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

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?

You’re just handing it to me like that.

That’s a good call, Dan, that I – go for it. I’ll let you have…

No, it’s a great call. It’s – I hate to put 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 kind of 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 recognize it was kind of a gradual closure. We - 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. And so we went to the Gaming Commission and said, we want to fold this license back into Bronco Billy’s. Technically…

$34 million.

$34 million. Yes. And about $10 million of that is used in operations. And of course, we’re generating cash at a pretty good clip at this point. So Illinois can be comfortable that we can come up with our commitment of $25 million, and this company is big enough that there is no question that they can come up with their share. So the whole reason for that commitment letter is to answer the question of how you’re going to pay for this, and I think we’ve provided a route that works that hopefully helps us get that license. It’s still a very competitive process. One of the other applicants is Neil Bluhm, who’s very well-known in Chicago, a very large developer. But he’s the illogical choice because he and Churchill Downs own the Casino near O’Hare Airport at Des Plaines, which is a very, very successful casino, and that’s the closest casino to Waukegan. And so he would be motivated to do something that cannibalizes as little as possible from his most successful casino. And that may not be, and I would argue, would not be in the best interest of Waukegan or the State of Illinois. And so he may be a political favorite, but he’s not the rational favorite. And then the third proponent has far less development experience than either Neil Bluhm or us. So a competitive process. The state law had said that they were supposed to reach a decision as to who would get it by the end of October. However, it also had a provision in there that they could give themselves more time if needed. And not surprisingly with the pandemic, they have given themselves more time. So they’ve indicated, they hope to reach a decision sometime in 2021, and the body…

I got one wrap-up item, Dan. We’ve been working behind the scenes with our lenders, who’ve been good lenders to us all along, and we’ve been going every quarter to really just do these one-off flavors and debt amendments to fix the covenants to represent – or to reflect the fact that we had that shutdown earlier in March. That amendment is essentially complete. So tomorrow morning, I expect to have the signature exchange, and we’ll wear out the funds, and then that amendment will be complete. From a cost point of view, it’s more of what you’ve seen in the past. Last quarter, it was 100 bps. This quarter, it’s 100 bps as well. The only difference being, it’s – last quarter, we had 25 bps of it punted on to the call premium. And this time, it’s all upfront in cash, but essentially the same cost. But yes, on the verge.

And I – one other thing I thought of is, there was some unusual trading on our stock about a week ago, and I’m sure some of you were probably wondering about that. Most gaming commissions give a waiver of licensure for bona fide institutions up to 10%, and Illinois normally does it, too. But in this case, the Illinois Gaming Board is being super sensitive that whoever they choose doesn’t embarrass them down the road. I don’t blame them. And so they actually came and wanted any institution that had over 5% to provide the social security numbers of its directors and officers so they could run background checks on them. And we had a couple of those institutions that fell in that category. Now recognize, we’re a small company. So, one of these institutions, even though they’re one of our bigger shareholders, we were two one hundreds of 1% of their assets under management. And I think the other one, we were two tenths of 1% of their assets under management. One of those institutions decided rather than accommodate it, I think – actually, what I was told was they had a handful, and it might have been as few as one outside Director, who was just refusing to give those security numbres to Illinois. And so rather than get into a battle with us or the Illinois Gaming Board or something, they sold out. And they sold their over one million shares of stock over a couple of days, so they were under 5%. And so Illinois could wash their hands of them and vice versa. And it was one of those cases where they didn’t tell us they were doing it until after they had done it, and we just saw a huge trading volume in…

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

[Operator Instructions]

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

We got stomped on, Dan.

They don’t look carefully to see whether they stomp on us.

Yes.

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

The first question is from the line of Chad Beynon from Macquarie. Please go ahead.

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

Hey, Jordan. Good.

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?

I don’t know. I mean, I wonder if we get back to normal life, are we going to have to spend more on marketing to keep the same revenue? I think a lot of our operating savings, like a lot of the payroll savings is probably – we can stick to it. We’re being careful not to operate too many restaurants for too many hours and just operate what we need to satisfy the customer demand. So, a lot of this is just more careful stuff. And frankly, we always had lower margins than we really should have. And this kind of kicked us into figuring that out, and so the margin was 30% in the quarter. Is it going to be 30% forever? I don’t know, it might – maybe it ends up at 25%, but I don’t think it goes back to 15%. I think we’re – a lot of this is sustainable. Is it all sustainable? I don’t know. And I’ve seen other regional gaming companies have kind of said the same thing. I think Eldorado said the results in their regional markets had improved a lot, and they thought a lot of it was sustainable. Somebody else said that and it was very reminiscent, and I think I said this last earnings call. When I was at Pinnacle, we had opened L’Auberge just before Hurricane Rita hit. And L’Auberge has been open three or four months, had huge revenues. But it wasn’t producing as much income as it really should have. And when we were closed for about a month to rebuild from Rita, then we focused on, okay, let’s – when we reopen, let’s be really careful how we reopen. And L’Auberge has been very profitable for 10 years since then, and this was kind…

And keep in mind, too, we’ve got some things on the margin side that are just – that are helping us out because they’re not in operation. So if you look at Stockman’s, the table games outfit is not operational currently, 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. And so Dan’s talked a little bit about margins generally. I will tell you, the conversations around here really 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. But look, we could shut down a lot of things and have a tremendous margin and we’d have no EBITDA.

But actually you bring up another point. We were kind of studying $5 blackjack tables anyway.

We were.

Because if you run the math, there’s 50 hands an hour. The house edge at blackjack, if it’s a normal player, not a card counter, but somebody who read a four-page article on how to bet at blackjack, the house edge is about 2%. So if somebody is betting $5 a hand, we’re making $0.10 a hand. And there’s 50 hands an hour, so 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 making enough to pay for the dealer. The relief dealer who’s taking a break in the back, the shift supervisors overwatching the dealer and so on, let alone, the meal you’re going to comp for the person or whatever. And so $5 blackjack, even if the table is full, is pretty much a breakeven proposition. And so we were already trying to figure out how do we migrate these people over to a machine or to a higher table limit. And it’s a cautious thing because all your competition is also offering $5 blackjack. And I know Eldorado was moving very aggressively to put in Stadium gaming. I don’t – this was before Caesars. I imagine they’re probably doing it now at Caesars, too – putting in Stadium gaming and getting rid of $5 blackjack tables, right? And we were looking at that, wondering do we have the courage to do that and so on. Well, you’re closed. And then you reopen, and you’re limited as to how many people you can have at each blackjack table. It’d be crazy to have $5 blackjack, if you can only have three people sitting at the table in a plexiglass cubicle. And so in Colorado, where we make a little bit of money on table games, but not much, well, we haven’t been allowed to open table games. So that’s helping our margins. At the Silver Slipper, and at Rising Sun and at Grand Lodge, we have table games open. But generally, it’s a $15 minimum. And the customer comes in and says, well, I want a $5 game, and it’s like, look, I’m sorry, we only have three positions for a blackjack player. It’s a $15 medal. So, you can go play at a machine or you can – so in effect, the pandemic and the forced reduction means that we now make money at our blackjack tables, where before we had a bunch of $5 tables that we probably weren’t making money on. And if there’s anybody out there with plexiglass setup that only allows them to have three or four people sitting at blackjack tables, and they’re still offering $5 a hand blackjack, you should short the stock because that’s a very stupid move. And so anyway, so there is a lot of stuff like that we’re focused on. So...

Thanks for the color. And then following up on trends within your demographics in the casino, have you seen any of the older 65-plus start to trickle back in over the last couple of weeks? And then the younger demographic, do you expect to keep those people in the casino once things start to open up?

I haven’t seen any data that really shows them "trickling back". In fact, it’s pretty striking. I mean my mom is 91, and she’s pretty terrified and is very careful. And you just – you go to the grocery store and look at people. And if there is an older people in that grocery store and you catch their eyes, they’re scared as they should be, if you look at the casualty rates of much older people. And so I think older people are being cautious, and I think they’re probably right to be cautious. And it varies a little bit from person to person, but certainly, if you’re an older person who might also be diabetic or maybe you’re living on one lung or something, it’s not unusual for us to have people come into our casinos with an oxygen tank. Well, that would be kind of silly today. So, I think that, that older segment will continue to be cautious and should continue to be cautious until a vaccine is available. And now the younger people, I don’t know. I mean, we’re – we have our marketing meetings. We talk about how do we make sure we get them into the program, we get them to get points, we get them to – so it becomes a habitual part of their life. And hopefully, they’re having a good time, and it does become a new customer for us. So – but yes, there’s no question. We are probably benefiting from the fact that people are hesitant to get on an airplane. Nobody has to fly to get to our places. A lot of places, bars closed at 10 o’clock at night. People are hesitant to go to movie theaters. So, there are quite a few places now where…

And you actually saw it.

Yes.

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

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

Great. Thanks, guys on the really strong results.

Yes. I should mention, you go back and look, our fourth quarter last year was pretty weak, and then first quarter was a little better, but still weak. And the second quarter was the pandemic. So, we got three easy quarters coming ahead of us.

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?

I was thinking of it as overall. Frankly, we’re pretty happy with a lot of this improvement went from Rising Star having basically no income to having a 24% margin. I mean, margins improved pretty much across the board, but can – and Lewis is right. I mean, I’m talking about margins because feels kind of good to talk about margins. So this is something you look at, but at the end of the day, you don’t eat margins, you eat income. So, if we’re allowed to reopen table games in Colorado, we will do so. Even though it might hurt our margins a little, it will probably add to our income, provided we don’t have $5 blackjack. And so I’m just trying to give some – if you kind of said, "Gee, you had $12.5 million times four, that’s $50 million as your EBDIT really $50 million a year. And I’d say, well, okay, first I’ll take the seasonality out of it. Maybe you’re in the low-40s. And then if you say some of it might not be sustainable, so maybe you’re in the low 30s. But then you’re going to have the sports betting stuff come on, which would add on to that, so the EBDIT of the company is, I don’t know, 30-ish maybe, 35-ish, it’s not 15, I guess, is the bottom line. And when you start at 50, and you start making adjustments to say, well, what is the ongoing number, we’re going to do the best job we can to get good sustainable income in this turbulent world, but I think our margins will not go back to where they were before the pandemic.

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

Actually, you’re just reminding me, things have been pretty good as well and easy comparisons to last year. But we did have a hurricane, which I failed to mention earlier, and it hit us – this was probably the biggest storm since Katrina to hit the Mississippi Gulf Coast. And we did have some damage. It’s covered by insurance, but we lost probably 80% of the shingles on the roof of our hotel. So, if you looked at it today, it’s got a big blue tarp on it and a few other things. Nothing insurmountable. We were closed for, I think, three days, if I remember correctly. We do have business interruption insurance. There’s deductibles and so on. The business was pretty good before the storm, and it was pretty good last Sunday after we reopened after the storm. So – but usually, business isn’t very good in the midst of a hurricane. So before and after the hurricane, it was pretty good, and that’s our most important property. And then the other two property – the other two key players – really the same thing that happened in the third quarter has been playing out. I mean, the results are good in Indiana, they’ve been good in Colorado, and weak in northern Nevada. Although – which one...

Nevada is just fine, too, actually...

Nevada actually had a decent October, right? And it’s – they’re the small properties, but they did better in October than they did in the third quarter. So...

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

Yes. We do have our – and we’re kind of going through our insurance policies, and it’s pretty clear, we have pretty good insurance. Not sure we get to the point where we collect on business interruption, but we might. So...

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?

They keep a pretty good poker face, to be honest. They said, thank you for that additional information. We will take it into consideration. So, they were not budging on the social security number issue, although I will tell you the other institution we have, it’s a big institution, they kind of shifted the investment into an entity that has a smaller board and that smaller board provided their social security numbers, and we think that may satisfy Illinois. It’s not our call. We’ll see. But it was a creative idea, and we think it might work. I think it probably will work actually because it’s – I mean, it’s a catch 22. You have these regulators who really want to make sure they know who they’re dealing with, and so they throw a broad net. And then you have some institution that says for this tiny, tiny investment, you’re going to investigate all of our officers and directors, you’re kidding me, right? And we get caught in the middle saying, listen, this is the world we live in, we deal with this all the time. Let’s see if we can find a way to keep everyone happy because the institutions we’re talking about, it’s not the teamsters pension fund or something, anything questionable there, reputable financial institutions, and so you try to get everybody comfortable that, that is the case. And so we got there with the one institution, but they had a – the portfolio manager told me he didn’t want to sell, but his Chief Investment Officer forced it. So, anything else?

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

Okay. Thank you, everybody. Is that it?

Yes. That’s probably it.

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

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