifically at the properties in Mississippi, The silver slipper continued with its recent strength. It had its best year in its 15-plus year history. Revenues there rose 45% for the year to about $91 million. Adjusted segment EBITDA in 2021 more than doubled from what it did in 2020, increasing to nearly $30 million. That's a very strong performance out of the silver slipper, which has been led since its opening day by our new COO, John Ferrucci. One other thing that happened during the quarter was the overwhelming defeat of a ballot initiative. to allow a casino to move from Bossier City in the northwestern part of Louisiana to Slidell, a city near Lake Pontchartrain on the other side of the state, and about 30 or 40 minutes from the Silver Slipper. For those of you that don't know, there is a cap on the number of licenses in Louisiana, and this license was the only idle license in the state as its owners closed their Bossier City Casino due to the COVID shutdown, and they never reopened it. Casino sites in Louisiana require local voter approval, and so this past December, it appeared on the ballot in St. Tammany Parish. Voter turnout for that off-cycle ballot initiative was strong, and just like they did some 20 years ago, voters overwhelmingly said no to a casino in St. Tammany Parish, defeating the proposal by nearly 26 percentage points. Because of that, we don't think we need to worry about that competitive threat again for a long, long time. For the year in Indiana, revenues were up more than 40%. Adjusted segment EBITDA in 2021 was more than three and a half times what was earned in 2020. That was a great performance out of the rising star, which has continued to improve in part due to the continued ramp up of our Konami slot system and the efforts of our team there to manage costs. In Colorado, construction is full swing on Chamonix. It really is an impressive site to behold. It's extremely large in footprint. and is really starting to come up out of the ground now. If you get really bored, pull up the website there, shamanaco.com, and you can see two different cameras, but it's looking quite impressive. Unfortunately, that construction has left us with no on-site hotel rooms and no parking, and so we're at a disadvantage versus a year ago. We've also lost portions of the existing Bronco Billy's Casino to construction. Despite that, we still have managed to have one of our best years in recent memory there with revenues of $23.7 million and adjusted segment EBITDA of $5.5 million. There will continue to be some short-term disruptions until construction of Chamonix is completed in the second quarter of 2023. However, we're more confident than ever in our bright outlook for Colorado when Chamonix opens. All the major metrics that we look at suggest Chamonix should be a home run The casino that Monarch built in Blackhawk is doing quite well. Our estimates peg that new Monarch casino at doing about $100 million per year in EBITDA. Gaming spend per capita out of Colorado is still extremely low. And a lot of you, I think, know, but the April 2021 removal of betting maximums really did help gaming revenue in the state, especially in Blackhawk, where there is actually quality gaming product, unlike in Cripple Creek. But over in Blackhawk, gaming revenues have been up strongly, up in the mid-40% range. And I think Dan's going to speak to more of all that in a second. In Nevada, that segment showed great strength during the year. It really was the segment that was most affected by COVID because capacity constraints at the ski areas and a lack of destination travel affected Grand Lodge. And then a lack of visitation to the Naval Air Station near Stockman's. affected them as well, all in the 2020 period. That all changed as restrictions eased in 2021. Revenues for the year were up 58%. Adjusted EBITDA was up more than 10 times. Right now in Northern Nevada, we're in the process of installing the Konami slot system. That system is what has helped us tremendously improve our marketing analytics at Rising Star and at Bronco Billy's. We did just complete the installation of Konami a few weeks ago at Stockman's. And we've got Grand Lodge scheduled for their own install at the end of April. Once Grand Lodge is done, our whole company will be on that same slot marketing system. And then our last segment is our contracted sports wagering segment. On December 1st, 2021, our sixth skin went live. That compares to three skins that were in operation during the fourth quarter of 2020. We will get one skin back in Indiana and one skin back in Colorado beginning on May 15th of this year. That's because the operator of those two skins recently announced that they were exiting the online sports and iGaming business entirely. We've already begun negotiations with other companies regarding those skins. More importantly, we'll also have one more skin in Illinois due to us winning the Waukegan gaming license. There really hasn't been a shortage of interest for that skin. We've gotten a ton of phone calls about it. That should be expected largely because there are a limited number of casinos in Illinois Each casino only gets one skin, and Illinois is the sixth most populous state in the country. And so that's created a decent amount of interest from others in that available sports skin. Regarding the balance sheet, about a month ago we funded construction of our temporary Waukegan Casino, named the temporary. We did that by tacking on $100 million to our existing senior secured notes, and so that gives us a total of $410 million of those notes outstanding as of today. We issued those notes above par at 102, and so the implied yield or worst for those was about 7.7% on issue date. We also used to have $5.6 million of CARES Act loans that we took out during the height of the pandemic when all of our properties were closed. Those loans were fully forgiven during the fourth quarter per their loan terms. And so from a liquidity point of view, I feel like I said this a year ago at this time, by the way, we have more cash than we've ever had in my history at this company Here in real time, we have roughly $340 million of cash with $216 million of it reserved for the build-out of Chamonix. We also have a $40 million undrawn revolving credit facility, which has a floating rate below 4% currently, and so our total current liquidity is about $380 million. We'll spend some of that cash as we build Chamonix and the temporary. Keep in mind, though, that our existing business already more than covers interest expense, and that's before any financial contributions from the temporary, which should be open at about half a year, and Chamonix, which will open up in the second quarter of 2023. I talked a lot. With that said, Dan, you want to chat about some strategy?

Yeah, let me address kind of a five-year strategy for the company as we see it these days. As Louis mentioned, EBDIT of our existing business is about $50 million. The 410 of debt, and all of our debt at this point is the one big bond issue, that's at 8%, so it's about $33 million a year of interest expense. Our maintenance CapEx at our existing properties is pretty small, about $5 million a year. We have NOLs that will still continue to shelter taxes for a while, and then we're going to have accelerated depreciation on the new stuff we're building. So in a five-year time frame, we don't expect to be paying any income taxes. Now, as Lewis mentioned, $340 million in cash only takes about 10 to run existing operations. And then we have a $40 million undrawn revolver. It takes about $215 million from this point to complete Chamonix. We've spent a fair amount already and recognize... like as we're talking, there is a foundry somewhere pouring steel beams to our specifications. We don't have to pay for them until they arrive at the property. So more has been committed than would appear for a $250 million project, but there's $215 million to go to complete it. The temporary, let me stick to Chamonix for a moment. This is a four-star hotel, four-star casino, the first of its kind in Cripple Creek. Colorado as a whole is an underserved market. Denver is 4 million people. Colorado Springs is 1 million people. That's most of the population of Colorado. And the gambling per capita is significantly below that of other markets. The U.S. average is significantly below any place that has casinos. Part of the reason for that is for years they had a $5 betting limit. So even though they've had casino gaming for 25 years, for over half that time, you really couldn't justify building a nice place because the betting limits were so low. Then they were increased to $100, and some places were built pretty successfully in Blackhawk. And then in last April, betting limits went away completely, which allows the investment to build a better product, which will result in higher gambling per capita, And that's part of why it's such a good market. Complicated to get into because it's only legal in a handful of places, and assembling the land or a site in either of them is a little complicated. But we did so. It took us a couple of years. And Chamonix, when it opens, will have 300 guest rooms. Now, let me compare this with the Monarch Casino, which opened in the fourth quarter of 2020. So it's been open a little more than a year now. They have 500 rooms. Both Chamonix and Monarch have parking garages. Theirs is bigger than ours, but we also have pretty significant surface parking lots, which they don't have. We have far more convention and meeting room space than they have. We can actually seat 1,000 people for a show in our ballroom. They don't have anything close to that. The casinos are very similar in size. They both have about 900 slot machines, 20 table games. We have less competition. We'll be the only four-star hotel or, frankly, the only casino hotel of this size in Cripple Creek. They have competition from Ameristar and Jacob's Place and the Isle of Capri and a few others. Of course, they're close to Denver, which is the bigger city. We're close to Colorado Springs. Those two cities are one hour apart. So somebody from Denver is one hour from Black Hawk and two hours from us. and so many from Colorado Springs is two hours from Blackhawk and one hour from us. So our most important market will always be Colorado Springs, but a strong secondary market will be Denver because people will sometimes travel further to check out a different place. Anyway, if you look at Monarch, they're a public company. They only have two casinos, one in Reno and the one in Blackhawk, and they played hide the weenie a little bit. They don't break it out. But you can go back and look historically at what they earned in Reno, and it's been pretty consistently about $30 million to $40 million a year for many, many years. And then they acquired the Riviera in Blackhawk, which made about $15 million. Those numbers were broken out by Riviera, which was a public company. But if you take Monarch's results for 2021... Uh, their operating income plus their depreciation is about $135 million, 137, I think it was. And so, uh, their EBDIT is about 137 million and, uh, probably 37 of that is from Reno and a hundred million roughly is from Blackhawk. Um, and so, uh, We're three-fifths their size in number of guest rooms, similar in size in terms of casino capacity, much greater convention space and everything else. Not unreasonable to expect us to make $50 million a year once we're open and mature. And that will be open in the second quarter of 2023. Like Louis mentioned, you can see the details on the website. Now let's talk about Waukegan for a moment. We were chosen through a competitive process to develop this in December. And our whole proposal is a $500 million project. About 100 of that is for the temporary. And the temporary is going to go on the same 40 acres that the permanent goes on, but at the opposite end of it, so it will use the same parking lots. And people will be accustomed to going to that location to go to a casino. And to get open quickly, We have purchased a sprung structure, which is a company makes these. You'll see them around the country. Tesla, for example, has an assembly line inside of one at the moment. And it's an aluminum structure, and then you stretch Kevlar over it and it puts insulation on the inside. And so ours, which is a little more than $4 million, then it costs a million to put it up, Ours covers and encloses one-and-a-half football fields. So it's a very large sprung structure. And in that one-and-a-half football fields, there will be a casino with 1,000 slot machines, 50 table games, two large restaurants. We've also bought a diner, which will be attached to it, so we have a third restaurant. It's hard to have a high-end restaurant in a tent with a 47-foot ceiling like this. our sprung structure has. So we decided to, to buy a diner. Uh, they come like a double wide trailer and you hook them up and, uh, and it'll be a diner like the fog city diner in San Francisco, which is actually very high end restaurant that happens to be an old diner. And so it doesn't mean you can't have a good menu and a diner. So we will have a full on casino, three restaurants, uh, big surface parking lots. Um, And we'll be in at about $100 million. Now, a lot of that $100 million is really money that's being spent towards the permanent. So, for example, about a third of it is a gaming tax that we have to pay up front when we open. $25 million is slot machines that will end up in the permanent as well. The pre-opening costs, well, a good chunk of that or the bulk of it is hiring and training employees. Well, when we open the permanent, the employees from the temporary will shift over. And so even the pre-opening costs, a good chunk of that is actually applied to the permanent. So we're spending $100 million now, and we'll have to spend $400 million to get the permanent open. But there's three years in between. We will operate this temporary for the better part of three years. And let's assume, just hold this number for a second, let's assume it makes $50 million a year. So it will generate $150 million during the construction period of the permanent. Bear in mind, we already have our interest expense covered by existing casinos. So if you take $400 million as the additional expenditure that we have to put out to get to the permanent, but we're going to generate $50 a year for three years, then we need $250 incremental cash to get to the permanent. What do we expect the permanent and the temporary to make? Well, the closest casino to us is the Rivers Casino, which is about 32 or 33 miles away. And they're doing about $500 million in gaming revenues in a place that was limited to 1,200 slot machines. They're expanding it now. That's akin to the typical margins you have in regional gaming. That's probably $200 million a year in EBIT. We don't expect to make that much. They're in a more densely populated area, and it would be great if we could do $200 million, but we don't expect that. Now, we're in the town of Waukegan, which is about 80,000. It's kind of an old Rust Belt town, pleasant town, but typical of a lot of towns in the Midwest. But it is the county seat of Lake County. Lake County, Illinois, is 700,000 people. And it's the 27th wealthiest county in America. And we will have the only casino there. Now, if I just take the population of Lake County and assume they gamble $300 per person, that would be $200 million in revenue. And on that, we would have EBIT of close to $100 million in a regional gaming-type margin. That's ignoring the other 11 million people who live within 90 minutes of our site. So it's not unreasonable to think that the permanent could do 100 million of EBDIT. And the question is how many of those people will come to a facility that is not as splashy as the permanent. And the temporary will not be. It's, after all, in a sprung structure. Now, we are spending some money to do some interesting things to it. so that it will give you a good experience and it'll be an interesting place and so on. So that's where I get back to my 50. You know, maybe we do half of what the permanent can do. So maybe the temporary does 50 and the permanent does 100. And those are all just guesses. But it leads to kind of the following analysis. Let's look at the timeline. We opened the temporary casino in the third quarter of 2022. And we're scrambling, but that big tent arrives in a couple of weeks. We're trying to get the permit pulled so we can put in a ring foundation so we can throw up the tent when it arrives. It arrives in, I think, 28 trucks, like big trucks. I mean, it's a big deal. We've already got the slot chairs en route. We're picking out the slot machines, you know, all the things. We have a job fair in about a week. So we're starting to identify people to hire and department heads and so on. So a lot of work to do, but we do expect to open in the third quarter of 2022. Then in the second quarter of 2023, we expect to open Chamonix. We will start construction on the permanent place in Waukegan in late 2022. Now, the construction through 2023 will be funded from internal cash flow. I mean, the early stages of construction aren't big dollar months. The amount you spend per month goes up kind of exponentially. So for the first year and a half, really, the construction on the permanent can be pretty easily funded from the profits of the temporary. Then in February of 2024, our bonds become callable. And at that time, our EBDIT should be in the ballpark of 150 million. 50 on today's casinos, 50 from Chamonix, and 50 from the temporary. It won't be exactly that, but portfolio theory suggests some will do better than we expect, some will do worse, and maybe we end up in that ballpark. 150 versus our existing debt of 410 is kind of under levered compared to most casino companies. But we should be able to replace that 410 of debt with call it 650 of debt. You issue new bonds or maybe it's bonds in a bank agreement. We'll see what the market conditions are at the time. But 650 on 150 of EBDIT is acceptable leverage, especially since the incremental 250 is used to build the permanent. And so that's how we get the remaining money to build the permanent. And then the permanent would open in 2025, about three and a half years from now, is where we think it will shake out. So at that point, actually 20, yeah, three and a half years from now, So you start adding it together. At that point, you've got 50 from today, 50 from Chamonix, and now 100 from the permanent. So the company's got about maybe 200 million of EBIT. I don't know whether we'd want to sell it at that point or continue to run it. Other things come along that might be good. But let's assume it was worth 10 times EBDIT at that point. And if you look at what, you know, the Mirage is getting sold for, or Peninsula is getting sold for, or even the price at which Bally's is either going to go private or get sold for, you know, 10 times is pretty reasonable these days, especially since we haven't done the opco-propco thing. We own all of our real estate, or we lease it with an option to buy it. And And so we'd get a pretty good multiple if we did try to sell the company. Well, at $200 million at 10 times, that's $2 billion. Subtract the debt that we would anticipate to have when the permanent opens of $6.50, that's $1.35 billion. We have 37 million shares outstanding, and that's something north of $30 a share, which is a quadruple of our stock price from where it is today. even though we had the best performing stock in the industry last year. And we think we still have a very bright future ahead of us. So we go to work every day thinking, don't screw this up. And whether we do anything else or not is irrelevant. We don't want to screw this up. We just want to execute on what we have. And I guess that's it. Lewis, did I miss anything?