Golden Entertainment Inc (GDEN) 2015 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Golden Entertainment fourth-quarter 2015 earnings call. (Operator Instructions). Please note that this call is being recorded today, March 9, 2016. I will now turn things over to the Company's Investor Relations contact, Jacques Cornet with ICR. Please go ahead, sir.

Thank you, operator, and good afternoon. By now everyone should have access to our fourth-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 laws. These forward-looking statements, which are usually defined 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 in interpreting and relying on them.

We refer all of 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 of 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. Financial results before August 2015 did not include the results of Sartini Gaming. Sartini Gaming was merged with a subsidiary of the Company on July 31, 2015 and its financial results were included beginning in August.

Because of the merger, management believes it is helpful to provide comparisons on an unaudited, combined basis where the results of the Company are combined with the premerger results of Sartini Gaming for the relevant periods. We have provided that information in the press release issued earlier today.

The combined presentation does not conform to GAAP or the SEC's rules for pro forma presentation. 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 2015 earnings release.

Hosting the call today, we have Blake Sartini who serves as Chairman of the Board, President, Chief Executive Officer of the Company, and Matt Flandermeyer, who serves as 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 and welcome you to our fourth-quarter earnings call.

To begin, it is important to understand that the fourth quarter was the first full quarter of results as a combined Company post our merger which closed on July 31, 2015. As a result we ended calendar year 2015 with a strong trajectory which reveals the benefits of the combination of Lakes Entertainment and Sartini Gaming. Today we are very pleased with the integration as we anticipate additional operational and growth opportunities as we move forward.

Starting with our distributed gaming segment, revenues increased 4.2% over prior year period and adjusted EBITDA increased 10.5%, reflecting the benefits of our scale and resulting operating leverage. Going forward, we remain focused on revenue growth through increased market share as well as new development. As of this date we anticipate third-party distributed gaming accounts growing by 34 locations which will deploy approximately 312 gaming devices throughout 2016.

Within our distributed gaming segment, our wholly-owned branded tavern locations turned in a strong quarter. Same-store revenues increased approximately 8.2% versus the prior year period and full-year same-store revenues grew 6.9% versus last year, highlighting our unique business model and brand strength in the Nevada market.

Moving forward, we are currently on track to add six new tavern locations in Las Vegas during 2016, including one new Sierra Gold, our flagship tavern brand. Recently, on February 10, we successfully opened our first of the six planned new taverns, PT's Brewing Company, and early results are encouraging. Even more encouraging is our continued strong pipeline of tavern opportunities both for new tavern development as well as targets to acquire and rebrand.

Now turning to our Casino segment, during the quarter, the combined properties continued to perform at expected levels. At Rocky Gap, we completed a new live table game area just in time for the New Year's holiday week. In effect, we replaced four underperforming poker tables with four blackjack tables and one craps table which are more popular to our guests. We are seeing increased table game demand and revenue as a result of these added games.

During our third-quarter conference call, we outlined a phased master plan for the property; several components of that master plan are now underway. First, we recently received approval to add 168 new parking spaces to our current parking inventory of 746, resulting in a 23% increase to our parking capacity. A catalyst for this project are the constraints of our current limited parking situation.

Approximately 25 days per year we experience parking shortages which occur on dates including weekends, holidays and special events. We have at times opted to forego additional special events as a result of this insufficient capacity. This project will cost in the neighborhood of $1 million and we anticipate partial completion and use by mid April with full paving and completion by the Memorial Day holiday. We expect a 30% the 40% return on our invested capital going forward.

Another initiative underway is the remodeling of several rooms and suites within the hotel. The goal is to get our test rooms remodeled, give the final approval to the design and amenity packages and then provide a detailed phased remodel program going forward. We continue to believe that in the long-term, Rocky Gap provides significant upside opportunity.

As previously communicated, our device count can flex up to 1,500 gaming devices while adding an unlimited number of table games and we can add an additional 200 hotel rooms supplementing the current 200 room inventory. Also, we continue to consider additional food, beverage, retail and entertainment options. We are still in the initial planning stages of these components of the overall master plan and will provide more visibility and impact estimates as we move forward.

Turning to our Pahrump, Nevada, casinos, we continue to be the significant market leader in Nye County. Given our strong market position, 2015 still proved to be a challenging year as a result of general market conditions as well as a small competitor entering the market in March of last year.

As a result, we have focused on operating efficiencies and margin improvement. These operations contributed a 24% EBITDA margin during fourth quarter and full year 2015, reflecting our successful approach to managing operating costs in a challenging environment.

Beginning in November, we began several capital improvement projects, enhancing our properties with market-leading amenities. These include a single card player rewards program which enables our guests to earn and redeem rewards across all three of our properties, the Pahrump Nugget, Gold Town and Lakeside Casinos.

Additionally, we have completed a remodeling of both of our bingo rooms at the Pahrump Nugget and Gold Town casinos. The remodels include fresh audiovisual and furniture and fixture improvements as well as new technology and player friendly programs allowing for an enhanced player experience.

Also, we are adding several dining and beverage options which will debut this summer at our Gold Town Casino. These projects have caused us some disruption to our ongoing operations and we anticipate this to continue through the first half of 2016.

Finally, we have installed a new high definition marquee on Highway 60 to highlight all property amenities, promotions and special events. The marquee is located directly in front of our Pahrump Nugget Casino which currently receives daily traffic volume of over 21,000 vehicles.

In addition to our operating results I want to highlight two transactions which we completed since our third-quarter call. During the fourth quarter we sold a significant noncore asset, the Jamul Indian Village Note for $24 million. This note had been written down to zero just a few years ago.

The proceeds received from the sale of the Jamul Note, net of related costs, will be distributed in a cash dividend to the Company's shareholders that hold shares as of the record date. I will have Matt elaborate in more detail in just a few minutes.

On the acquisition front, in January of 2016, we acquired a Distributed Gaming operator in the state of Montana that operates approximately 1,140 gaming devices as well as certain non-gaming assets for approximately $20 million including the issuance of approximately 50,000 shares of Golden's common stock. As a result, we enter this market with a sizable footprint and are excited about our future in this jurisdiction.

As mentioned in a previous press release, this acquisition is expected to be immediately accretive to our operating results going forward. We have been evaluating entering the Montana market for some time. To give some perspective, the state has more than 1,400 locations offering approximately 16,000 video gaming devices similar in size to the Nevada market. There are locations in every county within the state. The tax rate is 15% and the market currently generates approximately $400 million in gross gaming revenue from video gaming.

With that overview I will turn the call over to Matt. Matt?

Thanks, Blake. To start, let me remind you that our financial results for the fourth quarter last year and did not include the results of Sartini Gaming. Sartini Gaming was merged with a subsidiary of the Company on July 31, 2015 and its financial results are included beginning in August.

Because of the merger, we believe it is helpful to provide comparisons on an unaudited combined basis where we include results of the Company's with the premerger results of Sartini Gaming for the relevant periods. We have provided that information in the press release issued earlier today.

Turning to the quarter, net revenues for the three months ended December 31, 2015, were $86.4 million, an increase of more than five times compared to the prior year period and an increase of 3.2% compared to the unaudited combined results for the prior year period.

Adjusted EBITDA for the current quarter was $9.4 million compared to $0.2 million in the prior year period. Again, we believe the more meaningful comparison is to our unaudited combined results for the prior year quarter which represents 7.4% growth for adjusted EBITDA.

Excluding some transition expenses, we continued to realize merger synergies during the fourth quarter of 2015. We expect to achieve full run rate merger synergies beginning in the second quarter of 2016.

Looking at our segments, as Blake mentioned, Distributed Gaming net revenues for the fourth quarter increased 4.2% compared to the combined amount for the same period last year. Distributed Gaming adjusted EBITDA was $9 million versus a combined $8.1 million last year, an increase of 10.5%.

Adjusted EBITDA margin improved to 14.2% representing an increase of over 80 basis points compared to the combined margin for 2014, due to higher gaming and food and beverage revenue on subdued operating expenses. Distributed Gaming revenue was positively impacted by improved same-store results and positive economic indicators in the Las Vegas and Reno markets.

Casino net revenues were up 0.4% during the fourth quarter, compared to the combined results for the same period last year. Casino adjusted EBITDA for the quarter was $4.8 million, essentially flat versus the combined results from a year ago. We believe there are additional margin opportunities at the Rocky Gap property.

At the end of the year, we had $74.8 million of net operating loss carry forwards which begin to expire in 2032, which can be applied against our future taxable income resulting in minimal cash income tax payments 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 fourth quarter, we had $69.2 million of cash and cash equivalents. Of that amount, approximately $23.6 million relates to the proceeds from the Jamul Note sale net of related costs. As Blake mentioned, the proceeds received from the sale of the Jamul Note, net of related costs, will be distributed in a cash dividend to our shareholders that hold shares as of the record date.

We anticipate that the net proceeds received from the sale of the Jamul Note will be distributed to our shareholders during the summer of 2016. The record date for such dividend will follow the Board of Directors' declaration and will be announced at such time.

Per the Merger Agreement, approximately 8.5 million shares owned by the former Sartini Gaming sole shareholder and others, waived their right to the Jamul dividend, subject to the receipt of a favorable private letter ruling from the IRS.

Excluding the waved shares, the current outstanding shares subject to the Jamul distribution total approximately 13.5 million shares. We estimate the dividend would be approximately $1.72 per eligible share which is subject to change based on several factors detailed in the press release.

At year-end, we had total debt outstanding of $148.6 million including $25 million drawn on the revolver and $118.5 million outstanding under the term note. Subsequent to year end, we closed on the Montana acquisition, finding the cash portion of the purchase price using excess cash and $15 million in borrowings under the revolving credit facility. Credit facility matures in July of 2020.

As of the end of the quarter, the weighted average effective interest rate was approximately 3.17%. Capital spending for the quarter was approximately $5.1 million which included approximately $1.7 million not related to maintenance CapEx. On a combined basis, capital expenditures for the year ended December 31, 2015 were $12.2 million including $4.2 million of growth CapEx and $3.1 million of nonrecurring maintenance capital.

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

Thank you all for joining us afternoon.

(Operator Instructions). Howard Rosencrans, Performing Capital.

Hi. Thanks, guys. Everything sounds very good. Just remind me if you would. You gave us some stats on what your device count was or what the add was -- you were adding I guess 34 -- I guess to Vegas you were adding 34 locations and 112 devices and that is on a base of --?

So it was 34 locations as of this date. Now understand that these numbers fluctuate as we go through the year. But as of this date we're anticipating 34 locations being added, which will deploy approximately 312 devices.

Okay, and I was just asking what base that's on top of. What does that bring the total to?

So we currently have approximately 650 locations with approximately 7,500 devices. So that does not include the Montana location which is approximately 100 and 1,000 devices in Montana.

Okay, and the Montana is all new. Am I correct in that?

Yes.

Well, it's new to us and was added effectively January 29.

Okay, and if we were to do the math on the -- is it fair to say that the 300 devices or the 34 additional locations, were those pretty much -- are you expecting them to be additive at the same rate on a per -- if I was to look at what the 60 -- the 650 or 7,500 do on a per location or per device basis, will these be similarly productive in your vision?

Yes, we believe that they'll have a similar productivity. Basically they are a contribution to us, so revenue less expenses to the location.

Okay, and if you would remind me what the revenue per either locale or device and what sort of margin you garner on that, if you would?

So, we haven't gone through those economics at this point in time. I think it would be fair to take a look at our income statement and extrapolate that information.

Okay. And do you -- are you hopeful that the Montana properties will be more or less productive than these?

Well, I think it's a bit different of an analogy. The Montana operations are new to us. We have said that we believe that they are accretive, and so I believe Blake can provide some market estimates on Montana and hopefully that's helpful.

So, Howard, there is a significant difference in the model between Nevada and Montana, which is going to result in different economics and the biggest difference is there is a $2.00 wager limit on the devices in Montana with an $800 payout limit.

Obviously, the state website I think in Montana can provide significant information regarding current performance of those devices in the state. But you're going to see disparity in the economics given the model in Montana is governed by a max wager and a max jackpot versus Nevada which does not have that.

Right.

Also, I will illuminate just a bit further because I think it's important. Although there is that max wager and max jackpot situation in Montana, it is also a different operational model up there in that it is more operationally light, if you will, in terms of fixed cost. And the use of cash up there is provided by locations versus what we do down here is provide our cash for our locations. So there is some very large pros in that market up there to make up for a limited wager and limited jackpot situation.

Okay, very good. That's very helpful. I'll get back in queue. Thank you.

(Operator Instructions). Jeff Bronchick, Cove Street Capital.

Good afternoon, gents. Is Montana -- is that the beginning of a series of acquisitions or is this get you in state and you go organic or is this what you see what you get?

Jeff, this is Blake. I think, as I mentioned in my opening remarks, we enter the market with a sizable footprint. And given the breadth and size of the market up there we're hopeful that there is growth both organically and potentially through additional acquisition.

It's a fairly fragmented market in terms of the number of operators. And so, as we get up there and get our feet on the ground we're learning more each day. We're hopeful, I would say, that we continue to expand our footprint, potentially both through organic and acquisition approaches.

And as you look elsewhere at whether -- at market appetite or changing regulation and governed by your balance sheet conceptually, what else are you seeing, sniffing, looking around? What areas look of interest over the next year or two?

Well, I'll answer that consistently. I think you and I have had the conversation prior, and that is I view very tangible opportunities as, again mentioned in our opening comments, around taverns here in the Nevada market which we are rolling out six this year. We anticipate that pipeline to remain pretty full going forward to your time frame of the next couple of years.

In addition, these route opportunities, whether Montana or potentially elsewhere, are tangible in regards to potentially acting upon them as jurisdictions such as Montana, Illinois and others are growing in terms of their distributed segment. So, I think those are very tangible and we're also obviously in the Casino business.

So, I would answer it that way. Tangible opportunities you are going to continue to see us rollout on the Distributed side and we will be selected on the Casino side if those opportunities present themselves.

All right. Thank you.

Michael Melby, Gate City Capital Management.

Thanks for taking my questions. Just curious, you gave some overview on gaming devices for the state of Montana. With your acquisition are the wins per unit similar to the state average there?

They are not quite at the state average. As a result of this acquisition we believe there may be some opportunity. Although there will be some maybe deferred capital expense incurred in getting some of the devices current, if you will. But they are performing at a reasonable level compared to the state average and we believe over time we can improve.

Got it. and you mentioned some gives and takes compared to maybe your current business. Just curious how -- if you could directionally provide (technical difficulty) their EBITDA margins, whether it is significantly higher or pretty similar to what you are doing now in Distributed Gaming?

Mike, I'm sorry. You broke up a little bit there. Can you repeat the question?

Sure. With the acquisition, you mentioned some gives and takes in terms of their margin contribution. Just curious directionally if it's substantially higher, lower or equal to what you are currently doing now at around 14% EBITDA margin?

So, their model is different, as you mentioned. Their tax rate is higher than what we have here in Nevada, but then they are, as Blake mentioned, operationally light. So, those things somewhat wash a little bit out but I think their margin is just slightly higher than what we currently are running on our route.

Great. That's it for me. Thank you.

[Roy Berry], private investor.

Mr. Sartini, I actually read your December 23 blog that's on your website and I've got a question concerning it.

Okay.

You mentioned something about a partnership with Uber. I can't envision how you would partner with Uber, but secondly, it could be huge.

Yes, I hope you're not disappointed here. It is a partnership, but essentially with our wholly-owned taverns here in the Las Vegas area, which number approximately 50 at the moment, we've partnered with them to provide their service to our locations by incenting our customers through a promotion which enables free rides. The first ride is free or several rides are free with the Uber service.

We're trying to be responsible, obviously -- continue to be responsible as we provide food and beverage services in our taverns. The Uber service is a great benefit to our consumers who don't want to drive if that's their choice. Uber is very prompt and has been very well received by our customers. So the partnership is essentially around us promoting that service with our current guests through initially some free rides.

That answers my question. Thank you.

(Operator Instructions). Howard Rosenkranz. Howard Rosencrans.

Hi, guys. What was the incremental synergy number that has not been achieved? I don't know how much was achieved in 2015, but what is the incremental full year that we'll achieve in 2016 from -- you laid it out in a previous call. I think it might have been a total of maybe $5 million or something. I don't know how much was achieved in 2015. Thank you.

Thanks, Howard. We had laid out prior that there was roughly anticipated to be $3 million of synergies. Essentially it was costs that were to be eliminated day one. We achieved -- pro rata that we were only 5 months out of 12. We achieved that in 2015. We expect to achieve the remainder in 2016. We did in 2015, though, have some incremental transition costs of approximately $400,000. Those costs will go away effective on April 1, 2016.

So in theory, there is just a -- pick round numbers -- the $3 million. So maybe you got $1.5 million last year and this year you'll get $3 million plus an additional $400,000 -- well maybe you got $1.5 million less $400,000 so you got $1.1 million and this year you'll get like $3 million. Is that sort of a delta of about $2 million incremental? Is that the way we should think about it?

Yes, I think that for the most part is pretty rough. Maybe I'll just reiterate so that we're on the same page. We achieved roughly $1.250 million in 2015 of synergies, less the $400,000. We expect then the delta between $3 million and $1.25 million to be achieved in 2016 during the first seven months and then we'll pick up that $400,000 on a run rate beginning April 1, 2016.

Okay. That was the math I was looking for. Very good. Thank you so much.

We have no further questions at this time. I would like to turn the call back to Mr. Blake Sartini, CEO, for any additional or closing remarks.

Thank you. And again, thank you all for joining us this afternoon. We look forward to updating everyone on our progress when reporting our first-quarter results. Thank you again for joining.

Ladies and gentlemen, that does conclude today's conference. Again we thank you all for joining us.