Golden Entertainment Inc (GDEN) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Golden Entertainment Incorporated's Third Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded today, November 8, 2017.

Now I'd like to introduce your host for today's conference, Mr. Joe Jaffoni, Investor Relations. Sir?

Thank you very much, James, and good afternoon, everyone. By now everyone should have access to our third quarter 2017 earnings release, which can be found on the company's website at www.goldenent.com, under the Investors section.

Before we begin our formal remarks, we need to remind everyone that 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 or 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 risks that could impact our future operating results and financial condition and other forward-looking statements.

During today's call, we will discuss non-GAAP financial measures, 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 measures is available on our third quarter 2017 earnings release.

On the call today, we have Blake Sartini, the company's Chairman, President and Chief Executive Officer; Charles Protell, the company's Chief Strategy Officer and Chief Financial Officer; Steve Arcana, the company's Chief Operating Officer; and Ned Martin, the company's Chief Administrative Officer. Blake and Charles will provide some prepared remarks, after which, we'll open the call to your questions.

With that, it's my pleasure to turn the call over to Blake Sartini. Blake?

Thank you, Joe, and good afternoon, everyone. Welcome to our third quarter conference call.

Charles will review our quarterly numbers in more detail shortly, but I wanted to spend a few minutes at the beginning of the call giving you an update on our operations as well as some additional color on our plans for integrating the American Casino & Entertainment Properties, which we acquired on October 20.

On a macro level what we have said about the Las Vegas economy over the past several quarters remains true today. Even as the city and our businesses endured the shooting tragedy on 1 October, we remain confident in our positive outlook for the balance of this year and beyond.

Currently, many resort operators are focused on reinvesting in their properties on the Las Vegas Strip, which we are also evaluating within our own properties. In addition to the many construction projects we understand to be underway in Las Vegas, just the Genting Resorts World project and the Las Vegas Convention Center expansion alone represent billions of new dollars of investment on the north end of Las Vegas Boulevard.

Further, the Vegas Golden Knights NHL team has gotten off to a resounding start with a winning record and overflow attendance, which we feel is only a preview of what will be our city's reception for the Raiders when they ultimately move here in 2020.

Our strong third quarter results reflect continued growth across Golden's portfolio of distributed gaming and casino businesses. We had a very active quarter delivering consolidated and adjusted EBITDA growth of 20.1%. These results demonstrate our continued efforts to both diversify our business and bring greater efficiencies to our expanding operations.

During the third quarter, our Nevada distributed gaming business continued its momentum, driven by both the strength of the locals market and our success in actively managing our revenue mix towards more profitable wholly owned and valuable third-party locations. Our new wholly owned taverns continued to perform very well, representing an attractive opportunity to expand our Las Vegas presence as we steadily grow our portfolio.

We opened our 57th branded tavern location in September, the fourth new location opened in 2017, and we remain on pace to open 2 additional new taverns by the end of the year and expect to open our 60th tavern in early 2018.

In addition to our anticipated continued organic growth, we continue to see accretive opportunities for smaller distributed gaming acquisitions in Nevada, building on our leading market share in the state. To that point, on November 1, we completed the acquisition of a smaller Las Vegas route operator with approximately 30 locations and 300 gaming devices.

We expect the acquisition to add incremental EBITDA of approximately $2 million on a total investment multiple of less than 2x. These locations were acquired through a bankruptcy process, highlighting the importance of gaining scale in distributed gaming as well as our ability to continue to do so even in our home market here in Nevada.

Turning to Montana. Our adjusted EBITDA margins continued to expand as we benefited from our 2 acquisitions in 2016 and delivered further operating efficiencies. Since entering the market last year, we have set the stage for long-term growth by establishing a significant local platform to build additional scale and expand our state-wide presence.

We recently offered a new proprietary game to our third-party locations that has initially shown higher win per unit performance than our current location averages. We believe that this game could eventually become 10% to 15% of the approximately 3,000-machine portfolio that we have in the state and meaningfully drive increased revenues from our existing and new locations.

Turning to our casino operations, first in Pahrump. We saw significant adjusted EBITDA improvement in the quarter as we completed efforts to rightsize marketing expenditures while increasing market share. We are encouraged by Pahrump's financial contribution to our portfolio for this quarter and see this performance continuing into the fourth quarter.

In Maryland, our Rocky Gap casino resort again delivered another quarter of significant adjusted EBITDA growth. As we noted on the second quarter call, we purchased the previously state-owned gaming devices on our casino floor on July 1, which resulted in a 10% reduction in our slot tax. We continue to operate this property successfully in a competitive Maryland market and believe that Rocky Gap's superior resort amenities continue to create and reinforce a loyal customer base.

Finally and most significantly, our $850 million acquisition of American Casino & Entertainment Properties was completed on October 20. This transaction vastly increased the scale of our company and diversified our already unique portfolio of assets. The 4 properties we acquired, the Stratosphere Tower casino and resort, the locals-oriented Arizona Charlie's Decatur and Arizona Charlie's Boulder Highway and the market-leading Aquarius Casino and Resort in Laughlin, all will dramatically expand our footprint in Southern Nevada, which I believe is the best gaming market in the country.

Our immediate focus is to successfully and efficiently integrate these properties with our existing operations, and we are off to a great start. I want to thank all of our team members for their efforts, which so far has resulted in a smooth ownership and operational transition, and we look forward to the future of our newly combined company.

In closing, Golden Entertainment enters 2018 as a much larger and much more diverse organization, which we believe positions us well for continuing to increase shareholder value. With our unique asset diversity across distributed gaming and traditional casinos, I'm excited to continue to execute on our strategies going forward.

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

Thanks, Blake. Golden Entertainment generated net revenues of $108.3 million in the third quarter, representing an increase of 3.9% over last year. Adjusted EBITDA in the quarter was $15.1 million, up 20.1% year-over-year.

In our distributed gaming business, total net revenues during the third quarter were $80.7 million, a year-over-year increase of 3.2%, while adjusted EBITDA of $11.2 million was up 6.5% from a year ago, as we primarily benefited from continued margin expansion in our Nevada operations.

Net revenue from our Nevada distributed operations grew 4% in the quarter to $65.7 million, while adjusted EBITDA grew 7% year-over-year to $9.1 million. Our results demonstrate our continued adjustment in the portfolio mix towards more of our wholly owned branded taverns and profitable third-party locations. As Blake mentioned, we recently acquired a small route operator for a total investment of approximately $3 million. We expect that these operations will immediately begin to contribute $2 million incremental annual EBITDA to our distributed gaming business.

In Montana, distributed gaming operations generated net revenues of $15.1 million and adjusted EBITDA of $2 million in the quarter, as we improved margins throughout these operations after acquiring 2 separate Montana operators last year.

Moving on to our casinos. For the quarter, net revenues were $27.5 million, a year-over-year increase of 6.1%, while adjusted EBITDA at $8.9 million was up 37.1% over the prior year period.

Pahrump grew net revenues 10.2% in the quarter to $8.7 million and grew adjusted EBITDA 46.3% to $2.7 million. As previously discussed, in Pahrump, we made adjustments to our marketing plan while increasing market share for the quarter.

Net revenues at Rocky GAAP grew 4.3% in the quarter to $18.8 million, while adjusted EBITDA grew 33.6% year-over-year to $6.3 million. In addition to the continued overall growth in the Maryland market, our adjusted EBITDA results reflect the impact of the 10% slot tax reduction from the state we received in exchange for purchasing previously state-owned gaming devices.

Looking at corporate and other expenses in the third quarter, impact to adjusted EBITDA from the corporate expense was up year-over-year to $5 million and in line with our expectations as we continued to scale up our business and grow.

For the third quarter, Golden Entertainment reported net income of $8.6 million or $0.36 per diluted share compared to $1.3 million or $0.06 per diluted share in the prior year period. As for our balance sheet, at the end of the quarter, we had $42.9 million of cash and cash equivalents and total debt outstanding of approximately $175 million.

Note, in October, we completed the refinancing of our existing credit facilities with the closing of our acquisition of American. Based on our expected year-end pro forma combined EBITDA of approximately $180 million, which includes pro forma synergies of $18 million and the estimated full year impact of the Maryland slot tax reduction, anticipate pro forma net leverage to be approximately 5x at year-end.

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

(Operator Instructions) Our first question comes from Chad Beynon with Macquarie.

Just wanted to start with American Casino. Obviously, it's incredibly early, and you talked about the focus is integrating the property. Obviously, a lot going on in the market with respect to the shooting. Can you just talk about cancellations what you've seen in the fourth quarter? And anything just to kind of point out -- I don't really want to start on that note, but we've had some questions from clients just on what the impact could be.

Yes, Chad. Obviously, the horrific event on the 1st had effects on all of us. It is incredibly early as we took ownership of these properties in October. I will say that we have seen some near-term rate disruption, if you will, within, in particular, the Stratosphere. Other properties, we haven't seen really anything. But we are seeing that weigh in as the quarter goes on, and we are very positive on the first quarter fully recovering next year. It's -- the event was unfortunate, and I think a lot of us are dealing with the same issues.

And I -- Chad, I just would add to that sort of to kind of delay the suspense for everyone. We will be filing an 8-K tomorrow concurrent with our quarterly numbers. It will show the third quarter results for American. So folks will have that. As far as the fourth quarter goes, we're very confident that we will be at the $180 million in pro forma EBITDA that we continue to advertise. The consistency of that, as you all know, from having followed our investor presentations is approximately $103 million out of the American portfolio. The business remains on track for that even through the results that we're seeing through October.

Okay. On a more positive note, on the quarter, you had pretty significant flow-through and margin expansion within the casino segment, both in Pahrump and Rocky Gap. Could you talk about if this is sustainable? If you have any targeted goals for margins? And if you're able to offset inflation in these regions, given where unemployment is? Just some color around that would be helpful.

In Maryland, the margin is certainly sustainable. We think it is in Nevada too, but we'll come to that in a second. I mean keep in mind, that margin improvement is not only from the operations, but there is the impact of slot tax reduction, which isn't impacting revenues but is impacting our margin. So I would expect that margin to continue in the foreseeable future.

On the Nevada casino side, our second quarter margin was impacted by some of the marketing strategies that we pursued in Pahrump, and we feel that, that has been rectified. And we see that based on the margins we have here and the continued growth in market share that we have for our locations that are in Pahrump. So we're comfortable with these margins in the way that they're progressing moving forward through the end of the year.

Okay. My last question is with respect to the Pennsylvania bill that was ratified. Could you provide your view on some different parts of the bullet points that were within the bill? How you see that? And if you think it's an opportunity for you to expand your business into Pennsylvania?

We think it's a great opportunity. I mean, look, we're excited that distributed is now part of the discussion when it comes to gaming expansion in a major way. So the truck stop piece of that is what obviously we're most focused on from expansion of our business on the distributed side, and we intend to play a meaningful role in that in the state and other potential new states.

(Operator Instructions) Our next question comes from John DeCree with Union Gaming.

I wanted to just briefly ask about the bolt-on acquisition that you had just talked about, the small route operator in Nevada. It's relative to the size of the pro forma business now. It might seem relatively small, but these things can tend to add up over time. And lot of discussion about you guys entering Pennsylvania and Illinois, but at home in Nevada, I was curious how much more of this type of stuff might be out there? And how frequently an opportunity like this comes along, if you'll be able to kind of keep adding a couple of these in the coming quarters or years?

We think we will. I mean, that's opportunistic, right? It's a bit of a function on what is that opportunity size and price. So Nevada for us is fairly unique. We obviously have a very large market share within the state, and we have numerous avenues to grow that aren't open necessarily to us in other jurisdictions. What I mean by that is we're vertically integrated here. So we have our tavern business as well as our third-party locations. So wholly owned as well as third-party. We see opportunities across the spectrum from not only building our own new taverns but acquiring taverns as well as in this case acquiring what was a third-party route operator. So that is fairly unique to us. And based on our position I'd say across all of those opportunities, we're usually the first call just based on our market-leading position.

So the benefit to us is that we could add very accretive EBITDA, although it may be smaller than the size of opportunities that we're focused on now with the portfolio and the acquisition of American. But we still think that it's important to highlight that even at a 40-plus percent market share in our home state here in Nevada, we see opportunities for growth, organic and inorganic.

So John, I would just add quickly that the opportunity for that growth along with what Charles has outlined is the natural fragmentation of the route distributed business in terms of critical mass, right? In Nevada and Montana, most of these operations are small or fragmented across the state, which allows for I think more of these opportunities coming our way in the future, given our scale and size.

That makes sense. That's helpful. And to kind of jump over to Illinois, you were licensed relatively recently a large VGT market. I was wondering if you guys had any update or plans on how you might approach Illinois from here.

We're evaluating ways to participate in that market. We're excited about it. The distributed gaming market there is still growing, and there are still opportunities to consolidate that market. So we're excited about it, but we are taking our time to evaluate the right entry point with the right opportunities in that jurisdiction and others.

I'm showing no further questions in queue. So I'd like to turn the call back over to Mr. Sartini for closing remarks.

Thank you, operator, and thanks to everyone for joining us today. We look forward to updating everyone on our continued progress as we report fourth quarter results next March. Thank you.

Thank you. That does conclude today's conference. Thank you very much for your participation. You may all disconnect. Have a wonderful day.