Full House Resorts, Inc.

Greetings and welcome to the Full House Resorts, Inc. Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Louis Salinger, CFO of Full House Resorts. Please go ahead.

Thank you and good afternoon, everyone. Welcome to our second quarter earnings call. Before we begin, we did poke some slides on the website. So if you go to investors.fullhouseresorts.com, you'll see that bronze banner. And if you hover over company info, you can go to the presentation section and find some of the slides that we'll discuss today. including a bunch of current photos of the work going on at Chamonix. 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 securities 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 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 said, ready to go, Dan.

All right. It's kind of a complicated quarter, so I'm going to figure out where to start. But, you know, we're busy these days, and the busyness kind of falls into four categories. One is still ramping up the temporary. This was its first full quarter of operations, and it did well and is getting better. The table games is starting to be a bigger factor, and we're still hiring more dealers. We now rank third in the state in table games as of the July numbers that came out yesterday. Our steakhouse should arrive in late September. It's disappointingly late. It's basically a large diner. It's coming in seven trucks, and they're trying to line up the permits to bring these oversized trucks from Florida to Illinois. Then it's got to be assembled and opened, so it probably doesn't get open until sometime in the fourth quarter. Um, the sports book, uh, should be up and running, uh, in September. So, you know, we're still pulling it together and, and, uh, still hiring people. Um, but the trends are pretty good and it's, and it's profitable. So it's, it's, uh, going very much the way, uh, most, uh, successful new casinos go. Um, second big task is completing construction of Chamonix in Colorado. Um, It's pretty unusual for a company our size to undertake two things at the same time, but we didn't pick the timing in Illinois, and that's how it ended up. And so we're preparing for it to open on December 26th. So it's not only completing the construction, which is a job and a half, but also preparing for the opening. Along those lines, we made some pretty good progress with the staff. the high-end restaurant, which we intend to be one of the best, if not the best, restaurants in the entire state of Colorado. We've done a deal with Barry DeCake and Yassine from Barry's Prime down at Circa. They used to run the 9th Steakhouse at the Palms, and before that, Barry was with Ariel, which is Charlie Palmer's company, and was in Manhattan, and he moved to Las Vegas to open the one at Mandalay Bay. quite a few years ago. But this is a guy who's had Michelin stars before, knows how to run high-end restaurants and high-end restaurants in a casino setting. So we're excited to have them as part of the team. It's an outside chef deal, very much like most of the restaurants at Bellagio, where they get a percentage of revenues and percentage of profit for running it. But it's a It's our restaurant, but they're motivated to make it their restaurant as well. We have a pretty small part of the overall business, but nevertheless pretty important. We have a prominent jewelry store on the property. We have a consultant from Santa Fe who's got a successful business there called Rock and Feather, and she's helped them pull together how to make our jewelry store special. And in terms of new hires, we just hired Brett Modell, who I think started work actually today. And that's a pretty important hire. He's director of non-gaming operations. Recognized that this is a high-end hotel that we're building here. And our team there has not operated a lot of this high-end stuff before. And so we needed somebody with that experience. And, you know, Brett grew up in New York City. He's actually fluent in Mandarin. He's fully American. His wife's from China. But he trained at Wynn Macau in Macau, and then he helped open casinos in Vietnam and Nepal. He worked for Amman Resorts for a while in Bhutan. Amman is probably the highest-end hotel chain that's out there. And after working in China, he was running a hotel in Crested Butte, which is where we found him. And he and his family are relocating to our part of Colorado, and we're excited to have him on board. And he can make sure that the hotel, the spa, the meeting room space, the food and beverage all lives up to the expectations that the high-end customers expect. So he's an important hire, and he starts today. So then the third thing, of course, is we have an existing company with existing properties, and that's had some challenges. And in particular, in this quarter, The silver slipper had some cost issues. The payroll went up quite a bit, and the revenues didn't, and that had an impact on the bottom line. We're getting that back under control. We've got a freeze on any raises. We're looking at staffing numbers, and we'll get it under control. In Tahoe, there was a huge winter in Tahoe, and the snow has been gradually going away. that caused people to delay their return for the summer, and the summer is pretty important up there. And now we're in the heart of it, and it's doing better, but in the second quarter that affected it, it's an off-season quarter for the Tahoe property, and so it was down. In Colorado, the construction of Chamonix has been affecting bronchopillies for quite some time. That continues to be the case. Bronchopillies are Because of Chamonix doesn't have any parking, we try to operate valet parking as best we can, and we shuttle from an outside lot, but all of our competition is on-site parking, and we don't. We also don't have an on-site hotel. We have a bed and breakfast two blocks away. All of that will change when Chamonix opens, but at the moment, Bronco Billy's is making money in the summer, but it wasn't in the second quarter. And then... Rising Star in Indiana is doing okay, especially considering that there is a competitor that didn't exist a year ago, and that's the Churchill Casino at Turfway Park in northern Kentucky. So it's a mature market. When somebody adds a casino in a mature market like that, it becomes a market share game, and I think we're holding our own. Then the fourth task that we're busy with is, frankly, designing the permanent American place. We're incorporating a lot of what we've learned from the temporary. We've learned quite a few things. We haven't started construction yet. There's now, but we are actively designing it, which costs some money, but it's, now there's a lawsuit out there from the Potawatomi tribe, who's a competitor of ours to our north, and they filed a whole bunch of lawsuits, not against us, but against the city and the state. That may end up delaying our start of construction and financing. I think ultimately, the suits will end up being resolved and everything can go forward. But at the moment, it's something that just happened last week. We thought this suit was pretty much gone, and they had appealed something, and the appellate court sent it back to a lower court. So that puts it back into flux a little bit. And so that's on the permanent. There's a bunch of unusual stuff. Because we have a lower tax rate in Indiana than most of the other casinos, because we're the smallest one, and there's a progressive tax rate in Indiana, there is an amount of free play that you're allowed to deduct every year. We have found it makes sense for us to sell our free play to guys in a higher tax bracket, and we've done that every year for about five years now. And we did that this year in the first quarter for $2.1 million. We did it last year as well for $2.1 million, but it was in the second quarter last year. So looking at the year-over-year results, that kind of affects it. Generally, we'll do it early in the year as possible because you never quite know. During the pandemic year, for example, when we were closed for three months, fortunately, we had sold the free play before that period because with everybody being closed for three months, we might not have sold it for as much as we were able to sell it for. And so then on the sportsbooks, Churchill got out of the online sportsbook business in the second quarter of last year, and when they did that, they had paid us an upfront fee plus a percentage of the revenues. The upfront fees of these deals go into deferred revenue. When they pulled out of the deal, it accelerated the unamortized deferred revenues. There was about a million dollars of revenue and income in last year's second quarter. Now, one of those sportsbooks that they backed out of, we now have a deal with a new company who paid us a new upfront fee and is paying us on a regular basis. But the big number there is the sportsbook operation in Chicago where we were paid $5 million upfront, which, again, is deferred revenue. And we will receive a minimum of $5 million a year from that, and that starts in the middle of August, whether the sportsbook is actually up and running or not. But we do expect them to be up and running pretty soon, and if they're very successful, we will get more than $5 million a year, but the minimum of $5 million starts in mid-August, and that's by far the biggest of these. See, Illinois, no, Indiana and Colorado In Indiana, each casino is allowed three websites. In Colorado, each casino is allowed one website, but we actually have three licenses, so we end up with three there as well, and there's quite a few small casinos in the state, each of which gets a license. In Illinois, there's I think 13 total casinos, if I remember correctly, and each gets one website. And, of course, the population of Illinois is much bigger than either Colorado or Indiana, actually bigger than Colorado and Indiana combined. So each website's worth much more. So that's why our agreement in Illinois would be very important and coming on stream in a week, I guess. Next week. Then there was some accounting issues, and not unusual in a new casino. You start up, and then you'll find some little things and And so, for example, our progressive slot machines, a number of them have a progressive-type jackpot on them. You don't start those at zero. You've got to start them at something else because it's not very exciting to look at a progressive jackpot that's zero. And that amount, when you open, would be a charge to pre-opening costs that and it's a liability. I forget whether it's a debit or a credit on the old T accounts, but there was about $300,000 that we missed, so we took that charge in the second quarter. We have a new finance person who helped us discover that, and we moved him from Rising Sun, and we think we have everything straightened out now, but that was a little bit of a surprise for us. We do continue to have training costs in Illinois because we are trying to hire more dealers, and we run our own dealer school, and we pay dealers their wage in order to go to the dealer school. We will also pay relocation costs to get dealers. And we're gradually getting there. We have enough dealers now to operate 30 games on a Saturday night, and we're allowed to have 50. And as people get more experience, we can also increase the table limits right now. We go to $5,000 a hand. One of our key competitors will go to $20,000 a hand. We don't want to do that until we have more experienced dealers. And so that's going on. And then I guess that's the main unusual stuff. All of this stuff is going to get cleared up in the next few quarters. And now we should be pretty mature at both of the new properties and generating a lot of free cash flow. So if we go to the presentation we put online that... Everything I just said I meant to be kind of a summary, but I guess I went into a little more detail than a summary. But on the presentation that's online, it notes that our revenues increased 34%. That's really the temporary, which is most of that. In fact, more than all of it. adjusted EBDIT decline, but a good chunk of that is the timing of the free play, the million dollars that I mentioned from the deferred revenue, and the temporary actually made 4.1 million despite that accounting charge I mentioned. There's a couple of other small accounting charges. It was closer to 4.5 to 5 if you back out the accounting charges, which is, you know, it's not where we expect it to mature at, but for the first full quarter of operations, That's respectable. And then we start getting Illinois sports guns here shortly. And part of the reason for my comfort with the results in Illinois is the next few slides. If you look at admissions, they've been trending up very nicely since April. Now, when we first opened, you get a lot of tourists coming into town, what Mike Edson used to refer to as looky-loos. People come in and look at the casino, but they don't gamble a lot. And over time, you build a mailing list and you start replacing tourists with gamblers. And so since April, we've had a steady trend of admissions going up. And you can see as a result on the next slide, you can see our slot coin in likewise is steadily going up. And our table games drop steadily going up. Now on table games, it's also affected by the fact that we are offering more tables at any given time, and we're operating them more hours of the week than we had before, and we are also allowing larger bets over time. And so, you know, if you had these charts on the same scale, you'd see that table games drop is actually growing faster than the slot coin in, and that's a result of adding more tables over time. And so a lot of our growth is coming from tables at the moment, but we're continuing to show growth in slots. Slots will always be the preponderance of the business here, but tables are going to be meaningful, whereas in some of the markets, they're not very meaningful. So going way back, when we opened, This is on slide 8. We had 28 table games. By middle of May, we were at 36. By now, we have 48. But we don't have enough dealers to operate all 48, so we have about 30 open on weekends. But, of course, we pull people from potential shifts during the week in order to have more tables open on weekends. So as we hire more dealers, it helps how many tables we have open on a weekend, but it also helps how many tables we can open during the week. Generally, our table gains are $15 minimum bet. We might have, during some times of the week, one $10 table as kind of a loss later out there, but generally we're $15 minimum table and up. And as mentioned, in July we were third in the state, which is pretty good for a place that's only been open a few months. And And then we expect to extend our weekend table games hours to 4 a.m. Currently it's closed at 2, and so we're picking that up. The guest database, you can see, has been building. We're now at about 40,000 people in our database. That's pretty important. We started at zero. And this allows us eventually to be more efficient on our marketing costs. We are still spending quite a bit of money on marketing and advertising, getting our brand out, letting people know we exist, and so on. But over time, we are already being more targeted, and that will continue to be more targeted as we have a bigger database. It's almost like we were talking about the advertising agency. It's like showing up at a lake in Wisconsin to go fishing and You've never been there before, and you don't really know where the fish are. And so you end up going out in different places and dropping your bait. And over time, you start to realize that certain bays, certain depths, certain areas have more fish. And you start going back to those areas more and more. And that's effectively what happens when you open a casino in a market where you haven't been before. You gradually figure out who gambles and who doesn't gamble and how to incentivize the people who actually gamble. So that's American Place on Chamonix on page 10. We show the original renderings of the project. It's very large by Crickle Creek standards. I remind myself sometimes that it's about 10% of the size of the casinos we built in Las Vegas 20 years ago. But we're also a small company, so this has a pretty big impact on us. It's $250 million. It's a very high-end casino, 300 guest rooms. I remember Steve Wynn, when he opened the Golden Nugget in Atlantic City, it had 500 guest rooms, and it was doing $100 million a year of income 25 years ago, 35 years ago. So if you get the right people in the guest rooms, you can make a lot of money. I mentioned the steakhouse. We've got a rooftop pool and spa, a nice parking garage, and it opens December 26th. We'll be having play nights. The construction will get turned over to us early in December, and our employees will be practicing and doing play nights. And then we'll send the employees home for Christmas with their families and open the day afterwards. So like most families, I find you get together with your family And you all celebrate Christmas, and the day after Christmas, like, what the hell do we do now? And you end up doing something else. Well, hopefully, we're the something else. So we hope that we can have a lot of people there. And then we're planning a significant party on December 31st, which is both kind of an opening party and a, obviously, New Year's Eve celebration. Page 12 shows the front of the facade. And all that fancy brickwork is actual brick. Some of our competition, one in particular, used like a brick veneer, which is now peeling off. Ours looks really nice. We did spend the money to have some pretty fancy brickwork, which fits very well with the old buildings in town. And then a lot of the hotel rooms are in that glass thing up on top. which is designed to kind of meld in and reflect the clouds in the mountains and kind of mask the size of what the building really is. That one square, rectangular building you see in front, the one-story building that's got a ladder leaning against it, that's a jewelry store. And when we got the city's permission to close 2nd Street, because this building squats right across 2nd Street, one of the commissioners said they didn't want a big gap and the facades along the street. They thought that would take away from it, and there was some suggestion that we could take an old streetcar and put it there. There's an old streetcar up the street that uses a tourist information booth. We didn't want to do that, but we said we'd build a jewelry store there that's the size of a streetcar, so that's what that is. Jewelry stores go very well with casinos. People will win money, and then they have to bring home involuntary jewelry, as someone once called it. And so we think the jewelry store will be a nice amenity, and it fits very well. And it was important to the city in order to get permission to close Second Street. So we addressed it in a good way. The high-end restaurant is those windows to the left. You can see a chimney there. That's because where there's valet pickup, we have an outdoor fireplace that will keep you warm while you're waiting for your car. This is a cold climate. And the main valet entrance is behind the jewelry store. The parking garage is on the back of the building. The next page shows the main part of the casino, the table games part. Those tall windows will be shaded and they have curtains on the inside because you don't want a lot of daylight into the casino. But we wanted the outside to look regal. So we put these windows on the outside, but on the inside they will not bring in a lot of light.