Earnings Call Transcript - FLL Q3 2020

Operator, Operator

Greetings, and welcome to the Full House Resorts Third Quarter Earnings Call. During the presentation, all participants will be in a listen-only mode. As a reminder, this conference is being recorded on Thursday, November 5, 2020. I’d now like to turn over to Mr. Lewis Fanger, CFO. Please go ahead, sir.

Lewis Fanger, CFO

Thank you, and good afternoon, everyone. Sorry for the busy earnings day, but welcome to our third quarter earnings call. We promise we’ll be upbeat here today. 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. And lastly, we’re also broadcasting this conference call at fullhouseresorts.com, where you can find today’s earnings release, as well as all of our SEC filings. And with that all said, are you ready, Dan?

Daniel Lee, CEO

You’re just handing it to me like that. No, it’s a great call. I hate to put a good spin on a pandemic, but it kind of happened at a good time for us. We had started to focus on operations pretty intensely early this year after having kind of not a great second half of last year. And part of that was we decided we needed to change the marketing approach at Rising Star and perhaps, also at Cripple Creek, and we installed the Konami system into both in the later part of last year. By the time we were forced to close in March, we had started to develop data from that. And then we took the pandemic period where we were closed for three months and sadly, we had to lay off most of our people, but the people we kept, we were very focused on reinventing the way we operate, and that led to a number of decisions. We closed the Christmas Casino, a satellite casino we had in Cripple Creek. It was something we tried; it didn’t work. And so we recognized that it wasn’t working and closed it. It did seem to increase our revenues a little but not enough to offset the additional costs from it, and we recognized it was kind of a gradual closure. Just before the pandemic required everything to be closed in Colorado, we scaled it back to only operate a handful of hours a week. And when it reopened from the pandemic, we did the same thing. And the reason we did that was we wanted to retain the license because it’s tied to one of the mobile sports betting licenses. So we went to the Gaming Commission and said, we want to fold this license back into Bronco Billy’s. Technically speaking, Bronco Billy’s now has three different licenses in one building, which allows us to have three skins for mobile sports betting. And so through the third quarter, we were continuing to operate the Christmas Casino, but only a handful of hours a week without the burger bar or anything operating. So it was really at a minimal cost to retain the license. In September, we had gaming commission approval to close it completely, which we did, which gives us the benefit of reducing the gaming tax rate back into Bronco Billy’s for complex reasons. But that was one of the things we did. Looking at the Konami system, we had gotten up to speed on it. We had good data for it. We had used it for years at the Silver Slipper, and that’s very, very good. There are a number of different slot systems recognized. At Rising Star and at Bronco Billy’s, we had 20-year-old systems; they were really out of date. If you look at the different slot manufacturers, many of those systems started out as kind of accounting systems or control systems. The Konami system started out as a marketing system that also provides accounting and control, but it was marketing first, and that was why we opted to go with it. When we added up everything we were doing for our customers with free buffets and free hotel rooms and everything else, we were upside down. We were not making money. So we fired a bunch of our customers, if you will, or we basically scaled back what we were doing for them. We focused more on the customers that really matter and did more and better stuff for them. While we were closed, we reinvented all that stuff; we introduced new loyalty programs in both Rising Star and in Cripple Creek. We continued to fine-tune the one we have at the Silver Slipper. We opened very cautiously. We weren’t sure. We knew we would only have half the slot machines roughly, and we knew that there were limitations on our table games and so on and limitations on the seating in our restaurants. We didn’t know whether customers would show up or not. We were careful in our staffing and hours of operations. Little things like not operating table games at 5 o'clock in the morning. We looked at the new marketing systems we had and saw that on a typical mid-week morning, we had more dealers than we had customers. It just said don’t operate the table games in the wee hours of the morning. The pandemic allowed us to get rid of what I’d call some sacred cows. Bronco Billy’s is a good example. They had a $0.49 breakfast that was available for 12 years. Every morning, you’d see the same handful of local people having breakfast. I always wondered if they were really gambling. When we reopened from the pandemic, that small coffee shop only had half the number of seats. We said, let’s not have the $0.49 breakfast because our seating is limited anyway. Guess what, we’re doing fine without a $0.49 breakfast, and of course, we lost money on that. We no longer offer the two-for-one buffet special at the Silver Slipper midweek. The buffet in Indiana lost money for years and years. Indiana did not allow us to open a buffet at all, and we’re doing fine. If you get into the details, the Silver Slipper in the quarter and two months in the quarter were the best months in its 15-year history. Overall, the revenues were up 10.5%. That’s good marketing. We refurbished that casino late last year, so it’s in very good shape. EBDIT more than doubled; it was up 116%. Our revenues were up about $2 million, and our EBDIT was up $3.5 million, yielding both revenue increase and expense savings. At Rising Star, our revenues fell about 15% because we weren’t comping as aggressively to lower-yielding players than we used to, which is probably the principal reason in there, along with reduced hours of operation and not operating the buffet at all. Last year, it barely made money; this year, it made $2.4 million. Rising Star had EBDIT of 24% of revenue, which is where it ought to be in a regional casino. It’s the first time in many years that we achieved that. The same measure at the Silver Slipper is 32% this year, up from 17% last year. Bronco Billy’s had the Christmas Casino. We had a new marketing plan. Revenues were about flat, off 2.5%, but EBDIT more than doubled from $1.06 million to $3.4 million, leading to a margin of 43%, which is abnormally high compared to last year's 19%. One unusual thing happened as we changed our loyalty program. When we acquired Bronco Billy’s four years ago, we started a system that required some complicated math to accrue a liability for the points given out. We changed the program to a new one, making previous points worthless. Since we had perhaps guessed a little too conservatively on what portion of points would be redeemed, we ended up with about $400,000 of accrued liability related to points from the old program. Since they are no longer redeemable, it ends up being a credit in the quarter—a real income shifting from past quarters. In Northern Nevada, that’s our toughest spot. Our revenues fell 35% due to the crisis, but our cost controls helped mitigate that. While revenues fell $2.2 million, our income only fell $1.1 million. Our corporate expense was down about 18%. When you add it all up, our EBDIT was up 115%. A good chunk of that is sustainable. I don’t know if all of it is sustainable; things are going pretty well. There’s an element of people being hesitant to fly. Nobody flies to our places; they drive. Senior citizens, 65 and older, are off about 30%, which I hope is just them saving for the day they can come back. But people in their 20s, 30s, and 40s, are coming in and gambling more often and in bigger amounts than before. We’re trying to maintain contact to keep them as regular customers going forward. One theory is that people who say they’re “working at home” might not be so much. We’ve been exploring adjusting our machines to allow Zoom calls while playing, which is possible technologically but something we’re joking about. Things are pretty good, and a lot of it seems sustainable.

Lewis Fanger, CFO

That’s everything, Dan. Let’s do some questions.

Operator, Operator

That’s everything, Dan. Let’s do some questions.

Daniel Lee, CEO

When we schedule these calls, we look carefully to make sure we’re not stomping on Wynn or Caesars.

Lewis Fanger, CFO

We got stomped on, Dan.

Daniel Lee, CEO

We do have some questions though. I know everyone’s hopping from call to call to try and ask something.

Jordan Bender, Analyst

Hi, guys. Jordan Bender on for Chad. How are you doing?

Daniel Lee, CEO

Hey, Jordan. Good.

Jordan Bender, Analyst

Good. You kind of talked about some of the components to your marketing and labor saves that you’ve taken basically since the casino is shut down and then the ramp back up. I mean, high level here, how much of that isn’t coming back into the business? Obviously, your margins were pretty impressive in the quarter. Just trying to gauge, where they might fall on a run-rate basis?

Daniel Lee, CEO

I don’t know. I mean, I wonder if we get back to normal life, would we have to spend more on marketing to keep the same revenue? A lot of our operating savings, like payroll savings, is probably sustainable. We’re careful not to operate too many restaurants for too many hours and just operate what we need to satisfy customer demand. So, a lot of this is careful stuff. Frankly, we always had lower margins than we really should have. This kind of kicked us into figuring that out, and the margin was 30% in the quarter. Is it going to be 30% forever? I don’t know; maybe it ends up at 25%, but it doesn’t go back to 15%. A lot of this is sustainable. I’ve seen other regional gaming companies that kind of said the same thing. I think Eldorado said their results in regional markets had improved a lot, and they thought a lot of it was sustainable. When I was at Pinnacle, we opened L’Auberge just before Hurricane Rita. It had huge revenues, but wasn’t producing as much income as it really should have. When we were closed to rebuild from Rita and focused on okay, let’s be really careful how we reopen, L’Auberge has been profitable for 10 years. This was kind of the same thing. When you have to close everything and lay everybody off, it’s an opportunity. There’s almost a human part to this because you go into one of these regional casinos; it’s hard to want to normalize payroll because you’re laying off friends and neighbors. When you shut everything down and lay everybody off, you restart, and every phone call you make is good. You’re asking somebody to come back to work. It allows you to go to what I’d call zero-based building. It’s harsh, but we operate more efficiently than we were before, and I think we can keep that up. We got lucky with the Konami system going in at the right time. Once you really had the marketing data, it was striking how much we were giving away at Rising Star, and to people who weren’t gambling enough to pay for what we were giving them. So it was like, let’s give them less. If they show up, great; they’ll be continuing customers. If they don’t show up, we don’t have to feed the community for free. We’re trying to do our best to make money. Can we maintain 30% margins? That would be pretty high for this company. But there’s no reason we should be at 15%. We should be in the mid- to high-20s.

Lewis Fanger, CFO

And keep in mind, too, we’ve got some things on the margin side that are just helping us out because they’re not in operation. If you look at Stockman’s, the table games outfit is not operational currently, and continues to not be operational. When that comes back, do table games bring down your margins? They do. But you would bring it back with the hopes that your absolute level of EBITDA goes up. So Dan talks about margins generally, but the conversations around here tend to be more about absolute levels of EBITDA, making sure we’re doing profitable things on a daily basis and still looking at the margin. We could shut down a lot of things and have a tremendous margin, and we’d have no EBITDA.

Daniel Lee, CEO

But actually, you bring up another point. We were kind of studying $5 blackjack tables anyway. If you run the math, there are about 50 hands an hour. The house edge at blackjack is about 2% for a normal player. If someone is betting $5 a hand, we’re making $0.10 a hand. At 50 hands an hour, we’re making $5 an hour on that person. So, if you have a $5 blackjack table with three people sitting at it, you’re not covering the dealer's costs. We were looking at how we migrate these players to a machine or higher table limit. It’s cautious because all your competition offers $5 blackjack. I know Eldorado was putting in Stadium gaming to rid of $5 tables. Well, we’re closed, and when you reopen, you’re limited in the number of people you can have at each table. It’d be unwise to have $5 blackjack if you can only have three people at the table. In Colorado, where we make a little profit, we haven’t been allowed to open table games, so that’s helping our margins. At Silver Slipper, Rising Sun, and Grand Lodge, we have table games open, but generally, it’s at a $15 minimum. The customer walks in wanting a $5 game. We say I’m sorry; we only offer $15 minimum. So, in effect, the pandemic enables us to become profitable at our blackjack tables, where before we had $5 tables losing money. If there’s anyone out there with a plexiglass setup limiting the number of players at blackjack tables and still offering $5 blackjack, that’s a very poor strategy.

Jordan Bender, Analyst

Thanks for the color. Following up on demographics in the casino, have you seen any of the older 65-plus start to trickle back in over the last couple weeks? Do you expect to keep those younger people in the casino once things start to open up?

Daniel Lee, CEO

I haven’t seen any data showing them trickling back. It’s striking how cautious older people are. My mom is 91, and she’s terrified. You see older people in grocery stores—they’re scared, as they should be. I think they’re right to be cautious until a vaccine is available. We haven’t seen them returning in large numbers. For the younger demographic, we’re having marketing meetings discussing how to ensure they become loyal customers. We’re probably benefiting from people being hesitant to fly. They don’t have to fly to come to our casinos. A lot of places, bars close at 10 pm; movie theaters aren't drawing people. They understand they can go into one of our casinos and be reasonably safe. I will tell you, in Colorado, our Konami system has a feature that disables a machine until an employee sanitizes it. That gives customers confidence that machines are being cleaned before they sit down.

Lewis Fanger, CFO

Thanks, Dan. So we’ll probably have time for one last question.

Operator, Operator

The next question is from the line of Ryan Sigdahl from Craig-Hallum Capital. Please go ahead.

Ryan Sigdahl, Analyst

Great. Thanks, guys, on the really strong results.

Daniel Lee, CEO

Yes. I should mention, our fourth quarter last year was weak, and the first quarter was a little better, but still weak. The second quarter was the pandemic. So, we got three easy quarters ahead.

Ryan Sigdahl, Analyst

That’s thinking from that perspective. Dan, just to clarify on – you mentioned EBITDA margin, a number of different ways, but it all kind of points to holding somewhere in the mid- to high 20%. Is that on an overall company basis? Or on a property level basis, excluding the corporate costs?

Daniel Lee, CEO

I was thinking of it as overall. Frankly, we’re pretty happy with a lot of this improvement going from Rising Star having basically no income to having a 24% margin. Margins improved pretty much across the board. I’m mentioning it because it feels good to talk about margins, but remember, you don’t eat margins; you eat income. So, if we’re allowed to reopen table games in Colorado, we will do so. Even if it hurts margins a little, it will probably add to our income. I’m trying to provide some insights. If you take the $12.5 million EBDIT and multiply it by four, you get $50 million. That’s seasonally a little strong. You shouldn’t multiply by four; multiply by 3.5 instead. Some might not be sustainable, so maybe you’re in the low 30s. The sports betting stuff adds on to that. The EBITDA of the company isn’t 15. It’s clearly not that low.

Ryan Sigdahl, Analyst

Good. Helpful. And then trends in October and then the first few days here in November—revenue, cost, margins, anything directionally changing?

Daniel Lee, CEO

Actually, it’s been pretty good. Easy comparisons to last year. We did have a hurricane, which hit us. We did have some damage covered by insurance, losing about 80% of the shingles on our hotel roof. We lost business during the storm, but once reopened last Sunday, business was good. Before and after the storm was pretty good. Our most important property performed well. The other two properties have also been consistent with the results from the third quarter. The revenues in northern Nevada actually had a decent October, improving from the third quarter.

Lewis Fanger, CFO

Yes. It’s never helpful in a hurricane to close down on a Friday and Saturday. We did have that at Silver Slipper here a week ago, but outside of that, Dan is spot on.

Ryan Sigdahl, Analyst

Good. Last one for me. On Waukegan, great to hear the financing partner. Any feedback that you received from the Illinois Gaming Board when you amended your proposal and informed them about a partner?

Daniel Lee, CEO

They keep a good poker face. They said, thank you for that information; we will take it into consideration. They wanted institutions over 5% to provide social security numbers of directors and officers for background checks. We had a couple of institutions meeting that requirement. We’re a small company, so, one institution, despite being a major shareholder, was minimal to them. Another institution decided rather than accommodate it, they sold their shares over a couple of days, reducing their stake below 5%. That resolved the issue, allowing us to avoid drama with the Illinois Gaming Board, but we were not pleased to see them sell down. Going forward after the initial licensing, I believe it's Illinois's intent to revert back to the normal 10% rule for everyone.

Lewis Fanger, CFO

That’s it from me. Nice job on the results. Good luck.

Daniel Lee, CEO

Okay. Thank you, everybody. Is that it?

Lewis Fanger, CFO

Yes. That’s probably it.

Daniel Lee, CEO

All right, everybody. Have a good afternoon. Thanks.

Operator, Operator

That will conclude the conference call for today. We thank you for your participation, and you can now disconnect your lines.