Golden Entertainment, Inc.

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Golden Entertainment First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal remarks. Please note that this call is being recorded today. Now I'd like to turn the conference over to Joe Giaffone, Investor Relations. Please go ahead, sir.

Thank you very much, operator, and good afternoon, everyone. On the call today is Blake Sartini, the company's founder, chairman, and chief executive officer, and Charles Portel, the company's president and chief financial officer. On today's call, we will make forward-looking statements under the safe harbor provisions of the federal securities laws. Actual results may differ materially from those contemplated in these statements. Additional information concerning factors that could cause actual results to materially differ from these forward-looking statements is contained in today's press release and and our filings with the SEC. Except as required by law, we undertake no obligation to update these statements as a result of new information or otherwise. During the call, we will also discuss non-GAAP financial measures and talking about our performance. You can find the reconciliation of GAAP financial measures in our press release, which is available on our website. We'll start the call with Charles reviewing details of the first quarter results and a business update. Following that, Blake and Charles will take your questions. With that, it's my pleasure to turn the call over to Charles Fortel. Charles, please go ahead.

Thanks, Joe. For the first quarter, we generated revenue of $278 million and EBITDA $62 million, with revenue up over last year, but EBITDA impacted by cost pressures, as well as disruption of the strat from ongoing room renovations we are undertaking to be ready for the strong Las Vegas calendar later this year. Before getting into the operations, We have a few updates on our previously announced M&A activity. At the end of April, the Maryland Lottery Commission approved Century Casinos to acquire a Rocky Gap Resort. We have one more step in Maryland, the approval of Vici's lease with the state, and then we will be able to close, which we still anticipate by the end of June. In March, we announced the sale of our Nevada and Montana distributed businesses to J&J Gaming, the largest distributed operator in Illinois, which will become the largest distributed operator in the country after closing. We remain confident both transactions will close by year end, and we look forward to having J&J as our gaming partner in our Nevada taverns. Importantly, both these transactions accomplish our goal of divesting non-core businesses at attractive valuations. leaving us with a Nevada portfolio of owned casino assets and the largest gaming tavern footprint in the state. Collectively, these transactions will generate over $500 million of net proceeds, which will allow us to reposition our balance sheet, more effectively invest in our core assets, return capital to shareholders, and evaluate strategic opportunities. Within our segment results, revenue at a Nevada casino's resorts increased 4% while EBITDA declined 5.5%. Revenue for the Strat increased 9% and EBITDA rose 6% despite having about 15% less rooms available given the ongoing renovations. Disruption from having rooms offline during the quarter cost us about 2 million EBITDA and we expect similar disruption in Q2 before the renovations are completed. We initially planned to renovate the rooms throughout the year, but we were able to accelerate construction and are willing to live with a little disruption now to get these 537 rooms and pool renovations finished before 4th of July and in advance of the fall citywide event calendar. Atomic Golf Construction is also progressing nicely, and we expect our development partner to open this new amenity by the end of the year. We had a challenging comp in Laughlin, as this year we had one less Laughlin Event Center concert, resulting in 4,000 less event attendees this quarter. Laughlin revenue was down 1% and EBITDA was down 13%, as labor and utilities increased more than 10% from last year. For Q2, we have a stronger event calendar in Laughlin, which is expected to drive increased visitation over the coming months. Our Nevada local casinos maintained strong year-over-year performance for the quarter, with increased revenue and EBITDA. Within our local segment, Las Vegas outpaced our parent properties, where a few of our higher-rated guests played less frequently this quarter, but these players have largely returned in Q2. Our overall Nevada casino margins were down compared to Q1 of last year, but up sequentially from Q3 and Q4. As we said on recent calls, cost increases began to moderate in Q3 of last year. So going forward, we expect our casino margins to be roughly in the range of this quarter. At Rocky Gap, revenues were up, but higher payroll costs impacted EBITDA for the quarter compared to last year. As the summer season gets started, Rocky Gap will capitalize on higher visitation, and we expect the property to perform very well for Century Casinos after closing. For Nevada tavern operations, first quarter revenue in EBITDA was down from last year, reflecting one less tavern in the portfolio and lower same-store revenue. Total tavern revenue was down 3%, with margins impacted meaningfully by labor and other operating expenses that were up 10% over last year. This is partially the result of wage inflation for our back-of-the-house employees, primarily due to increased labor demand on the strip. Despite current revenue and margin pressures, we expect the long-term demographic trends of Las Vegas to support our tavern growth strategy. With the sale of our third-party distributed businesses, we are turning our focus to expanding our leading tavern market share, and to that end, we now have six locations under contract to be acquired and agreements for two future development sites. In addition, we opened our newest tavern in April, which is performing well and ramping up in line with our expectations. We expect the signed Tavern acquisitions to close at the end of the year or early 2024, depending on regulatory approval, and anticipate that they will add about $4 million of annual EBITDA to our results. Our acquisition development pipeline represents about 14% unit growth, and we will continue to add premier sites in the Las Vegas Valley. Total third-party distributed revenue was flat compared to last year, while EBITDA decreased 13%. We saw some weakness in Nevada across our third-party tavern partners, which was similar to our own Nevada tavern performance for the quarter. We are seeing improved performance in April and May as the Golden Knights playoff run has helped tavern visitation and spend. In Montana, we grew revenue in EBITDA with the addition of new accounts, and our business remains a leader in the market. Moving to our balance sheet, our total debt outstanding is approximately $910 million, and we ended the quarter with $161 million in cash and cash equivalents. Our net leverage remains at 2.9 times, and we intend to maintain our net leverage below three times going forward. We will use $175 million of the proceeds from the sale of Rocky Gap to reduce our first-lane term loan, which we plan to refinance in Q2. On a pro forma basis, our leverage will be approximately 2.4 times after the sale of Rocky Gap. Looking forward, after the closing and the sale of our distributed business, our pro forma net leverage moves down to 1.4 times. With a target net leverage of less than three times, we will have significant room in our capital structure to pursue value-creating initiatives, whether investing in our own assets, pursuing acquisitions, or more aggressively returning capital to shareholders. That said, in the near term, we'll be primarily focused on closing our previously announced transactions, executing on modest reinvestment in our core businesses, and maintaining our low leverage profile. After the sale of Rocky Gap in our distributed businesses, we will have transformed the company to being 100% focused on Nevada, with owned strip and local casinos, as well as the leading Las Vegas gaming tavern platform. These assets will continue to benefit from the long-term visitor and population growth of Las Vegas, which will also remain the most stable, regulatory, and competitive environment in the country. Regardless of the future economic outlook, we will have one of the most pristine balance sheets in our industry, enabling us to take advantage of potential acquisition opportunities in our core markets and to establish a more regular return of capital to our shareholders. That concludes our prepared remarks. Blake and I are now available for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you're using a speakerphone, please pick up the handset before pressing the keys. To withdraw your question, please press star, then two. Your first question comes from David Bain with B. Riley. Please go ahead.

Thank you. Hi, Blake and Charles. My first question around the completion of Atomic Golf, since it's coming up, I was hoping to get a little bit more detail on how you look to maximize its value in terms of potential cross-pollination with your casino strategies around either promotion, coupons, rewards, or anything around signage or ingress to the casino. I understand it has a separate driver that's very high margin, but I'm trying to understand the strategic opportunity to the casino.

Yeah, David. I mean, short answer is all of the above. We meet with those folks regularly, and after touring the facility, we believe there's significant potential cross-marketing opportunities even beyond what we had originally contemplated But we have a very willing ownership group on that side to combine the two properties. I think we've said in the past we're looking at roughly 500,000 to 600,000 visitors potentially that would be driven by that facility. I think the main thing to consider here is we have plenty of capacity within our current parking garage. which our anticipation is those people have to transition through the property to get to Atomic Golf, the majority of them, let's say. There is a rideshare drop-off and there is some adjacent parking to the facility. But we intended to, without getting into granular detail, intend to combine marketing efforts with that property and our property primarily through, there's all kinds of things we can do there, but primarily We can integrate our Play Rewards program. There's all kinds of offers that we can make one-off, if you will. But we're pretty confident that we can get those people to stick in the casino. Particularly, as you know, we've renovated what we call the South Casino. As we go forward, we will renovate that North End Casino with more food and beverage offerings and additional gaming, which we anticipate to capitalize on that foot traffic. So... All of the above, as you said, without getting into grander detail, we are very focused on ensuring that those people within that Atomic Golf facility have many reasons to visit our properties before or after they are done with the Atomic Golf.

Okay, perfect. And then I guess my second one would be on the tavern expansion strategy. Could that include a kind of a broader focus outside of Las Vegas with the Sierra Gold and PT's brand still in Nevada, you know, Reno, Laughlin, Mesquite, or is the focus solely, you know, on Las Vegas expansion?

That's a great question, David. I would say we, by divesting of, as Charles mentioned, our non-core, what we believe our non-core route or third-party business, does not forego our ability to continue to operate within the distributed platform, not only Nevada but other states. We outperform with our brick-and-mortar assets where we control the environment. So there is brick-and-mortar opportunities in other states potentially, and with J&J being our partner who is broadening their footprint, there may be a lot of synergies there as other markets open up we could potentially participate on the brick and mortar side versus the third-party round side.

Interesting. All right. Thank you so much.

Thanks, Blake. Thanks, Charles.

Your next question comes from David Katz with Jefferies. Please go ahead.

Hi, afternoon, everyone. Thanks for taking my questions. I wanted to just follow on that line a little bit and just talk about any parameters qualitatively that you might be willing to share terms of size, you know, where you would take leverage back up to, and, you know, those kinds of issues other than just kind of where it's located. Thank you.

Yeah, I think from a, Dave and Hayes, Charles, from a leverage perspective, we've been pretty clear we're going to keep our net leverage below three times. Like I said on the call, that's a lot of capacity within the existing capital structure. I think our time this year needs to be spent on focusing on closing these transactions, keeping the balance sheet leverage low so we can think about those opportunities that may come up in the future. With respect to the specifics around taverns, we have data in our investor deck. We track all of the ROIs on our recent tavern openings, remodels, and new builds. And it's about a 30-plus percent ROI. is where those are tracking to. So to us, that means that, quite frankly, the new tavern build is probably the most attractive ROI opportunity in the portfolio. They're just small in terms of quantum of EBITDA. But it's still something that we should be doing when we find premier sites or acquisition opportunities to pursue.

Perfect. And just to follow up, and I know this is all out there and available Can you remind us what excess land you may have available in Las Vegas and whether that's an area of attention for you at this point in terms of activating it in some way?

Yeah, that's actually a very clairvoyant, great question. If you take each of our wholly owned assets here in Nevada and add up the contiguous and or adjacent property that we have to develop, in addition to our current core assets that already sit on the property, if you include the Colorado Bell, which is approximately 22 acres, which is a blank canvas on the Colorado River with 1,000 feet of river frontage, we have approximately 95 additional acres, if you add them all up between our existing properties, to develop, to provide ancillary amenities that would benefit those properties, whether they're high density, third-party investments, hotel rooms, additional casino space, or whatever. So to answer your question, if you include the Colorado Bell, it's about 95 acres. If you exclude the Colorado Bell just for perspective, it's about 74 acres of additional real estate between the Strat, the two Arizona Charlies, our Laughlin properties in Pahrump that we would have to invest in to generate additional returns at those facilities.

Thank you very much.

Our next question comes from Edward Engel with Ross MKM. Please go ahead.

Hi, thanks for taking my question. Could you please maybe just remind us, at the stratosphere, in terms of the investments going on there, other than maybe some of the final room renovations, I guess what other projects are also being completed in the first half of this year? Thanks.

Yeah, of course. As you know, the rooms which we talked about, we also have embarked on our main mezzanine level, our eighth floor pool, which is the main pool for the property. We began in January. That should be completed by Memorial Day. We also have Open Tea Restaurant, which is our new Asian facility, which is doing extremely well at the moment. Those are the things that are going on currently. We have plans, as I mentioned in my prior comments, for North Casino and other amenities coming on later. But the pool, the rooms, and the food facility that we just opened are our primary investments at this point in time.

Thanks. And I guess on that, the future plans, projects related to the casino floor, is that within this year's budget or is that more of a longer term?

No, I mean, look, I think that those are all things that we look at and we say if the property is performing or doing well, we're showing the growth and return on investment we've made. Those are things that we think that we could do. I think if you look at where we're going to be when we get to the end of Q2, we'll have renovated over half of the rooms. where we're seeing right now currently a $20 ADR premium in those rooms. We will have touched up all of the pool space. We will have touched up the main casino and done some light work in the north casino, and we've refreshed all the food and beverage offerings. And by the way, we're adding a $75 million amenity in the form of Atomic Golf that is not coming off of our balance sheet. So when you look at all of that, I think that we're going to be in a position to see what the property could really do as we get into the fall, to see what it does when the town's full with F1, with the Raiders as we head into Super Bowl, and then we'll be able to evaluate the trajectory of further investment in the property.

Helpful. Thank you.

Once again, if you have a question, please press star then one to join the question queue. Your next question comes from Chad Mignon. with Macquarie. Please go ahead.

Afternoon, Charles Blake. Thanks for taking my question. Charles, wanted to just hit on kind of your last comment, but asked with respect to the quarter, your rooms revenues were up significantly, I think about $5 million year over year. Can you just kind of talk about what you saw in the quarter with some compression on the weekdays and then, you know, roughly what your gap is to the average strip? ADR right now. Obviously, this will kind of help inform what you're going to be able to charge for the renovated rooms. Thanks.

Yeah. I mean, look, I'd say relative to where we were in 2019 is kind of how we think about looking at it. How do we get that back? And if you look at this quarter's performance relative to 19, occupancy is still down 16%. And all of that is really midweek midweek occupancy for the most part. I think that while we had this construction going on, there was some of that displacement that happened during the weekend, which cost us a little bit. So from a strip performance perspective, you look at our, you know, improvement in EBITDA and revenue relative to, you know, others who, by the way, have group meeting space, have larger facilities, you know, we aren't quite there. But again, when you have 15% of your room base offline, we expect that. So from our perspective, we're pretty encouraged at the strat to show EBITDA up, revenues up with 15% of the rooms that are offline.

Thank you. And then within your database or maybe within the different tiers of your taverns, have you seen any meaningful change in trends with the different levels of customers that you have? that you cater to?

Yeah, I mean, look, I think when you look over the past, if you go back a year plus ago, which was the comp clearly for Q1, we had very strong tavern performance across all of the demographics within the database. We have seen that tail off a little bit. We've seen a little bit more volatility at the higher end of that database. I think as you've had more things that are opened up in town, there's more alternatives for spend, and those folks are traveling more. We just see a lot more volatility within the tavern top end. Now, that's in Q1. I think when things happen, like the Knights make a deeper run into the playoffs, we see that pick up the tavern business also across the entire spectrum of the player database.

Okay. Thanks for the additional color. Next quarter.

Yep.

Thank you. Your next question comes from John Decree with CBRE Securities. Please go ahead.

Hey, Blake, Charles. Thanks for taking my question. Charles, I'm not sure I caught in the prepared remarks, but you had mentioned about potentially refinancing the term loan into Q and using proceeds from Rocky Gap to pay that down. I'm not sure if I caught that and if you were thinking about doing anything with the bonds as well. So maybe the question is capital structure plans as we get closer to Rocky Gap closing in June.

Yeah, I mean, I think if you just fast forward, in the near term, we'd like to refinance the existing $575 million of term loan that we have outstanding. We would use, as we said in the remarks, $175 million of the Rocky Gap proceeds to do that and I think at this point our view is we leave the bonds outstanding which are unsecured and at a fixed rate that quite frankly is lower than our secured debt from a cost perspective right now until we close on the distributed sale and then use the proceeds from the distributed sale to pay off the bonds after their call protection is up in April of next year. Now, if you fast forward through all of that, we are a 200-ish million EBITDA entity that's one and a half times levered with just a $400 million term loan on a net basis, $400 million term loan in place with a $240 million unfunded revolver that provides us plenty of liquidity to go find opportunities.

Thanks, Charles. Thank you. You caught my follow-up question, so maybe I'll ask one about operations. You had discussed, I think, different components of cost inflation that you've experienced in the quarter. I think, you know, Laughlin, if the metric was up 10%, and I think Taverns, you know, labor up. Similarly, I was wondering if you could, you know, revisit that for us and kind of help us understand, you know, when maybe the cost inflation, you start to anniversary. I think you've mentioned that maybe it starts to taper off, all of that's absorbed, or at least a good chunk of it. So if you could give us a little bit more color on how you're thinking about costs, maybe for the balance of the year, that would be helpful.

Yeah. I mean, look, if you look at over the last nine months, if I look at Q3, Q4, Q1, the margins have been fairly consistent within this range. So it's our view that we're at the margin point going forward, despite some of the continued cost increases that we saw year over year from Q1. You'll still see some of that in Q2, but if you look back again historically over the last nine months, we've been telling people, hey, we think margins have kind of settled in at this point.

Thanks, Charles. Thanks, Blake.

Thank you. This concludes our question and answer session and today's conference call. Thank you for attending today's presentation. You may now disconnect.