Earnings Call Transcript - FLL Q2 2024

Operator, Operator

Ladies and gentlemen, greetings, and welcome to the Full House Resorts Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lewis Fanger, CFO. Please go ahead.

Lewis Fanger, CFO

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. Lastly, we're broadcasting this conference call at fullhouseresorts.com, where you can find today's earnings release as well as all of our SEC filings. And with that, I'll kick it off and let Dan fill in the gaps here. We'll start just with a quick comment. We have some slides on the website. We recently had about 35 investors here at Chamonix in Colorado, where Dan and I are today to show off the place. It's quite a beautiful property, as we heard from not just the investors that saw it but pretty much everyone who's walked through the door. We continue the phased opening of the property during the second quarter. 980 Prime, which is our high-end steakhouse, opened in April. The rooftop pool and portions of the spa opened in May. The balance of the spa is imminent. It should be in the next two and a half weeks or so. We have a jewelry store that should open up before the end of the third quarter. With all of that done, the core Chamonix project will be complete. There’s one other item we do want to focus on, not quite yet, but there's an old restaurant, an old steakhouse that was at the old Bronco Billy's. We are eventually turning that into an Italian restaurant. For the core project, we'll be essentially done here in the next quarter. At the property, we did generate positive EBITDA. We are certainly looking for a lot more than what we made here in the most recent quarter, which was about $600,000 of positive EBITDA. We see a lot of promising signs coming out of that opening. If you look back in January, we sold 2,100 room nights at Chamonix. That's ramped up pretty massively as the months have gone by. As expected, in June, we were around 5,900 room nights sold. In July, we closed out with a little over 6,500 rooms sold. Gaming revenues at Chamonix more than doubled versus a year ago. An interesting thing to highlight is if you look at the city of Cripple Creek, revenues there grew by about $4.5 million, whereas we grew by about $5.6 million. We made up all of the city's growth and then some. When looking at the state's revenue growth, they grew by $9.6 million. So again, we made up a significant majority of the state's revenue growth during the quarter. Our market share in Cripple Creek has climbed from about 21% in January to almost 26% in June. The database continues to expand. A year ago, we were collecting about 1,000 to 1,500 sign-ups every month. In June, that number was up to 4,000, and in July, it’s over 5,000 new sign-ups into the database. This is important as we continue to spread the word about the property. One of the more promising observations so far is that 21% of our sign-ups are coming from the Denver market. We've talked about how Colorado Springs will be the backbone of our business here. Because of that, we've focused on the 1 million people that are in Colorado Springs, Canyon City, Pueblo, Woodland Park—all the cities surrounding us. What we haven't discussed as much is Denver, especially those southern suburbs. With Denver traffic, many southern suburbs are closer to us than they are to Black Hawk. That area is really an added bonus for us as we think about the longer-term potential for this property. The fact that they account for 21% of our new registrations into the database is a promising sign. Regarding opportunities, table games is an area we target for improvement. Year-to-date, gaming revenues from table games have been about 5% to 6% of total gaming revenues. That number should be 20% or higher. The challenge is that we have been in a city perceived as a casino destination for the past 25 to 30 years with nothing inspiring. What we bring is a true luxury product—what we believe is the nicest casino in the state—featuring beautiful rooms and a phenomenal restaurant. However, we still need to overcome decades of branding. American Place, in the second quarter, faced typical summer seasonality present year after year. Revenues for us in the quarter were up approximately 34%, with EBITDA up 84%. We have a relatively fixed expense line, and as revenues continue to climb, we expect an outsized bottom line impact. Regarding sports skins, I’ll highlight quickly that we lost one skin during the quarter here in Colorado, which resulted in the acceleration of some market access fees in the second quarter. Additionally, we had two skins that previously were postpaying their annual minimums, and we had not received payment for those. We settled that in the third quarter. As a part of the settlement, we will receive a $2.05 million payment during the third quarter. We agreed to reduce the annual payment amount, and now we're getting that amount prepaid instead of postpaid. We extended our lease at Grand Lodge, which was due to expire at the end of this year, pushing it out for 10 years to December 31, 2034. That’s all I had, Dan, so feel free to fill in some gaps.

Daniel Lee, President

I don’t want to be repetitive with what Lewis said, but I would characterize it a little differently. First, I want to clarify that when Lewis says we sold that many rooms, he means room nights. Assuming an occupancy rate of about 65% in July, filled on weekends but not during the week, we have a big push to ensure we fill every night, which will come in time—it’s typical for a new casino. Last year, we discussed American Place having opened in February, and we were gradually extending operational hours. It took us some time to get the approval for higher table minimums. We were finishing elements like the race and sports book, and the steakhouse didn’t open until February of this year. We built our employee base and customer list. Since we lapped February of last year, revenues have increased by 30% to 40% above the prior year. Expenses haven’t risen nearly as much, leading to a significant increase in income. This is the story of the second quarter. American Place made a good profit in the second quarter. It’s now one of the more profitable casinos in Illinois, and we believe that picture will continue. We can operate the temporary casino until August 2027. We intend to complete the permanent casino before then, which means we will break ground roughly a year from now. We have at least a year—probably more like 18 months—to secure financing, and we’re confident we’ll achieve that. Looking at where we were a year ago at American Place gives us a similar outlook for Colorado. We are still opening things, like the spa. We now have four masseuses, who are very busy, but we need about eight to ten, so we’re in the process of hiring. We're also hiring casino hosts, sales and marketing representatives, and we appointed a new head of table games from Fontainebleau with a long history with Harrah's. We are actively building the mailing list while stabilizing our employee base. A year from now, we hope to report revenue increases of 30% to 40%, with expenses not rising as much. This is the normal maturation process for a casino, and we are doing well. Regarding the Silver Slipper, it had a rough first quarter but has shown significant improvement this second quarter. John Ferrucci is retiring, having run it since inception; we have opted to promote Angie from Rising Sun to take over at Silver Slipper. She's run Rising Sun for quite some time, so this will be a smooth transition. Having a fresh set of eyes often provides benefits. While the Silver Slipper used to be our dominant earnings contributor, it now plays a significant role in a three-legged stool that includes Colorado, Mississippi, and Illinois. We also make decent money at Grand Lodge with very little investment, in addition to having Fallon and Rising Sun hanging in there, alongside our sports operations. Liquidity-wise, we are in good shape, gradually utilizing the restricted cash to complete remaining tasks in Colorado. We're nearly finished. Lewis mentioned a few items—the parking lots are still temporarily paved, which we will finish this fall. Otherwise, Lewis covered everything. I believe we are in good shape; earnings are strong, and we’re observing opportunities, not immediately, but potentially in the future, when the bonds become callable, which is in February. They're callable at a higher premium today, likely between February 2025 and February 2026, when we may issue a new bond to pay off the old bond and allocate incremental funds toward the permanent American Place, anticipated to cost about $325 million. Other financing methods are available, but that’s likely to be the most cost-effective approach. We could turn to REITs, but that's costly capital that isn't repaid easily. Currently, we own all our real estate, or where we have leases, we retain the right to buy out the lease, contributing to a more traditional balance sheet than most of our competitors. That’s it from my side; I’m happy to take questions.

Operator, Operator

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. Our first question is from the line of Ryan Sigdahl with Craig-Hallum Capital Group. Please go ahead.

Ryan Sigdahl, Analyst

Hey, good afternoon, Dan, Lewis. Thanks for hosting us last month as well.

Daniel Lee, President

You got it.

Ryan Sigdahl, Analyst

I want to start with Chamonix. Good to see positive EBITDA, obviously looking for more as it ramps. But can you walk through the monthly progression on EBITDA, specifically there throughout the quarter? And then if you're willing to comment on July, that would be great.

Daniel Lee, President

In the quarter, it's gotten better every month since it opened. July is still preliminary, but we would probably make about $1 million in July, up from June. That’s not an acceptable number considering the investment, but it’s trending the right way. We currently run many promotions offering complimentary nights for Sunday through Thursday stays, which is helping our occupancy rates. We assess whether they gamble or not and invite them back. We are overcoming a negative perception of Cripple Creek; many people are surprised at what we offer. It’s frustrating because I’m constantly running ads about this tremendous place, and it's hard to break through the clutter. People need to realize that this is a luxurious product placed in a historic gold mining town; it takes time to change perceptions.

Lewis Fanger, CFO

By the way, so did Black Hawk, if you look back to the early 2000s.

Daniel Lee, President

Yes. Black Hawk faced the same challenges when Ameristar opened. We're confident that we are reinventing this town; it takes time, but it’s happening. Last Saturday was one of our best revenue days since opening. We may need to open a second pit for table games due to increased demand. There’s a new speakeasy bar we just completed, and it's thriving. We’re seeing progress, though it takes time to achieve consistent profitability. Wall Street sometimes fails to recognize that, but this will be a successful casino in the long run, no doubt.

Lewis Fanger, CFO

I want to add that we have a database of customers who are used to lower-quality offerings. Over months, we will enhance that database to attract better players. July saw record gaming revenue with a 15% increase compared to June. Everything we see aligns with our expectations; this casino is exceptionally well-designed and has garnered countless positive responses.

Daniel Lee, President

Most of our operational costs are already incurred. While we want to hire more staff like masseuses and salon personnel, about 90% of our operating costs are fixed. Our revenues have a long runway for growth and we’re already profitable, which positions us well.

Lewis Fanger, CFO

To provide perspective, if you look at last year at American Place, we achieved $17 million - $18 million of EBITDA for the full year. This year, for the first six months alone, we've nearly reached $15 million. So we expect similar growth at Chamonix.

Ryan Sigdahl, Analyst

Very good. I'll make my next question quicker. Lewis, what is the new run rate for your sports skins absent the one-time costs in Q2? What are your expectations for Q3?

Lewis Fanger, CFO

The annual figure is about $5.6 million, and it will increase over the coming years.

Daniel Lee, President

That assumes we don't find any new partners and use fixed revenue.

Operator, Operator

Thank you. Our next question is from the line of Jordan Bender with Citizens JMP. Please go ahead.

Jordan Bender, Analyst

Thanks for taking my question. Following up on the previous conversation, it’s great to hear about room nights on weekends in Colorado. What are you seeing regarding group and convention mix to fill midweek rooms?

Daniel Lee, President

Honestly, we’re slightly behind where we should be. We hired one woman as a sales force 18 months ago, and we just recently added a second who manages corporate meetings. We need four or five sales reps. The Broadmoor has 900 rooms and has a large meeting and conference business, while they have 18 people in sales. We’re in pursuit of additional talent, which is crucial to filling our midweek business. We’ve had some, like the state VFW convention, which energized the property.

Lewis Fanger, CFO

The VFW convention had 300 attendees, I believe.

Daniel Lee, President

Booking these events in advance is crucial, but it’s tough to secure bookings for a hotel that isn’t open yet. Now that we’re open, we can show potential clients the property in person. This is essential for gradually building our business. I want to point out that Las Vegas fills on weekends with transient visitors, but it’s meetings and conventions that drive midweek occupancy. Our pricing strategy is intentionally competitive against the hotel market.

Jordan Bender, Analyst

Thank you, that’s helpful. For American Place, the margins appear high over a 20% trajectory, with a 50% flow-through. Are there cost levers left to help margins exceed 30%?

Lewis Fanger, CFO

We’re focused less on that and more on the path to grow from $9 million to $10.5 million in monthly revenue. That’s where our focus is currently.

Daniel Lee, President

There are margins to be improved through more efficient marketing as we build our mailing list. Yes, we can achieve a 30% plus margin.

Lewis Fanger, CFO

We are aiming for $10.5 million in monthly gaming revenue consistently with margins above 30%, which would give us over $40 million a year in EBITDA.

Operator, Operator

Thank you. Our next question is from the line of Ricardo Chinchilla with Deutsche Bank. Please go ahead.

Ricardo Chinchilla, Analyst

Thanks for providing details on your financing strategy. Could you provide more specificity regarding how much of the $325 million you anticipate financing through new bonds?

Daniel Lee, President

We are methodical about our approach. While ambitious, we do not want to overextend ourselves financially and seek very expensive capital. We expect a good chunk of cash flow generated between now and August 2027, which we will apply towards the $325 million. We likely will not need the full amount of financing, probably more like 50% to 75% of that. We will be one of the less-leveraged casino companies as American Place matures.

Lewis Fanger, CFO

We aren’t tied to any specific structure and prefer simplicity. A larger credit facility would be favorable, allowing us to draw down as needed for the permanent casino development without incurring interest until required. So, we will explore various structures as we finalize our plans.

Daniel Lee, President

I can commit to one thing—at $5 a share, there’s no way we're issuing equity or any equity-related entity for financing. We don’t need to.

Lewis Fanger, CFO

We aren’t concerned about financing; many banks are interested in supporting us. We’re simply considering timing for our approach.

Ricardo Chinchilla, Analyst

For my follow-up, can you provide numbers regarding CapEx for American Place next year and maintenance CapEx now that you have a new facility?

Daniel Lee, President

The commitment with the state involves an incremental investment of $325 million above our current investment. A considerable portion of that will not be spent until construction, which should begin in August 2025. Most of that will be back-ended in the last six months of construction.

Lewis Fanger, CFO

You’ll find that about 40% to 50% of that budget will be expended in the final six months. This is true for traditional projects.

Ricardo Chinchilla, Analyst

Thank you for the clarification.

Operator, Operator

Thank you. Our next question is from the line of John DeCree with CBRE Securities. Please go ahead.

Maxwell Marsh, Analyst

Hi, this is Max Marsh on for John DeCree. Thank you for hosting us during the tour of Chamonix and American Place. I want to look at your same-store performance. It appears that trends from Q1 have continued into Q2 despite your note that Silver Slipper is improving. What are the high-level causes behind this? Are there property or market-specific conditions affecting this?

Daniel Lee, President

Well, I anticipated someone would ask how a potential recession affects us. As a regional casino company, we typically perform well in recessions. Our challenges relate more to operational complaints like slot machine issues, rather than external economic conditions.

Lewis Fanger, CFO

The second half of Q2 was better than the first half performance; trends are improving.

Daniel Lee, President

In Incline, we didn’t have a strong June, but July looks promising. August also plays a significant role. We've operated for about ten years at that venue. It was previously a short-term lease, now extended for a full decade. We maintain a good relationship with them.

Lewis Fanger, CFO

The American Place continues to hold its own despite unique gaming volatility. July showed a lower hold percentage. Nonetheless, our numbers remain solid overall. We expect to maintain our performance amidst table game volatility.

Maxwell Marsh, Analyst

Thank you for your responses. Just to clarify, have you considered monetizing any of your less core assets for potential financing purposes?

Daniel Lee, President

We are constantly looking for opportunities to enhance our portfolio but have nothing to report at this moment.

Operator, Operator

Thank you. Our last question is from the line of David Hargreaves with Barclays. Please go ahead.

David Hargreaves, Analyst

Hi. I want to echo what others have expressed, thanks for hosting us. Chamonix is fantastic. Regarding the escrowed cash, the $13.6 million, can that be used for the coupon payments? Is that permitted?

Lewis Fanger, CFO

No, that cash is allocated for Chamonix's purposes, but we are well-positioned to make the upcoming payment.

David Hargreaves, Analyst

Thank you very much. Great job and good luck.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I would now hand the conference over to Daniel Lee, President and CEO for his closing comments.

Daniel Lee, President

I want to thank everyone for their support. I apologize if I jested about Mr. Farahi, but I commend him for doing great work. Our two key properties will represent our focus, and portfolio managers can handle diversification. Ensuring we excel in our three key properties should help our valuation. Thank you all.

Operator, Operator

Thank you. The conference of Full House Resorts has now concluded. Thank you for your participation. You may now disconnect your lines.