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Edited Transcript of GDEN earnings conference call or presentation 14-Mar-19 9:00pm GMT

Q4 2018 Golden Entertainment Inc Earnings Call

MINNETONKA Apr 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Golden Entertainment Inc earnings conference call or presentation Thursday, March 14, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Blake L. Sartini

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

* Charles H. Protell

Golden Entertainment, Inc. - Executive VP, Chief Strategy Officer & CFO

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Conference Call Participants

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* Chad C. Beynon

Macquarie Research - Head of US Consumer, SVP and Senior Analyst

* David Brian Katz

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

* Joseph N. Jaffoni

Jcir - Founder & President

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Golden Entertainment Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note that this call is being recorded today, March 14, 2019.

Now I'd like to turn the conference over to Joe Jaffoni, Investor Relations. Please go ahead, sir.

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

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Thank you very much, Chelsea, and good afternoon, everyone. By now, everyone should have access to the fourth quarter 2018 earnings release, which can be found on the company's website at 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 the 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 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 discussion 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 within -- 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 fourth quarter 2018 earnings release.

Golden also provided a supplementary information accompanying the earnings release, pro forma income statement for the fourth quarter and full year period ended December 31, 2017, for Golden and American Entertainment.

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

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

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Charles H. Protell, Golden Entertainment, Inc. - Executive VP, Chief Strategy Officer & CFO [3]

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Thanks, Joe. For the fourth quarter, total revenues were $210.1 million, up 2.5% versus the prior year on a combined basis in American casinos. Adjusted EBITDA for the quarter was up 1.9% to $34.4 million on a combined basis compared with $33.8 million in the prior year.

As we review the segments, I'll provide comments around challenges in some of our businesses in Q4 and the steps we are taking to improve future results.

For our Nevada casinos, fourth quarter revenue was $107.9 million, up 0.9% from the prior year on a same-property basis, while adjusted EBITDA increased 1.1% to $31.1 million. With the ongoing construction at the property, the Strat's EBITDA was down roughly 2% for the quarter. We expected minimal construction disruption. And as we move through our renovations, we intend to keep a phased approach on all aspects of the project to mitigate significant future disruptions from our construction. Blake will speak further on our capital investment plan at the Strat, which is focused on enhancing our ability to access casino players and midweek group business. Conversely, in the fourth quarter, our Arizona's Charlie's (sic) [Arizona Charlie's] local properties generated a 6% increase in EBITDA as we continue to manage the cost structure of these 2 properties, which allowed us to overcome the increasingly competitive environment.

Outside of Las Vegas, our Aquarius property has maintained EBITDA in Laughlin, where the market experienced some decline in visitation towards the end of the year as well as tight local employment.

With our 2 new casinos in the market, we are focused on integrating these assets and realizing identified cost synergies across our 3 Laughlin properties. In Pahrump, our 3 casinos generated a 10% improvement in EBITDA for the quarter, and we are pleased with their performance in that market.

At Rocky Gap in Maryland, revenue increased 2.4% on a year-over-year basis, while EBITDA declined 6.8% to $3.9 million. Rocky Gap saw increased marketing costs as the property felt some pressure from weekend visitation migrating to some of the sports books opening in West Virginia, which has subsided in the early part of 2019.

In our Nevada distributed gaming business, total revenue during the fourth quarter were $69.6 million, a 3.3% year-over-year increase. Adjusted EBITDA at $9.4 million was down 1.1% compared to last year as our tavern performance was offset by year-over-year declines in our third-party chain store locations.

We have approximately 150 chain stores in Nevada where we pay monthly rent to a third party, staff gaming areas with our employees and collect 100% of the revenue from the gaming machines in these locations. We established new rent structures in approximately 50% of our chain store locations and expect to see improvement in the Nevada distributed business as we move through 2019.

Our Montana distributed business showed strong improvement in the fourth quarter, generating revenues of $16.7 million, up 12.5% on a year-over-year basis. Adjusted EBITDA for the Montana distributed business grew 32.4% year-over-year to $2.2 million.

Our Montana operations benefited from our ongoing investments in new game product to help us drive revenue growth and market share gains as well as having a milder Q4 weather compared to '17. Corporate expense of $12.1 million in the fourth quarter was slightly lower than corporate expenses of $12.3 million in the prior year. Corporate expenses in Q4 include marketing and IT initiatives related to our rebranding and our True Rewards one-card rollout that Blake will touch on.

Moving to the balance sheet. We had cash and cash equivalents at the end of the fourth quarter totaling $116 million and total outstanding debt of approximately $1 billion. LTM net leverage was 5.4x at the end of the fourth quarter.

In January, we borrowed $145 million against our $200 million revolving credit facility and used cash on hand to fund the cash consideration for the 2 properties we acquired in Laughlin. Net leverage remained at 5.4x pro forma for the acquisition of these properties.

Total capital expenditure for the quarter was $19.2 million with approximately $7.4 million spent on the Stratosphere renovations in the quarter. As of December, the company's total investment in the Strat was approximately $24 million, and we had budgeted $53 million for 2019, which includes spending on the soon-to-be-completed projects such as the sports book and lounge as well as other new projects to be completed, which Blake will review in a moment.

Golden Entertainment's total budget for the Stratosphere remains at approximately $140 million, with the project on schedule to be completed in 2021. The company is currently evaluating the size and scope of meeting space appropriate for the property and anticipates finalizing convention space design by year-end.

In 2019, the company anticipates spending approximately $24 million in maintenance CapEx as well as $20 million on 6 new taverns in our new integrated Konami casino management system. We intend to fund all 2019 CapEx with cash flow from operations.

Our board recently approved a new $25 million share repurchase program, which replaces the previous $25 million repurchase program authorized in November. Under the previous program, we spent $19.6 million to repurchase 1.2 million shares of our common stock at an average price of $16.06 per share. In January, we issued 911,000 shares to entities related to Anthony Marnell as part of the consideration for his 2 properties in Laughlin. Reflecting the Laughlin transaction and our repurchase activity to date, we currently have 27.7 million shares outstanding.

If you add the pro forma EBITDA contribution from the 2 acquired Laughlin properties to our '18 EBITDA, our free cash flow is over $3.50 per share, inclusive of estimated cash interest expense and maintenance CapEx. We were not a cash taxpayer in '18 and do not anticipate being so over the next several years.

Free cash flow per share is an important metric and, in '19, we will continue to allocate capital to where we see accretive opportunities between reinvestment in our asset, leverage reduction or the opportunistic return of capital to shareholders.

I'll now turn the call over to Blake to review progress on our recent strategic initiatives.

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

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Thank you, Charles. I'd like to now share with you the progress we're making towards positioning the company for future growth and our capital plan going forward at the Strat.

As we look at the economic environment in Nevada and Las Vegas in particular, population is at an all-time high and continuing to grow rapidly as people from all over the country move to Nevada for better quality of life and lower cost of living. Visitations to Las Vegas is near record levels, and the appeal of Las Vegas as a place to visit will only get stronger in the future.

With over 85% of our total revenue coming from Nevada, mostly from wholly owned southern Nevada casino resorts, these trends supporting future economic growth can only serve to benefit Golden Entertainment's future. Within our wholly owned casino portfolio, the biggest concentration of revenue and EBITDA comes from the Strat and our 3 Laughlin properties, the market-leading Aquarius and now the neighboring Edgewater and Colorado Belle. These assets are where we are focused on making meaningful improvements to drive the company's performance.

Starting with the Strat, we continue to believe that a thoughtful focus and disciplined reinvestment approach is necessary to realize the full value of its strong worldwide visitation, expansive footprint, iconic attractions and enhanced food and beverage and other amenities. The Strat's current room, product, restaurants, Tower attractions and entertainment are all being touched in our renovations in order to be relevant as new city-wide traffic drivers open, including the expansion of the Las Vegas Convention Center a few blocks from the property.

In 2018, we renovated 311 Elevate rooms, which are currently generating a $20 ADR premium over our base rate. We refreshed our signature award-winning Top of the World restaurant in the Tower as well as our observation deck level, which leads to several attractions we've added, including new food and beverage outlets.

We also completed renovations to the new Strat Café on the casino floor, finished a new Starbucks and made significant upgrades to the property's exterior lighting and landscaping. We are now nearing the opening of the BLVD & MAIN Taphouse, our new sports book and lounge on the casino floor, which were initially targeted for opening earlier this year.

While our budget remains unchanged, we plan to shift our 2019 investment toward remodeling the casino floor while continuing to invest in our room remodel program, which will include suites and upgrading entertainment offerings to deliver a more complete guest environment. In addition, we plan to remodel and rebrand the Tower as the SkyPod, with the goal of leveraging the over 1.2 million annual visitors to the top of the Strat into more opportunities to spend while in the Tower and at the property.

By the end of 2019, we will have invested approximately $77 million to renovate the interior and exterior of the casino, add a new state-of-the-art sports book, create new food concepts and rebrand our owned food outlets, renovate rooms and suites, upgrade the Tower experience and add new entertainment to the property. By the end of the year, we will also finalize the group meeting space design and will evaluate the timing of any future development at the property.

Group meeting space will ultimately allow this property to be competitive midweek, build longer lead-time occupancy, reduce dependency on OTAs and access convention visitors that comprise approximately 15% of the visitor volume to Las Vegas. The Tower is a truly unique feature to the skyline of Las Vegas, and its iconic nature will continue to draw visitors from around the world. Suite product, a refreshed casino and new dining and entertainment options are especially important to give these guests more opportunities to spend at the Strat.

The completed renovations at the Strat and those planned for 2019 will allow us to reposition the property casino and retail guests alike. As we evaluate the design and cost of group meeting space over 2019, we will also evaluate the impact of our renovations on our financial performance. The Strat budget remains approximately $140 million, and we intend to complete the property's renovations by the end of 2021.

Now turning to Laughlin. We now own approximately 40% of the market's room base, 1/3 of the gaming positions and the largest traffic driver to the market, the Laughlin Event Center. The Laughlin market is a very convenient drive for major Southern California and Arizona population centers. It is also increasingly becoming a destination for Las Vegas locals that are looking for a value-oriented weekend experience only 90 minutes away.

Annual gaming revenue for the Laughlin market has shown consistent growth over the last 5 years and is currently over $500 million, which is approximately $0.20 below -- 20% below peak levels. We believe our Laughlin operations have significant potential to grow profitability through synergies across the 3 properties. We are also embarking on opportunities to grow our market share through targeted tier marketing. We completed the acquisition of the Edgewater and Colorado Belle in January, and I'm looking forward to updating you on our progress in Laughlin over the course of 2019.

While we have recently focused on growing our wholly owned casino operations, distributed gaming, including our successful tavern platform, has been core to our company's history and remains a critical piece of our go-forward strategy. We view this business as an extension of regional gaming opportunities in established markets and a robust part of local gaming markets throughout Nevada, Montana and beyond.

In 2018, we devoted considerable time to renegotiating the economics of third-party leases in our Nevada chain store portfolio. Over the course of 2019 and throughout future periods, we will improve the economics of approximately half of our 150 chain store locations in Nevada. We will also continue to open new taverns when and where we have an opportunity to generate strong returns and have 6 new locations planned to open within the first 6 months of 2019. Our Montana distributed operations are showing strong year-over-year growth, and there is potential for Montana to quickly lead the way in allowing sports wagering within distributed gaming locations across the state.

We continue to be active in pursuing new distributed gaming jurisdictions as well as potential legislative changes in existing ones to improve the operating environment for this business. Having built, owned and operated all types of gaming establishments over my 30-year career, I am confident that distributed gaming has the potential to be one of the biggest growth catalysts for the gaming industry and regional markets.

With the initiatives underway across our businesses, combined with our new Konami casino management system, including our new one-card player rewards program, we believe we can improve revenues from casino guests at the Strat and across our entire portfolio of gaming assets. Our new True Rewards players club program will allow us to cross-market targeted rewards to millions of players in our database in order to increase wallet share and time within our properties.

We remain committed to creating value over the long term, and I firmly believe that our planned initiatives for 2019 and beyond will best position Golden Entertainment for future success.

Operator, you can please open the call up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of David Katz with Jefferies.

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David Brian Katz, Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure [2]

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Can you talk about the degree to which -- I think when we went back a quarter or so, the dynamics on The Strip among the larger players were related or a driver to your ability to drive [self at] the Strat. If we were to just look at the property and its performance, and a portion, some of the construction disruption as well as just the overall dynamics in The Strip where other operators may or may not have a good string of performance and how that impacts you, that'd be helpful.

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

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Well, if I understand the question, I think in -- specific to Q4, I think the dynamic is a proper comparison. Q4 -- to segue for just a minute, many of our assets performed significantly above Q4 of the prior year. I think the story for us at the Strat, specific to your question, was there was ongoing construction, but the demand for the property in terms of rooms in that fourth quarter was -- did not meet our expectations. And therein, I think, lies the delta that you're talking about. And I do believe that throughout the course of the year, the South Strip properties were driving a lot of the occupancy trends at the Stratosphere. I think Q4, in particular, was specific to us year-over-year in that we did not experience in the prior year the same downturn that the South Strip properties experienced as a result of the event on October 1. So our comps were not as -- our comps were not the same, let's say, for the fourth quarter. I don't know if that answers your question and, if not, you can let me know. I'll try to answer.

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David Brian Katz, Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure [4]

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No, it does, it does. Just with respect to -- Charles, if you could -- when I look at the capital allocation philosophy, right, and just taking a holistic view of it, there's a lot going on in there. And if you could just give us an updated perspective on how you're ranking those choices at this point between investing in M&A, investing in the Strat, delevering, returning through share repurchases, if you could rank order those or just update us on your philosophy, that would be helpful.

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Charles H. Protell, Golden Entertainment, Inc. - Executive VP, Chief Strategy Officer & CFO [5]

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Yes, I think with maybe starting with the last first, M&A is taking a backseat from us from a priority standpoint, certainly, for the first half of this year other than if we see opportunistic tuck-in acquisitions on the distributed side, which is really part of our business plan, certainly, in Nevada and Montana as we go forward. If you think about the #1 priority on capital, clearly, as Blake outlined, it is investment in the Stratosphere, certainly, for the front half of this year. In addition to that, we have 6 new taverns that are slated to open in the first 6 months of this year. So investing in our own portfolio is the priority for the next 6 months. As we get into the back half of the year, I think that gives us a chance to take a look at where we are from a performance perspective, where we are in terms of achieving the goals we've set in terms of hitting the capital allocation within the Stratosphere and in other areas. And then we could really evaluate how we think about the other 2 prongs of returning capital to our stakeholders in terms of leverage reduction and share buybacks. That said, clearly, I think in the fourth quarter, if you look at where we were acquiring shares in the market, we saw that as an opportunity versus the valuation presented to us, and we're not wed to our priorities that I just outlined based on the market conditions at the time.

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Operator [6]

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(Operator Instructions) And our next question comes 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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Charles, you mentioned in your prepared remarks that if we take the simple math of 2018 EBITDA, add on the Marnell projected EBITDA or, I guess, TTM EBITDA, we'd arrive at roughly $3.50 of free cash flow or $95 million -- I think what we calculate to be roughly $95 million of free cash flow. So understanding that you're not giving guidance for 2019 outside of the 6 new taverns, which would be a positive, slightly better terms on the chain stores, which I think should improve margins and be a positive, those will be offset by potentially some disruption from Strat renovations. Is there anything else kind of in that algorithm that we should be aware of just when we think about 2019?

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Charles H. Protell, Golden Entertainment, Inc. - Executive VP, Chief Strategy Officer & CFO [8]

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Look, Chad, I mean, I think we -- obviously, Blake outlined a lot of initiatives. You mentioned some of them. We talked about the Konami one-card system that we're putting into place. We obviously have our own expectations and plan. As you said, we're not giving guidance. The purpose of that math I was outlining is if you take the business as it sits right now today, that discretionary free cash yield per share relative to where we're trading at is probably the best in the space at this point. So that was really the point of that. I think that there's going to be puts and takes as we get through the year, and you said the trade-off for some of those may be some of the ongoing disruption at the Strat. But regardless of that, we still feel that the cash flow generation coming out of this business, again, relative to our share count and yield is very attractive.

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Chad C. Beynon, Macquarie Research - Head of US Consumer, SVP and Senior Analyst [9]

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Okay. And we agree. On the Marnell Gaming results, as you kind of take that under your wing here, were they wildly different than when you originally announced the acquisition? I know some of the numbers had to close up the books to be finalized, but just as we think about revenues and EBITDA, did anything change dramatically from when you last reported them?

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Charles H. Protell, Golden Entertainment, Inc. - Executive VP, Chief Strategy Officer & CFO [10]

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For Marnell?

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Chad C. Beynon, Macquarie Research - Head of US Consumer, SVP and Senior Analyst [11]

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Yes.

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Charles H. Protell, Golden Entertainment, Inc. - Executive VP, Chief Strategy Officer & CFO [12]

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So I'd say that, look, our expectations for the year for Marnell is still that we'd approximate roughly where we close on an LTM basis plus the $4 million in synergies that we've talked about in the past and earning those synergies over the next 2 years.

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Chad C. Beynon, Macquarie Research - Head of US Consumer, SVP and Senior Analyst [13]

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Okay, great. And then my final question, Blake, just as you think about the returns, some of the details have been tweaked on the Strat, but are you still targeting a 15%-plus return on the overall project?

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Blake L. Sartini, Golden Entertainment, Inc. - Chairman of the Board, President & CEO [14]

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I would say, Chad, I would say that's fair. I would say it's -- the gestation of all of these investments, as I've outlined, really culminates in 2021. I think when we get the full slate of the amenities together in this property, along with a concerted marketing campaign, which really we're not doing at all right now, is -- I think we're very positive on achieving the results that we've outlined in the past regarding return on that investment.

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Charles H. Protell, Golden Entertainment, Inc. - Executive VP, Chief Strategy Officer & CFO [15]

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And Chad, not to get into the details of it too much, but if you think about our room nights sold within that asset, it's roughly 800,000 on an annual basis. We have almost 1.3 million visitors that come to the Tower. And those 2 experiences, on the best we could tell, are not linked, so there's a very small percentage of our casino guests that overlap that. So you think about 2 million touch points a year. What we're trying to do with this investment is generate another $20 at each of those touch points with the investment we're making. And if you think about that as the margins that we're achieving, that is where we're getting to our returns. So we'd obviously look at that through every investment we're making in the room. We're looking at that through every investment we're making in the SMB outlets, but we've got to get to the end point of that project in order to get to that full return profile.

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Blake L. Sartini, Golden Entertainment, Inc. - Chairman of the Board, President & CEO [16]

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I think lastly, Chad, I think it may be helpful to summarize, the thesis of the investment overall is really not real complicated, right? We want to invest in the rooms and amenities on a focused and targeted basis while minimizing disruption. And those investments are really meant to keep our guests in the resort longer, spending more as a result of us providing more retail points, entertainment options and an overall experience, which competes effectively for out-of-town guests at Nevada. And I will say, just a snippet here, of the venues that we have completed and are operating fully, we are realizing good returns from. So that's giving us, whether that's at Top of the World restaurant or the 108 restaurant we just opened, meaning floor 108, or the Strat Café, we are realizing nice returns on those investments that have been completed. That also is a bit -- it's a bit challenged with a continued construction going on, but there are highlights with those investments that have been completed. And the second part of the thesis, as Charles has said, is drawing more wallet share from the 1.2 million people currently visiting the Tower who are not staying at the property. And I think at the end of this, we're comfortable with realized returns that we've spoken about as Charles has just outlined.

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Operator [17]

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I'm showing no further questions at this time. I would now like to turn the call back to Mr. Sartini for closing remarks.

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Blake L. Sartini, Golden Entertainment, Inc. - Chairman of the Board, President & CEO [18]

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Thank you, operator, and thanks to everyone for joining us today. We look forward to updating everyone on our continued progress when we report our 2019 first quarter results.

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Operator [19]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes the program, and you may all disconnect. Everyone, have a great day.