Golden Entertainment Inc (GDEN) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Golden Entertainment 2018 Third Quarter Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

I would like to introduce your host for today's conference, Mr. Joe Jaffoni, Investor Relations. Sir, please go ahead.

Thank you very much, Michelle, and good afternoon, everyone. By now, everyone should have access to our third quarter 2018 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 today's discussion 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 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 you to the risk factors in our recent SEC filings, including our most recent Form 10-K and is 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 measure is available in our third quarter 2018 earnings release.

Golden also provided a supplementary information accompanying the earnings release, pro forma income statements for the third quarter and 9-month period ended September 30, 2017, for Golden Entertainment and American Entertainment.

On the call today is Blake Sartini, the company's Founder, Chairman, President and Chief Executive Officer; and Charles Protell, the company's Chief Strategy Officer and Chief Financial Officer.

Blake and Charles will review the quarterly results, recent strategic initiatives and their outlook, after which we'll open the call to questions.

Thank you for your patience with that, and it's now my pleasure to turn the call over to Blake Sartini. Blake?

Thank you, Joe, and good afternoon, everyone. Welcome to our 2018 third quarter conference call. The third quarter results we reported today were short of our expectations as market softness on the Las Vegas Strip impacted the Stratosphere. In addition, the Stratosphere had some construction disruption with the bulk of our 2018 room renovations occurring in July and August and one of our busiest food and beverage outlets, the Strat Café, was closed the entire month of September. As a result, the Stratosphere had lower occupancy, room rate and retail revenues over the third quarter when compared to last year.

In our prior calls, I've spoken about minimal disruption associated with our ongoing work at the property, and I would categorize the disruption in the third quarter as within the anticipated levels. Additionally, given the Stratosphere's lack of group meeting space, our occupancy and rate trends were more pronounced during the week when compared to weekends.

Without group meeting business, room bookings are highly reliant on OTAs and subject to higher volatility than other Strip properties. Occupancy was lower by 5.8% for the quarter, and as weakness materialized in the Strip, we maintained a disciplined room pricing strategy for the Stratosphere, and as a result, ADR was down 1.3%.

Now turning to our distributed gaming business, which in general, remains healthy and growing. We have seen continued pressure within our chain store locations in Nevada, resulting from rapidly changing consumer behavior, such as increased use of cashless payment options as well as curbside and home deliveries. We have discussed these factors on prior calls, and we are in active dialogue with the owners of these locations to either change the economic terms of our relationships, or over time, remove our sales from this segment of its -- this -- of the distributed business and continue to invest in our more profitable wholly-owned tavern locations.

Despite a challenging third quarter, recent trends continued to reinforce our confidence in the long-term outlook for Las Vegas and our portfolio of gaming assets. We currently see no signs that Las Vegas is losing its place as the leading destination for leisure and convention travel. Las Vegas is on pace to attract 42 million visitors this year and is expected to grow in 2019.

Rising home prices falling on appointment, ongoing wage increases and elevated consumer spending in Las Vegas point to a healthy and growing local economy.

Further, several major gaming and non-gaming development projects, such as the convention center expansion, new north Strip resort development and Raiders stadium are well underway.

Elsewhere in the Las Vegas locals market, our 2 Arizona Charlie's properties at Decatur and Boulder Highway generated over 5% EBITDA growth on modest revenue declines as we continue to improve operations and seek further efficiencies in our marketing programs. The health of our Las Vegas locals casinos was a stark contrast to the overall environment on the Strip during the third quarter.

With our pending acquisition of Marnell Gamings to Laughlin Properties, the Edgewater and the Colorado Belle, we are excited to be increasing our presence in this growing $500 million Southern Nevada gaming market. When the operations of our existing Aquarius property are combined with the Edgewater and Colorado Belle casino resorts, we will control approximately 40% of the room inventory in the Laughlin market. In addition, we will own and operate the Laughlin Event Center, which is directly across the street from our properties and a key driver of visitation to the market.

We expect our leading market share of Laughlin will serve us well, particularly, as core driving customers from Southern California and Arizona are joined by Las Vegas residents seeking a convenient weekend getaway with Strip quality entertainment without the expensive Strip markup. All 3 properties, the Aquarius, the Edgewater and the Colorado Belle delivered EBITDA growth in the third quarter, highlighting the strength of our diverse portfolio.

Turning to our redevelopment plan at the Stratosphere. Our Phase 1 renovations remain on budget and on time for completion in early 2019. We have already completed the renovation of 254 rooms, the Strat Café and the refreshing of our [6th] restaurant, Top of the World. We are now in the process of completing renovations of an additional 63 rooms and exterior lighting and landscaping by mid-December, and will open a new taproom concept, sports book and casino lounge area on the main floor in early 2019.

For our renovated rooms that went into service after Labor Day, we are seeing a range of $20 to $25 in ADR premium over our base room rate. While these are early results out of a small portion of the overall 1,100 rooms we intend to renovate, the rate premium observed so far is in line with our expectations and reinforces our confidence in the project.

We are now beginning preparations for our Phase 2 work, which will include the renovation of over 450 additional hotel rooms, our south casino floor remodel, various food and beverage outlets and the design of our planned meeting space. When complete in 2021, we will have renovated 1,133 rooms, opened a new sports book and lounge area, refreshed the interior and exterior of the property, added new food concepts and created attractive meeting space, targeting approximately 7 million business travelers coming to Las Vegas each year.

To review, we expect to complete the entire $140 million Stratosphere renovation in 2021 and anticipate a minimum 15% return on our invested capital. We believe the Stratosphere renovations are necessary to make the property more competitive with other Strip properties; allow us to target midweek group business; reduced reliance on OTAs for bookings; and ultimately, increased occupancy and customer spend.

Through September, we have spent approximately $17 million on the Stratosphere renovations and intend to continue funding the remaining CapEx from our operating cash flow.

As discussed, we have planned these renovations in phases over a 3-year period. This approach provides us with flexibility to modify or delay certain aspects of the project should we change our long-term view on the opportunity with this property.

As we look to 2019, we have several opportunities to grow our business and drive further improvements in operating performance.

I have already mentioned the renovations we have completed and are continuing to make up the Stratosphere, the pending completion of our acquisition of 2 complementary assets in Laughlin and the expected improvement of our Nevada chain store business. In addition, we are opening 1 new tavern in the fourth quarter and plan 5 additional tavern openings in 2019.

We have also expanded our relationship with William Hill to manage all our sports books in Nevada and will extend our partnership into Montana and Maryland should sports wager become legal in these jurisdictions. We are still evaluating our entry into new distributed gaming markets and believe that there will inevitably be continued expansion of this business across the country.

Lastly, we are eager to roll out our new one-card loyalty program in early 2019, which will allow our customers to earn rewards across our entire gaming portfolio. We remain confident of our prospects to create shareholder value in the coming year with initiatives already in place that will grow our business both organically and through M&A. However, we don't believe that our growth prospects are reflective in the current market price for equity. Reinforcing this belief, our Board of Directors has authorized a $25 million share buyback program.

In closing, we continue to be focused on refining our existing operations, positioning our company to be competitive over the long term and continuing to generate significant free cash flow, all of which are targeted to increase shareholder value.

I will now turn the call over to Charles.

Thanks, Blake. For the third quarter, revenues were $210 million, down 2% for the prior year on a combined basis with American casinos. Adjusted EBITDA for the quarter was down 7% to $38.1 million compared to $41 million in the prior year. Most of this decline can be attributed to the performance of the Stratosphere, but we were also impacted by weakness at our distributed chain store locations in Nevada. As we think about what to expect in the fourth quarter, we see trends that suggest year-over-year improvement as well as some improvement to the third quarter. However, we do not foresee dramatic increases in occupancy and room rate at the Stratosphere in the fourth quarter, and therefore, the company will not meet its prior full year EBITDA guidance for 2018.

For our Nevada casinos, third quarter revenue was $110 million, down 4.8% for the prior year on a same-property basis, while adjusted EBITDA declined 8.8% to $31.5 million. Our Aquarius property in Laughlin grew EBITDA by 6.3%, while our locals Las Vegas Arizona Charlie's casinos grew EBITDA by 5.5%, reflecting the strength of our diverse casino operation in these unique markets. However, Stratosphere's EBITDA was down 23% for the quarter, affected by the widely reported weaker occupancy and room rates along the Las Vegas Strip.

Revenue remained flat at the Rocky Gap Resort, while EBITDA declined slightly year-over-year to $6.2 million. I want to add some color as to what happened with the Stratosphere this last quarter and why we remain confident in the opportunity to invest capital in this asset.

As you know, the property represents only 2,400 hotel rooms out of almost 148,000 rooms in Las Vegas. Approximately 75% of the bookings are done through OTAs, with over 50% of the reservations booked within 30 days and almost 25% within just 7 days of arrival. With no meeting space to support midweek group business, the property is challenged to build a base of rooms at competitive rates with longer booking visibility. In addition, rated casino players currently make up less than 6% of the occupancy, which limits the property's ability to drive increased overall occupancy with direct offers to our database. When the market leaders on the Strip are dropping room prices to maintain occupancy levels, the Stratosphere will suffer increased pressure on both occupancy and price. Conversely, when citywide conventions fill up the Strip, Stratosphere benefits in picking up marginal rooms and rate for those events.

To put this in specifics for the quarter, Stratosphere's RevPAR was down 7%. Obviously, this was not our plan for the third quarter, and we are encouraged to see some improving trends early in the fourth quarter. However, we believe this highlights why we feel our renovations at the Stratosphere are necessary and prudent to make the asset more competitive, upgrading almost 1/2 the room product, renovating F&B outlets, updating the property visually and adding group meeting space. We understand the $140 million of free cash flow has alternative uses, and we will continue to be disciplined around the budget for this project.

Turning to our Nevada distributed business. Total revenues during the third quarter were $65.5 million, a slight year-over-year increase. Adjusted EBITDA of $8.4 million was down 8.2% compared to last year as growth in our wholly-owned tavern portfolio continues to be offset by weaker contribution from chain store locations. We expect to see improvement on our Nevada distributed operations in future periods, given our commitment to not renew on profitable chain store agreements.

In Montana, our distributed business generated revenues of $15.7 million, an increase of 5.4% compared to last year. Adjusted EBITDA for the Montana distributed business was flat at $2 million for the quarter as we continue to invest in new game product and salespeople in Montana, which is compressing near-term margins but these initiatives are helping drive revenue growth and market share gains.

Corporate expense was $9.9 million in the third quarter, which is roughly 9% lower than the $10.9 million of expense recorded in the prior year reflecting continued recognition of cost synergies from our acquisition of American properties. Corporate expenses will likely increase in the fourth quarter as we prepare for the rollout of our single loyalty card program next year and continue in our efforts to close and integrate the pending acquisition of Edgewater and Colorado Belle properties in Laughlin.

Moving to the balance sheet. We have cash and cash equivalents at the end of third quarter totaling $132 million and total outstanding debt of approximately $1 billion. LTM net leverage was 5.3x at the end of the third quarter. We expect to end the year at approximately 5x net leverage, and we'll likely see that tick up slightly in the first quarter of '19 as we complete the acquisition of the Marnell Gaming assets.

We intend to use cash on hand and our unfunded revolver to pay $155 million cash portion of the acquisition. Given some of the concerns I've heard about leverage and floating rate debt, I want to highlight that the blended rate on our credit facilities is approximately 6% with 65% of our outstanding debt hedged at the current rate. I'd also highlight our credit facility has no financial covenants, and our nearest funded debt maturity is in 6 years in October of 2024. In addition, today, we upsized our revolver capacity of $200 million without changing any pricing or terms of our existing credit facilities.

Total capital expenditures for the quarter were $21.5 million with approximately $10 million spend on the Stratosphere in the quarter. As Blake mentioned, we intend to fund all our planned future capital expenditures for operating cash flow, which pro forma for acquisition in Laughlin will be in excess of $100 million annually.

In the first quarter of 2019, we anticipate having approximately 29 million shares outstanding after issuing equity in Marnell Gaming. So you can do the math on our equity free cash yield relative to our current stock price.

Our casinos and distributed gaming operations continue to generate significant discretionary free cash flow. Over the near term, we intend to use it to reinvest in our existing assets, reduce our leverage and return capital to shareholders.

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

(Operator Instructions) And our first question comes from the line of David Katz with Jefferies.

This is [Eric Holquist] on for David. So just wanted to touch on some of the weakness you saw in the quarter on the distributed side. Can you just talk a little bit about -- I know you mentioned the renegotiation of some of the contracts, but just talk about how you're seeing those trends going into the fourth quarter.

So from the fourth quarter perspective, we actually see those trends stabilizing. I mean, just to give you a sense of how far these chain stores have fallen, their contribution to the business from an EBITDA basis was double in the same period last year. So again, we've fallen quite a bit on a year-over-year basis. That's masked, quite frankly, a very healthy growth that we've seen in our taverns and the base distributed business with third parties. So we're excited to move forward, and like we've said, we will not continue to pursue and operate these chain store locations to the extent we can't make them profitable for the company.

Great. And on the improvement in the taverns, are you seeing a lot of that from new tavern openings or just existing organic growth?

So both. So our new tavern openings, clearly, we've got a format that has done better. So I'd say, if you compare that to the overall Las Vegas locals market within the third quarter, our new taverns on a revenue basis performed better than that whereas our old taverns, depending on where they're located, performed in line to a little bit lower than that.

Okay. Great. And then just switching over to Stratosphere. Talking about kind of the results there, do you feel like the improvement you've been seeing in the fourth quarter is that coming mostly midweek or are you seeing more improvements in the weekends?

For us, it's both. I mean, we see it -- again, I don't think we wanted to give too much guidance around the fourth quarter other than what we've already said, which is that we see modest improvement. At this point, our visibility, as we said, is relatively low, relative to where other assets are with group meeting space. So modest growth on a year-over-year basis is where we're seeing the modest improvement in the third quarter across the board, both on a weekend as well as midweek.

Great. And then just one last question on the OTAs, can you just talk about how you've seen the dynamics of trying to reduce reliance on the OTAs and how that's been shaping up lately?

Look, from our perspective, when you don't have a lot of alternative sales channels, we are relying on the OTAs. And again, as the property sits now, it's our view, and we knew this going into buying these assets, that this is why we need to make this investment so we don't have to be as reliant on the OTAs. A couple of things are going to help that in addition to the group meeting space. The one-card loyalty program that we're rolling out early next year will allow us to have better visibility into the casino database, and we'll get some lift out of. But again, as I mentioned, that's less than 6% of the occupancy right now. The real lift that you're going to see out of that is once we get the group meeting space put in place and we're able to compete for that business, which should make up roughly 15% to 20% of the room nights of the asset when it's all said and done.

And I'm showing no further questions at this time. And I would like to turn the conference back over to Mr. Blake Sartini for any closing remarks.

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

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