Full House Resorts Inc Q4 FY2021 Earnings Call

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 Lewis 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 are 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 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 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 we don't expect to occur in 2022, and so adjusted EBITDA could have been even higher for the 2021 period. And 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 didn't occur in the fourth quarter. It occurred in the third quarter of 2021. That led to different timing differences on the income statement. If you're looking only at the fourth quarter, you'll notice there, 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 is $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. If you add that back, it gets you above $49 million. Keep in mind that our sports skins weren't up and running for the full 2021 period. 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 CEO, 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 minutes 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. 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%, and 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 economy slot system and the efforts of our team there to manage costs. In Colorado, construction is in full swing on Chamonix. It really is an impressive sight to behold, an extremely large footprint, and it's really starting to come up out of the ground now. If you get really bored, pull up the website there, ChamonixCO.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, 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 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 Black Hawk is doing quite well. Our estimates peg that new Monarch casino 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 Black Hawk, where there is actually quality gaming product unlike in Cripple Creek. Over in Black Hawk, gaming revenues have been up strongly, up in the mid-40% range. I think Dan's going to speak to more of all that in a second. In Nevada, our staff segment showed great strength during the year. It really was the segment that was most affected by COVID, because capacity constraints at the key 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 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 tenfold. 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 just completed 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. Our last segment is our contracted sports wagering segment. On December 1st, 2021, our six skins went live, compared 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 are 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. 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. That gives us a total of $410 million of those notes outstanding as of today. We issued those notes above par at $102 million. The implied yield of warrants for those was about 7.7% on the issue date. We also had $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. From a liquidity point of view, feel like I said this a year ago at this time, 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 buildout of Chamonix. We also have a $40 million undrawn revolving credit facility, which has a floating rate below 4% currently, 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 in about half a year, and Chamonix, which will open in the second quarter of 2023. I talked a lot. With that said, Dan, do you want to chat about some strategy?

Let me discuss the company's five-year strategy as we see it. Our current EBITDA from the existing business is approximately $50 million before factoring in $10 million of debt, which is entirely from a single bond issue at an 8% interest rate. This results in around $33 million annually in interest expenses. Our maintenance capital expenditures for existing properties are relatively low, around $5 million a year. We have net operating losses that will help us offset taxes for a while, and we will also benefit from accelerated depreciation on new developments. Over the next five years, we do not anticipate paying any income taxes. Currently, we have $340 million in cash available to sustain our operations, which require about $10 million, as well as a $40 million unused revolver. Completing the Chamonix project will cost approximately $215 million from this point, and we have already made significant investments. We recognize that steel beams are currently being produced to our specifications, and payment is only due upon delivery to the property. Despite appearing understated for a $250 million project, we still have $215 million left to finalize it. The Chamonix will be a four-star hotel and casino, a unique offering in Cripple Creek. Colorado is an underrepresented market in this regard. Denver has a population of 4 million, and Colorado Springs has 1 million, which comprises most of Colorado's population. The gambling expenditure per capita is significantly less than in other markets across the U.S. Historically, the state imposed a $5 betting limit, which made it impractical to create high-quality venues until the limit was raised to $100, and previously built establishments in Black Hawk have thrived since then. Last April, the removal of betting limits entirely has allowed for more robust investment and increased gambling per capita, making it an appealing market. Entering this space can be challenging due to the limited legal jurisdictions, and it took us a couple of years to assemble the necessary land and site. Once Chamonix opens, it will feature 300 guestrooms. To put this into perspective, the Monarch Casino, which opened in late 2020, has 500 rooms. Both properties will include parking garages; although Monarch's garage is larger, we compensate with significant surface parking. Additionally, we offer much more convention space than the Monarch, accommodating around 1,000 people for events. The size of the casinos is comparable, with each offering approximately 900 slot machines and 20 table games. We face less competition, as we will be the only four-star hotel and casino of this scale in Cripple Creek. Monarch competes with establishments like Ameristar and Jacobs Place, and is closer to Denver, while we are closer to Colorado Springs. Our primary market will always be Colorado Springs, but we view Denver as a strong secondary market, as some individuals may travel further for a new experience. Monarch operates two casinos, one in Reno and the other in Black Hawk. Although they do not disclose specific earnings, historical data indicates that their Reno operations consistently generate between $30 million to $40 million annually, with the Riviera in Black Hawk reportedly making about $15 million. Looking at Monarch’s 2021 results, their operating income plus depreciation was around $135 million, equating to an EBITDA of approximately $137 million—estimated to be $37 million from Reno and roughly $100 million from Black Hawk. Our hotel count is three-fifths of theirs, and we anticipate generating around $50 million a year once Chamonix is operational and fully established by the second quarter of 2023. Shifting to Waukegan, we were selected to develop this site last December through a competitive process. Our proposal for the project totals $500 million, with about $100 million allocated for a temporary casino. This temporary structure will occupy the same 40 acres as the future permanent facility but at the opposite end, reusing the same parking area, which will familiarize patrons with the location. In order to expedite our opening, we have acquired a sprung structure, commonly used across the U.S. For instance, Tesla currently utilizes one for an assembly line. Our sprung structure, costing just over $4 million with a $1 million installation expense, will enclose the size of 1.5 football fields. Within this space, we plan to operate a casino featuring 1,000 slot machines, 50 table games, and two large restaurants, along with an attached diner. Given the nature of the venue, creating a high-end dining option within a tent poses challenges, hence the decision on three restaurants. A significant portion of the temporary project budget, approximately one-third, represents upfront gaming taxes required upon opening, and about $25 million is allocated for slot machines that will later be integrated into the permanent facility. Most of the pre-opening expenses will go toward hiring and training personnel, with employees from the temporary location transitioning to the permanent venue when it opens. Essentially, we are investing $100 million now, followed by an additional $400 million to launch the permanent facility, which we expect to operate for nearly three years prior to the permanent opening. Assuming the temporary casino generates $50 million annually, this would provide $150 million during the construction of the permanent facility. Our existing casinos already cover our interest expenses, leaving us to identify an incremental $250 million necessary to transition to the permanent structure. In terms of projected revenues for both locations, the nearest significant competitor, the Rivers Casino, about 32 or 33 miles away, achieves around $500 million in gaming revenue despite being limited to 1,200 slot machines and is expanding. With typical margins, this likely translates to $200 million in EBITDA. Our expectations are more conservative given our location in Waukegan, a town of approximately 80,000 but within Lake County, which has a population of 700,000, ranking as the 27th wealthiest county in the U.S. If we consider that each resident of Lake County might contribute $300 to gambling expenditures, that could yield $200 million in revenue, producing an EBITDA near $100 million based on regional gaming margins. This does not account for an additional 11 million individuals residing within a 90-minute radius of Waukegan. It’s plausible that the permanent facility could target $100 million in EBITDA. The concern remains regarding how many patrons will be drawn to a temporary facility that may not be as impressive as the permanent structure. The temporary location might generate $50 million, with the permanent project reaching $100 million, but these figures are speculative. Now, let's review the timeline: we anticipate launching the temporary casino in the third quarter of 2022, and we’re currently working diligently towards that goal. The critical structure will arrive soon, and we’re in the process of securing permits for preliminary foundations to accommodate the tent's installation, which involves substantial logistics. We’ve arranged for the slot tiers and are finalizing our selection of slot machines, with a job fair scheduled shortly to begin recruiting key personnel and department heads. We expect the temporary casino to open in the third quarter of 2022, with Chamonix following in the second quarter of 2023. Construction on the permanent facility in Waukegan will commence in late 2022, supported by cash flow from operations throughout 2023. Early construction expenses are relatively manageable, but are anticipated to escalate significantly over time. For the first 18 months, we expect that the profits from the temporary casino will sufficiently fund the construction of the permanent venue. By February 2024, our bonds will be callable; by that time, we estimate our EBITDA will approximate $150 million—comprising $50 million from existing operations, $50 million from Chamonix, and $50 million from the temporary site. While these figures may not be exact, industry trends suggest that some projects will outperform expectations, while others may lag, potentially placing us in that general range. Our debt, estimated at $410 million currently, will be under-leveraged compared to most casino companies. We foresee the potential to replace that $410 million with about $650 million in new debt, whether through bonds or bank agreements, dependent on market conditions at that time. This level of leverage is acceptable given the projection of $150 million in EBITDA, especially since the additional $250 million will finance the permanent facility, expected to be operational by 2025—roughly three to three-and-a-half years from now. By that point, when everything is consolidated, we might anticipate $50 million from existing properties, $50 million from Chamonix, and $100 million from the new casino. Collectively, this suggests about $200 million in EBITDA. It remains uncertain whether we would opt to sell the company or continue operations at this juncture; this decision may become more apparent over time. If we consider a valuation of 10 times EBITDA based on property sales in Las Vegas, particularly since we own or lease our real estate with purchase options, a sale could yield a substantial return. Valuing at $200 million with a 10 times multiplier translates to $2 billion, subtracting projected debt of $650 million yields a potential value of around $1.35 billion. With 37 million shares outstanding, this implies a share price exceeding $30—a quadrupling from our current valuation—even after being the top-performing stock in the industry last year. We genuinely believe in our promising future, and we diligently work each day to ensure we execute properly on our plans. That's all from me, Lewis; have I overlooked anything?

No. You're good, Dan. Want to take some questions?

Yeah. That'd be great.

We’ll take our first question from Ryan Sigdahl with Craig-Hallum Capital Group. Please go ahead.

Good afternoon, Dan, Lewis. Congrats on all of the recent success and awards and licenses and everything else, and appreciate the comments as well.

Great.

Thanks. Yeah.

Maybe switching back to the base business, because you answered most of my questions on The Temporary and Chamonix and everything else. But can you comment on the core business, the casinos you have today, performance in December versus January versus February, and the impact Omicron potentially had there?

Our business has stayed strong. I mean, Omicron, we had issues like a lot of businesses with a lot of employees getting Omicron and we had to scramble to fill in, but I think that's mostly past us. Our business has stayed pretty steady. The biggest operating struggle we have is really in Colorado, where we've got no surface parking. We've managed to continue to make some money despite that, but it's pretty torn up. And of course, it's kind of weird to be sitting here talking about putting slot machines in Waukegan when there's a war going on in Europe. Obviously, the war has no direct impact on us. Price of gasoline going up has been a distraction, but historically when the price of gas goes up, it has been good for regional gaming. When you get on an airplane and fly to Las Vegas, you're actually burning more oil sitting in that airplane than you are getting into your car and driving to a regional casino. The price of gas goes up, the relative cost of coming to us versus other vacations is cheaper. We don't want gas to go up this much. I do not want the price of gas to increase, because I buy gas too, and all the things in the economy and the reasons it's going up, but business-wise, I don't think it's a negative for us. I think Omicron is behind us, and hopefully, the pandemic is somewhat behind us. People aren't wearing masks anymore. I view it as anybody who hasn't gotten vaccinated is now at this point almost like somebody who was a heavy smoker. They are taking a personal health risk, similar to how I don't want to be on an airplane where people are smoking. It's not allowed to smoke because of secondhand smoke, and so on, but it's kind of similar. It's going to become part of our normal lives, and we'll just deal with it. Things are still pretty normal; pretty much the same results as last year.

Good, Dan. You mentioned the surface parking issue in Colorado during the construction route. Have you noticed an improvement since you added the valet parking and shuttle services there, or has it just been this run rate given all the construction around?

We put that in just as we were closing off our surface parking for the construction. It was kind of an offset. I think if we hadn't done it, we’d have been really struggling. It does cost us some money to do that, but we've held our own. The differences are, when you look at Colorado as a whole since last time, it’s up like 40%. Black Hawk is the biggest piece of that, but even Cripple Creek is up pretty strongly. We're not, and we had one competitor with a 100-room hotel, and we understand they’re doing very well with that. It’s a Fairfield Inn type hotel—a pretty simple hotel—but the market was starving for rooms, so they added 100 acceptable rooms, and I think they’re doing well with that. When we back out what we think they're doing and look at us, it's like we think everybody in Cripple Creek is up except us. The only reason we're not up is really in parking. Otherwise, we’d be up nicely. That’s just something we’ll do work for another year, and when Chamonix opens, I recognize Bronco Billy's; we're talking about Bronco Billy's, but even Bronco Billy's has no parking, has construction all over, and has parts of its casino closed because of the construction and is hanging in there. I joke with the general manager, it’s almost like, the guy at Money Pai, Simon when they cut his arm off and he's bleeding and says, 'Hey, I'm still here.' That's Bronco Billy's today. They're making money despite all the stuff around them.

Good stuff, Dan. One last one from me, then I'll turn it over to the others. Just I think you mentioned it a bit, but can you talk through the timeline on Waukegan of temporary up the summer, but it sounds like you're going to run that for three years with the permanent out to 2025. I guess, when are you planning to really break ground on the permanent, and does the bond being callable in February 2024 have to do with that, or is it just a matter of timeline?

No, it doesn't. The call date of the bonds is irrelevant, except that it was when we were trying to figure out how to finance that logical way to finance the cost of the temporary was to do an add-on to the bond deal. It's really two-year money because it's callable in two years. We’re moving as quickly as we can. We don't control everything, so for example, we have to get certain permits from the city, and there are certain meetings set up in the next few weeks to allow that to happen. Certain things have to be approved by the Gaming Commission and they've been working very well with us so far. We need their permission in just about everything we do, and assuming everything continues to go smoothly, we can be open this summer. We actually have a timeline that has us open for the 4th of July, but that never happens as everything has to happen just perfectly for that. So don’t expect the 4th of July; I think if we’re open by Labor Day, that’s a hell of a successfully quick. Remember we were just chosen in December. We’re moving as quickly as possible. It's exciting. I remember someone asked me what color they wanted the slot chairs, and I said whatever is in stock, just whatever is in stock. We’ve rented offices now, and we’ve bought an additional piece of land that was pretty important, and that has been enclosed, but we have it under contract, so it will close. We’re moving very quickly. It’s actually kind of fun. You don't have time. The more permanent casinos you really stop and think about things; this is going to run for three years. The state law allows you to operate a temporary casino for two years, and then if you're under construction on the permanent, the Gaming Commission can give you a third year. Our permanent casino is pretty intricate; it's pretty complicated building. I don't think it's possible to get it done in two years. I think we will probably seek permission for some of that. If we open in July or August of this year, we will make sure that the permanent is open three years out. It dovetails well with the call date on the bonds; that’s coincidence.

Thanks, Dan.

Even though it’s going to be temporary we are working on some things that give it a little more splash. I won’t ruin the surprise yet, but it will still be a very, very special temporary too.

We'll take our next question from Chad Beynon with Macquarie. Please go ahead.

Hi, good afternoon. Thanks for taking my question. Dan, Lewis, you laid out the vision for the next five years, and I think a lot of the questions that we're going to get from investors moving forward will be around Waukegan and Chamonix. I’m wondering how you're thinking about the current portfolio? There are certainly bids out there for assets; you have a few that have put up some good results. Is there a scenario where you would look to potentially divest at the right price to help maybe some of these future funding needs given that a lot of the future and your stock price is going to be determined by the returns at Waukegan and Chamonix? Thanks.

As a public company, I guess, anything's always for sale. But we don't have a need for the money. I kind of outlined how we expect to do it. Our existing bonds are eight and a quarter, and we issued them at 102, so it's about 8% money. We can borrow money under a credit facility at 4%. To sell a property to get cash, you're comparing that against borrowing costs of 4% floating and 8% fixed. It has to be a pretty good multiple to make that attractive. Frankly, I'd like to gather diversity; I mean, today half of our income comes from the one property, the Silver Slipper in Mississippi, which is a great property. But we're going to be far more diverse in a couple of years. I guess Waukegan will still be the giant, but it’s nice to have some diversity. In Northern Nevada, we have the two small properties, but the same management team runs both of which allows us to afford a better management team than either one could probably afford on its own. Even there it’s like if we get offers all the time for Stockman’s, because I think a lot of individuals are like, 'Hey, that’s something I can afford by myself.' But it makes a million a year, and by sharing the administrative costs with the casino at the high end, it works. If you’ve sold one of those two, you’d have a management team that’s kind of expensive to be carried by the other. So, Bronco Billy’s! is a partner with Chamonix. Rising Sun, if you were offered a big price, frankly property is doing really well now, and it’s pretty big property, and we’re pretty happy with it. The answer is, look, I’m never going to say no if somebody offers us $100 million for Rising Sun; I will beat him to the bank. That’d be great. But at the prices we're likely to get for any of our assets, we're better off holding them.

Great.

I guess the answer is, I'm never going to say no. If somebody offers us $100 million for Rising Sun, I will beat them to the bank. That'd be great. But I think at the prices we're likely to get for any of our assets, we're better off holding them.

Okay. I wanted to ask; I believe you talked about this during the process of seeking the license in Waukegan. Is it still your view that one of the casino, the Chicago casino licenses, of which there are three bidding right now, if and when that's constructed and operating, it will have very little impact? You've noted that you primarily compete against Rivers and then maybe some of the properties over the state line and closer to Milwaukee. But is that still your view that the new competitions, so to speak, in the state won't really affect you in Downtown Chicago?

Well, we've always assumed that there would be a casino in Downtown Chicago, because that has been discussed for years now. So, if you're building a $500 million place with a long-term view, you naturally assume that's going to happen. We've also assumed that there'd be slots at Arlington Park; that was in our original projections, and now the Chicago Bears are moving there, so there won't be slots in Arlington Park. Sometimes you get a pleasant surprise. If you look at the geography, anybody going into those Downtown casinos would have to drive past Rivers to get to us, and so I think because of that, we're quite a bit further from Downtown Chicago than Rivers is. I don't think it has much impact on us. It will be a little different experience too. If you look at the quality of the competition, the other thing that kind of drew us to the market was, other than Rivers, all the other casinos in Illinois near Chicago are old riverboats. They're 25 years old. They’ve got low ceilings, and the smoke kind of hangs in them. They’re multiple deck boats; they don't have to sail anymore, but they had to be on a river. The rivers aren't near freeways, so you have to get off a freeway and drive on often kind of circuitous two-lane roads to get to almost all of the casinos in the state, the only exceptions being Rivers. You can go to Indiana now, which has the Hard Rock Casino right off a freeway, and the giant Caesars place in Hammond is pretty close to the freeway. But they are on the far side of Chicago from us. If you look at Elgin, Joliet, and Aurora, they're all old riverboats. Downtown Chicago will be nice because they're all talking about big expenditures. Ours is going to be a nice place, and between the two of us, we’ll have the nicest casinos in the Midwest; a lot of people there.

That drive from downtown to us is a bit of a hike with traffic and everything else. The nice thing about our location is we're kind of tucked up in that northern suburb, really, all by ourselves. I won't go over everything that Dan just said, but when you get bored, look at that map and look at the nearby casinos; you’ll realize pretty quickly where the closest casino to 1.2 million people is, that alone is a tremendous benefit.

Yes. We will be the closest casino to 1.2 million people, before and after the Chicago casino opens; that does not affect that math at all.

Okay. Thanks. I wanted to ask, what percentage of the Chamonix construction bill has been finalized at this point?

It's better than 70%, I believe it has been subcontracted to the subcontractors. It might be higher than that, but I haven't checked with the construction guy lately.

Okay.

But it's either work we've already done or it's already been subcontracted.

Great. Thanks. I appreciate it guys.

Yes.

Yes. Thanks, Chad.

We’ll take our next question from Edward Engel with ROTH Capital. Please go ahead.

Hi. Thank you for taking the question and congrats again on Waukegan. I appreciate all the color on this call. Just kind of getting back to that CapEx budget; looks like you lifted it a couple dozen million on Chamonix versus the last time you checked in. Was that all just cost inflation and supply chain issues, or is there anything incremental that you're doing there?

No, it was sadly what you said: supply chain issues and frankly unemployment being so low in Colorado, getting people to work on the backside of Pikes Peak at 10,000 feet. We had to pay up; or our subcontractors had to pay up. Our original budget of $180 million was based on the design we had and the experience of our contractor—the largest contractor in the state. They’ve built Ameristar and Black Hawk, and we were all kind of shocked when we put things out to bid how much higher it was. There are tariffs put on by the former president on steel from China and places like that. Those haven’t gone away. The following administration kept those tariffs in place, which lets US steel companies charge more than they ever had and on and on and on. We’ve been fighting for that for a while. When we made that change in the budget for Cripple Creek, I had Alex, our development guy, go back to our contractor and say, 'Let’s rethink what this thing is really going to cost us at Waukegan,' because we had presented the whole building and everything? The state came back and said, 'Are you willing to pay us more in taxes upfront?' Our answer was, 'You know what? We’ve figured out that this building—this beautiful sexy building we showed you with all these restaurants and everything—isn’t going to cost $400 million; it’s going to cost $500 million.' That’s our increased bid. We will build what we promised you, but it's $500 million, not $400 million. That increase in that budget was dictated by what we learned in Cripple Creek. Hopefully, we have that sort of issue taken care of in this expanded budget in Waukegan. Time will tell, but we went to the fat side of what we thought we could build it for.

Perfect. Thanks for the color. Just kind of on the quarter and the last couple of weeks. Have you seen any change in behavior since the mass mandates were lifted in Colorado or Nevada? Would it be fair to say hopefully; things have picked up above where they were probably in the first quarter and then some from the fourth quarter?

No, it’s been stable. I haven’t seen an increase because of it. I see people smiling, but maybe they were smiling behind their masks. I don’t know. Everybody’s kind of happy to have the mask gone, but I haven’t seen a lift in our business because of it. Some of our markets, where they were required to wear masks, they were barely wearing the masks. They had masks down around their chin.

Actually, for whatever reason, maybe it was a pleasant surprise. Historically, I've found the Olympics were bad for our business. People stayed home and watched television. I expected we’d have a soft period during the Winter Olympics. We didn’t. I don’t know whether that meant that not as many people were watching, or maybe it was like, 'Hey, I don’t have to wear a mask; I’m going to go out'. I don’t want to watch the Olympics; I don't know. Our business has been fine—nothing unusually up or unusually down.

We'll take our next question from David Levine with MidOcean. Please go ahead.

Hey, thanks. How are you guys? Thanks for taking my questions. First question just around the current operating environment with respect to gas and food prices. I thought your comments were interesting. Can you talk about some of the moving pieces around keeping the guidance or the base business the same? Do you think, perhaps, like older customers who haven’t gambled because of COVID maybe have more income will come and that'll offset some of the potential weakness from the higher gas and food prices, or do you just not expect there to be really much of a drop-off? Additionally, can you speak to the margin side; do you think you’ll be able to keep up the robust margins? A bit of a jumbled question, but a little more color around just the inflationary environment would be helpful. Thanks.

Actually, in there, you had a lot of questions. I found the older segment back when there were vaccines, and stuff. We saw a definite fall-off of gambling by older people. Fortunately, that was offset by younger people, and we've been able to maintain the younger people and the old people came back. That happened really a couple of quarters ago. At this point, we're back to a normal age spread. We're doing the same revenues with a lot less marketing dollars, which is part of why our margins have improved. That's a function of putting the Konami system in at the right time; honestly, paying smarter about our business when we went to the pandemic closures. We kind of went to zero-based budgeting and examined everything. As we reopened, frankly, I think a number of the other casino companies looked at it and said, 'What? $5 blackjack tables don’t make money? Let's stop offering it! We don’t need to have two-for-one buffet specials mid-week, et cetera, et cetera.' That’s helped our margins. The cost of food is obviously going to affect our costs; we will seek to pass that through, so it’ll again cost more. A lot of our customers are comped anyway, but they’ll end up burning through their points faster when they get comped. They probably don’t perceive that as much. And on the cost of gas; I just stop and think about our customers come almost predominantly by car. Very few people fly in, but almost everyone’s driving. If you're in a car with two or three people, and you're driving 50 miles; that’s two gallons of gas, which you're dividing amongst three people. Whether the gas is $3 a gallon or $5 a gallon or $8 a gallon, doesn’t really change the cost of that trip very much because you're really not using that much gas. Now if you're living in Cleveland and you're in Cincinnati and you’re thinking of going to Las Vegas, yes, that takes a lot of gas, even in a 737. The price of gas going up or down doesn't seem to affect us very much because we're kind of the easy alternative.

Interesting. Okay, that's helpful. And then on the skin points; my sense was that before this kind of announcement the way to think about skin revenue was in the $7 million to $9 million range, correct me if I'm wrong around that; maybe $8 million to $10 million. How do these additional skins frame much more revenue that might add to the business?

We had a couple of things. One is they paid a market access fee upfront. Churchill, which was one of our partners in both Indiana and Colorado, announced they’re exiting the business, which is disappointing. When we did the deal with Churchill, they had the opportunity to be the DraftKings; online betting had been legal for years. They had a website for years, and even had an office in Mountain View, California. They kind of dropped the ball and ended up with a minuscule market share. They were losing money, so they're exiting the business. There are other people who still want to be in the game and will step in. The market access fee they paid was over $3 million. We've only amortized because you have to amortize that over the life of the contract. We’ll find replacement players, and there are other players who want to step in. There will be another market access fee, and there will be a commitment from somebody else. The Illinois license for sports betting, which is new, is significantly more valuable than any of the others. Our guaranteed minimum without the market access fee is $7 million a year.

$7 million without the market access fee and $7.6 million if you include the annual amortization.

With Churchill leaving, yes, that shrinks some. There are confidentiality clauses in each of those contracts, so we can't tell you exactly which one each is. But if you said, 'Well, you just lost two out of six because Churchill's pulling out,' that's true, but we hope to replace them. The $7 million a year could shrink a little bit as we find a replacement and get them licensed. When you add on Illinois, I'd be surprised if we’re not north of $10 million in that segment.

Illinois plus the replacement would get you north of 10.

Yes. There's no guarantee the replacements will be on the same terms as Churchill. It might be better or worse. There are companies out there. If you go from 7 as of March 15, they are guaranteed minimum of something less than 7. It could be a third less than 7 going from 7 to what, 4.7. Then you find replacements back to something close to 7, and then you add Chicago. You're probably north of 10.

When I think about The Temporary this year, if you talk about August, opening something around there, for EBITDA there for the year, obviously you're kind of exiting the high season, so you wouldn't exactly do like a third of 50, but would it be something like—I'm just thinking for EBITDA for The Temporary for just this year. Would it be like a quarter times 50, is that a fair estimate, or am I not thinking about—?

Even with our board, we said, 'Assume that our existing business does X.' It’s uncertain when we can open. We assumed that the first month we’re open we earn zero because of the first full month—if you opened July 15, when you first open any casino, it’s temporary or permanent, you have much higher costs, hiring additional employees—employees don’t really know their jobs yet. There's a lot of turnover, and a lot of training costs. So, you don’t really make a lot of money. Even Bellagio did not make a lot of money in its first month or two. You start getting it under control after you've opened for a while. If you opened July 15, assume you wouldn’t make any money in July, probably not much in August, maybe nothing. By September, you might start making money and then by the time you get to October, maybe you're making $4 million a month, something like that. How much ends up in this year will depend very much on exactly when we can get open. It’s not completely in our control.

Okay. Thanks a lot, Dan.

You're not wrong, David, that you can get some harsher winter weather over there in Chicago. Knock on wood; hopefully, the sheer volume of people that we have right around us will help offset much of that seasonality.

In terms of having an earnest mile trying to put a number on this year; a job I used to do as well is guess when you can pinpoint an exact date. Your guess within that third quarter is about as good as mine. If you assume it opens August 1, then they wouldn’t make much money in August. They would make some money in September, and then maybe $4 million a month thereafter, use that number. We’re moving as quickly as we can to get this open. Exactly when is, a lot of things not in control.

With that, Dan, we’ve run out of time, so feel free to close it out.

That’s it. We’re working hard. It’s pretty exciting. I think we got a great future, and we had a great team of people, and everybody’s best in cryptology. Waukegan is a game changer for us, and it came at the right time. It’s the right size. It fits in perfectly. You can see once you put that together with Chamonix, the five-year strategy is as good as it gets. Now we just need to execute that. Thank you, everybody. Take care.

Thank you, everyone.

Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect.