Golden Entertainment Q1 2023 Earnings Call Transcript

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May 10, 2023

There are 9 speakers on the call.

Operator

Afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Golden Entertainment First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal remarks.

Operator

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

Speaker 1

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 Actual results may differ materially from those contemplated in these statements. Additional information concerning factors that could cause actual results To materially differ from these 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 non GAAP financial measures and talking about our performance.

Speaker 1

You can find the reconciliation of GAAP financial measures in our press release, which is available on our website. We'll start the call with Charles reviewing details of the Q1 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 Frotell. Charles, please go ahead.

Speaker 2

Thanks, Joe. For the Q1, we generated revenue of 278,000,000 And EBITDA $62,000,000 with revenue up over last year, but EBITDA impacted by cost pressures as well as disruption at The Strat from ongoing room renovations we are undertaking to be ready for the strong Las Vegas calendar later this year. Before getting into the operations, we have a few updates on our previously announced M and A activity. At the end of April, the Maryland Lottery Commission improved Century Casinos To acquire a Rocky Gap Resort, we have one more step in Maryland, approval of VICI's lease with the state and then we will be able to close, which we still anticipate by the end of June. In March, we announced the sale of our Nevada and Montana distributed businesses to J and J Gaming, the largest distributed operator in Illinois, which will become the largest distributed operator in the country after closing.

Speaker 2

We remain confident both transactions will close by year end and we look forward to having J and J as our gaming partner in our Nevada taverns. Importantly, both these transactions accomplish our goal of divesting non core businesses at attractive valuations, leaving us with a Nevada portfolio of owned casino assets and the largest gaming tavern footprint in the state. Collectively, these transactions will generate over $500,000,000 of net proceeds, which will allow us to reposition our balance sheet, More effectively invest in our core assets, return capital to shareholders and evaluate strategic opportunities. Within our segment results, revenue at the Nevada Casinos Resorts increased 4%, while EBITDA declined 5.5%. Revenue for The Strat increased 9% and EBITDA rose 6% despite having about 15% less rooms available given the ongoing renovations.

Speaker 2

Disruption from having rooms offline during the quarter cost us about $2,000,000 in EBITDA and we expect similar disruption in Q2 before the renovations are completed. We initially plan to renovate the rooms throughout the year, but we were able to accelerate construction and are willing to live with a little disruption now To get these 537 rooms and pool renovations finished before 4th July and in advance of the fall citywide event calendar. Atomic Golf Construction is also progressing nicely and we expect our development partner to open this new amenity by the end of the year. We had a challenging comp in Laughlin as this year we had one less Laughlin Event Center concert resulting in 4,000 less event attendees this Laughlin revenue was down 1% and EBITDA was down 13% as labor and utility has increased more than 10% from last year. For Q2, we have a stronger event calendar in Laughlin, which is expected to drive increased visitation over the coming months.

Speaker 2

Our Nevada Locals Casinos maintained strong year over year performance for the quarter with increased revenue and EBITDA. Within our Local segment, Las Vegas outpaced our Parem properties, where a few of our higher rated guests played less frequently this quarter, but these players have largely returned in Q2. Our overall Nevada Casino margins were down compared to Q1 of last year, but up sequentially from Q3 and Q4. As we said on recent calls, cost increases began to moderate in Q3 of last year. So going forward, we expect our casino margins to be roughly in the range of this quarter.

Speaker 2

At Rocky Gap, revenues were up, But higher payroll costs impacted EBITDA for the quarter compared to last year. As the summer season gets started, Rocky Gap will capitalize on higher visitation And we expect the property to perform very well for Century Casinos after closing. For Nevada Tavern operations, 1st quarter revenue and EBITDA was down from last year, Reflecting one less tavern in the portfolio and lower same store revenue. Total tavern revenue was down 3% with margins impacted meaningfully by labor and other expenses that were up 10% over last year. This is partially the result of wage inflation for our back of the house employees, primarily due to increased labor demand on the Strip.

Speaker 2

Despite current revenue and margin pressures, we expect the long term demographic trends in Las Vegas And to that end, we now have 6 locations under contract to be acquired and agreements for 2 future development sites. In addition, we opened our newest tavern in April, which is performing well and ramping up in line with our expectations. We expect the Cyntavrin acquisitions to close at the end of the year or early 2024 depending on regulatory And anticipate that they will add about $4,000,000 of annual EBITDA to our results. Our acquisition development pipeline represents about 14% unit growth Well, EBITDA decreased 13%. We saw some weakness in Nevada across our 3rd party tavern partners, which was similar to our own Nevada Tavern performance for the quarter.

Speaker 2

We are seeing improved performance in April May as the Golden Knights has helped tavern visitation and spend. In Montana, we grew revenue and EBITDA with the addition of new accounts and our business remains a leader in the market. Moving to our balance sheet. Our total debt outstanding is approximately $910,000,000 and we ended the quarter with $161,000,000 of cash and cash equivalents. Our net leverage remains at 2.9 times and we intend to maintain our net leverage below 3 times going forward.

Speaker 2

We will use $175,000,000 of the proceeds from the sale of Rocky Gap to reduce our 1st lien term loan, which we plan to refinance in Q2. On a pro form a basis, our leverage will be approximately 2.4 times after the sale of Rocky Gap. Looking forward, after the closing and the sale of our distributed Our pro form a net leverage moves down to 1.4 times. With a target net leverage of less than 3 times, we will have significant room in our Capital structure to pursue value creating initiatives, whether investing in our own assets, pursuing acquisitions or more aggressively returning capital to shareholders. That said, in the near term, we'll be primarily focused on closing our previously announced transactions, executing on modest reinvestment in our core And maintaining our low leverage profile.

Speaker 2

After the sale of Rocky Gap and our distributed businesses, We will have transformed the company to being 100% focused on Nevada with own strip and local casinos as well as the leading Las Vegas gaming tavern platform. These assets will continue to benefit from the long term visitor and population growth of Las Vegas, which will also remains The most stable regulatory and competitive environment in the country. Regardless of the future economic outlook, We will have one of the most pristine balance sheets in our industry, enabling us to take advantage of potential acquisition opportunities in our core markets and to establish a more regular return of capital to our shareholders. That concludes our prepared remarks. Blake and I are now available for questions.

Operator

Thank you. We will now begin the question and answer Your first question comes from David Bain with B. Riley. Please go ahead.

Speaker 3

Thank you. Hi Blake and Charles. My first question around the completion of Atomic Golf, since it's coming up, I was hoping to get a little bit more detail on how you Look to maximize its value in terms of potential cross pollination with your casino strategies around either promotion, coupons, rewards or Anything around signage or ingress to the casino, I understand it has a separate driver that's very high margin, but I'm trying to Understand the strategic opportunity to the casino.

Speaker 4

Yes, David. I mean, short answer is all of the above. We meet with those folks regularly and after touring the facility, we believe there's significant potential Cross marketing opportunities even beyond what we had originally contemplated, but we have a very willing ownership group on that side Combine the two properties, I think we've said in the past, we're looking at roughly 500000 to 600000 visitors potentially that will be driven by that Facility, I think the main thing to consider here is we have plenty of capacity within our current parking garage, Which our anticipation is those people have to transition through the property to get to Atomic Golf, the majority of them, Say, there is a rideshare drop off and there is some adjacent parking to the facility, but we intended to Without getting into granular detail, intend to combine marketing efforts with that property and our property Primarily, through there's all kinds of things we can do there, but primarily we can integrate our Play Rewards program. We can there's all kinds of offers that we can make one off, if you will, but we're pretty confident that we can get those people to stick in the casino, particularly As you know, we've renovated what we call the South Casino.

Speaker 4

As we go forward, we will renovate that North End Casino with more food and beverage offerings And additional gaming, which we anticipate to capitalize on that foot traffic. So All of the above as you said, without getting into grander detail, we are focused very focused on ensuring that those people within that Atomic Golf So we have many reasons to visit our properties while they Before or after they are done with the atomic golf.

Speaker 3

Okay, perfect. And then I guess my second one would be on the Taverna expansion strategy. Could that include a kind of a broader focus outside of Las Vegas with the Sierra Gold and PT's brand Still in Nevada, Reno, Laughlin, Mesquite or is the focus solely on Las Vegas expansion?

Speaker 4

That's a great question, David. I would say we by divesting of, as Charles mentioned, our non core what we believe our non core route or third party business does not forego our ability to continue To operate within the distributed platform, not only Nevada, but other states, we outperform with our brick and mortar assets So there is brick and mortar opportunities in other states potentially and with J and J Being our partner, it was broadening their footprint. There may be a lot of synergies there as we as other markets open up. We could potentially participate on the brick and mortar side versus the 3rd party route side.

Speaker 3

Interesting. All right. Thank you so much. Thanks, Blake. Thanks, Charles.

Operator

Your next question comes from David Katz with Jefferies. Please go ahead.

Speaker 5

Hi, afternoon everyone. Thanks for taking my questions. I wanted to just follow on that line a little bit and just Talk about any parameters qualitatively that might be willing to share in terms of size, where you would take leverage back up to And those kinds of issues other than just kind of where it's located? Thank you.

Speaker 6

Yes. I think from a David, hey, it's Charles. From a leverage perspective, we've been pretty clear we're going to keep our net leverage below 3 times. Like I said on the call, that's a lot of capacity within the existing capital structure. I think our time this year needs to be spent on focusing on closing these transactions, Keeping the balance sheet leverage low, so we can think about those opportunities that may come up in the future.

Speaker 6

With respect to the specifics around taverns, we have data in our investor deck. We track all of the ROIs On our recent tavern openings, remodels and new builds. And it's about a 30 plus percent ROI Is where those are tracking to? So to us that means that quite frankly the new tavern build is Probably the most attractive ROI opportunity in the portfolio. They're just small in terms of quantum of EBITDA.

Speaker 6

But it's still something that we should be doing when we find premier sites or acquisition opportunities to pursue.

Speaker 5

Perfect. And just to follow-up, and I know this is all out there and available. Can you remind us what Excess land you may have available in Las Vegas and whether that's an area of attention Are you at this point in terms of activating it in some way?

Speaker 4

Yes, that's actually very clairvoyant and great question. If you take Each of our wholly owned assets here in Nevada and add up the contiguous and or adjacent property that we have to develop In addition to our current core assets that already sit on the property, if you include the Colorado Bell, which is approximately 22 Acres, Which is a blank canvas on the Colorado River with 1,000 feet of river frontage. We have approximately 95 additional acres If you add them all up between our existing properties to develop, to provide ancillary amenities that would benefit those properties, whether they're Whether they're high density, third party investments, hotel rooms, additional casino space or whatever. So to answer your question, if you include the Colorado Bell, it's about 95 acres. If you exclude the Colorado Bell just for It's about 74 acres of additional real estate between The Strat, the 2 Arizona Charlies, our Laughlin properties in Pahrump We would have to invest in to generate additional returns at those facilities.

Speaker 5

Thank you very much.

Operator

Your next question comes from Edward Engel with Roth MKM, please go ahead.

Speaker 7

Hi. Thanks for taking my question. Could you please maybe just remind us at The Stratos In terms of the investments going on there, other than maybe some of the 5 room renovations, I guess, what other projects are also being

Speaker 4

Yes, of course, as you know the rooms which we talked about, we also have embarked On our main mezzanine level or 8 to 4 pool, which is the main pool for the property that we began in January, that should be completed by Memorial Day. We also have Open Tea Restaurant, which is our new Asian facility, Which is doing extremely well at the moment. Those are The things that are going on currently, we have plans, as I mentioned in my prior comments, for North Casino and other amenities coming on later. But the pool, the rooms and the food facility that we just opened are primary investments at this point in time.

Speaker 7

Thanks. And I guess on that, the future Projects related to the casino floor, is that within this year's budget or is that more of a longer term?

Speaker 6

No, I mean, look, I think that those are all things that we look at and we say if the property is performing, we're doing well, We're showing the growth and return on investment we've made. Those are things that we think that we could do. I think if you look at where we're going to be when we get to the end of Q2, We'll have renovated over half of the rooms. We're seeing right now currently a $20.80 year premium in those rooms. We will have touched up all of the pool space.

Speaker 6

We will have touched up all the main casino and then some life work in the North Casino. And we've refreshed all the food and beverage offerings. So and by the way, we're adding a $75,000,000 amenity in the form of That is not coming off of our balance sheet. So when you look at all of that, I think that we're going to be in a position to see what the property could Really do as we get into the fall to see what it does when the towns pull with F1 with the Raiders as we head into Super Bowl and then we'll be able to evaluate The trajectory of further investment in the property.

Speaker 7

Helpful. Thank you.

Operator

Your next question comes from Chad Beignon with Macquarie. Please go ahead.

Speaker 8

Afternoon, Charles, Blake. Thanks for taking my question. Charles, wanted to just hit on kind of your last comment, With respect to the quarter, your rooms revenues were up significantly, I think about $5,000,000 Year over year, can you just kind of talk about what you saw in the quarter with some compression on the weekdays? And Roughly what your gap is to the average strip ADR right now. Obviously, this will kind of help inform what you're going to be able to charge For the renovated rooms?

Speaker 8

Thanks.

Speaker 6

Yes. I mean, look, I'd say relative to where we were in 2019 is kind of how we think about looking at it. Do we get that back? And if you look at this quarter's performance relative to 2019, occupancy is still down 16%. And all of that is really midweek occupancy for the most part.

Speaker 6

I think that while we had this construction going on, there was Some of that displacement that happened during the weekend, which cost us a little bit. So from a strip performance perspective, you look at our Improvement in EBITDA and revenue relative to others who by the way have group meeting space, have larger facilities, Yes, we aren't quite there. But again, when you have 15% of your room base offline, we expect that. So from our perspective, We're pretty encouraged at The Strat to show EBITDA up, revenues up with 15% of the rooms that are offline.

Speaker 8

Great. Thank you. And then within your database or maybe within the different tiers of your taverns, have you seen any meaningful change in trends With the different levels of customers that you cater to?

Speaker 6

Yes. I mean, look, I think when you look over the past, if you go back a year plus ago, Which was the comp clearly for Q1. We had very strong tavern performance across all of the demographics Within the database, we have seen that tail off a little bit. We've seen a little bit more volatility at the higher end of that database. Think as you've had more things that are opened up in town, there's more alternatives for spend and those folks are traveling more.

Speaker 6

We just see A lot more volatility within the Tavern top end. Now that's in Q1. We think when things happen like the Knights make a deeper run into the playoffs, We see that pick up the tavern business also across the entire spectrum of the player database. Okay.

Speaker 8

Thanks for the additional color. Nice quarter.

Speaker 6

Yes.

Operator

Thank you. Your next question comes from John DeCree with CDRE Securities. Please go ahead.

Speaker 7

Hey, Blake, Charles. Thanks for taking my question. Charles, I'm Not sure I caught in the prepared remarks, but you had mentioned about potentially refinancing the term loan in 2Q and using proceeds from Rocky Gap To pay that down, I'm not sure if I caught that and if you were thinking about doing anything with the bonds As well. So maybe the question is capital structure plans as we get closer to Rocky Gap closing in June.

Speaker 6

Yes. I mean, I think if you just fast forward, in the near term, we'd like to refinance the existing $575,000,000 of term loan that we have outstanding. We would use as we said in the remarks $175,000,000 of the Rocky Gap proceeds To do that and I think at this point our view is we leave the bonds outstanding which are unsecured and at a fixed Quite frankly, it's lower than our secured debt from a cost perspective right now until we close on the distributed sale and then use the proceeds The distributed sale to pay off the bonds after their

Speaker 2

Call protection is up in April of next year.

Speaker 6

Now if you fast forward through all of that, we are a $200 ish million EBITDA entity that's 1.5 times levered with just a $400,000,000 term loan on a net basis, dollars 400,000,000 term loan in place With a $240,000,000 unfunded revolver that provides us plenty of liquidity to go find opportunities.

Speaker 7

Thanks, Charles. I think you caught my follow-up question, so maybe I'll ask one about operations. You Had discussed, I think, different components of cost inflation that you've experienced in the quarter. I think Laughlin, The metric was up 10%, and I think taverns labor up similarly. I was wondering if you could revisit That for us can kind of help us understand when maybe the cost inflation you start to anniversary.

Speaker 7

I think you've mentioned that Maybe it starts to taper off, all of that's absorbed, so or at least a good chunk of it. So if you could give us a little bit more color on how you're thinking about costs Maybe for the balance of the year that would be helpful.

Speaker 6

Yes. I think I mean look if you look at over the last 9 months, if I look at Q3, Q4, Q1, the margins have been fairly consistent within this range. So it's our view that we're at the margin point going forward despite Some of the continued cost increases that we saw year over year from Q1, you'll still see some of that in Q2. But if you look back again historically over the last 9 months, We've been telling people, hey, we think margins have kind of settled in at this point.

Speaker 7

Thanks, Charles. Thanks, Blake.

Operator

Thank you. This concludes our question and answer session and today's conference call. Thank you for attending today's presentation. You may now

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Golden Entertainment Q1 2023
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