Golden Entertainment Inc (GDEN) 2016 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Golden Entertainment fourth quarter 2016 earnings conference call.

(Operator Instructions) A question and answer session will follow the formal remarks.

Please note that this call is being recorded today March 13, 2017. Now I would like to turn the conference over Joe Jaffoni, Investor Relations. Please go ahead, sir.

Good afternoon, everyone. By now, everyone should have access to our fourth quarter 2016 earnings release, which can be found on the company's website at www.goldenent.com under the investor 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 identified by the use of the 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 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 risk that could impact our future operating results and financial condition and other forward-looking statements.

During today's call, we will discuss non-GAAP financial measures, which management uses and believes are useful in evaluating the Company's operating performance.

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 31st, 2015 and its financial results were included beginning in August 2015. 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 pre-merger results of Sartini Gaming for the relevant period. We have provided that information in the press release issued earlier today.

The combined presentation does not conform with GAAP or the SEC's rules for pro forma presentations. 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 on our fourth quarter 2016 press release.

On the call today, we have Blake Sartini, the Company's chairman, president and chief executive officer, Steve Arcana, the Company's chief operating officer and Charles Protell, the Company's chief strategy and financial officer. Blake and Charles will provide prepared remarks, after which, we will open the call to questions. With that, it's my pleasure to turn the call over Blake Sartini.

Good afternoon, everyone. Welcome to our fourth quarter call. The fourth quarter capped off an extremely active and successful 2016 for Golden Entertainment, as we delivered record financial results across our business.

Over the course of the year we have continued our strategic expansion of our distributed gaming business through two significant acquisitions in Montana and the opening of five new wholly-owned taverns in the highly attractive Las Vegas locals market. Also, we have gained additional traction with our full scale casino operations in Nevada and Maryland.

Finally, we strengthen our senior management team with the appointment Charles Protell as chief strategy and financial officer. Charles will go through the numbers in more detail in a few minutes. But let me first say that his deep industry and financial expertise has been a welcome addition to Golden Entertainment, and will no doubt serve us well as we continue to pursue growth.

We entered 2017 as a leading provider of distributed gaming services, operating the largest footprint in Nevada and the second largest footprint in Montana. In total, we operate more than 10,000 devices in nearly 1,000 locations, including a growing base of wholly-owned taverns in Las Vegas.

Our strong market position is the direct result of 13 successful acquisitions completed over the past 15 years, including the two key Montana acquisitions which together added approximately 2,900 gaming devices and 300 locations to our footprint in 2016. We are a leader in negotiating, financing and integrating accretive acquisitions and the combination of our scale and leadership in both Nevada and Montana has created strong barriers to entry.

Turning to our branded taverns, we have been able to generate excellent returns and see no reason to slow our pace of investment in new, wholly-owned locations. Our locations branded PT's, Sierra Gold and Sean Patrick's typically offer 15 gaming devices along with a quality food and beverage experience. They attract a strong mix of Millennials and Gen X customers and we built a robust, active customer database.

Further, a respected digital industry trade source recently awarded Golden Entertainment's mobile app an honorable mention in their annual entertainment campaign competition. The app is another tool for us to drive brand loyalty while [emulating] a customer's tavern experience to increase visitation and gaining volume. Finally, as with our third-party distributed gaming segment, our dominant position in our wholly-owned tavern division offers a significant barrier to entry within the Nevada restricted gaining market.

Looking at the market, Las Vegas welcomed a record 42.9 million total visitors and more than 6.3 million business travelers in 2016, both signs that Las Vegas remains one of the premier tourist and business destinations in the country. Major league sports continue to recognize Las Vegas as an attractive potential market for expansion and we are hopeful that the NFL's Raiders follow the lead of the NHL's Golden Knights who will have their first game at T-Mobile Arena in Las Vegas later this year.

Overall, we firmly believe that our locals oriented gaming establishments provide Golden Entertainment with a substantial opportunity to benefit from continued long-term growth in the Las Vegas market. On the casino front, our operations in Pahrump, Nevada and in Rocky Gap, Maryland, continue to benefit from an enhanced focus on cost controls, disciplined management and more profitable marketing initiatives.

Additionally, all of our properties are benefiting from prudent capital investments and upgrades that further enhance their attractiveness, thus elevating the guest experience.

I'd quickly like to touch on the current environment at Rock Gap. As you are all no doubt aware, late in 2016 a large property opened in the Washington, DC market. While it is still early, we believe Rocky Gap's resort quality offering and Western Maryland location has largely insulated us from competitive pressures posed by properties in the Baltimore and DC area. And we have seen our business volumes remain strong. In particular, the state's release of gross gaming revenues for the first two months of 2017 show Rocky Gap with a year-over-year gain of 11.8% in January and a 13.9% rise in February.

As we look to 2017 and beyond, we believe Golden Entertainment is well positioned to deliver another year of strong results as we leverage our expanded scale and more efficient operations. In our distributed gaming business we will benefit from a full year of ownership of our Montana operations and we will also continue to aggressively expand our branded tavern business in Nevada.

Through the planned opening of seven new taverns in Nevada, the first of which will open this week, we expect to benefit from a market that continues to see positive underlying microeconomic trends with unemployment in the valley at a nine-year low, growing population levels and significant Las Vegas Strip visitation.

Our Nevada taverns are attracting a younger demographic than traditional casinos and we are effectively monetizing this patronage through our active database and targeted marketing. We are well versed in identifying new sites and expect to deliver adjusted EBITDA and margin growth in the year ahead. Finally, we expect continued, steady organic growth at our casinos as we further improve operations in 2017.

In closing, we'll remain focused on further improving our existing operations while seeking expansion opportunities in current and new markets, with an eye towards adding scale to our distributed gaming and casino businesses. We believe Golden Entertainment is very well positioned to deliver on these goals, which supports our efforts to create a new long-term value for shareholders.

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

Before getting to the results, let me remind you that the fourth quarter represents the first period in which the year ago comparison also includes the full results of Sartini Gaming, which was merged with the subsidiary of the company in July 2015. The 2015 full year financials presented in our earnings release include what we believe to be helpful comparison on an unaudited combined basis where we include our results with the premerger results of Sartini Gaming.

In the fourth quarter, Golden Entertainment generated record net revenues of $105.4 million, representing an increase of 21.9% over last year. Adjusted EBITDA in the quarter was $12.2 million, up 29.1% year-over-year. For the full year, net revenues were a record $403.2 million, up 16.7% year-over-year; while adjusted EBITDA grew 20.2% over the prior year to a record $48.6 million.

For our distributed gaming segment, net revenue during the quarter was $81.2 million, a year-over-year increase of 28.3%; while adjusted EBITDA of $11.5 million was up 28.1% from a year ago, as we benefited from our two acquisitions in Montana as well as the opening of five new taverns in Las Vegas.

In our Nevada distributed business, our primary focus was and remains driving financial performance by shifting our mix towards higher margin, wholly-owned tavern locations from chain store locations. Our existing chain store locations typically operate at a lower volume and margin levels, and we are working to manage these locations to maximize profitability.

As our chain store locations come up for renewal we have been aggressive in managing underperforming locations out of the portfolio and we expect this to continue over the coming years. This will lead to increased margins [to] provide us with the ability to redeploy capital into our higher return, margin owned taverns. In 2017, we plan to open seven new tavern locations and are working to build a pipeline of potential new locations for 2018 and beyond.

In Montana, we acquired Lohman [Gaming] in January 2016 and Amusement Services in April 2016, and we saw healthy growth in both businesses over the balance of the year. Today, we have approximately 17% of the overall Montana market, giving us a strong platform and substantial room to expand organically and through acquisitions over time. Finally, we are currently monitoring other potential new distributed gaming jurisdictions and are actively pursuing the chance to expand into new markets that are considering legislation to enable our unique business model.

Moving on to the casino segment, for the quarter net revenues were $24.1 million, a year-over-year increase of 4.3%, while casino adjusted EBITDA of $5.5 million was up 13.9% over the prior year period. In Pahrump, our three casinos saw combined adjusted EBITDA growth at a rate in excess of revenue, despite significant construction disruption related to recent investments in two of our three properties. We recently completed renovations at Gold Town which included the bingo room as well as the addition to restaurants and a liquor store.

The Nugget renovations included a complete casino refurbishment, a new bingo room and a new [sportsbook]. As a result, our business volumes have responded favorably. Looking to 2017, we are targeting the [slot floor] for refresh at The Nugget and expect our business to improve throughout the year particularly as we [lack] the construction disruption of 2016.

At Rocky Gap, demand at the property and our efforts to optimize a gaming floor resulted in us increasing the number of gaming devices while we further improved the overall guest experience through interior upgrades and expanded parking, which is allowing us to better accommodate patrons at peak periods. We also made several requirements to our marketing strategy as well as re-launched our royalty program at the property. These efforts allowed us to drive adjusted EBITDA and margin in 2016 and positioned us to further differentiate ourselves in a competitive market.

Looking to the year ahead, we expect to benefit from our new high limit slot room, opened in December, and our revised marketing efforts. In addition, legislation has been proposed in Maryland that could reduce our tax on slot revenue in exchange for us purchasing the machines on our floor which are currently owned by the state.

Quickly looking at our corporate and other expenses, adjusted corporate expense was up 10.3% year-over-year in the fourth quarter to $4.8 million. This was driven primarily by continued merger related integration activities and increased professional service fees.

As a percentage of revenues corporate expenses declined quarter-over-quarter and we expect corporate expenses to stabilize as we move into 2017.

For the quarter ended December 2016 ,Golden Entertainment reported net income of $10 million or $0.44 per diluted share compared to $23.4 million or $1.06 per diluted share in a prior year period. Note that the results for 2015's fourth quarter included a $23.6 million gain on the recovery of impaired notes receivable, while the results for 2016's fourth quarter included $5.1 million income tax benefit related to release of some of our valuation allowance again our deferred tax assets.

We continue to benefit from our net operating loss carry forwards with approximately $76 million of NOLs a year in, which begin to expire in 2032. These will be applied against our future taxable income resulting in little to no cash income tax payments over the next several years.

Looking at our balance sheet, we had $46.9 million of cash and cash equivalents at year end, total debt outstanding of $185.7 million including $150 million in senior secured term loans and $30 million of revolver borrowings. As a result, the company's gross and net beverages at year end stood at 3.8 and 2.8 respectively. The company's senior secured term loans and revolving credit facility mature in July 2020 and our weighted average cost of borrowings was approximately 3.3% during 2016.

Capital spending for the fourth quarter was $6.4 million, which brought our total year capital expenditures to approximately $31 million. As we look to 2017, we expect to fund capital expenditures of approximately $26 million as well as scheduled debt amortization of $12 million from our operating cash flows.

As Blake mentioned, we continue to see healthy macroeconomic trends across our businesses, with a particular strength in Nevada. It's important to note our distributed gaming assets directly benefit from a healthy locals economy, which in turn is driven by construction activity, increased employment and strong visitation.

In summary, our company is well positioned for successful 2017 as we plan to further leverage our portfolio of leading distributor gaming and casino assets, strong balance sheet and attractive the cost of capital to increase value for shareholders. We expect to continue executing on our organic growth plan while evaluating additional M&A opportunities which could further increase our scale in both our distributed gaming and casino segments. We are optimistic about our future and look forward to (technical difficulty) in building our business in existing and new markets.

That concludes our prepared remarks. Operator, please open the line for questions.

(Operator Instructions) [Chad Beynon] with Macquarie.

Firstly, I wanted to touch on your new tavern growth. You talked about the pipeline for 2017 and some of the wins that you have for 2018. Blake, Charles, could you guys address maybe the white space what you're seeing? For how many years do you think you could continue to see a pipeline of this size? This has been pretty impressive and we're just trying to figure out when that starts to fade.

If you look just in Clark County, there's approximately 450 tavern locations, 600 plus across the state. We are currently 53 of those tavern locations. So we think we've got plenty of room to run. The guidance of six to ten that we've previously put out there, that still stands and we think that is just what we can do organically, quite frankly. That doesn't include even us looking at potential tack on acquisitions to that portfolio.

And regarding the inorganic growth; as you look at the landscape in the different businesses that you're involved in, how do you kind of compare one versus the other, the returns? And what's your appetite for maybe looking more toward something in the distributed segment versus traditional casino?

Yes, that's a good question. I think for us, [is] it depends on the situation and the segment. And so for example, if we're just doing a tuck in acquisition on our distributed gaming business, whether that's in Nevada or in Montana, for us that is fairly easy to do. It might not be something that we necessarily stretch for, but those opportunities are plentiful for us to take advantage of.

If we're entering into new markets where we see significant growth potential, that initial acquisition may, on the face of it, look like a lower return if we decide to pursue that. But again, I think it's going to be situation specific for us, but our M&A criteria is across the board looking not only at distributed gaming operations in our existing markets and potential new markets like Illinois, as you mentioned, but also on the regional gaming operators. So we feel like we should be the company that is acquiring these smaller $10 million to $25 million EBITDA assets or portfolios.

And one last one from me with respect to the two Montana acquisitions that you made in 2016, I believe the first was in January; what have you learned through this process and have you been able to increase the performance at these? How long does it take? And is there still an opportunity to improve this from an organic standpoint?

As I had mentioned on prior calls, we had been contemplating Montana for some time prior to our investments. So we were familiar with the landscape in Montana prior to our investment. But what we've learned I think significantly since our two acquisitions - as far as I am aware, other than closures of very few locations, we have not lost one location. Which is, I think, a testament to our understanding of the core distributing gaming business and the transferability if you will of our relationship type approach to that business up there.

So we've learned that the people that are on the ground up there for our business have been extremely important for us to maintain continuity and actually growth - we're picking up some organic growth up there now. As far as improving, we are embarking on that. I think the eastern side of the state had been hurt a little bit by some of the cheapening oil and that. But the Bozeman and the Billings side of the state tend to be strong. But we are in the process of getting new accounts and investing in new proprietary gains for our locations which we are anticipating seeing growth once those are rolled out.

And Chad, the only thing I'd add to that, that we've learned is that size and scale matters. So we obviously suspected that based on our market position here in Nevada. But certainly for us going from a standing start to the number two player in the market, that's important and people look to that in terms of when their thinking about where to go for - not renewals, but new accounts as well.

(Operator Instructions) Patrick Schultz with SunTrust.

First question here, I have to ask, are you aware of anything that might have made your stock go up 10% in the last hour on four times volume? I got quite a few questions on this, anything on your end that you are aware of?

Not that I am aware of. Maybe some [people] stuck in the airport. I don't know.

Can you talk a little bit more about the chain stores that you mentioned you were losing? What percentage of sales and EBITDA does that represent?

Yes, look, we're not losing them. I'd say that we're certainly managing them when those accounts come up. So out of our Nevada business, it's about 30% of our locations are chain stores. And the ones that we focus on, it's probably around 150 of those locations. And so that's the best I could give you in terms of an answer. We haven't been breaking that data out. We intend to give a little bit more transparency going forward, but that's where we are right now.

A couple more questions here, on the modeling front; what was CAPEX in the fourth quarter? And then on your 2017 guidance, can you give us a little bit of breakout exactly what that will be spent on?

Sure, it's $6.4 million for the fourth quarter for CAPEX. And of the $26 million, I [would] say a little over half of that is for growth for our new tavern developments. Plus, as Blake had mentioned in Montana, we're looking at making some game investments that we think is going to be important to that business.

So not all just, obviously, maintenance CAPEX?

No, no.

Last question here, just on the fourth quarter result, the cash G&A was a bit higher than we had expected. What do you see as the run rate on that for 2017?

I think we're probably a few hundred thousand a little bit higher than the run rate, I'd expect it to be close to the $4.5 million on a run rate going forward.

John DeCree with Union Gaming.

I wanted to ask about Rocky Gap. Blake, you've talked a little bit about that in your prepared remarks. Obviously great 2016 looks like things are off to a really good start in 2017. Just wanted to see if you could give us a little bit more color; obviously made some improvements to the property; are you seeing just people spending more, more people coming, and how do you feel about the rest of 2017?

Thanks for the question. We have seen some really good results so far this year. Last year, we invested in parking and some infrastructure improvements as well as a new branding campaign that have all responded very, very well.

The MGM property opened up in December. We have seen no negative impact from that thus far. Our target market seems to be void of any conflict from the more eastern based casinos, so we're looking very good. March is off to a good start as well.

If I can [get] maybe a little bit more granular on the new tavern openings, Blake or Charles, anyway you could give us a little bit of color as to kind of how you expect the cadence of those new openings. And then, on that similar note, about how long do you forecast for new a tavern to kind of ramp up to a normalized operating potential?

Let's take the second part first; so we think [in] about a six months in terms of their ramp up, just to get going and get the location established. And in terms of the opening, we think it's going to be a fairly even cadence throughout the year. Of the seven, as Blake mentioned, we have one that's opening actually this week and the other six will be throughout the year.

At this time there appear to be no further questions. I'd now like to turn the call back to Mr. Sartini for any closing remarks.

And thanks to everyone for joining us today. We look forward to updating everyone on our continued progress, as we report our first quarter results in May. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect.