Full House Resorts Inc Q2 FY2022 Earnings Call

Good afternoon and welcome to the Full House Resorts Second Quarter Earnings Call. Today's call is being recorded. At this time, I would now 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 second 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 securities 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. 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 then lastly, we did include a small handful of pictures as well of our projects with some updated photos. So you should be able to see that directly through the press release. You certainly can see them through our website via the press release or the SEC filing. With that said, we are ready to go, Dan.

Okay. Well, I guess the main things that address everybody's attention is really the headlines. That's these two big projects. They're both coming along, taking a lot of our attention and time. By the time we talk at the end of the next quarter, we should be in the process of opening in Waukegan. It'll be right about the time we report third quarter earnings, I think, so in the fourth quarter. And then a year from now we will be opening Chamonix. So they're very important. Each of them is probably going to contribute more in earnings than all of our existing five casinos combined. So that's the important part of the company. Second, we're sitting on about $300 million of cash between our cash on hand and our credit facilities and what we earned. We're very confident that we have more than enough money to finish construction of these two projects. I keep hearing these rumors that we're somehow going to raise money, and we have no need to raise money. We certainly don't want to issue stock at these prices, and we don't want to go to the debt market in these conditions. We have no need for it, and we can complete all of these. We will need to raise money eventually to build the permanent one in Waukegan, but that's two years away. And we have a standby credit facility with a major investment company that I think we could do it on better terms than that. But if the bond market was bad, we could always turn to that. So we don't need money. Our debt is essentially all fixed rate at this point. Not just essentially; I don't think we have any floating rate debt in the company, not even $100. So, what interest rates are doing, what the bond market is doing is pretty irrelevant to us these days. Obviously, we'd like the bonds to trade better, to be better for the bond investors. But it doesn't really have any impact on the company. We did reach a nice agreement with Circa Sports, where they paid us a $5 million market access fee, and we will get a percentage of their revenues from operating in Illinois with a floor of $5 million a year, once they can be up and operating, which will be once we get the temporary casino open in Illinois. And so, that was a nice plus that came up in the quarter. In the quarter itself, we fell behind last year's results, but that's largely because there were the big stimulus checks last year that augmented resorts at all of our casinos and I think just about every casino in the country. Our results were actually decent, but just not compared to last year. In Colorado, we're pretty tied up with construction at the moment; that also didn't help. But the main thing in the year-to-year comparisons was just the difficult comparison with the second quarter of last year. So at the back of the financials, we added some pictures. The first one is off the roof of the SpringHill Suites that's next door to us. This is the Sprung structure in Waukegan. As you can see, the end of it is starting to be enclosed as is the other end. So it's just about done. I think this is literally from yesterday. Inside that Sprung structure is one and a half football fields, and when it opens in the fourth quarter, it will have 1,000 slot machines, 50 table games, and two significant restaurants that seat about 500 people. We have also ordered a diner that will be attached to it, which will seat another 150 people or so. We may not be able to get enough dealers to have all 50 table games open, and it's also possible the slot companies don't give us all 1,000 slot machines. We have heard from other people, both new casinos, to anticipate that if you order 1,000 machines, you might only end up with 800, and that's probably just fine because when we first open, we can use the space to have places for people to sign up for the players club and so on. If we get all 1,000 slot machines, that will be great. But we're open to what we get, and it's not the slot machines that gamble; it's the people that gamble. And so, in a few months, we think we will be quite busy at this place, and it will be very important. I wanted to include a map, but we couldn't put that in the press release without getting the rights from Google for Google Maps or whatever the map source is, and that was a little complicated. But I'd encourage anybody to pull it up yourselves. We are at a site called Fountain Place, an old shopping mall.

Fountain Square. It's an old shopping mall and it's 30 acres plus 10 that we acquired. So, it's 30 that we leased in the city and 10 we acquired. If you look at that Sprung structure to the left, you will see kind of a grassy area that's where the permanent casino goes. The dirt area out in front will all be parking lots for the temporary and eventually parking lots for the permanent. There is some stuff we are doing now. It's not major stuff, but there is some stuff we are doing now that is benefiting the permanent. For example, as we pave all this area, we have to put in some infrastructure to deal with stormwater when it rains and so on. And that's really for the permanent, but it has to go in now. You can see in the distance a hotel; I forget which one that is. But right at Ballpark, there's a SpringHill Suites, a Town Center Suites, a Courtyard Hotel, a Sonesta Hotel, Sonesta Suites Hotel, and Hampton Inn. So we're kind of surrounded by hotels; that's why in our first phase, we don't actually have a hotel other than 20 high-roller suites with a little boutique hotel for high-rollers. In the temporary, we will not have any hotel rooms, of course; it's about getting the slot machines open and running here as quickly as possible. But if you look at a map, you'll see that we are in the center of Lake County. I mean, it's called Waukegan, but Waukegan is the county seat for Lake County, which has about 700,000 people. It's one of the wealthier counties in the entire country. I believe it's the second wealthiest county in the State of Illinois. We will be the only casino there. There are some towns in Lake County, including Waukegan that have slot machines in bars; you can have up to six per bar. The ones in Waukegan do quite well, which I think bodes well for us because if you go and look at what they are, it's usually just a dingy little bar with six slot machines in the back, and yet they're doing pretty well. I think that bodes well for us. Even the temporary casino, which on the outside is pretty unimpressive, on the inside, we do have quite a bit of decor going in, so that we intend to be a positive surprise to people when they go in. Our competition is the Rivers Casino, which does huge numbers like $500 million or $600 million a year.

$500 million. Yes, and it's pretty nice, but they're on two levels, multiple rooms; they're kind of squeezed on a pretty small footprint. And yet they do extremely well. We're one big flat floor, which is usually what customers prefer. If you go up to Milwaukee to our North, the Potawatomi is having a pretty decent tribal casino. It's also different rooms, multiple levels. If you go beyond those two, pretty much all the other competition anywhere near us are old river boats that are 25 years old with low ceilings and multiple decks. Even our temporary casino compares pretty well with the competition, and our permanent casino will be head and shoulders above the competition. So that's that. Before you move on, Dan, I just want to make two quick points. One is, Dan is right about our location and not being on a riverboat. What's quite nice is we're one of the few casinos that are located right off a major freeway. You can see our site right from the freeway. If you compare that to the two big ones I know of, one would be Rivers, which makes $500 million a year in gaming revenue, as Dan mentioned. The other is a relatively new one; it's the Hard Rock Casino in Gary, Indiana that opened in May of 2021. That's doing almost $400 million a year in gaming revenue. It's a great platform right off the freeway.

That's exactly right. That freeway location is quite key. Go ahead, Dan.

Yes. The other thing is, if you pull up a population density map, you'll see obviously the suburbs of Chicago are very densely populated. To our North, it gets less densely populated, and to our West, it gets less densely populated. So we're kind of at the North end of the most densely populated suburbs. We think more of our customers come from the South than from the North. There’s a long gap between us and Rockford, where the temporary Hard Rock casino is operating; there’s talk about a tribal casino out that way, but it doesn’t have much impact on us. We're between the two main freeways that run North-South in this area, and in fact, the commuting train lines come out of Chicago and go North, and they fork about 10 miles South of us. One fork goes up along the coast through Lake Forest and Lake Bluff and continues on to Milwaukee. The left fork goes out through Libertyville and kind of angles Northwest. We're in the middle of the fork, and not surprisingly, the population tends to live along those train lines. Although I think most people today don't commute into Chicago, historically they did, and so the population centers tended to follow those train lines. The next pictures are of Chamonix, and this is a complex building on a complex site in a complicated town. We are between Bennett Avenue and let me hand this.

Carr Avenue.

Carr is quite a bit higher than Bennett. So in one picture, you'll see our parking garage with a crane in front of it. The hotel rooms are just starting to go up above that; that's on Carr. This picture is taken from 60 feet above the lowest part of our site. It's all laid out in such a way that the customers will not perceive all of this. You go into the parking garage, you take the elevator down, you walk out of the casino. The second picture shows the front of it. This is taller on the front than it is in the back because Bennett is lower than Carr. You can see it's coming together to the right of the crane in the picture that shows the front. That taller building with the big windows in it, that's the casino, and it ends up with big arched windows with sheer curtains where those openings are. To the left is a specialty restaurant, spa, and swimming pool. Above that structure are hotel rooms and a hotel lobby in the center. That building has now topped out. You can see in that picture to the right, the parking garage, and the other picture shows the back of that parking garage. There are three levels of rooms that go on top of the parking garage, and the first level is just about done. Then they'll start doing the second level. If you go to the rendering of what it looks like when it's done, you can see how there are essentially three buildings. The main one is the one in the middle that anchors the casino and has the spa and the restaurant. Behind it is meeting room space which has been framed now and so on. To the right is the parking garage with three levels of rooms on top of that. This is quite impressive when you're there in person. It's actually hard to get a good picture of it because it kind of sprawls. It's a historic district so we couldn't do a 30-story high rise like has been done in Black Hawk, but we get to a significant size by sprawling out. In Waukegan, we are pretty excited by the results of what we see around, whether it's the VLTs that operate in Lake County in a far inferior experience than what we are going to provide or the competition or even the Hard Rock in Gary, as Lewis mentioned. Chicago is still an underserved market and Lake County is a very underserved market because it has no casino. We think we'll do very well there. In Colorado, I wanted to include a map, but we can't display one in our press release. If you look at a map, you'll see we are just under an hour from Colorado Springs and about two hours from Denver. Colorado Springs, along with Pueblo and Canon City, which is part of the MSA, has around 1 million residents and is growing quickly. Denver has about 4 million people and is also experiencing rapid growth. Our primary market will be Colorado Springs, with Denver serving as an important secondary market. Black Hawk is about an hour west of Denver and two hours from Colorado Springs. Therefore, we believe Denver won't be our main market, even with its larger population, as people there will likely head to Black Hawk. We expect to attract around 5% of the gaming trips from Denver, and a similar 5% from Colorado Springs might choose to travel to Black Hawk. Since Denver's population is larger than Colorado Springs', we will benefit from that. We aim to match the quality of any casino in the state; in fact, I believe we will be the most upscale casino in Colorado. Unlike Monarch, which operates on a narrow footprint and has created a long and narrow casino, we have more space to work with. Ameristar also faces space constraints, yet both casinos perform very well, with each having about 500 rooms and generating over $100 million a year in EBITDA. We will have 300 guest rooms, and while we may not reach $100 million in EBITDA, we expect to generate more here than our entire company does currently. This investment of $250 million should yield a very good return for us. I was analyzing some numbers. In the first half of the year, our existing operations generated approximately $20 million in EBITDA. Several factors contributed to this, including the sale of free play and Churchill Downs exiting the sports business; notably, the sale of free play occurred in the second quarter instead of the third. This practice is something we have done annually in Indiana, where we take advantage of a tax rate that favors smaller casinos. These were some atypical occurrences in the first half. On a different note, we have the Circa deal, which will impact future results but is not reflected in the current figures. Our adjusted run rate is around $20 million for the first half, translating to about $40 million annually, which is lower than last year, but it provides an estimate of the performance of our existing operations. This figure is likely less than what either Chamonix or The Temporary should achieve moving forward. Considering our stock price, we have 37 million shares outstanding. I was contemplating the EBITDA needed to match that share price. Assuming the company should be valued at 8x to 10x cash flow, typical for casinos currently, it indicates we carry $400 million in debt. Once we complete our developments, we will have some surplus cash, but for now, let's overlook that. If we do the math, we would need around $60 million to $80 million in EBITDA. If valued at a 10 multiple, achieving this would require about $60 million in EBITDA, which is $20 million more than our current operations, something we could potentially reach within half of the structure we are building in Waukegan. If valued at an 8 multiple, we would need $80 million, which is also manageable. This is why we are focused on our current developments and the resources necessary to complete them. Although our existing operations faced a tough comparison, they are otherwise performing as we anticipated. So, okay, I know we're trying to do this a little quickly because we know Caesars has their earnings call coming up. So, we're happy to take any questions.

We'll go to our first question from Ryan Sigdahl with Craig-Hallum Capital Group.

I appreciate the insight on the projects and agree that's the main focus. In the press release, you mentioned that the launch dates have been pushed back a few weeks. Can you explain that? I believe The Temporary was expected in late October, but now you're indicating it will be in Q4. Could you clarify the launch timing?

That's correct. We don't have control over everything, and we're moving as quickly as we can, but construction issues do come up. The main problem for us was related to a union, local 150, which represents the workers who crush rock. Crushed rock is essential for both asphalt and concrete, which we need. They were on strike for about six weeks, resulting in the closure of our asphalt and concrete plants. We've managed to secure some materials in advance, which is how we established certain structures. Fortunately, the strike was resolved about a week ago, and the plants are now ramping up production, though they face a significant backlog. Every day brings new challenges, and dealing with unexpected issues is a normal aspect of construction. Building anything today is complicated due to supply chain problems, and we are managing through these difficulties. We factored these challenges into our budgets, especially in Chamonix, where we had to make substantial adjustments after realizing the challenges of construction. We set a significant contingency budget in Waukegan. We've also faced issues with Con Edison, which couldn't supply transformers for some time. Initially, we considered relying on generators mounted on trucks. However, our contractor successfully sourced transformers, which we purchased to offer to Con Edison to restore normal power. We also encountered difficulties finding pumps for our sprinkler systems, but we eventually located them. At the end of the day, it feels a bit like playing whack-a-mole, where we deal with one issue after another. We are optimistic about completing everything by the fourth quarter. We can't rush the process; the opening will happen when everything is ready, pending approvals from various departments. We have begun hiring employees and management, with job offers extended for positions starting at the end of October, indicating our expected timeline for opening. We will soon start a dealer school to train dealers, as this is a significant challenge to ensure we have enough licensed dealers for the table games. The Waukegan location is expected to employ around a thousand people, which is less than our entire company currently. There is a lot of work ahead this year, and our best estimate for timing remains as stated. In other words, we're on budget, but the timeline is later than we initially hoped, and we're wary of spending extra on overtime to expedite the process.

Yes, we're not that far off from where we were last quarter for what it's worth, Ryan. I think last quarter was late October, early November. Despite those challenges that Dan mentioned, we've come to a satisfactory resolution on all those items and continue to target that same ballpark.

In Chamonix, I've been visiting these sites once or twice a month because there’s a lot happening. About a month ago, we started using light gauge steel for the structures, which involves erecting the steel framework and then pouring a supporting slab on top. There are some challenges with subcontractors who focus on light gauge steel. While there, Phelps, the young man overseeing the project for Huntsville, was understandably frustrated as he had to turn some teams away due to delays in the delivery of the light gauge steel. Upon investigating, we found that the steel was manufactured off-site and shipped, but it didn’t arrive on schedule because the fabricator hadn’t received the plans from our architects in time. It turned out that several of their team members failed to send the plans out on time. After I raised my concerns, we scrambled to get things back on track. Issues like this can slow projects down significantly. This is my 13th and 14th major casino project, and each one presents similar standard problems that have to be managed. A memorable incident occurred while I was touring Chamonix. I went into the loading dock area, still in the early construction phases, and noticed there was no dock present where trucks could unload. I asked the construction manager about it, and after reviewing the drawings, we realized there was a space labeled for a loading dock, but it had not been constructed. We needed a four-foot height to facilitate unloading pallets. Once we identified the oversight, we made the necessary change to have a gradual ramp at the entrance, so trucks could back in properly. It didn't add to the costs, but it emphasizes the need for thorough oversight during construction. It's frustrating that such mistakes occur, and I often wonder how they went unnoticed until I pointed them out. The reality is, countless issues are likely resolved by construction teams before I arrive, which is essential for the process.

That's why we've done a lot of these.

I'll give you something else to ponder as we wrap up this question for you, Ryan. The next time we talk to you and others on these earnings calls will be late October, early November. We'll be on the verge of either just about to open Waukegan, or we will have a much more definitive date for you. Unlike some other casinos we've built in our past and in most casinos, I do think that the ramp-up period for this casino will be very short. Sometimes you might take 12 months or so before you fully ramp up a property. I think this will be a swift ramp, partly because of the competitors that Dan mentioned and partly because we are just so darn close to so many people. Yes. It's pent-up demand. They have no existing casino. I think we will ramp up pretty fast in Chamonix as well, but we are going to ramp up very fast in Waukegan. In Chamonix, there are existing casinos. We're just a lot nicer than any of the others.

Got something else, Ryan, or...

Good. Yes. For maybe my second question. Just curious what you are seeing on the demand side. If you have seen any deterioration in consumer behavior at the end of July? Dan, you mentioned kind of $20 million EBITDA done in the first half. You are going to lose the $2 million of free play, but is that kind of a realistic as you look at the back half, what you see in current demand and everything going on with construction at your existing facilities?

Well, the stimulus checks benefited mostly the second quarter. They came out very late in the end of the first quarter. In July, we were still off a little at the Silver Slipper in particular; that I recall, I haven't...

Versus prior year, yes.

Compared to the previous year, the decline was significantly less than what we experienced in the second quarter. Is this a recession? Typically, regional casinos withstand recessions better because we're an affordable option; people can easily drive to us, often sharing rides. Unlike Las Vegas, we don't rely heavily on convention business, which tends to be the first to decline during a recession. It's difficult to determine, but it seems our business isn't experiencing much impact. The year-over-year comparisons are becoming more favorable as we've moved past the stimulus checks from last year. Based on past recessions, I believe our business is quite resistant to downturns since we offer a low-cost gambling option.

Yes, I'll add, Ryan. Sequentially, so not looking versus last year, but the last couple of months, things continue to be on a relatively similar trend. We're pretty pleased with where it looks like July will have shaken out for us. The exception to that would be in Colorado, where as you know, the construction disruption continues, and we had a separate problem where our construction created this weird river floodwater pattern that created some flooding issues in our casino over that Fourth of July weekend. That wasn't helpful. But that set aside, things continue as we would have expected sequentially.

Yes. A significant portion of what used to be Bronco Billy's is currently closed, approximately half. Some of this area is being incorporated into Chamonix and is under construction. Additionally, we have closed the central section of Bronco Billy's for a light refresh. It remains closed, but we are in the process of putting it back together. Currently, Bronco Billy's is operating at a much smaller capacity than it has in the past.

This is actually Aaron on for Chad. Thanks for taking my question. With respect to the competition to The Temporary or to American Place, can you help us understand the situation in Kenosha where we've heard about potential development? But I think this would still need some major approvals, correct?

That's correct. I’m not sure how they phrase it, but the Menominee tribe...

Menominee.

Menominee, okay, I like Menomi better, which is they have a bingo-oriented, bingo palace type of casino, North of Milwaukee quite a ways up. It's a relatively small casino. They have tried to get into Kenosha before. The Potawatomi would be impacted by it the most because they're just North of that. Milwaukee killed it 10 years ago; it was an effort. This time the Menominee is backed by the Seminoles who get involved in these things sometimes, and they said they're going to try to put a casino in Kenosha. We think most of our customers come from the South, and there’s a pretty good gap of farmland between us and Kenosha. I don't think it has that big an impact on us. I also think they are a long way from having the governor's approval and putting land in trust and then actually building it. So I think it's a long way from done. I think there's a lot of uncertainty whether it ever happens. Even if it does happen, it doesn't really change our numbers very much.

Yes, I have a couple of additional thoughts to share. Historically, if you look at the Google satellite photo, you'll notice, as Dan pointed out, there's a significant population density where we're expanding to the South and West. However, as you move North towards Kenosha, you'll find a lot of farmland. From the perspective of population density, we have the advantage. Historically, casinos perform well if they are either close to quality attractions or have a strong customer base nearby, and in our case, we have both elements. Thus, we feel confident for those reasons. Additionally, if you consider the nearby cities, like Wilmette where our Head of Development resides, many areas around Evanston are closer to Rivers Casino in terms of distance. But if you check a Google Map, you’ll observe a lot of congestion going towards downtown, and many people in that region may prefer not to travel downtown, resulting in them spending just a few more minutes, possibly even less, heading our way instead. If we factor in the cusp population, it should counterbalance any potential impact from the Kenosha tribe. Therefore, we are feeling very optimistic.

I guess the Seminoles funded the purchase of a piece of land, but it's pretty insignificant to the Seminoles. That's what's caused the publicity. The Potawatomi have a serious casino; they're the only ones in Milwaukee. Milwaukee is a city of 2 million people. I'm guessing they make well north of $100 million a year in EBITDA at that place. It's a guess, but just from looking at it, that's a pretty wealthy tribe. This would cut into them. So, I think we're going to have a little tribal warfare here. They are both in the State of Wisconsin, and you need the governor's sign off on it. The governor has said he's not studied the issue yet. It is a much more serious competitor for the Potawatomi because they have kind of a monopoly on Milwaukee at the moment. Kenosha is a distant suburb of Milwaukee, so I think it's a long way from done.

Yes. That process is going to take a very, very long time.

And then as a follow-up, how are you thinking about the size of the Full House portfolio? Would there be benefits to potentially selling one of your smaller assets to help improve the balance sheet and allow you to spend more time on development?

Yes and no. I mean, frankly, the small assets we have would be principally the ones in Northern Nevada, and they're kind of a nice cash cow. It doesn't take a lot of our time, and we don't need to sell them. We don't need the money to be honest. It’s kind of like, if we did have money from selling an asset, I'm not sure what we'd do with it, and we don't really need it. Frankly, they are nice businesses as they are.

I will say that I always scratch my head a little bit because we get a lot of interest from people looking at those Northern Nevada assets, specifically over in Fallon, a lot more than you would expect. From a time point of view and cash flow point of view, they are consistent for us and don't require too much of us.

We have a strong management team working together from Tahoe, with a separate general manager in Fallon. We have made improvements to both locations over the last five years, and they are both performing well. We hold a monthly conference call for about an hour with those properties, and they are doing fine. I try to visit them once or twice a year. Unlike when I was CEO of Pinnacle and managed about 15 properties, including four in Argentina, which made it difficult to keep track of each one, we currently have five properties and are in the process of building two more. Managing these is not a burden, and we are not in a position where we need to sell any for financing or need to increase our focus on our operations.

And it appears there are no further questions at this time.

Okay. Well, thank you, everybody. I think our stock is pretty cheap. That was kind of implied by my little analysis of how little we have to earn in the new places in order to justify the current stock price. Hopefully, we will earn much more than that. The stock will rebound in the near future. In the meantime, we are going to get ready to open Waukegan so that next time we talk, it's either open or about to open. As I mentioned, a year from now, we will be open in Chamonix. So thank you very much, everybody.

This concludes today's call. Thank you for your participation. You may now disconnect.