Full House Resorts Inc Q2 FY2020 Earnings Call

Greetings, and welcome to the Full House Resorts Second Quarter Earnings Call. As a reminder, this conference is being recorded today, Thursday, August 6, 2020. I would now like to turn the conference over to Mr. Lewis Fanger, CFO, Full House Resorts. Please go ahead.

Thank you, and good afternoon, everyone. Welcome to our second quarter earnings call. I apologize for doing it during the trading day. We usually go after market, as you know, but it is a packed day today with a couple of our peers going after market. 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 a reconciliation of those measures, please see our website as well as the various press releases that we issue. Lastly, we're also broadcasting this conference call at fullhouseresorts.com, where you can find today's earnings release, the 8-K, as well as all of our SEC filings. And with that said, we're ready to go, Dan.

Okay. 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. We took the unusual step of releasing our June numbers because, frankly, the quarter numbers are not very relevant. Last year, of course, we were open; every property was open for the full quarter. This year, all of our properties were closed for at least half the quarter. 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. Let me phrase how unusual this is. I mean, we have 5 casinos in different parts of the country, and they’re each different. We’re small, but we’re pretty diverse. Sure, you'll have your challenges, like you could have a hurricane in the Gulf Coast. It could knock that casino out for a week. 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. So this was really an unprecedented situation, and I’m sure much of the economy could say that. I hope and think that the worst is behind us. Now, 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 better with our marketing. We really took a page out of an earlier time in Lewis and my career when we were at Pinnacle, and Katrina and Rita shut down L'Auberge and the properties in Mississippi and Louisiana. We got focused on how to open more efficiently. When we did reopen, after a couple of months, we were significantly more efficient than we were when we closed. It was a good opportunity to take a fresh start, get rid of the sacred cows, and reexamine everything, and we did that. To put this in perspective, Silver Slipper was opened in May. It was open for the full month of June but only had half its slot machines. When you go to every other slot machine, sometimes that meant every third slot machine was open. The table games were not operating as many as we used to, table minimums are higher, and the number of people at each table is limited. 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. As a result, the EBITDA was 28% higher, $1.7 million, which was the best month in its 14-year history, despite having half its slot machines closed. Bronco Billy's was only open for half the month, again, only using half its slot machines, none of its table games. Colorado has not approved table games out of concern that the chips might transmit disease. Despite being only open half the month, our casino revenues were 75% of what they were in the prior year of June, which means our win per day was up quite a bit. Our payroll for the period we were open was down about 11%, and our marketing expenses were down 52%. Part of that was we weren’t exactly sure when we’d open, making it hard to advertise. All of a sudden, they said we could open, and we did. The EBITDA was almost double what it was last year for the month, despite only being open 2 weeks this year. Rising Star was only open half the month too, operating with about 40% of its slot machines and half of its table games. Its revenues were down 39%. But remember, it was closed half the month. 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 time it was open was about half of what it was last year. Marketing expenses are off over 80% from what they were last year. The EBITDA was up 33% despite being only open half the month. A little more challenged in Northern Nevada for issues I'll talk about in a minute. They were open 90% of the month and had most of its slot machines, but it’s still off from last year. Less than half of its table games were opened. Casino revenues fell 31%. Since it was open most of the month, casino revenues are down on a revenue per day basis. Payroll is down 40%. Marketing expense is down 50%. We made 80% of what we’d made last year despite pretty soft revenues. Overall, our operating properties, the EBITDA margin in June was up 9 points over the prior year, despite carrying an entire month of utility costs and real estate taxes and rent with only half a month of operations at Bronco Billy's and Rising Star. I will tell you those trends have continued through July and into early August. July was a very strong month as well. Why is this? A few things: We opened conservatively, like we talked about; second, it proved an adage I’ve always said to our GMs, never forget that people gamble, not slot machines. 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. So how can you do the same revenues with half the slot machines? Well, walk into any casino, and you very rarely see every slot machine occupied. All we’re doing is kind of forcing people as to which slot machines they go to. Casinos generally don’t run more than 50% occupancy at their 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. In fact, it’s a little bit of a wake-up call. We don’t actually need as many slot machines. But slot machines are expensive. The casino actually looks better and feels better if you remove some slot machines. We are doing that in some cases just to not have dead machines sitting on the floor, but maintain that social distancing. Why are people coming out and gambling? A few reasons. Certainly, people are hesitant to fly. Air travel in the country is down sharply. Yes, 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 wear a mask. So people are hesitant to fly. That's one of the challenges Las Vegas has; people are hesitant to fly here. So I think to some extent, our customers, like people in Colorado, do come to Las Vegas. It’s ranked third or fourth of states in terms of visitation to Las Vegas; at the moment, they don’t want to fly. They gamble closer to home, and I think that’s helping us in a few places. I think that hesitation to fly is going to be there until a vaccine is out, proven effective, widely distributed, which may take 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 were because we find out that the casino close to home has the same slot machines and the same games. Second, a lot of the competing entertainment isn’t there. There are no movie theaters. You can’t go to movie theaters. In some states, you can’t go to bars or there are limitations on bars. There haven’t been and aren’t likely to be for a while, live sporting events. You can’t go to hockey games, football games, or any other type of live sporting event. 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. You can’t go to concerts or live theatrical events as well. You can’t go to a crowded restaurant to the extent that was kind of fun. We 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, has a very creative setup. We take your temperature when you come in, we have a big post that we put right on the slot machine 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. Here’s an empty machine that doesn’t have that card on it. It needs disinfecting, so we disinfect it, and the next person sits down. It’s a type of entertainment that you can be reasonably comfortable that you’re socially distant from other people. Obviously, there is a lot 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 a Konami system that can be played at machines spaced throughout the building. 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. 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 measures a little differently. If you say 60 and over or 65 and over, the revenue we’re seeing from that group is off, and off like 20% to 35%. However, that is more than offset by younger people who are new to us. They’ve never been here before or are coming more often or gambling more or staying longer. There’s a whole new segment there that we’re trying to get to know, and I think when there’s a vaccine, the older people will come back. 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. People cite how generous unemployment is, but remember, when you’re on unemployment, you don’t have health insurance, and you have to pay for your own health insurance. Health insurance is pretty expensive. I don’t think people realize how much companies actually pay for their health insurance. 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. 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 getting rich on the stimulus money. I think it was a help for us, but if it goes away, we will still be fine. I think it’s not likely to just go away in one fell swoop. We’re going to remain cautious on expenses, payroll, the number of employees, operations, and that sort of thing because, who knows? Things could turn around, and I think it’s important to be cautious. Marketing, we’re smarter, it’s more targeted, and we’re using the Konami system, which we just installed at two of our five properties. We already had it at one of them. We’re examining operating hours very carefully to avoid running empty restaurants. 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 Mondays and Tuesdays. We operate on one shift on other days, and we charge if you’re not in our program, which helps offset some of the operating costs. We’re looking at everything. This helped us get rid of some sacred cows. There was a buffet at Rising Star that cost us over $2 million a year to operate. Everybody said that was the key to the place; nobody would be there except for the buffet. Indiana doesn’t allow you to operate a buffet at the moment. So we do not have a buffet, and guess what? We still have gamblers in the casino. The $0.49 breakfast that we had in Colorado for 25 years is also history. That was a small coffee shop where the same local people would have breakfast, and none of them looked like gamblers. So I think that has changed too. We used to allow people to redeem their points for cash. We are only allowing free play now. The number of employees needed has also changed. I mean, how many times did you walk into a property and be told that restaurant needs this many employees? We need that many people in the cage, and so forth? This has caused us to reexamine that, and we found out that some of those concepts are just not true. You can operate that restaurant with fewer people. We still sit on about $30 million in cash; about $10 million of that is used in operations daily. We’re still being cautious. With the spikes around the country, we can end up closing again. I think it’s very possible; we might end up closing one place. It’s unlikely we would close all of them, but that will depend on what happens with the number of cases. It cost us $5 million in the first month we were closed with severance. Then thereafter, it cost us about $3 million a month, including interest expenses to our lenders. We want to be careful to preserve our liquidity because this world is still very uncertain. On the mobile sports betting, the second one opened. We have six agreements. We get a percentage of 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 trying to open for football season, a very large part of betting activity, at which point we will get a minimum of $7 million a year in participation in their revenues. We’re a small company. It’d be lovely to spin that off into some sort of entity and take it public at valuations like Tilman Fertitta and Rush Street Gaming are getting, but it should show up in a valuation of our company because we’re in that business. If they allow Internet gaming in the states we operate, we intend to participate as well. I think they probably will, and we will participate then. We have aspects of our company that are quite significant. We’re just too small to spin off into a separate entity and realize that valuation. Regarding our debt covenants, we have two issues with our existing debt. One is we are limited to $5 million of additional indebtedness. We took out $5.6 million of PPP loans that are only at 1% interest. Generally, under GAAP, if you have a deeply discounted loan, you would do a type of present value evaluation. It might go on the books for under $5 million, and we’re okay covenant-wise. We also believe we’re spending that money in a way that would entitle us to forgiveness. Of course, until we seek and receive forgiveness, it’s still counted as debt. If any portion is forgiven, then it’s probably under $5 million in total indebtedness. Just to clarify, we’re asking our lenders to allow that basket to exclude the PPP loan. Additionally, there is a test done at the end of each quarter where total indebtedness cannot be more than a multiple of trailing 12-month EBITDA. We were closed for three months. We flunked that quarter at the end of March and again at the end of June. We’ll probably flunk again at the end of September but may have a shot at meeting it by the end of the year. That means we’re in constant discussions with our lenders. They want to be paid for waiving that covenant, and we’re negotiating on what that payment should be. Last quarter was $0.5 million, which may be a little more this time, but probably something acceptable. We’re not alone; every casino company is going through that same process. We’re confident we’ll be fine. Considering everything, we decided to take two write-offs this quarter. One was in Fallon, where we planned to add office space to the outside of the building, popping the building out. A few years ago, we had a big office building in front that we got rid of to improve visibility and parking. We moved the management team into a construction trailer in the back of the property and kept putting off building new offices because we had other capital needs that affected customer experience. We can’t keep offices in temporary trailers forever. We looked at it and concluded we had too much management at this small property to begin with. So when we went to reopen, we rightsized the management team, reducing the need for offices. We decided to put up some walls in the back of the casino and create a small office area, which would be enough to accommodate our smaller executive team. We wrote off rent on the trailer and design costs on the office. In New Mexico, the Racing Commission had put out a request for proposals a few years ago for the last license for a racetrack in New Mexico, and with that, you could have a casino. We had options on land and put in a proposal that was deemed the best. However, a change of administration seemed to have abandoned the process. It hasn’t come up in recent meetings, and we did not renew our options on land outside of Clovis, New Mexico, writing off a couple hundred thousand dollars in previous deposits. We’re cleaning house; I told everyone that if there’s anything else, this is the quarter to do it. Nobody came up with anything. So I think we got it pretty clean at this point. In Waukegan, we are still in the race. They plan to award the license by the end of October, but they can give themselves more time if they want. We think we have a shot at that. It’s a good opportunity, and we believe we can make a lot of money there. We put together a proposal that’s the best among the three proposals. The gaming commission will be looking at how we can pay for it. We want a partner who can say how they would pay for it and how we would do it. We also have expansions in various stages of planning and entitlements in Colorado for a hotel and meeting space. We had started construction on the parking garage and stopped it, which contributes to our current cash. In Mississippi, we’ve sought entitlements to build another hotel tower extending over the Gulf of Mexico. We’re making good progress on that, but both are currently on hold. We want to see how the economy develops and our business continues to perform. Do the financial markets differentiate between regional casino companies like ours versus others that rely on meetings, conventions, nightclubs, and shows, which are not working in a pandemic? There should be a distinction between regional and destination gaming in terms of risks, at least near-term. Some companies have some of both and will do well in regional markets but suffer in destination markets. It’s unclear yet if the financial market will make that distinction. Given the uncertainties, we’re conserving liquidity but have a number of growth opportunities we could undertake if things improve. Did I get everything, Lewis?

Let me add a couple of small things, Dan. Regarding sports betting, we often get asked how to evaluate sports betting. I want to make one point: traditional gaming companies trade at 8x EBITDA. But remember that in running our physical casino, we have CapEx; we have to fix leaking roofs, buy slot machines. When we look at our sports contracts, we effectively get $7 million of revenue, marginal expense, resulting in $7 million of EBITDA, but this doesn’t have any CapEx attached. What is it? It’s certainly not the same 8 multiple. Is it 10? Is it 12? You can pick whatever multiple you want, but that’s a very important point we want to make clear. I’m pleased that one of our partners, Wynn Resorts, just launched in Jersey. We have nothing to do in Jersey, just to be clear, but we are linking up with them in Colorado and Indiana. It’s nice to see them go live. Knock on wood, as Dan said, we think they’ll be live shortly in our two states. One other point I wanted to make: looking at the first quarter of 2019, our LIBOR rate was locked in at 2.8%. Now, in the third quarter of 2020, we reset at 0.31%. That’s a 2.5 percentage point difference. Currently, we have a LIBOR of 4%, effectively at 1% for us. The annualized interest savings between those data points is almost $2 million a year, which is about $0.5 million per quarter. Some of that will be eaten up by the waiver fees, but just a point I wanted to make.

Okay. We’re happy to take questions.

Our first question comes from David Bain with ROTH Capital.

I was mentioning that we agree with your point about the separation of the sports multiple, and thank you for that. It appears that in June 2020 compared to June 2019, you achieved approximately 50% of property EBITDA for that month relative to the quarter, or around 60% of adjusted EBITDA, again for the month compared to the same quarter last year. Can we get a...

No, no. I'm not sure that math is right. I’m adding the four segments, and adjusted EBITDA in 2020 was $2.7 million versus $2.0 million last year; that’s for the entire month versus the entire month, despite two key properties open for only half of that month. That’s before corporate; corporate is also down from last year. So we had about a 10-point swing in margins.

Okay. I was looking at the one month and the adjusted property EBITDA of $2.7 million. Then I looked at last year, adjusted property EBITDA of $5.5 million. But either way …

Yes. The $5.5 million is the full quarter.

Versus for the month.

So what I’m saying is 2.0.

Yes. What I was trying to get at is the sustainability. If we look at July and trends in August, have you seen any indication of whether part of that was due to pent-up demand stimulus? With other entertainment venues now opening, have you noticed any kind of trend difference?

If it had been pent-up demand, we would have noticed a significant decrease in July, but that wasn’t the case. The only substantial entertainment option I can think of is that some sports are now on TV, allowing people to watch games at home. However, that influence did not really emerge until the end of July and early August. Our business remains robust. Though we haven't finalized our July figures yet and it's still early August, I believe July was likely the best month in the company's history, despite having half of our slot machines still closed. July was strong, and the start of August looks promising. I'm trying to understand the situation, especially since many people were aware of the additional unemployment benefits coming. It’s interesting to note that while there are claims of generous stimulus, many individuals who lost jobs were earning minimum wage and may have found unemployment benefits more favorable. For instance, in Mississippi, the typical unemployment benefit is just $200 per week, while some could have been earning $800 weekly. After considering the costs of health insurance for a family, it doesn’t seem overly generous enough to encourage gambling. While it’s true some individuals might be in better financial situations on unemployment, most would prefer to be working. Many of them come from sectors like airlines or restaurants that are currently unable to operate. When they return to work, it will likely benefit us rather than hinder us. While it's difficult to ascertain, the absence of competing entertainment is definitely an advantage. We might experience a period ranging from six months to two years where other entertainment options, like live sporting events and shows, take time to recover. This delay provides us an opportunity as people might opt to gamble locally instead of traveling to Las Vegas. Previously, there were numerous nonstop flights from Cincinnati to Las Vegas, but now there are none.

That’s great. Can you give us a sense of how competition may be trending in Illinois? It seems like you may be inching ahead there according to some checks. And any political happenings? You've always been helpful in keeping things in mind during this process that could delay things? Lastly, should you proceed with a finance partner, could you give us a broad overview of what that could look like in terms of splits or overall structure?

It’s a moving target. We’re talking with different people with different formulas, but we need something where we can come up with some money for our share, and somebody else comes up with theirs. Most of it will be debt financed. I handled deals for the Borgata and Park MGM, done as joint ventures. We’re looking at something similar; this project is too big to bet the whole company, which we don't want. Nevertheless, it’s a very good project and if structured rationally, it should make good money. We’re figuring that out. I neglected to talk much about Northern Nevada. We’re not doing as well for unique reasons. We operate the casino within the Hyatt Tahoe, which has low occupancy compared to last year, traditionally driven by meetings and conventions. That hotel isn't full in July when it normally would be, which affects our casino. We also have local clientele, but we’re not operating the table games 24/7 due to insufficient demand. That property is weak. In Fallon, there’s a local business, and people from the Naval Air Station go there to train, but the Navy isn’t allowing those Carrier Wings off base. They’re restricting travel to prevent the spread of the virus. We face competition from about five casinos in Fallon. We’re the best in town. We’re the Bellagio of Fallon. We’ve adhered to all rules, requiring masks and temperature checks for entry. Our competition has fully ignored the rules. They operated without masks or checks, while we adhered to the guidelines. The irony is you’re allowed to smoke in casinos in Nevada, so we joked offering to punch holes in masks for guests to smoke. Due to the restrictions, the low occupancy in Tahoe has been tough for us, as well as the fact that travel restrictions limit business in Fallon. Stepping back, while we’d traditionally prefer strong meetings and conventions, under these circumstances, we’re lucky to have the diverse business model we do.

That was great color. I was just wondering about Illinois, specifically Waukegan, any political happenings we should consider or hearing about competition?

One thing that happened is legislators altered the rules to make it more feasible to have a casino in downtown Chicago. That didn’t affect our projections very much because we think gambling in Waukegan will principally be from that area between Chicago and Milwaukee. It may draw focus away from others, but we’re not big enough to go downtown. It’s just a review since everything is slowed down. We think they will finish reviewing all proposals near year-end. The spread of Internet gaming, including sports betting and actual gaming, is establishing across states. New Jersey has developed impressive revenue numbers through Internet gaming. Every state has fiscal issues. They can’t shut down for three months without affecting revenues; thus, they're all seeking federal help. Internet gaming is becoming more socially acceptable; states are approving it more readily, so that will positively impact us across states.

Keep in mind our partnerships in sports wagering agreements with Smarkets, Churchill, and Wynn only encompass sports wagering. If we opt for online slots, we could consider those partners for an online casino as well, which will be additive. The online casino itself generates significantly more revenue.

Our next question comes from Chad Beynon with Macquarie.

Wanted to boil down some of your comments, Dan. You provided us with good insights into revenue drivers. Consolidated, you’ve generated margins between 10% and 12%. Silver Slipper got as high as close to 20%. A lot of companies are suggesting a new normalized margin goal. If we return to 2018 or 2019 revenues, can you help think about potential margins? Conversely, what revenue number gets you back to historical margins, with all the payroll and marketing reductions discussed?

For June, our operating margins were up around 10 points from June of the prior year. That margin would have increased had we been open for the entire month. Utility costs were for the entire month so we can’t predict those higher margins long-term. I expect we’ll improve significantly, maybe 5 to 7 points. We were headed that way anyway, making our marketing more efficient via the Konami system, and pandemic conditions accelerated this process. It’s usually challenging to lay off neighbors or friends in small towns, but we had no choice when the pandemic hit. We laid off almost everyone, retaining only 30 people. Our re-opening approach involved positive phone calls inviting them back but not overstaffing. This strategy allowed a cleaner look at operations, examining who we really needed to operate, thus enhancing margins. Marketing is more efficient now; we used to give away hotel rooms; now we focus on free play rewards, leading to higher casino spend without hotel room costs.

Despite current market conditions, there’s been an active market for regional and gaming properties under $20 million of EBITDA. Many bigger players are divesting these, with a number of smaller players. How do you view the consolidation environment in this space given current events? Are you open to growing with another smaller player or divesting assets you feel are no longer core?

Our goal is to make money for shareholders. If someone offers us a casino at a good price and we can profitably operate it, we’d consider it. But today, we are conserving liquidity, as we are not out of the woods yet. No one has offered to sell, likely because it’s a hard time to get a good price. We don’t feel the need to sell anything; however, if offered 15 times cash flow for any of our properties, we’d negotiate. We're focused on getting through these challenges while remaining on our feet, and when we show six months of good performance, we can re-evaluate the opportunities.

Lastly, around the Colorado initiative to increase maximum bets. How is that trending? If passed, what does it mean for your current business and better returns if you resume building?

The hotel we designed is a 4-star hotel. If someone shows up wanting to gamble $1000 a hand, it's just not likely to happen today. It would improve future numbers if we built a hotel and upgraded property. The history of Colorado has shown voters approving such measures, and I think it’s likely to pass. This will have a positive impact, especially if we can commence the hotel build out.

I think we’ve gone over time, Dan. So I suggest we wrap it up.

We’ll keep plugging along here and try to maintain the momentum we’ve gained through June and July. Thank you for your support. We told you on last call, we would be a survivor, and at this point, we’re not only surviving; we’re thriving, and we’re just trying to keep that going. Thank you.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.