Golden Entertainment Inc (GDEN) 2015 Q3 法說會逐字稿

Golden Entertainment third quarter 2015 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 conference call is being recorded today, November 4, 2015.

I will now turn the call over to the Company's investor relations contact, Jacques Lemay with [ICR].

Thank you, operator. And good afternoon. By now everyone should have access to our third quarter 2015 earnings release, which can be found on the company website at www.goldenent.com under the investors section.

Before we begin our formal remarks, we need to remind everyone that the discussion today will include forward-looking statements within the meaning of the Federal Securities law. 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 what we expect; and, therefore, you should exercise caution interpreting and relying on them.

We refer all of you to the risk factors in our recent SEC filing, 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 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 2015 earnings release.

Hosting the call today we have Blake Sartini who serves as the Chairman of the Board, President and Chief Executive Officer of the Company; and Matt Flandermeyer who serves as the Executive Vice President and Chief Financial Officer of the Company.

Management will provide prepared remarks, after which we will open the call to questions.

With that, I'll turn the call over to Blake.

Thank you, Jacques. And good afternoon. We appreciate everyone joining us today, and welcome you to our first call as the new Golden Entertainment.

On the call today I will provide an overview of the Company and review the strategic priorities we are focused on post-merger. I will then turn the call over to Matt, our CFO, who will discuss additional details about our financial results.

This past quarter was transformational for the Company. On July 31st, we closed the merger between a subsidiary of Lakes Entertainment and Sartini Gaming, renaming the company Golden Entertainment. This combination creates a well-capitalized company with increased scale and geographic diversity.

Looking forward, in addition to our current portfolio generating significant free cash, we have meaningful growth opportunities to expand our business and increase shareholder value.

Given the timing of the transaction, the third quarter was one of transition. As of today, we have been operating post-merger for just about three months. We are very pleased with the initial progress we have made regarding the integration of the two companies and are confident that significantly more progress can be achieved as we move forward.

The results we reported this afternoon reflecting two months as a combined organization are just the beginning of the financial benefits we anticipated when we first announced the transaction and the establishment of a truly diversified gaming company.

Now, with the merger complete, the new Golden Entertainment operates in two distinct segments - distributed gaming and casinos.

First, our distributed gaming segment operates over 7,700 gaming devices across nearly 700 locations. Included within this segment are over 730 gaming devices at our 48 wholly-owned and operated uniquely branded taverns, and there are 2,000 gaming devices within approximately 160 nationally recognized retail chain locations.

Our distributed gaming segment generates approximately 65% of our year-to-date combined company adjusted EBITDA, excluding corporate and other; and is the largest network of distributed games in Nevada.

Within this business unit we install and operate a limited number of gaming devices at strategic and convenient high traffic, non-casino locations. This is a business where scale enhances our disciplined operating strategy. The business is focused on high repeat local customers seeking value in convenient locations offering competitive payouts and unique food and beverage offerings.

We have been successfully executing this offering approach in this market for the better part of 14 years. A highlight to this business is that we have developed and deployed a proprietary player rewards program to facilitate ongoing desk communication and loyalty.

Our distributed gaming network is by far the market leader in Nevada with roughly 41 percent of the market share based on the total restricted gaming machine count in the state. This business has proven to be very capital-efficient and highly scalable with a variable cost structure.

Within this distributed gaming segment, we ended the third quarter with 85 more gaming devices than the same period a year ago, including 60 devices in our wholly-owned taverns. And most recently, we have contracted for 10 additional retail locations, which will deploy over 115 gaming devices expected to come online during 2016.

For the third quarter, same store revenue for our third party locations was 5% higher versus the prior year period.

Turning to our branded tavern business, we offer an upscale casual environment, typically with 15 on-site gaming devices, along with a superior food and beverage offering and a market leading player rewards program. We offer it under three distinct brands. Our PT's and Sierra Gold brands, and most recently we rolled out our Irish themed brand under Sean Patrick's.

Similar to our third party distributed gaming network, we are also the largest traditional tavern operator in the state of Nevada by a wide margin. Since we began in the tavern business in 2002, we have added approximately 30 locations over the past 13 years.

Even with this significant growth, our current market share is still just around 10%. We believe this provides significant upside opportunity to continue to expand through acquisitions of existing taverns and through the Green Field development of new taverns.

Financially, we believe that growth in this business can be achieved with a high return on invested capital.

Recently we announced expansion plans for early 2016; we'll be adding four new tavern locations, including the addition of a new brewery concept, PT's Brewing Company. We continue to experience a strong pipeline of new tavern opportunities

To provide a sense of the current performance of this business, for the third quarter, our same store revenues increased approximately 5.5% versus the prior year period. And year-to-date, same store revenues increased 5.6% versus the prior year.

Now, turning to our casino segment, we operate three casinos in Pahrump, Nevada and the Rocky Gap Casino Resort in western Maryland. Our combined casino segment generates approximately 35% of our year-to-date combined company adjusted EBITDA, excluding corporate and other.

Pahrump is located in Nye County, Nevada, and situated approximately 60 miles from Las Vegas. Our Pahrump casinos generate approximately 70% of the total gaming revenue within the county.

The three casinos which we operate are the Pahrump Nugget Hotel and Casino, the Gold Town Casino and the Lakeside Casino and RV Park. The Nugget, the Nye County market leader, is located on 40 contiguous acres, of which 20 is undeveloped.

Recently, a 107-room Holiday Inn Express Hotel and Suites operated by a third party opened adjacent to our Gold Town Casino and within a short walking distance to our Pahrump Nugget Casino.

With this new significant development along with our continued efforts to drive additional market share, we have initiated a capital plan which includes providing a single card player tracking system, combining our Pahrump and Rocky Gap properties, the remodeling of two of our properties' bingo rooms and the redevelopment of certain retail amenities. We are currently in a planning phase and are still finalizing the scope, and will provide additional details at the appropriate time.

Now, turning to our Rocky Gap Casino Resort, we are very pleased as the property turned in a solid quarter. During the quarter we added 54 gaming devices to the existing four, and are pursuing or considering several additional initiatives at the property.

First, we are currently seeking approval for a parking expansion that will add 150 parking spaces, which we anticipate could cost roughly $1 million. Presently, there are a significant number of days during the year where we reach parking capacity. We anticipate this investment will result in an approximate 33% return on our invested capital.

Secondly, we've requested approval to add three additional table games. In addition, our device count can flex up to 1,500 gaming devices while adding an unlimited number of table games.

Beyond these tangible improvements, we are also considering additional retail and entertainment options. Last week, the master plan includes the potential for an additional 200 hotel rooms. As a result, we believe that in the long term, this has to provide significant upside opportunity.

Going forward, we are exciting about the organic growth opportunities within our existing portfolio. And we expect to pursue external opportunities in the future.

As I mentioned regarding our distributed gaming segment, we remain active in expanding our tavern business as well as looking to expand into other states and jurisdictions where we can leverage our unmatched experience and business model.

Recently, Golden has been granted a gaming license in the state of Montana in addition to our current licenses in Nevada and Maryland.

Finally, our objectives are simple; we will allocate and manage shareholder capital in a diligent, proactive and prudent manner, always with the objective of creating value for our shareholders.

Also, we will continue to use our management expertise and significant financial flexibility to execute our external growth strategy.

With that, I'll now turn the call over to Matt.

Thanks, Blake. As Blake mentioned, we concluded the merger on July 31st. Net revenues for the three months ended September 30, 2015 was $62.5 million, an increase of 292% compared to the prior year period. Adjusted EBITDA for the current quarter was $7.1 million, compared to $1.6 million in the prior period.

For the current quarter, net income was $3 million, or $0.16 per diluted share, compared to a net loss of $23.1 million, or $1.72 per diluted share, in the prior year quarter.

The results for the prior year quarter were impacted by impairments and other losses of $21 million related to investment in Rock Ohio Ventures.

As Blake mentioned, this has been a transitional quarter for the Company. The results were impacted by four main items.

First, the current year results include the operation of Sartini Gaming for only 61 days. Second, the Company incurred $9.3 million in merger related expenses. Third, the Company recognized an income tax benefit of $12.9 million. Finally, the adjusted EBITDA includes some dual expenses in corporate overhead. Combined corporate and other expenses totaled $4.2 million for the quarter.

[Purses] are anticipated, steady state-run rate after cost elimination of approximately $3.7 million on average per quarter.

Given the merger, we believe it is helpful to provide comparisons on a combined basis; and have provided that information in the press release, combining the results of the Company with the pre-merger results of Sartini Gaming for the relevant period.

Combined adjusted EBITDA for the quarter was $9.9 million versus $8.8 million in the prior year quarter, an increase of 13.1% and a combined net revenue increase of 3.5%. Year-to-date combined adjusted EBITDA was $31 million, which included minimal merger synergies.

Distributed gaming combined net revenues increased 6.1% for the same period. Distributed gaming combined adjusted EBITDA was $8.4 million versus $7.2 million, an increase of 16.8%. Distributed gaming adjusted EBITDA was positively impacted by increased location and game count, increasing store sales results and positive economic indicators in the Las Vegas and Reno markets.

Casino combined net revenues decreased 2.5% for the same period. Casino combined adjusted EBITDA for the quarter was $5.7 million versus $5.5 million, an increase of 4.5%.

The Company also has a $94 million of net operating loss carried forward, which can be applied against our future taxable income, resulting in minimal cash income tax payment over that period, assuming no ownership change occurs under Section 382 of the tax code.

Looking at the balance sheet, at the end of the third quarter, we had $43.2 million of cash and cash equivalents. On July 31, 2015, the Company completed the syndication of a new $160 million senior secured credit facility, of which $145 million was drawn at closing. We refinanced approximately $198 million in combined debt at the closing of the merger by utilizing part of the pre-merger Lake's cash balance.

On a combined basis, we estimate this will save $18 million annually in interest expense, compared to the interest expense on the secured debt facilities of the companies in place prior to the merger. The credit facility matures in July of 2020. And as of the end of the quarter, the weighted average effective interest rate was approximately 3%.

Capital spending for the quarter was $1.3 million, the majority of which was maintenance capital. On a combined basis, capital expenditures were $2 million for the quarter and $8 million year-to-date.

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

Thank you. (Operator Instructions) We'll go to Jim Devlin with Henley and Company.

Yes. Hi. Congratulations on the merger and getting the platform public. And that being said - and, obviously, the refi. Moving forward now that you guys are public, can you give us some kind of structure around the new license in Montana, the kind of size and scope of the market? Or what your plans are there?

Sure. This is Blake. We, even prior to the merger, had been exploring opportunities in the state of Montana. To give you an idea of the potential scope, Montana has approximately 16,500 gaming devices in a distributed gaming format, much like Nevada, compared to Nevada, which is about 18,500. So a very similar market size.

We were issued the license in November of last year, I believe, in Montana. And we continued to try and position ourselves for potential opportunities up there. We have nothing to discuss at this point. But that gives you an idea of the scope of the market up there.

OK. And then as far as you guys know just up to your elbows in alligators just getting the whole platform public. As you move down the road, I don't think you guys went public just to maintain the status quo; I would assume you guys have some growth initiatives. Would you look at one-off hotel properties? That's, kind of, the management's background and trademark in the past. Do you stay in the quasi-route business? Or if you see opportunities to pick off attractive properties at right multiples, is that something that you guys would look at?

The short answer is yes. But obviously, we are driven to the broad shareholder value at this point to your point about growth. And I think importantly we're pretty uniquely positioned in the current gaming space regarding our ability to maneuver in the distributed segment with our infrastructure. But also, as you mentioned, our DNA, if you will, was really in operating casinos - traditional type casinos.

So if those opportunities do arise and they make economic sense for us and strategic sense for us, the answer would be yes; we would pursue those opportunities.

OK. And then just one last question. Northern Nevada as of late, maybe the last six months, with this Tesla-effect going on up in Reno, can you speak to the Company's position in northern Nevada during unprecedented come-back growth in Reno? And what's your size there? And do you guys have plans to expand in the market? Thank you.

You're welcome. I'll turn over the last part of that question to Matt. We operate currently, give or take, about 2,500 gaming devices in that part of the state on our distributed route. We operate, essentially, two taverns up there at the moment. We are focused on the I-80 corridor for continued expansion.

And your observation around Tesla and actually other pretty large developments that are going in up there, we believe that that market is going to provide continuing growth opportunities for us going forward.

Thank you.

Thank you. And we'll continue on with a question from Adam Joseph.

Adam Joseph: Hi, you guys. Matt and Blake, congratulations and thanks for the background.

How should we think about potential acquiring opportunities perhaps on the slot route business, both in the biggest jurisdiction markets, maybe even in northern Nevada, and then the deal flow that maybe you're seeing outside of those markets? Should we think about that as the typical expansion we might see out of you? Or perhaps basically, the gentleman previous to me talked about maybe one-off casinos where we're trying to model your growth. How should we think about the opportunities that you guys are looking at internally? Thank you.

Thank you, Adam. I think it's two parts. Very tangibly right now, as we mentioned in our opening remarks, the opportunities that exist to expand our current tavern portfolio. We're acting upon that; we talked about the four locations that we're getting ready to open, we also mentioned that the pipeline remains full.

I think you'll see us continue to have those opportunities and act upon those as they come about. Similar in the route business, we are experiencing organic growth as well as the potential for acquisitions, not only I think potentially in Nevada, but other jurisdictions in which states operate similar types of gaming routes, if you will, or distributed gaming.

So, tangibly, I think those may be at least something we're focused on short term here. Longer term or if an opportunity presents itself, I do think you'll see us, if it makes sense, being able to operate additional gaming - traditional casino gaming facilities as well. We're offering intangible opportunities now. And we're uniquely positioned on the casino side should those come about as well, we would act upon those if they made sense.

Great. And then a question for you, Matt. Can you recap the cash position? If you are to look at a potential deal again maybe even in the slot route or maybe it's a property that you would acquire, how should we think about what that cash position would look like moving forward? I know that's a bit of a moving target, but can you give us some comfort level about where that stands?

Thanks, Adam. As far as our current capital structure, we have $160 million facility. We're drawn at $145 million. On a net debt basis, we're levered about 2.5 times. We like that position; it's supported us very cost effective capital.

But as opportunities present themselves, we'll have to judge the merits of flexing up to take advantage of that opportunity versus what that returns would look like.

So, I would see us perhaps flexing up somewhat, but then over time by paying our debt to get down to a level that we're comfortable with.

OK. Great. Appreciate the information, guys. Best of luck.

Blake Sartini: Thank you.

Thank you. And once again, ladies and gentlemen, star-one for questions. We have a question from Greg Nelson, private investor.

Hi, Blake. I was just wondering, as far as your company, as far as, like, a boat show or getting some brokerage firms or investors interested in the stock, if you have any plans to do that? Because I noticed that the volume of the stock is really low and doesn't seem to trade a lot. And wondering how we're going to get investors or brokerage firms interested into what you guys do?

Yes. Greg, great. That's a very good question. Obviously, in the past, the stock has been thinly traded as the prior Lakes Entertainment. We have initiated communication with potential analysts to cover the stock. I think this call probably, we're hopeful, we result in a kick-off of analyst coverage of the Company which I think is significant.

In addition to that, the flow continues to be an issue. And I think that, over time, we'll see where that goes. But your observation is good in that we've initiated those contacts. We believe this call will be the kick-off for, hopefully, some coverage coming from some analysts that have expressed interest in covering the stock.

Oh. OK. Great. Well, thank you very much.

You're welcome.

Thank you. Again, star-one for questions. We'll go to Michael Melby with Gate City Capital Management.

Good afternoon. Thanks for taking my question. It might be a little off-topic, but I'm curious if you might have an update on the [renewal] note down in San Diego? Thank you.

Michael, thanks. This is Matt. Currently, we don't have an update on the [renewal] note. The way I think - just a refresher - the way it works is there would be a special committee of the Board which comprises three directors that were previously on Lakes board would handle any negotiations or monetization of that note, and should it be done within a, I believe, three-year period. It would be distributed to the shareholders other than Mr. Sartini. But currently there is no update.

Thank you.

Thank you. And with no additional questions in the queue, I'd like to turn the floor back over to Mr. Blake Sartini for any additional or closing remarks.

Thank you all for joining us this afternoon. We look forward to updating everyone on our progress when we report our fourth quarter results. Again, thank you for joining us today.

Thank you. And, again, ladies and gentlemen, that does conclude today's conference. Thank you all again for your participation.