Edited Transcript of GDEN earnings conference call or presentation 7-Nov-19 10:00pm GMT – Yahoo Finance

MINNETONKA Nov 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Golden Entertainment Inc earnings conference call or presentation Thursday, November 7, 2019 at 10:00:00pm GMT

* Blake L. Sartini

Golden Entertainment, Inc. - Chairman of the Board & CEO

* Charles H. Protell

Golden Entertainment, Inc. - President & CFO

* Chad C. Beynon

Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure

* John G. DeCree

Union Gaming Securities, LLC, Research Division - Director and Head of North America Equity & High Yield Research

* Joseph N. Jaffoni

Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2019 Golden Entertainment Inc. Earnings Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Mr. Joe Jaffoni. Thank you. You may go ahead, sir.

Joseph N. Jaffoni, JCIR - Founder & President [2]

Thank you very much, Robert, and good afternoon, everyone. By now, everyone should have access to our third quarter 2019 earnings release, which can be found on the company's website at http://www.goldenent.com, under the Investors section.

Before we begin our formal remarks, we need to remind everyone that today's discussion will include forward-looking statements within the meaning of federal securities laws. These forward-looking statements, which are usually identified by the use of words such as will, expect, believe, anticipate, should or other similar phrases, are not guarantees of future performance. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from our corporate working statements, and therefore, you should not -- you should exercise caution in interpreting and relying on them.

We refer you to the risk factors in our recent SEC filings, including our most recent Form 10-K as updated by our subsequent quarterly reports on Form 10-Q for a more detailed discussions of the risks that could impact our future operating results and financial condition and other forward-looking statements.

During today's call, we will discuss non-GAAP financial measures, which management uses and believes are useful in evaluating the company's operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measure is available in our third quarter 2019 earnings release.

On today's call is Blake Sartini, the company's Founder, Chairman and Chief Executive Officer; and Charles Protell, the company's President, Chief Strategy Officer and Chief Financial Officer. Charles will review the quarterly results, while Blake will review recent strategic and operating initiatives. After that, we'll open it up to your questions.

With that, it's my pleasure to turn the call over to Charles Protell. Charles?

Charles H. Protell, Golden Entertainment, Inc. - President & CFO [3]

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Thanks, Joe. Golden delivered record third quarter revenue and adjusted EBITDA as we generated growth in both our casino and distributed gaming operations. We also continue to make further progress across several growth initiatives that we will discuss after reviewing the numbers.

For the third quarter, net revenue grew 15.7% to $243.3 million, and adjusted EBITDA rose 12.9% to $43.1 million.

For our Nevada casinos, third quarter revenue was $135.5 million, up 23.1% from the prior year, while adjusted EBITDA grew 14.3% to $36 million. Growth from our Nevada casinos primarily reflects the contribution from the Edgewater and the Colorado Belle at Laughlin, partially offset by ongoing construction disruption at The Strat. While we have expected renovations to the central section of the casino floor at The Strat to be completed by the beginning of September, it did not reopen until early October. This part of the casino has nearly half the table games, making the disruption in the third quarter a bit more than we anticipated. Even with a few weeks delay to this section, we remain on track to complete the renovation of the casino by year-end.

Also in the last week of September, we had a power outage at The Strat, which led to room refunds and other lost revenue at the property.

We continue to see improved performance in areas of The Strat that we have renovated, such as the upgrades to the SkyPod, several F&B outlets and our new taproom and lounge connected to our new sports book. In addition, we are maintaining a $20 ADR premium in the hotel rooms that we have touched. We are through approximately 80% of the casino floor renovations with all our table games back at the end of October. However, we still have approximately 150 less slots on the floor than we will after the casino renovations are complete.

In addition to the casino floor remodel, we are now working on the front desk area, a new fitness center and ridesharing pickup area. We completed remodels of 130 rooms in the third quarter and expect to remodel another 126 rooms in Q4. At the end of this year, almost 900 out of 2,400 Strat hotel rooms will have been renovated within the last 3 years, including about 300 rooms renovated immediately prior to our acquisition of the property in 2017.

For our 2 new Laughlin properties, we remain on track to realize half of our target $4 million cost synergies by year-end, and we'll capture the balance in 2020. We have also seen an increased cross-play between these assets in our Aquarius property since the rollout of our new TrueRewards one-card player loyalty program.

At Rocky Gap in Maryland, revenue increased 4.6% on a year-over-year basis, while EBITDA increased about 1% to $6.2 million as competitive pressures in the region continue to cost us a bit more marketing spend to grow revenues.

For our Nevada distributed business, total revenues during the third quarter grew 5.9% to $69.4 million. Adjusted EBITDA of approximately $9 million was up 7% over the prior year, reflecting stabilized performance from our chain store locations, renegotiated rents as well as having 6 new taverns opened compared to last year.

In Montana, our distributed operations generated revenue of $18.6 million, up 18.7% year-over-year. Adjusted EBITDA for the Montana distributed business grew 19.4% to $2.4 million. Our growth in Montana is a result of new locations as well as our exclusive new games that are generating the highest win per unit in the state.

Moving to the balance sheet. We have $772 million outstanding of first lien term loans in addition to $375 million of senior unsecured notes. We continue to have no outstanding borrowings under our $200 million revolver. We ended the third quarter with cash and cash equivalents totaling $124 million, resulting in net leverage of approximately 5.6x.

Total CapEx for the quarter was $28 million, with approximately $16.6 million spent on our ongoing renovations at The Strat. Since June of 2018, we've spent approximately $70 million on the property and expect to spend approximately $20 million of additional CapEx at The Strat in Q4. All of our capital expenditures will continue to be funded with cash flow from operations.

By the end of this year, we will have spent approximately $90 million on The Strat, which will complete the majority of our planned investment in the property.

Since starting work last June, we'll have remodeled 573 rooms; completed a renovation of the main casino floor; remodeled the front desk area; built a new state-of-the-art sports book; added new F&B concepts and refreshed existing menus; remodeled the SkyPod and SkyJump experience; created a new entertainment venue on excess land; and updated exterior lighting, landscaping and other features of the property. We have no significant capital expenditures planned at The Strat for 2020 beyond additional room remodels and a few discrete projects.

We view 2020 as a year in which we will be able to operate the property with minimal construction disruption and take advantage of the many events that will drive improved citywide occupancy, such as ConAg, the NFL Draft and the Raiders.

As we look to harvest the free cash flow generation of the portfolio, we are evaluating a variety of capital allocation opportunities in 2020, including debt reduction, returning capital to shareholders and new market opportunities, particularly as it relates to expansion of our distributed gaming business.

Based on current Street estimates, we would generate more than $3.50 per share of discretionary free cash flow next year, which will position us favorably to allocate capital accretively for our shareholders.

I'll now turn the call over to Blake to provide additional color on our initiatives.

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Blake L. Sartini, Golden Entertainment, Inc. - Chairman of the Board & CEO [4]

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Thanks, Charles. I'd like to start with a review of the progress we're making for the renovations of The Strat. As Charles noted earlier, we have endured construction disruption at The Strat due to ongoing renovations across many of the property's public areas. The feedback from guests continues to be very positive.

When we acquired The Strat, we were well aware that there have not been any major reinvestment in the property since its opening in 1996. As a result, we were committed to investing wisely and with design discipline to elevate the property physically as well as operationally. By the end of this year, we will spend approximately $90 million on these renovations that are modernizing and updating the look and feel of the property. These investments are already positioning The Strat to be more relevant and appealing as the Las Vegas Strip continues its development further north.

There would be some legacy spend in 2020 but nothing significant. And we expect the total investment for The Strat, when complete, will be approximately $100 million to $110 million. This does not include adding group meeting space to the property, which we have put on hold while we operate the asset without construction disruption next year, and evaluate the property's performance and Las Vegas market conditions.

Our capital investment plan to update the property was based on the thesis of creating an environment for our customers, where we can generate a modest incremental spend from their trip. Between our hotel guests and our unique tower visitation, there are about 2.5 million unique annual visitors to The Strat. By presenting our customers with a compelling offer to stay on the property to eat, drink and play just a little longer, we will earn an attractive return on our investment.

The early benefits we are generating from our investments in The Strat are promising and include: during the third quarter, we exceeded the balance of the Las Vegas Strip in terms of year-over-year RevPAR growth; we generated the highest ever third quarter ADR for the property; and we are seeing initial signs of an improved room and rate mix, including an increase in group room nights and in direct Internet room bookings. Additional indications of our progress at The Strat include continuing to generate an additional $20 in ADR premium for our newly remodeled rooms and the success we are having with our newly opened restaurants, bars and entertainment amenities.

We have used cash flow from operations to fund all of the renovations of The Strat and have been able to operate the property effectively throughout the construction disruption.

Over the balance of this year, we are focused on completing the renovations to the main casino floor while remodeling an additional 126 rooms by year-end. We expect the work remaining on the casino floor will continue to be disruptive through year-end, and we are pushing to finish so we can move forward with the rebranding of the property.

The major citywide events that Charles spoke about earlier will undoubtedly drive more visitors to Las Vegas, which will create a favorable dynamic for existing properties, like ours.

I'd also note that The Strat sits on approximately 35 acres, with about 17 acres undeveloped along Las Vegas Boulevard. Recent M&A transactions for Las Vegas properties only further highlight that there is strong strategic demand for long-term Strip exposure and the enormous value we see in owning the real estate under The Strat as well as our other assets.

Turning to our initiatives on Laughlin. We have rationalized the labor cost of the Edgewater and Colorado Belle properties acquired earlier this year and have begun to adjust our marketing reinvestment. As we have spent more time operating these properties, we are gaining greater confidence that we can improve their operating margin from the 23% margin they were achieving at the time of the acquisition.

For reference, excluding the acquired properties, our Nevada casinos currently operate at over a 30% EBITDA margin, while our Aquarius property in Laughlin operates at close to a 40% EBITDA margin.

Moving on to our distributed gaming platform. We continue to lead the industry, operating approximately 11,000 devices across multiple jurisdictions. Our distributed business revenues and EBITDA grew at a healthy pace in the third quarter, and we see this growth continuing in future periods. By the end of this year, we will integrate our current casino TrueRewards loyalty program with our taverns and certain distributed gaming locations to create a network of more than 130 locations across Nevada. This will establish the largest location network of any players' club in the industry and be a clear differentiator for Golden.

In addition, we are accelerating our activity in jurisdictions where we believe there is an increasing potential for new legislation and expansion of existing distributed gaming operations.

In closing, we have a unique portfolio of gaming assets concentrated in Southern Nevada that are well positioned to deliver significant free cash flow in 2020 and beyond. I look forward to our future success and continuing to create value for our shareholders.

With that, operator, please open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question will be coming from the line of Carlo Santarelli with Deutsche Bank.

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Carlo Santarelli, Deutsche Bank AG, Research Division - Research Analyst [2]

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Guys, could you just talk a little bit about what went into the decision with respect to the 2020 plans for the [trop] -- sorry, for the start-ups? And acknowledging it was never firmly in your agenda to definitely go ahead and move forward with the group space, and you'd always said that it would be something you would reevaluate. But is it just kind of giving the asset, as it stands, a chance to breathe and see where it takes you, and then potentially revisit whether or not that money is best spent there or elsewhere? Or can you just talk us through the process?

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Blake L. Sartini, Golden Entertainment, Inc. - Chairman of the Board & CEO [3]

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Yes, Carlo. I think that's very accurate. As we look into 2020, there are a couple of variables that are becoming clearer to us. One, there's approximately 2 million square feet of convention space that will come online during some portion of 2020 in the Las Vegas market. Obviously, we want to see how that absorption takes place for that convention and meeting space. While at the same time, as I mentioned in my comments, we're seeing some positive impacts to the capital dollars that we're currently spending at the property. So the decision to hold on the CapEx on the banquet space, as you mentioned, doesn't mean it will eventually may be built. We will have a design-ready plan to implement on that mezz level when and if appropriate. In addition, I would also mention that we're exploring additional potential uses for the space, as you might imagine, including capital-light models that may be unique and attractive and would drive additional traffic to the property. And ultimately, as you mentioned, we believe by operating in a nondisruptive environment at The Strat throughout 2020, and as Charles mentioned, we can redeploy that free cash to our balance sheet, which I think offers us many options to create value for the shareholders, again, as Charles mentioned.

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Carlo Santarelli, Deutsche Bank AG, Research Division - Research Analyst [4]

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Great. That's very helpful. And then just one follow-up, if I may. On the distributed side, both in Nevada and Montana, obviously, you guys showed very healthy growth on both the revenue and EBITDA lines. Any guidance or color you could provide around what the same-store contributions were to growth and kind of the split between the incremental unit adds year-over-year relative to kind of same-store organic growth?

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Charles H. Protell, Golden Entertainment, Inc. - President & CFO [5]

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Yes. I mean we don't typically break that out. I mean I think we're over 40% of the market here in Nevada, so the portfolio ebbs and flows with over 700 locations. So we'll lose a few and we'll add a few. In Montana, it's very similar with about 300 locations that are there. We were net additive in Montana. A lot of the growth out in Montana coming out of not only new additions of new locations, but we do have a proprietary exclusive game, exclusive to Golden, in our partner locations that is earning about 2x the state average in terms of win per unit. So that is a big driver of revenue growth for us within that state.

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Operator [6]

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Next question will be coming from the line of Chad Beynon with Macquarie.

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Chad C. Beynon, Macquarie Research - Head of US Consumer, SVP and Senior Analyst [7]

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Back on The Strat CapEx reduction from, I guess, the $140 million master plan to your now projected $100 million to $110 million. Has the return profile of 15% changed at all given that some of the amenities, particularly on the mezz level won't be there? Or do you still think a 15% cash-on-cash return is kind of in your crosshairs?

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Charles H. Protell, Golden Entertainment, Inc. - President & CFO [8]

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Absolutely. We're looking at that over time, and we expect to make progress on that next year. Obviously, we're deploying this capital with the expectation we will earn a return. As Blake said in his comments, our thesis is pretty simple. We're not trying to completely to transform the property, to compete with the most highest end properties on The Strip. We already have 2.5 million unique visitors to the asset each and every year between our hotel guests and our unique tower visitors. You can do the math. If you just get another $20 out of each one of those patrons at a reasonable flow through, that's how we're thinking about it. How do we have someone come to our asset and not use it anymore as a dormitory, use it where they like to actually stay in play, eat at the restaurants, play in the casino and go see a show and enjoy the tower experience, which is very unique to Las Vegas.

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Blake L. Sartini, Golden Entertainment, Inc. - Chairman of the Board & CEO [9]

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I think, Chad, just quickly too, this CapEx time out of The Strat, once we're complete with the projects we just discussed, will obviously allow us to fine-tune our operating approach to the property to deliver the returns that we're anticipating. And I think that's going to be -- it's going to be very helpful without a disruptive environment over there.

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Chad C. Beynon, Macquarie Research - Head of US Consumer, SVP and Senior Analyst [10]

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Okay, makes sense. And then on the excess cash that you'll have from not spending it on the property in 2020, how do you think about risk-adjusted returns? Charles, you mentioned your stocks, free cash flow yield, which is attractive. You guys have been successful in land-based acquisitions, obviously, on the tavern side. So how do you just think about, I guess, from a risk-adjusted standpoint, how you can deploy your capital in the best way for shareholders?

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Edited Transcript of GDEN earnings conference call or presentation 7-Nov-19 10:00pm GMT - Yahoo Finance