Full House Resorts (NASDAQ:FLL) Q2 2020 Earnings Call

0:01 Greetings and welcome to the Full House Resorts second quarter earnings call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. As a reminder, this conference is being recorded today, Thursday, August 6, 2020. I would now like to turn the conference over to Mr. Louis Fanger, CFO, Full House Resorts.

0:43 Please go ahead. Thank you, and good afternoon, everyone. Welcome to our second quarter earnings call. Apologize for doing it during the trading day. We usually go after market, as you know, but it is a packed day today with... and a couple of our peers going aftermarket. But 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.

1:29 For 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, the 8K, as well as all of our SEC filings. And with that said, we're ready to go, Dan.

1:48 Okay. Thanks. It's odd to say this. It was actually an extremely good quarter. It's odd to say that because we were closed for over half of it. And we took the unusual step of releasing our June numbers because, frankly, the quarter numbers are not very relevant. And last year, of course, we were open. Every property was open for the full quarter. And this year, all of our properties were closed for at least half the quarter. and even the June numbers, you have to bear in mind that Bronco Billy's and Rising Star were only open for half the month of June. And I think the phrase how unusual this is, I mean, we have five casinos in different parts of the country and they're each different and, you know, we were small but we're pretty diverse and sure, you'll have your challenges like you could have a hurricane in the Gulf Coast and it could knock that casino out for A week or if there's damage, it might be a month or two.

2:51 Or if there's a calamity, it might be a year or two. But it's one place. We've had the Ohio River flood and shut down the road going into rising sun for a week or two at a time. We've had forest fires in Colorado that have shut down the road that leads to Cripple Creek. There are snowstorms sometimes in Colorado. There are snowstorms sometimes at Tahoe. but you never have something that shuts everything down at once for three months and so this was really an unprecedented situation and I'm sure much of the economy could say that and I hope and think that the worst is behind us. Now as we went, as we were closed for three months, we only kept a handful of employees and we put a lot of work into thinking about how we should reopen and how we could be more efficient and how we could be better with our marketing and so on.

3:48 Really took a page out of it earlier time in Lewis and my career when we were at Pinnacle and Katrina and Rita shut down La Berge and the properties in Mississippi, Louisiana. And we got focused on how do we open more efficient. And when we did reopen after a couple of months, we were significantly more efficient than we were when we closed. So it's kind of a good opportunity to take a fresh start, get rid of the sacred cows, and reexamine everything, and we did that. So just to put this in perspective, now the Silver Slipper was open in May, so it was open for the full month of June, but it only has half its slot machines. And when you go to every other slot machine, or worse than that.

4:39 He had to be six feet apart. Sometimes that meant every third slot machine was open. And the table games were not operating as many as we used to. Our table minimums are higher and the number of people at each table are limited and so on. And yet it did almost the same casino revenues as it did in the prior year. It was off 3% in the month of June. The payroll was 22% lower. The marketing expenses were 13% lower. and as a result, the EBDIT was 28% higher. Million seven, which is, is that the best month in its history? Certainly one of the best months. That was the best month. Best month in its 14-year history and despite having half its slot machines closed.

5:27 Bronco Billy's was only open for half the month. Again, it was only using half its slot machines. None of it's table games. Colorado has not approved table games out of concern that the chips might transmit disease. And table games are a pretty small part of our business. Despite being open only half the month, our casino revenues were 75% of what they were in the prior year, June, which means that our win per day was up quite a bit. Our payroll for the period we were open was down about 11%. Our marketing expenses were down 52%. Part of that was we weren't exactly sure when we'd open, so it was hard to advertise, and all of a sudden they said, okay, you can open, you open.

6:13 But EBDIT was almost double what it was last year for the month, and that's despite only being open two weeks this year. Rising Star, similarly, it was only open half the month. It's operating with only about 40% of its slot machines, about half of its table games. So its revenues were down 39%, but remember, it was closed half the month. Okay, so its revenues per day were actually up, and its revenues per slot machine per day were up a lot. The payroll at Rising Star, for the period of time it was open, is about half of what it was last year. Marketing expenses are off over 80% from what they were last year. And so the EBDIT was up 33%, despite only being open half the month.

7:02 A little more challenged in northern Nevada for issues I'll talk about in a minute. But they were open 90% of the month. And it's got most of the slot machines, but still off from last year. Less than half its table games open. Casino revenues fell 31%. And since it was open most of the month, casino revenues are down on a revenue per day basis. Payroll is down 40%. Marketing expenses down 50%. So we made 80% of what we made last year, despite pretty soft revenues. Overall, our operating properties, the EBITDA margin in June was up nine points over the prior year. And that's despite carrying an entire month of utility costs and real estate taxes and rent and so on, with only half a month of operations at Bronco Billings and Rising Star.

7:59 and I will tell you those trends have continued through July and into early August, roughly speaking. I mean, July was a very strong month as well. Now, why is this? A couple of things. One is we opened conservatively, like we talked about. Second, it proved an adage that I've always said to our GMs, never forget that people gamble, not slot machines. And so... If you add 10% more slot machines, you will not add 10% to your revenues. But if you add 10% more people in the place, you will. And so how can you do the same revenues with half the slot machines? Well, walk into any casino, very rarely will you see every slot machine occupied.

8:44 And so all we're doing is kind of forcing people as to which slot machines they go to. But casinos generally don't run more than 50% occupancy at their slot machines, even on and I think, well, LaBerge, which runs very high volumes, and Lake Charles on New Year's Eve at peak time might get to 70% or 75%. But in normal operations, nobody is above 50% occupancy at the slot machines. So the fact that you had to shut down a bunch of slot machines doesn't really hurt you as much as you might think. And in fact, a little bit of a wake-up call. We don't actually need as many slot machines as we have, but slot machines are expensive. and so the casino actually looks better and feels better if you remove some slot machines.

9:32 So we are doing that in some cases just to not have dead machines sitting on the floor but maintain that social distancing. Then, you know, why are people coming out and gambling? Well, a few things. Certainly people are hesitant to fly. Air travel in the country is down sharply. Yeah, it just doesn't feel safe getting on a crowded plane, even if people are wearing masks. And there's almost always somebody who doesn't want to wear a mask. And so people are hesitant to fly. And certainly that's one of the challenges Las Vegas has. People are hesitant to fly here. and so I think to some extent our customers are, you know, like people in Colorado do come to Las Vegas. It's ranked third or fourth of states in terms of visitation to Las Vegas and, you know, at the moment they don't want to fly so they gamble closer to home and I think that's helping us in a few places and I think that hesitation to fly is going to be there until a vaccine is out, proven effective, widely distributed and That may be a year before we get back to the type of air travel we used to have. And maybe to some extent we never get back to where we used to have because you find out that the casino close to home has the same slot machines and the same games. And second, a lot of the competing entertainment isn't there.

11:00 There's no movie theaters. You can't go to movie theaters. In some states you can't go to bars or there's a limitation on bars. There haven't been and aren't likely to be for a while live sporting events. Can't go to hockey games and football games and so on. You couldn't even watch them on TV until recently. Now you can watch them on TV, so I guess we have some competition coming there. Concerts, you can't go to concerts. Can't go to live theatrical events. You can't go to a crowded restaurant to the extent that that was kind of fun. And I think people realize that We can take our casinos and socially distance the slot machines, and it's a safe environment, and we're pretty careful about that. Bronco Billy's, for example, is a very creative setup, and we take your temperature when you come in. We have a big post-it that we put right on the slot machine on the face of it that says it's been cleaned. You really can't play it with that thing sitting in front of you, so you remove it, you play the machine, and if you change machines, our employees notice, hey, here's an empty machine that doesn't have that card on it, so it needs to be disinfected. So we disinfect it, and the next person sits down.

12:04 And so it is a type of entertainment that you can be reasonably comfortable that you're socially distant from other people. And now, obviously, there's a lot of stuff that we normally do that we can't do. We're not sponsoring concerts. We're not sponsoring giveaways where everybody has to be in a crowd. We're not sponsoring VIP events where everybody is in the same room. We have tournaments that use the Konami system can be played at machines that are spaced throughout the building. But to the extent if you don't have the Konami system and it was your practice to try to put everybody at one bank of machines for a tournament, you're not allowed to do that today. And so I think we're benefiting from a lack of competition, and I think we're going to benefit from that for a while. I will tell you, within our database, The older clientele in each casino measures it a little differently.

12:59 But if you say 60 and over or 65 and over, the revenue that we're seeing from that group is off and off like 20 to 35%. But that is more than offset by younger people who are new to us that we've never seen before or are coming more often or gambling more or staying longer. and so there's a whole new segment there that we're trying to get to know and get to know us and I think when there's a vaccine the older people will come back and so I think that's the main thing. Certainly the stimulus money has probably been a help but it's also a hindrance because it's been a little more challenging for us to get employees back sometimes.

13:49 and people cite about how generous unemployment is, but if you remember, when you're on unemployment, you don't have health insurance and you've got to pay for your own health insurance. And health insurance is pretty expensive. I don't think people realize how much companies actually pay for their health insurance. And so if you net that out, even that extra $600, it wasn't like you were getting rich on unemployment. certainly our customers were better off with it. And now it's kind of up in the air what's going to happen. My guess is they'll figure out something. There'll be some compromise. But nobody was really getting rich on the stimulus money. I think it was a help for us. But I think if it goes away, we will still be fine.

14:36 And I think it's not likely to just go away in a one fell swoop. The Now, we're going to remain cautious on expenses, you know, remain cautious on the payroll, on the number of employees, the hours of operations, you know, and that sort of thing, because who knows? You know, things could turn around, and I think it's important to be cautious. Marketing, we're smarter, it's more targeted, and using the Konami system, which we just installed at two of our five properties, so and we already had it at one of them. So it's only our two smallest properties that don't have the Konami system yet, which is pretty helpful.

15:21 And operating hours, and we're really examining it pretty carefully so that we're not operating restaurants that are empty. We're not running, for example, we used to run the ferry at Rising Star 15 hours a day, seven days a week. Now we don't operate it at all on Monday and Tuesday. We only operate at one shift on the other days and we charge, if you're not in our program, which helps offset some of the operating costs. So we're looking at every single thing. This helped us get rid of some sacred cows, for example. There was a buffet at Rising Star that cost us over $2 million a year to operate, and everybody said that's the key to the place. Nobody would be here except for the buffet. Well, at the moment, Indiana doesn't allow you to operate a buffet, so we do not have a buffet. And guess what? We still have gamblers in the casino.

16:07 So that sacred cow has been killed. and 49 Cent Breakfast that we had in Colorado. It's been there 25 years. And I'd walk into this little coffee shop and see the same local people there every time I was there having breakfast for 49 cents and none of them looked like gamblers. But if you talked about getting rid of the 49 cent breakfast, everybody was afraid to do it because it was kind of been there for 25 years. It was part of the reason for our success. We don't have it at the moment. You can only have half the seats. We said, you know what? It's a small coffee shop to begin with. Forget about the 49-cent breakfast. And you know what? We're doing fine. So I think the 49-cent breakfast is history. We used to allow people to redeem their points for cash. Taking that away, you can redeem your points for pre-play. And the number of employees. I mean, how many times you'd be going through the property and they'd say, well, you know, that restaurant needs this many employees.

16:59 We need this many people in the cage and so on. And this has caused us to re-examine that. And we found out that some of those employees concepts are just not true, that you can operate that restaurant with fewer people and so on. Liquidity, we're still sitting on about $30 million of cash. About $10 million of that is used in operations on a daily basis. We're still being cautious. It's possible with the spikes around the country, we can end up closing again. I think it's very possible we'd end up closing one place. I think I think it's unlikely we'd end up closing all of them, but that's going to depend on what happens with the number of people getting sick and so on. As last time, it cost us $5 million in the first month we were closed with the severance we paid to people, and then thereafter it cost us about $3 million a month, which includes our interest expense to our lenders and so on and so forth.

17:51 And so we want to be careful to preserve our liquidity because it's still a very uncertain world. On the mobile sports betting, the second one opened. As you know, we have six agreements. We get a percentage of the revenues under each of those agreements. Two of the six are now open, which is Churchill Downs in Indiana and Smarkets in Colorado. We think the other four will probably all open in the third quarter. Honestly, they have not opened as fast as we hoped. But we know they're all trying to be open for football season, which is a very large part of the betting activity. And so we think they're all likely to open in the quarter we're now in, at which point we get a minimum of $7 million a year of our participation in their revenues. And we're a very small company. It'd be lovely if we could spin that off into some sort of entity and take it public at at the valuations that Tillman Fertitta has gotten and that Rush Street Gaming is getting and that DraftKings has.

19:01 But it should nevertheless show up in a valuation of our company because we're in that business. And if they allow internet gaming in the states we operate, we intend to participate in that. And I think they probably will and we will participate in it. So we have those aspects in our company. It's actually a pretty significant chunk of our company. We're just too small to spin it off into a separate entity and realize that valuation. Debt covenants, we have two issues with our existing debt. One is we were limited to $5 million of additional indebtedness. We took out $5.6 million of PPP loans. Now, those loans are only at 1% interest, and normally under GAAP, if you have a deeply discounted loan, You would do this kind of present value evaluation. So maybe it should go on the books for under $5 million and we're okay in the covenant.

19:59 We also believe that we are spending that money in the way that would entitle us to forgiveness. Of course, until we actually seek and receive forgiveness, it's still debt. But if we have any portion of it forgiven, then it's probably under $5 million in total indebtedness. Just to make it very clear, we're asking our lenders to allow that basket to exclude the PPP loan. And the other thing is there is a test that's done at the end of each quarter where your total indebtedness cannot be more than X times your trailing 12-month EBIT. Well, we were closed for three months, so we flunked that quarter at the end of March. We flunked that test at the end of June. will probably flunk it at the end of September. We have a shot at meeting it at the end of the year, but that means we're in constant discussion with our lenders.

20:57 They obviously want to be paid for waiving that covenant, and we're negotiating on what that payment should be. Last quarter was half a million dollars, and it could be a little more this time, but probably something acceptable. and we're not alone. I think every casino company is going through that same process and we're confident we're going to get there soon and in fact we have some draft documents going back and forth but just be aware that we obviously have to deal with our lenders on a daily basis in a situation like this. Because we had kind of a fresh start thinking about the company We chose to take two write-offs that ended up in the quarter.

21:44 One was in Fallon. We originally had planned to add office space to the outside of the building, popping the building out and building offices there. Years ago, there was a big office building out in front of the building we got rid of so it improved the visibility and improved parking. We took the management team and stuck them in a construction trailer at the back of the property, and then we kept putting off building the new offices because we had other Capital Needs that really affected the customer experience, and this really wouldn't affect the customer experience. Well, you can't have offices and temporary trailers forever. The zoning wouldn't allow it, among other things. But we got looking at it and saying, well, we really had too much management at this property for what it is. It's a very small property, and why do we have all these people in these offices and this trailer anyway? So when we went to reopen, we kind of right-sized the management team, which meant we didn't need that many offices.

22:40 And we also realized that the win per slot machine per day on the property is pretty low, and maybe we didn't need that many slot machines. So we're going to the very far back of the casino where the slot machines are least productive, and just putting up some walls and creating a small office area, which would be enough to accommodate the reduced executive staff we have. It'll be pretty similar to the small offices we have in Tahoe. and so we didn't have a need to build that new office building. Well, we had capitalized the rent on the trailer and the design costs on the office and so we wrote that off in the quarter. And then in the cost of building out those offices is something like $25,000 because we're not adding to the building so it's pretty inexpensive. And then in New Mexico, you'll recall that the New Mexico Racing Commission had put out a request for proposals a couple of years ago for the last licensed for a racetrack in New Mexico.

23:36 And then with that racetrack, you'll have to have a casino. We had taken out options on land and put in a proposal. The consultant for the Racing Commission had deemed ours the best on just about every measure. But there was a change of administration, a change of the Racing Commission, and they seem to have abandoned the process. It hasn't come up in the last several meetings, and it doesn't look like they're going to do anything. So we did not renew our options on the land that we had outside of Clovis, New Mexico, and there was a couple hundred thousand dollars of previous deposits that we wrote off. And so that kind of cleans house. I told everybody if there's anything else we should write off, this is the quarter to do it, and nobody came up with anything. So I think we got it pretty clean at this point.

24:23 And in Waukegan, we are still in the race. They are planning to award the license The legislation actually says by the end of October, but there is a pretty easy process for them to give themselves more time if they want to. So they may, given the circumstances. But we think we have a shot at that. And if so, we will probably do it in a project finance way with a partner. It's a pretty big project relative to the size of our company. And so we've been talking with some potential partners who would be good partners for that. and that's where we stand with Waukegan. It's a very good opportunity. We think you can make a lot of money there.

25:10 We've put together a proposal that we think is the best of the three proposals. Obviously, when the Gaming Commission starts looking carefully at it, they're going to ask us how we can pay for it. And so we want to have a partner who can say this is how they're going to pay for it and this is how we're going to do it. And I think if we can answer that question, then we clearly have the best proposal in Waukegan and hopefully we can do something there that's a win for the state, a win for the city and profitable for our shareholders. So that's what Keegan. We also have expansions in various stages of planning and entitlement in Colorado for a hotel and meeting space and so on, which was we had started construction on the parking garage and stopped it.

25:55 That's part of how we have the cash we have. And in Mississippi, where we have sought for a couple years now the entitlements to build another hotel tower that would go out over the Gulf of Mexico, which is pretty complex because of all the environmental stuff and state approvals that are needed. And we've made pretty good progress on that. And so when we started the process, we said this will take years, and here we are a couple years later, and it's not too far down the road that we could build that. But nevertheless, at the moment, both of those are on hold. We want to see how the economy develops, see if our business continues to be as strong as it is currently. What do the financial markets do? Do the financial markets differentiate between regional casino companies like ours that are doing well and those that have a lot of casinos, their bread and butter is based on meetings and conventions, nightclubs, shows. all flying there. Those are all things that don't work in a pandemic economy. And so I think there should be a distinction between regional gaming and kind of destination gaming in terms of the risks and the vitality of the business, at least near term.

27:15 Now, some companies have some of both. They're going to do really well in the regional markets and suffer in the destination markets. But but it's unclear yet whether the financial market's gonna make that distinction. And so in the meantime, given the uncertainties out there, we're still conserving liquidity, but we do have quite a few growth opportunities that we could undertake if we get to a better world. Get everything loose?

27:42 I have a couple of small things to add to you, Dan. With regards to the sports betting, You know, we often get the question from a lot of you guys, how do I value sports betting? And I just want to make one very important point to all of you. Traditional gaming companies trade at eight times EBITDA, but you have to remember that when we go out and we run our physical casino, we have CapEx. We have to fix the leaking roof. We have to buy slot machines. And so when we look at our sports contracts, we're effectively getting $7 million of revenue, marginal expense, so effectively $7 million of EBITDA. That $7 million of EBITDA doesn't have any of that CapEx attached. There are no slots to buy. There's no linking rope. And so what is it? It's certainly not the same eight multiple.

28:30 Is it 10? Is it 12? You can pick whatever multiple you want. But that's a very, very important point that we want to make sure you guys know about. We were very pleased to see that one of our partners, Wynn Resorts, just launched in Jersey. We have nothing to do in Jersey, just to be very clear, but we are linking up with them in Colorado and Indiana, and so it's nice to see them go live and knock on wood, as Dan said, we think they'll be live shortly in our two states. One other point I wanted to make, and I had to look at it a few times because I didn't realize just how much had gone down. But if you look at the first quarter of 2019, our debt, our LIBOR rate was locked in at 2.8%. If you look here, the third quarter of 2020, we reset at 0.31%.

29:21 That's two and a half percentage points of difference. Now, we have a LIBOR floor, so effectively, it's 1% for us. But the annualized interest rate Thank you. If you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request.

30:10 If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. One moment, please, for the first question. Our first question comes from the line of David Bain with Roth Capital. Please go ahead.

30:30 Hi, David. Mr. Bain, your line is open.

30:38 You have to unmute it, David. Oh, there we go.

30:42 There you go. Thanks, Dan. And, Lewis, I was saying, by the way, we agree with you on the bifurcation of the sports multiple, but, yeah, thanks again. So, you know, looks like in June 20 versus June 19th, you did about 50% of property EBITDA for the month relative to the quarter, about 60% of adjusted EBITDA, again, for the month versus the quarter last year. I mean, can we get a peak? I'm not sure that matters right now.

31:18 When I add up the four segments... adjusted EBITDA in 2020 was $2.7 million versus $2.0 last year. That's entire month versus entire month. And despite the fact that in 2020, two of our key properties were only open for half that month. Now, that is before corporate, but corporate is also down from last year. So we had about a 10-point swing in margins last year.

31:49 Okay, I was looking at the one month end.

31:50 I think that's different than what you were saying.

31:52 Yeah, I was looking at the one month end of June number, adjusted property EBITDA of 2.7, and then I looked at last year, adjusted property EBITDA of 5.5.

32:03 Oh, yeah, the 5.5 is the full quarter versus the month of June.

32:13 So what I'm saying is, yeah, I think we're, yeah. What I was trying to get at is, you know, the sustainability. You know, if we look at July and trends in August, have you seen any sort of, you know, was part of that, you know, pent-up demand, stimulus, other, you know, entertainment venues opening up now, anything, any kind of trend differential?

32:40 Well, okay. If it was pent-up demand, you would have seen a significant lessening in July and and we didn't. Now, the competing entertainment venue and the only one that I can think of that's material is you now have some sports on television. So you can stay home and watch a hockey game, for example. And that really didn't come to play in July. That's really end of July, early August phenomena. And our business is still strong. And we haven't closed the books for July yet. It's still early in August. But based on what I've seen, I'm pretty sure it was the best month in the company's history. and that's with half our slot machines still closed. And so July was strong. First few days of August looked pretty good.

33:28 And I've been trying to figure out what that is because the extra unemployment benefits, people knew that that was coming. And it's kind of funny. It's almost a... Some people run around and say, yeah, everybody's getting all this generous stimulus stuff from Really, yes, there are probably some people who were making minimum wage and then they became unemployed. Maybe they're better off on unemployment. But, you know, in Mississippi, for example, the normal unemployment is only $200 a week. And so you could have been making $800 a week. And if you back out what it would cost to buy a health plan for your family, it's not like it was super generous that you feel like going out and gambling.

34:15 So I don't think it was – I think the stimulus money was certainly helpful, but I don't think that was the major factor because you can find individual cases where people might have been better, but I think most people on unemployment would rather be working. And I think economically they would be better off to be working. They're in some business like an airline or restaurant or something where they can't work today. And when they go back to work, I think it's more of a plus for us than a negative. It's a hard one to say. But the lack of competing entertainment is a clear plus. And I think we're going to have that for a while. Because a lot of the other activities you can do is... I don't know how you do it.

35:02 I love going to a Cirque show or a Broadway show. But I probably won't do it until I've been vaccinated and I'm comfortable other people have been vaccinated. And in the meantime... Those shows are all going to disband. I mean, nobody can afford to pay the acrobats or the actors or something for a year to sit around and go back to work. So when it's time to start Broadway again, the producers are going to have to start new shows. Somebody's going to have to fund a whole new rehearsals and training and so on. It's not going to come back right away. And so, you know, we have a period of time that I think is six months to a year to two years. where competing entertainment may not be there.

35:47 It comes and goes. I think that's probably the single biggest thing that's driving us. In Colorado in particular, people might be choosing to go to the local casinos instead of Las Vegas. Mississippi and Cincinnati are a little further away. But it could be a bit of a phenomenon there, too. We used to be quite a few nonstop flights between Cincinnati and Las Vegas. There's none now. So that sort of thing speaks well for us.

36:17 That's great. And can you give us a sense of how competition maybe is trending in Illinois? It seems like you may be inching ahead there, according to some checks. And any kind of political happenings, you've always been helpful, like keeping things in mind, you know, during – the whole process that could delay things. Finally, I know you mentioned the financing partner. Should that go forward? Can you give us a broad stroke of what that could potentially look like in terms of overall structure?

36:50 It's kind of a moving target. We're talking with different people with different formulas. We need something where we can come up with some money for our share and Somebody else comes up with their money, and then most of it's debt financed. You know, I did the deal for the Borgata. That was how it was done. I did the deal for what is today Park MGM. That was a joint venture that was structured that way. And so, you know, something like that, because it's too big a project. If we did it on our balance sheet, we'd be betting the whole company, and we don't want to do that. Nevertheless, we think it's a very good project, and... and so if we can structure something that makes sense, it's good for our shareholders and good for somebody else. Our partner will make good money too.

37:38 And so we're trying to work that out. You know, I neglected to talk much about Northern Nevada. I think it's worth talking about because we're not doing as well and there's some unique reasons. We operate the casino within the Hyatt Tahoe and the occupancy of that hotel is down quite a bit from last year. and that's a hotel that people fly to, they come to, they normally have a good meeting and convention business and so on and that hotel is not full in July when it normally would be full and that's affecting our casino. Now, we do have a local clientele as well who come but we're not operating the table games 24 hours a day, seven days a week because it just isn't the demand for it and so that property is weak and then in Fallon, there's a local hotel Business, and then there are people at the Naval Air Station where carrier wings go to get trained. Well, the Navy is not letting those carrier wings off the base.

38:40 They're restricted to base because they don't want to either spread the virus within the community or have the community spread it to the base. So they're restricting travel, and that's affected us there. And there's another thing that's affected. We're one of about five casinos in Fallon. Well, we're the Bellagio of Fallon. Now, it's not Not Bellagio, but we're the Bellagio family. But we've adhered to the rules. So we have a security guard who takes your temperature when you come in. We have every other machine turned off. We make you wear a mask. Those are the rules. Our competition has completely ignored the rules. And you didn't have to wear a mask. There's no security guard at the entrance. They're like, we're fully open. And this is one of those, you know, rural communities where they think this is all fake news or something, right?

39:27 and so that put us at a competitive disadvantage but we notified the Gaming Commission and it's now warned the other parties and I think if they don't follow the rules they're going to find them and so but in the meantime we operated for several weeks but we were the only casino in town that was requiring masks and the other casinos were not and and so The irony is you're allowed to smoke in casinos in Nevada, so we offered to punch little holes in people's masks so they could smoke while they were wearing them. But there was a unique issue there where because people were restricted to base, that affected the business in Fallon, and because people were hesitant to travel to a resort hotel at Lake Tahoe, that affected business there. And you step back and look at it in a broader context, I'm really glad that that Normally, I would like to have a strong meeting in convention business and so on, but under these circumstances, we're kind of lucky to be the type of business we are in most of the country.

40:35 I'm sorry, David. You had some other questions, and I don't think I answered them.

40:39 No, that was great color. I was just wondering, just Illinois, like Waukegan, if any political happenings we should keep in mind, any thoughts on competition, if you just have something.

40:51 Well, I think The one thing that happened is they had the legislator altered the rules to make it more feasible to have a casino in downtown Chicago, which is great. That didn't affect our projections very much because we think that gambling in Waukegan will be principally from that area between Chicago and Milwaukee. But that may take some of the other guys' focus to say, hey, let's see if we can get one in downtown Chicago. which, look, we're not big enough to do Waukegan. We're certainly not big enough to do downtown Chicago.

41:28 Not big enough on our own, Dan. On our own, right. We've done major projects of this size bigger than that.

41:35 Yeah, and so, you know, I think that's the only thing that's changed in Chicago. Of course, you know, the backlog because everything has kind of slowed down because people are learning how to have gaming commission meetings on Zoom calls and stuff like that. But, you know, We still think they will get around to it near year end. You had to submit by a certain date. There were three proposals that made it by the city. We were one of the three. The city's consultant rated us by virtually every measure as the best of the three proposals. The only spot we were weak was that we're small relative to the size of the project. Now, the other thing that I think has happened is you see...

42:22 the spread of internet gaming, both sports betting and actual gaming. And so it's now starting up in Pennsylvania, the internet gaming. The numbers out of New Jersey, which is the only state that's had it now for a couple of years, have been very impressive. And I think there's clearly pressure on state budgets across the country. You can't shut the economy for three months and not have it affect sales tax revenues and income tax revenues and so on. So I think every state in the country has fiscal issues at this point. That's why they're all trying to get the federal government to send them some money, whether it will or not is yet to be seen. But there are pressures on state budgets like never before, and yet internet gaming is more socially acceptable. Everybody's like, well, why not?

43:15 We already have regular casinos. We already have Sports betting that you can do online. Why wouldn't we allow you to play a slot machine online? And so it's a good source of revenues to states. I think you're going to see it. I think it'll probably come up in Indiana in the legislative session in the first quarter. And it may come up in Colorado pretty quickly. There's also a move in Colorado to increase or eliminate completely the maximum bet and maybe add the game of Baccarat. which would be good for us. And that's why you see the huge valuations in FanDuel which went public through a SPAC and also on I think FanDuel is trading like seven or eight times revenue and similar valuation on the taking public of Tillman Interactive Gaming or whatever it's called that also went public through a SPAC and then the most recent one is Rush Street Interactive is going public through a merger with the SPAC at very big valuations, which are only big relative to what they are today. What the market is saying in assigning that valuation is we think this is a growth business. If you extrapolate New Jersey to all the other states in the country, this will be a very big business someday.

44:36 I mean, casino gaming between tribal and non-tribal is $63 billion a year of revenue. It's completely possible, based on New Jersey numbers, that the interactive stuff could be $10 or $20 billion. If you just look at New Jersey, and New Jersey has developed that business without having a negative impact on Atlantic City. So this is like incremental gaming, and it seems to be the case so far. So this is not like Amazon destroying Barnes & Noble. It's more like DVD players came along and it provided an additional distribution avenue for the theatrical companies without really affecting movie theaters.

45:25 Now, movie theaters have been affected by the pandemic, but prior to that, they were holding on to their own. And so people are looking at it and saying, wow, this could be a really big business someday. The cash flow characteristics of business are great because there's no You don't have to have brick and mortar. You don't have to have maintenance capex and so on and so forth. And so far, our stock doesn't seem to reflect the fact that a third of our EBDIT is from internet gaming. But it's also something that it's been slow to ramp up, but it's coming. And then I think you're going to have expansion of it. And in almost every case, it's tied to brick and mortar. The only exception I'm aware of is in Tennessee where you can have mobile sports betting and it's not tied to brick and mortar because they don't have any brick and mortar.

46:17 There are no casinos in Tennessee. And so elsewhere when it comes up, you know, the existing casinos often bring it up and argue that it should be tied to existing licensees because the state's already regulating. Everybody knows them. They know how to operate within the regulatory structure. and that was frankly how we got involved in mobile sports betting in Indiana and Colorado and I think Mississippi will probably allow mobile sports betting in the not too distant future but I think in all three states online wagering will not be far behind.

46:54 I think the only thing to add to that, David, is our existing sports waging agreements with Smarkets and Churchill and Wynn, those only encompass Sports Wagering. If we were to go down – if we were to have online slots and whatnot get approved, certainly we could look to use those guys for an online casino business as well, but that's all additive. So keep that in mind. The only other point I wanted to add was what strongly appears is that sports wagering is the small piece of the pie. It's the online casino itself where you see significantly more revenue being generated.

47:37 Well, great. Yeah, congrats on all the resouling to take advantage of the transit. Good stuff. Thank you. Thanks. Thanks, Dave. As a reminder, ladies and gentlemen, to register a question, please press the 1 followed by the 4 on your telephone. Our next question comes from the line of Chad Baynon with Macquarie. Please go ahead.

48:01 Hi, Dan. Hi, Lewis. Thanks for taking my question.

48:04 Hey, Chuck. Sorry, we're talking today a lot.

48:06 Yeah, no, not a problem. No, very helpful. Wanted to, I guess, boil down some of your comments, Dan. You gave us a lot of, I guess, good revenue driver perspective and kind of a good understanding of what could move this up or down, and then also on the payroll and marketing side. but as we put all that together, I know historically consolidated, you've generated margins between 10 and 12%. I think Silver Slipper got as high close to 20%. A lot of the companies in the space have been talking about maybe a new normalized margin goal. So if we get back to 2018 or 2019 revenues, can you help us think about what margins could look like or Inversely, is there a revenue number on a percentage basis that gets you back to historical margins, given all the payroll and marketing reductions that you talked about earlier?

49:09 Well, I would say for the month of June, our operating margins were up about 10 points over the prior year. And it would have been more than that if we had been open for the full month of June, because you get... certain things like utility costs for the full month and only half a month of operations at two of the five properties. I don't know that I want to predict that we're going to have 10 points higher going long-term forward because the marketing costs were very low in June because as I mentioned, suddenly you're opening and maybe you didn't have time to do the normal marketing you would have done. and we were cautious like we don't know if people are really going to show up so let's make sure we don't have too many employees and then people did show up and that was okay.

50:04 But I don't think we'll go back to the margins we had. I think we'll have significant improvement and it may be 5 points, 6 points, 7 points and we were headed that way anyway. That was part of the reason we put in the Konami system was to make our marketing more efficient and to re-examine things. There's another little phenomenon that happens. Recognize when you operate these casinos in these small towns, and casinos have been around, some of our places have been open 25 years, and Lewis or I will go into town, we'll talk to the management team, we'll say, you've got to be efficient with the payroll, you've got to be careful, we want you to try to reduce the payroll. And that's often a difficult conversation because nobody wants to lay off their neighbor, their friend, the person they've been working with for years, right?

50:52 And And you're trying to say, you know, you've got to get more efficient. And there's kind of a – it's like water aerobics. You can't get people moving quite as fast as you want. And this pandemic, you know, we laid everybody off, right? And we didn't have a choice because we didn't know how long we'd be closed. We didn't know how it would reopen. It was like we need to, you know, try to salvage the company, right? So that when we, you know, if you don't move quickly and get your costs down, you're staring at bankruptcy. And then the difficulty of reopening is way more complicated, right? So we laid everybody off. I think we kept 30 people and a handful of security guards out of 1,600.

51:40 Now when you're reopening, every phone call is a positive call. You're calling people and inviting them to come back to work. and the message the management team was, okay, we need to make some positive phone calls here and get people back to work, but don't make too many of those calls. Let's really examine who we really need to operate and just bring those people back who we really need and who we know are effective and help us get there. And so I don't know quite how to quantify that, but there was certainly an element of that in reexamining what you really need. And so I do think it helped us get to margins that are better. And even on the marketing, we used to give away hotel rooms all the time at Rising Sun.

52:29 And now we're not. I mean, we still comp rooms, of course, not nearly as readily as we did before. And instead, we're focused on the free play more than anything else and trying to reward people for moving up in the tiers and so on. And we found out Casino's doing fine. Hotel Occupancy's down quite a bit. It's okay. Casino's doing fine. And if we give somebody, let's say, a buffet, it was costing us like $15 a cover to give somebody a free buffet. And we gave it away as if it wasn't costing us anything. And now we give them free play, and it augments what they spend in the casino, and ultimately it comes back to us. And we don't have to buy as many tomatoes and prime ribs. and so there's been a chance to re-examine everything and I guess the last thing is we have some new clients and we're trying to figure out who they are.

53:30 I mean that literally the percentage of people who are not in our slot system but are in our casino playing slots is probably double what it was last year and so we're scrambling trying to figure out who they are Indiana actually helped us. I don't know quite why. Sometimes regulators do these things that you really wonder about. They require masks in the casino in Indiana, as they do in several states. But apparently regulators are really afraid that then if somebody stole a purse in the casino or something, they're wearing a mask, we couldn't figure out who they are. So as you come into the casino, they require us to take a photo of the person and their driver's license so we know who the person is.

54:17 And I thought, well, that's kind of intrusive. And I actually thought it was kind of funny because even before, somebody could go into our casino with a mask in their pocket, go into the men's room, put the mask out, come out and steal somebody's purse and run out of the building and we wouldn't know who they are. So I don't know why this is any different, but that was the rule they had. So every casino in Indiana is taking pictures of everybody. Well, that means that if we have somebody who's not in our player system and they're gambling quite a bit, We can go back to the surveillance tapes, figure out who they are, call them up, and try to get them into the system. So I'm not sure why Indiana did it, but it worked out well for marketing. And so, you know, and I think that's something that might stick.

55:02 You know, somebody who used to go to the movies once a week now, you know, that younger couple decides, hey, you know, we kind of enjoy going out and gambling once a week. Yeah. and so I think we will find some new customers and hopefully our older customers will come back when it's safer.

55:20 Interesting. Thanks. Separately, you know, despite current market conditions and I think a lot of these deals were announced right ahead of the pandemic, but there has been a pretty active market for regional gaming properties, I'd say, under 20 million of EBITDA or so. I think a lot of the bigger players are divesting these, and there's been a number of press releases from some of the smaller players. How do you think about the consolidation environment in this space, kind of on the back of what's going on, your appetite to potentially grow with another smaller needle mover? or vice versa if there's an asset in your portfolio that you think is no longer kind of core to the thesis.

56:08 We're here to try to make money for shareholders. And if somebody comes to us with a casino that's for sale and it's at a good price and we think we can make money for shareholders, we'd obviously look at it. But today we're really conserving liquidity because we're still not out of the woods yet. I mean, you could have spikes in different markets. You could end up have another period of closure, right? So we're being very cautious. Frankly, nobody's offered us one for sale in a while. And I think that might be because this is a tough time to sell a casino. You're not going to get a very good price here for a while. And we don't feel a need to sell anything. Now, if somebody offered us 15 times cash flow for any of our properties, we'd go buy them lunch, right? But Yeah, we're in this to make money. We don't need to get bigger just for the sake of getting bigger.

57:04 We look at a lot of deals. I mean, we did acquire Bronco Billy's, which has become a very important part of the company now. And if something else came along that we could buy at a reasonable price that we thought had good upside, we'd obviously look at it. But it's not our priority these days. Our priority is to get – we're on our feet now. We want to stay on our feet. We want to stay lean. get to the point where, you know, right now we're all looking at one month. We had one month that was great. I think we're going to be able to give you a quarter that's great. And maybe by year end, we can show you six months that's great, right? And at some point, people start to say, hey, this company really is doing EBIT in the high 20s. And because that's the run rate that June would suggest, and...

57:53 and then at that point you look at it and say, gee, they have $108 million of debt and $25 or $30 million of EBITD, they're under levered. Then you're not going to be paying, you know, LIBRO plus seven on the debt anymore and then that opens up all sorts of opportunities for us. But, you know, we need those, we need a solid six months of good stuff and maybe a little longer than that because I actually think we're under levered today but, you know, If you're just looking at trailing 12 months, you wouldn't believe that. And so we need a period of time to prove it to people. And so that's what we're focused on.

58:29 Sure. And then my last one, just around the Colorado initiative to increase the maximum bets. Do you have a sense of how that's trending? And then secondarily, if that passes, I guess, what does that mean for your current business? Or does it maybe just... improve the medium-term return if you go back to building the parking garage in a more expanded structure.

58:58 Yeah. I mean, the hotel we designed is a four-star hotel. And so, obviously, if you could... Like today, you know, if somebody showed up and wanted to gamble $1,000 a hand, even if the state... I mean, it's just not likely to happen, right? And the state wouldn't allow it. But if... and so I don't think it would change much for Bronco Billy's itself as it exists today. It would certainly make the numbers even better if we built the hotel and upgraded the property and so we're all for it and the history of Colorado has been that voters generally have approved these measures and so I think it's likely to pass and that would be a positive. Clearly it's a like Ameristar and what Monarch is building. So it's a pretty big plus for them.

59:52 And it could be a plus for us when we go and build the hotel. But Bronco Billy's as it exists today is not going to be very appealing to that person who's willing to gamble $1,000 a hand. Gotcha.

1:00:05 Thanks, guys.

1:00:06 Best of luck. Thanks, Chad. And I think we've gone over time, Dan, so we should probably just wrap it up.

1:00:14 All right, well, we'll keep plugging along here and try to keep the momentum going that we came out of June and July with. And thank you for your support. And we told you last call we were going to be a survivor, and I think at this point we're not only surviving, we're thriving, and we're just trying to keep that going. So thank you. That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.