Golden Entertainment Inc (GDEN) 2023 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Golden Entertainment Second Quarter 2023 Earnings Conference Call. (Operator Instructions) Please note that this call is being recorded today.

I'd now like to turn the conference over to Joe Jaffoni, Investor Relations. Please go ahead, sir.

Thank you very much, operator, and good afternoon, everyone. On the call today is Blake Sartini, the company's Founder, Chairman and Chief Executive Officer; and Charles Protell, the company's President and Chief Financial Officer.

On today's call, we will make forward-looking statements under the safe harbor provisions of the federal securities laws. Actual results may differ materially from those contemplated in these statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in today's press release and our filings with the SEC. Except as required by law, we undertake no obligation to update these statements as a result of new information or otherwise.

During the call, we will also discuss non-GAAP financial measures in talking about our performance. You can find the reconciliation of GAAP financial measures in our press release, which is available on our website.

We will start the call with Charles reviewing details of the second quarter results and a business update. Following that, Blake and Charles will take your questions.

With that, it's my pleasure to turn the call over to Charles Protell. Charles, please go ahead.

Thanks, Joe. In the second quarter, we generated revenue of $287 million and EBITDA of $58 million. With revenue essentially flat to last year, but EBITDA impacted by cost pressures as well as disruption at The STRAT from ongoing renovations, we wanted to complete before the strong Las Vegas calendar this fall.

Before getting into the operations, we have a few updates on our previously announced M&A activity. Last week, we closed on the sale of Rocky Gap Casino Resort for aggregate consideration of approximately $260 million, representing an 11x multiple based on the property's trailing 12-month EBITDA.

Immediately after closing, we used $175 million of the proceeds to repay the balance of our original term loan that remained outstanding after our refinancing in May.

In March, we announced the sale of our Nevada and Montana distributed businesses to J&J Gaming for approximately $360 million, including cash. We remain confident that both transactions will close by year-end, and we look forward to having J&J as our gaming partner in our Nevada taverns.

These transactions will accomplish our goal of divesting noncore businesses at attractive valuations, leaving us with a Nevada portfolio of owned casino assets and the largest gaming tavern footprint in the state.

Within our segment results, revenue at our Nevada Casino Resorts declined 4.6%, while EBITDA declined 28%. Revenue for The STRAT was down 10%, with EBITDA down 44%, in part due to having 15% less rooms available for the majority of the quarter due to room renovations. Those 537 new rooms were completed in mid-June, and we estimate that we lost $3 million in revenue and about $2 million in EBITDA in Q2 from this disruption.

The STRAT's Q2 results were also impacted by higher labor expense, weaker spend per guest and reduced table game volumes. Upon completion of our 537-room renovation in June, we commenced renovations on another 118 rooms in our oldest tower at the property. The budget for these rooms is $8 million and will be funded with proceeds from the Rocky Gap sale. We expect to complete these room renovations prior to the fourth quarter so we can further capitalize on F1, the opening of Atomic Golf and increased citywide conference attendance in the fall.

Atomic Golf construction remains on schedule, and we expect it to open by the end of the year which we expect to drive meaningful new visitation to The STRAT.

In Laughlin, revenue was up slightly compared to last year, supported by a more robust event calendar, while EBITDA declined 18%, reflecting the impact of higher costs for the added events as well as higher labor and utilities expenses compared to last year.

In June, we initiated a local marketing campaign in Laughlin highlighted by our new bingo offering at the Edgewater. Since opening our riverfront bingo room, we have seen strong initial results in driving additional traffic from Bullhead City, and we anticipate this accelerating throughout the end of the year.

Revenue and EBITDA for Nevada local casinos were both in line with Q2 2022, continuing their strong performance relative to 2019. We are investing modestly in new restaurant offerings and slot capital at these properties to refresh the experience for our loyal customer base.

For our Nevada tavern operation, second quarter revenue and EBITDA was down from last year with declines in gaming revenue, partially offset by increased food and beverage sales. Margins at our taverns also continue to be impacted by increased labor and other operating expenses versus prior year.

We continue to expect the favorable Las Vegas demand drivers to support our tavern business. We opened our 65th tavern this quarter and have committed to acquire 6 additional taverns by year-end during Q1. In addition, we have 3 development sites for future locations.

Total third-party distributed revenue is down 4% compared to last year, while EBITDA decreased 14%. We saw some weakness in Nevada across our third-party tavern partners, which is similar to our own Nevada tavern performance for the quarter.

In Montana, revenue was up slightly, while EBITDA declined slightly, reflecting higher payroll expense. Both Montana and Nevada have strong pipelines of new locations, which will start to come online in the second half of this year.

Moving to our balance sheet. In May, we successfully refinanced our first lien term loan and revolver, lowering the interest rate on our credit facility by 25 basis points and extending maturities.

After using $175 million of the Rocky Gap sale proceeds to repay the remaining portion of our original term loan, our current outstanding debt consists primarily of our new $400 million, first lien term loan and our existing $335 million of senior unsecured notes. At the end of the quarter, we had full availability on our $240 million revolver and $166 million of cash on the balance sheet.

Pro forma for the sale of Rocky Gap, our current net leverage is 2.5x, and we intend to maintain our net leverage below 3x going forward.

Given the strength of our balance sheet and confidence in our future cash generation, we are accelerating our return of capital initiatives. To that end, we announced a $2 per share special dividend and an increase in our share repurchase authorization to $100 million. Looking forward, pro forma for the sale of our distributed businesses and this special dividend, our net leverage declines to 1.7x.

Our company remains uniquely positioned to benefit from the growth drivers of Nevada's resort and locals markets, and we believe our properties will demonstrate better performance in the back half of the year.

In addition, our strengthened capital structure will allow for maximum flexibility to invest in our core assets, return capital to shareholders on a regular basis and evaluate future strategic alternatives.

That concludes our prepared remarks. Blake and I are now available for questions.

(Operator Instructions) The first question comes from David Bain with B. Riley.

Blake and Charles, I was hoping I could start with return of capital. And maybe if you could speak to some of the considerations made with regard, first to special versus recurring? And I know some specials end up being recurring, I think Wynn was known for that. But is that kind of the potential mentality here? Or is this more of just like a onetime thing and you'll look at recurring dividends at a later date?

And then similarly on the buybacks, with the move upward there, are we looking to be more opportunistic versus a set average every quarter? Or is it a mix? How do you think about those things?

Yes. I think on the dividend question first, I mean, keep in mind, we did just monetize an asset at 11x EBITDA that for $260 million that, at the time when we acquired that asset, we [donated] approximately $60 million. So in our mind, it seems like -- and given the leverage point of the company on a pro forma basis, it seems like the right time to accelerate return of capital to shareholders. And we view that both in the form of dividends and buybacks.

As far as regular, I think that's something that we'll evaluate going forward. We clearly are focused on closing the distributed transactions that have been announced this year, and we'll continue to evaluate regular dividends as we move forward through the year.

In terms of the buyback, we just see that as another tool. I don't think we're ready for a program, single amount of buyback in any one particular quarter or over the year, but we view it as opportunistic dry powder to, quite frankly, invest in what we think is the most compelling M&A opportunity out there, which is our own company.

Okay. Great. And then I know you'll get questions on operations. So maybe I can ask one more on -- we had that small discussion about tavern expansion strategy last quarter outside of Nevada, and potentially using your brands, your processes.

Is there some thought towards expanding in new markets -- I'm sorry, existing markets as well outside of Nevada because we had talked about as new markets open up, looking at that. But is there an opportunity in any of the existing distributed markets for that, either branding, M&A? Or is that something not to think about at this point?

Yes. I mean, look, we obviously have a decent pipeline here in our home state of Nevada, but we're pretty excited about the partnership with J&J. They're obviously operating in other states, Illinois, the largest. They're looking at new jurisdictions. And so we think that this partnership will lead us to some of those opportunities, but our immediate focus is here in Nevada.

Yes, I think, David, that's true. And I think -- as I think I mentioned on our last call, that we significantly outperform our third-party partners. But when we own the brick-and-mortar asset on the tavern side. So along with Charles' comments, I think we're uniquely positioned, particularly with the J&J acquisition to potentially capitalize on that.

The next question is from Carlo Santarelli with Deutsche Bank.

Charles, just before I ask my question, I did just want to clarify the $3 million and the $2 million disruption at The STRAT, I'm assuming that's just -- what you're marking for the hotels -- the hotel rooms being out of service? Or is that in...

That's right. That's right.

Okay. Okay. So if I could ask this question then, obviously, the impact's presumably a little bit more than that if you're not capturing the ancillary spend of those guests. But if you think about your margin profile in that Nevada Casinos segment. How much of the year-over-year decline would you allocate to that specific impact at The STRAT versus the cost pressures you spoke about?

I think the other way to look at it is I'd say, most of the impact within that segment is related to The STRAT. You think in terms of saying, did we have extra cost to deal with this disruption in terms of servicing other guests? Where were we missing out in other revenue, whether pool or otherwise as we had those under renovations? Or we just had people who we said, you know what, I'm not going to be spending as much time here at the property, even though I'm staying here because of the construction disruption, that's a bit tough to unpack.

But I would say if you look at the last 4 quarters of margins for the entire company, it's been fairly consistent across the whole casino side, particularly on the locals side. And so if you eliminate that downdraft from The STRAT, then we're kind of back in line with where we've been.

I think Q2 last year versus Q2 this year, that's just a bit of a tougher comp. We had not yet had a lot of the labor cost increases from minimum wage, just competitive increases in the workforce and we haven't had the continuous rise in utilities and other costs.

But again, if you look at just the trends over the last 4 quarters, I think those numbers have been fairly consistent from a margin perspective. And so that's why we feel confident that going forward, our margins, we think, are going to be relatively stable. We think The STRAT improves, which should improve the margins within the resorts segment. And we feel good that the back half of the year will be a better comp to last year.

And Charles, I mean, would you say, just based on what you know now, getting back, obviously, a bunch of the rooms that were out in the 3Q, not the full complement, as you mentioned, kind of a little bit more left, coupled with Atomic Golf, coupled with Formula One, that the back half of this year could kind of show resumption of margin expansion given the easing situation in the back half of last year relative to what you faced in the first half? Or would that kind of be the stretch goal?

Yes. I mean, look, I think that, that is achievable. I think within that segment, labor is a big piece of that puzzle. There's obviously a Culinary Union contract being negotiated right now by larger folks in -- on the Strip. And I think if those come in line with our expectations and what we're thinking about right now, then yes, that is the achievable goal. But labor will be a bit of the wildcard within that forecast.

Carlo, let me add real quick that towards the -- your question towards the back end of the year about margin coming back into line. You mentioned Atomic Golf. There are also additional catalysts that we see going forward. We've operated this property as best we can in normal course through this construction process. That all should be done by the end of September, even with our existing 100 room renovation. That's the only piece that's not.

You mentioned Atomic Golf, which will open November, December. We think that's worth 100,000 plus additional patrons annually, through the property. The Fontainebleau, I think, will open at the end of this year, which we believe brings more inertia to the north end of the Strip. And we have many options for looking at traffic driving assets on our undeveloped real estate around The STRAT.

So the master plan there is yet to be realized, I think. But in the long run, we -- our position hasn't changed. Our stated return and the EBITDA goals we believe are more than achievable at that property.

Understood. And if you don't mind, if I could just ask one other. Charles, you kind of talked about some weakness at some of the third-party taverns. Historically, and I'm not going to sit here and tell you that I know this to be true, but historically, those assets perhaps have kind of been a little bit of a leading indicator for what's going on with the locals customer in general. Do you guys get that sense? Is it prolonged kind of trend that you're seeing, that kind of has your antenna up? Or was it more of a blip and you've seen this before and it's kind of popped back?

I would say the latter, Carlo. I would say, clearly, the latter in the context A, Las Vegas is still one of the fastest-growing communities in the country in terms of population. Tavern, the tavern, we're seeing a little bit of kind of normalized seasonality come back as the plates have shifted from COVID and sell-in the last 2 or 3 years. So there's a bit of that in June. But the taverns are as consistent as they've ever been. And my anticipation is it's a bit of an anomaly as we look forward.

The next question is from David Katz with Jefferies.

I wanted to sort of look forward a little bit and think about potential M&A opportunities. If you could give us some updated boundaries around whether you think it's more corporate or individual assets and what your tolerance for dilution might be or leverage might be just so we prepare ourselves in case a great opportunity comes along.

Yes. As I said in the comments, our pro forma leverage will be less than 2x even with a $2 a share dividend. So we obviously have capacity to go out and look for deals. I think those opportunities for us would need to be in the West. Casinos of -- or portfolios of a more meaningful size, to us, that's $50 million plus, $50 million to $100 million are the things that we would target to look at and importantly, where we think we can create value through synergies in the operations with our existing portfolio.

So you think that, that is a fairly narrow lens to look at acquisitions, but we will do that. I think the other thing that we're trying to highlight as we think about our future going forward is that will be weighed against simply buying our own stock, given the capacity that we have on the balance sheet and the buyback authorization from the Board.

If I can sort of follow that up, right? Sometimes there's value to add walking in the door. Sometimes it takes until year 3 to start to realize that value. How patient -- what's your patience level for stuff like that?

Look, I think we've been pretty patient in the past. But from a synergy perspective, we can -- we built the company through acquisitions. We intend to not underwritten revenue synergies. We look at cost synergies, and those are more day 1 through 120 in terms of achieving this.

My patience level, David, is I'm very patient. I'm very patient, but I'm opportunistic as well. And I think that narrow lens that Charles talked about is something we're focused on. And as we said, as we look through the landscape right now in the M&A -- kind of on the M&A board, we see a lot of value in our own shares. We see a lot of value in our own company. But the capacity is there for us to look at. I think Charles mentioned $50 million plus, looking at things that move the needle and that we can use synergies within our current organization. So patient but opportunistic.

The next question is from Jordan Bender with JMP Securities.

Great. Can you maybe update us on the ADR uplift you're seeing from the hotel renovations at The STRAT? I think you had previously said about $4 million to $5 million of EBITDA would come from that. Is that still kind of the right way to think about those returns? And then the next slate of rooms as well, is that kind of a similar return?

Yes. We see -- we're currently seeing about a $20 to $25 ADR premium on the renovated rooms. So the issue is when midweek is still weaker than it's been in the past, you're making up a lot of that during the weekends. But again, we're still underwriting that same pace, and we're seeing that in terms of the incremental improvement.

Keep in mind, we are still in missing, even if you look just in Q2 alone, almost 50,000 room nights relative to 2019, and almost all of those are midweek room nights. So that has to do with lack of meaningful group business back, lack of international travel, in some part due to the renovations that we're doing throughout the quarter. But still, that's fairly substantial. And we think about that on an annualized basis through the first half of the year, that opportunity for the property, at the current average spend in the property, is about $40 million in revenue and $20 million in EBITDA.

So to us, that's what's out there on the table. That's really what we're playing for in terms of these renovations at the property to be able to capture that demand at a premium when it comes back, and we're underwriting that the traffic drivers to the town in the fall, both align the business side through the conventions as well as the retail side through F1, NBA, Rodeo and then rolling into the Super Bowl that those will drive the pickup in room nights that we'll be able to capitalize on.

Great. And then for my follow-up, the message seems to be deleverage the balance sheet. You still have some land, whether it's Colorado Belle or just laying around The STRAT. Has the thinking changed in terms of monetization of land to, I guess, further deleverage the balance sheet and drive shareholder value?

No, no. I like -- we like the flexibility that owning the real estate gives us. And I think given the opportunities that Charles has just described, along with synergistic amenities that we may add or put next to our facilities with some of this excess property, we think in the long run, the value remains in our ownership. So at this point in time, that attitude has not changed.

The next question is from Chad Beynon with Macquarie.

I wanted to ask another one about The STRAT and just kind of the outlook in the back half of the year. I guess 2-parter on that. One, it seemed like Vegas in general got some additional attention when the Sphere opened and a lot of people who weren't familiar with what that was and kind of what it was going to bring, certainly, were exposed to that.

And wanted to ask if you saw any change in booking windows. Obviously, F1, we've known about that for some time. But as we kind of got through the quarter, whether it was macro related or new programming content related, did you see any change in just the booking patterns generally versus what you would have expected?

Yes. Thanks, Chad. I mean, look, I think given that we had such a significant amount of our room base offline, we were definitely playing a bit of catch-up and tough to tell.

I will say, as we look forward, obviously, we're through July now, we've got a pretty good handle on what August looks like from an occupancy perspective. Those are up meaningfully from last year. We ran the properties last year around 65% -- or ran The STRAT about 65% occupancy. That's pushing closer to 80% in terms of what's on the books for us. So that's a meaningful improvement and rate has been fairly, fairly stable.

So again, I think we like where the property is heading. As Blake said, we like our investment in the property, which has been relatively modest to other Strip or large property operators. And we're playing again for the fall and getting back those room nights and getting them at a premium to where they've been in the past.

And then just on the performance throughout the quarter, Blake, I believe you said that the seasonality kind of came back in June, which indicates that the consumer's strong. One of the other Las Vegas locals operators reported that there was a little bit of softness in April, and June and July have certainly improved. So as you kind of got -- went throughout the quarter, did you see any change in the promotional environment? Did anyone rise up the terms of promotions on the slot side that could impact how you're thinking about the next couple of quarters?

Yes. Chad, the answer is no. I think other than maybe an independent out there who's continuing to promote as they always have, the balance of the local portfolios, we've seen pretty consistent marketing approaches. So I see that as a -- I see that as sustainable going forward. And as we look into the back half of the year, I don't see that changing.

I think hopefully, this kind of normalcy in the seasonality begins to appear more regularly as we get through the white water of COVID and all of the whiplash that, that caused. But in regards to promotional activity, specifically, I see a lot of consistency right now.

Congrats on closing the deal and the debt reduction.

Thanks.

Thanks, Chad.

The next question is from Edward Engel with ROTH Capital.

I just want to confirm in the 3Q, would you expect disruptions at The STRAT to be less than the 2Q?

Yes.

Yes.

I mean it's less than 5% of the rebates that we're renovating.

It's fairly isolated.

It's in a separate tower. It's actually the oldest tower at the property.

Perfect. I just want to confirm.

I think that's done on the 29th. Just to go back to September 20 -- the end of September.

Okay. And then, I guess, looking into the 4Q, should this be a relatively clean quarter for The STRAT then, just whether it's renovations or even maybe some start-up costs associated with Atomic or anything we should kind of keep in mind?

Yes. I think it's fair to say, yes. I think fourth quarter and beyond, we believe is -- I would think is kind of normal course. Now the property is volatile given its lack of banquet space, right? We don't have the meeting space that guys on the South Strip do and tend to fill up at times with. So given that, there's going to be a little volatility. However, we think Q4 and going forward from there would be kind of a normal course look at what our investment will be able to do at The STRAT.

The next question is from John DeCree with CBRE Securities.

Wanted to circle back to the -- to some of the cost increases that you've been dealing with. I think on an earlier question, you've mentioned that maybe labor is still a little bit of a variable component going forward. But some of the other costs that you've absorbed, are those larger increases absorbed? So will you be anniversary-ing those through 2Q and start to see a little bit more normal cost or OpEx growth in the back half? Or is there still some potential larger increases in costs?

No. Like I mentioned, I mean, the only one to watch would be potential labor at The STRAT related to the Culinary Union, but that covers less than 1/2 of the workforce there at that property. I think all the other costs, you have a pretty good anniversary relative to Q3 of last year. And I think, again, if you go back and look at our margins over the last 4 quarters, they've been relatively consistent across the entire remaining portfolio of Nevada Casinos.

So I think that, again, is why we feel pretty good about the back half of the year being maybe a better comp.

I think maybe some helpful color is a significant portion of the friction that we're seeing in labor cost increases is really combined to 2 or 3 job descriptions. It's not necessarily widespread. So to Charles' point, I think we brought those into -- those 2 to 3 specific positions into more of a market rate scenario. And going forward, we see that as much more manageable.

Understood. That's helpful. That probably dovetails into my follow-up question, Blake. So the costs you've seen on the labor side have been most -- mostly in Laughlin and The STRAT, where there's probably some of those job descriptions that you've mentioned. Is that fair? Is that why the locals just less labor-intensive operations? Or it's kind of the resort side of the labor that's been driving the costs? I guess why have the locals perhaps not experienced the same type of cost increases?

That's exactly right. It's confined to primarily those 2, the Laughlin and STRAT resort properties. Everything else is pretty stable. And again, those 2 -- the Laughlin and STRAT properties, again, were confined to 2 or 3 major -- the major amount was confined to 2 or 3 job classification.

This concludes our question-and-answer session, and the conference has also now concluded. Thank you for attending today's presentation. You may now disconnect.