Joseph Jaffoni - IR Blake Sartini - Chairman, CEO and President Charles Protell - CFO, Chief Strategy Officer and EVP Stephen Arcana - COO and EVP.

Charles Scholes - SunTrust Robinson Humphrey.

Welcome to the Golden Entertainment Q1 2017 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the call over to Joe Jaffoni, Investor Relations. You may begin..

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

Before we begin the 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 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 risks -- 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 in our first quarter 2017 earnings 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 Officer and Chief Financial Officer. Blake and Charles will provide some prepared remarks, after which we will open the call to questions.

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

Blake?.

Thanks, Joe and good afternoon, everyone. Welcome to our first quarter call. We began 2017 with record quarterly results as we leveraged the growing momentum in our businesses built throughout 2016 as discussed on our March conference call.

For the first quarter, Golden Entertainment generated consolidated net revenue growth of 17.1% and EBITDA growth of 28.6%, reflecting strong performance across all of our business units.

Charles will go over the quarter 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 and the healthy growth prospects we continue to see for the year ahead.

I'd also like to provide some color on the key initiatives we're pursuing to further establish Golden Entertainment as a leader in distributed gaming and casino operations.

Our distributed gaming business started the year strongly, as we continued to benefit from the 2 Montana acquisitions made last year as well as from the ongoing expansion of our Nevada tavern platform.

Our core route operations continued to perform well as we continued to expand our distribution and manage the business to further enhance its overall profitability.

At the same time, our market-leading branded taverns are delivering very healthy performance, thanks to the quality food, beverage and gaming experience and unique environment they offer our guests. Importantly, we opened our 54th tavern in the first quarter and we expect to open 6 more new locations this year.

As we indicated last quarter, tourist visitation and convention business continue to support a very strong local economy in Las Vegas. The Governor of Nevada recently noted that since peaking at 13.7% during the recession, Nevada's unemployment rate has declined to an incredibly healthy 4.8%.

In addition, what was once a state economy that featured some of the country's most significant private sector job losses is now one of the country's fastest-growing job markets. On top of this, several construction projects are currently underway or in planning which will add significantly to the area's infrastructure.

With these developments and the continued economic strength in Nevada, we remain very excited about our distributed gaming operations and continue to invest in this market. Turning to our casino operations. We saw continued healthy net revenue and double-digit EBITDA growth in both Pahrump and Rocky Gap.

Pahrump benefited yet again from the implementation of our disciplined operating principles throughout the business as well as our efforts to further enhance the guest experience.

At the same time, our recently completed investments at Rocky Gap led to solid year-over-year revenue and EBITDA growth, despite a new property opening in Maryland late last year.

Importantly, you may have read about the recent activity at Maryland with respect to Senate Bill 495 which was passed by the Legislature and signed into law by the Governor in April.

To provide a little perspective, the state authorization for casino gaming in 2008 included a mandate that the Maryland state lottery own the gaming devices placed on casino floors, statewide. With the exception of the newest entrant into the market, all of Maryland's casinos opened under this arrangement.

Since then, the state's licensed operators have assumed ownership of the gaming devices, in exchange for a slot tax reduction. With the new law signed by the governor in April, we now have the same opportunity to purchase the state-owned slot machines at Rocky Gap, in exchange for a 10% reduction in our slot tax.

We expect the tax reduction to begin July 1 of this year. As we look to the balance of 2017, we remain fully focused on growing our business and taking advantage of the many opportunities in front of us.

Our continued investment in branded taverns is an attractive way to drive high-return growth and further participate in the health of the Nevada economy. At the same time, we're actively evaluating strategic M&A opportunities that will allow us to leverage our deep understanding of the distributed gaming and casino businesses.

Finally, we remain committed to more fully optimizing our existing business segments to drive further profitability, just as we did in the first quarter. With these opportunities and initiatives, Golden Entertainment is well positioned to deliver financial growth in 2017 and create additional long term value for our shareholders.

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

Thanks, Blake. Before I get to the results, I want to highlight that we're now disclosing net revenue, net income and EBITDA for both our Nevada and Montana distributed gaming operations as well as for our Nevada and Maryland casinos. We believe these additional disclosures will help investors better understand our business and growth profile.

In the first quarter, Golden Entertainment generated record net revenues of $106.6 million, representing an increase of 17.1% over last year. EBITDA in the quarter was $13.6 million, up 28.6% year-over-year.

Looking at our distributed gaming business, total net revenues during the first quarter were $82.3 million, a year-over-year increase of 19.9%, while EBITDA of $13.1 million was up 28.2% from a year ago as we continue to benefit from last year's 2 acquisitions in Montana.

Net revenues from our Nevada distributed gaming operations grew 3.9% in the quarter to $67.1 million, while EBITDA grew 16.5% year-over-year to $11 million. In the quarter, we made further progress in shifting the Nevada mix towards our more profitable wholly owned tavern locations, opening the first of our 7 new locations for 2017.

Our Montana distributed operations generated net revenues of $15.2 million and EBITDA of $2.1 million in the quarter.

We remain optimistic about the long term growth prospects of our Montana operations and see ourselves as the key consolidator in what remains a fragmented distributed gaming market, not only in Montana, but in other jurisdictions across the country. Moving on to the casino business.

Net revenues for the quarter were $24.3 million, a year-over-year increase of 8.5%, while EBITDA of $6.3 million was up 32.3% over the prior year period. In Pahrump, net revenues grew 4.2% in the quarter to $9.1 million, while EBITDA grew 24.6% year-over-year to $2.9 million.

Our 3 casinos in that market continue to benefit from our efforts to enhance operating efficiency as well as our recent investments in 2016 to improve our product offering. At Rocky Gap, net revenue grew 11.2% in the quarter to $15.2 million, while EBITDA grew 39.6% year-over-year to $3.4 million.

The first quarter growth at Rocky Gap reflects our disciplined operating focus at the property since our merger with Lakes Entertainment in August of 2015. We firmly believe we're offering a differentiated product to our customers relative to our competitors. And that is continuing to drive player loyalty and financial performance.

As Blake noted, the Governor of Maryland recently signed into law a bill that will provide us with a 10% slot tax reduction once we purchase the state-owned machines on Rocky Gap's casino floor. We expect to purchase the machines by July 1 and estimate an increase in Rocky Gap's property EBITDA by approximately $3 million on an annualized basis.

And we expect less than a 3-year payback on our estimate [indiscernible] machines. Looking quickly at corporate and other expenses. Adjusted corporate expense was up year-over-year in the first quarter to $5.8 million. This was driven primarily by increased activity related to our various growth initiatives.

For the quarter ended March 2017, Golden Entertainment reported net income of $5.3 million or $0.23 per diluted share compared to $2.2 million or $0.10 per diluted share in the prior year period. Looking at our balance sheet. We had $45.2 million of cash and total debt outstanding of approximately $181 million.

In the first quarter of 2017, our strong financial performance allowed us to further reinvest in our business and reduce leverage. We reduced total borrowings under our existing credit facility by $6 million while also allocating $5.7 million to capital expenditures.

In addition to our organic growth and reinvestment plans, we continue to evaluate several strategic opportunities to expand both our casino and distributed gaming businesses. That concludes our prepared remarks. Operator, please open the line..

[Operator Instructions]. Our first question comes from the line of Patrick Scholes from SunTrust..

A couple of questions here. First, I'm wondering if you can give us an update what you're seeing in Pennsylvania as far as legalization efforts for gaming and bars and the like..

Sure. Patrick, we're obviously heavily involved and focused on that. We're hopeful that, that happens this calendar year for enactment starting January 1. But obviously, the bills are still being debated as we speak..

Okay. All right. Moving on here. On Maryland, just a couple of questions on -- just clarification. So you would expect, as you mentioned, $3 million for the year.

But should we prorate that? Is it fair to assume that begins July 1?.

Yes..

Okay, just to be sure for modeling. And then you mentioned a 3-year payback. So we're -- tell me if I'm wrong, but roughly $8 million, $9 million to purchase the machines.

What would be the ongoing costs -- what additional costs would there be [indiscernible] ?.

I mean, that's embedded in that number of $3 million EBITDA and a run rate going forward. That includes our cost to operate, from technicians we have to hire, et cetera, et cetera..

I guess I meant any additional CapEx after that..

That will be evaluated each year, just in terms of a normal replacement cycle for the slot floor..

Okay. All right. And then, lastly, I'm wondering if you can give us an idea of what the -- on the corporate and other line item, what the run rate might be.

Certainly it was a -- and maybe you give more color on the step-up in that line item versus where you were over last year?.

Obviously, we're pretty heavily involved in the -- in looking at opportunities, both organic and inorganic. And I'd say there's probably $0.5 million to $1 million of that's related either lobbying, legal efforts, diligence, et cetera, around those initiatives, setup costs and otherwise.

So I'd expect, though, that, that corporate and other expense to remain at an elevated level throughout the balance of this year until you see a more robust strategic announcement from us around some of these initiatives..

Okay.

Anything -- on that last part, anything else you can give a little more color on?.

No. I mean, that's it. I mean, obviously quite frankly, it's one of the reasons that I'm here. I mean, I think this company is positioned best to grow in the space given our leverage profile and the opportunities that we have both in regional casinos as well as the distributed gaming side.

So we're very active and looking at ways to grow both those businesses right now. And -- but nothing at a level that's ready to report..

[Operator Instructions]. Our next question comes from the line of Chad Beynon from Macquarie..

This is Ed [ph] on for Chad. I was wondering if you could maybe talk about the economics of your northern Nevada taverns and if they tend to perform as well as those in Las Vegas Valley area.

And then should we expect you to ramp up expansion here? Or do you think there's plenty of room to run in southern Nevada?.

Chad, it's Steve. Thanks for the question. We currently only operate 2 taverns in northern Nevada, but we're keeping an eye out for the macroeconomics up there. We're always looking for opportunities to grow, particularly on the routes side, but if the right opportunity came about, we would also develop taverns up there as well..

So you if you think about the market up there, there's roughly 150 licensed tavern locations which Steve said, we operate 2. So clearly, there's room to grow in the north. And you compare that with the south, we've got 52 that are down here in southern Nevada out of 450.

So we view that there's opportunities in both markets to grow significantly and we're actively pursuing those organically and strategically..

And then, Chad, on the distributed side. Just for the record, too, we operate approximately 3,000 devices up there and we're the largest distributed operator in the Reno Washoe Valley [indiscernible]..

And then just as a follow-up, of the states that do allow for distributed gaming which ones do you think you're kind of -- the tavern strategy would apply to?.

Yes, I mean, look, I think -- in some you're not allowed to vertically integrate right now, so meaning that you can't actually own the tavern operations as well as service or operate the machines. Whether that changes or not, we don't know. We're evaluating both models in all jurisdictions.

We think that, that gives us a competitive advantage, since we, obviously, have a meaningful business on both sides of that equation. But -- so we haven't ruled out or favored one versus the other as we've looked at new jurisdictions.

We do think, though, that in the -- from Pennsylvania's perspective, we would see entering that -- into that market as a distributed operator to start..

[Operator Instructions]. At this time, I'm showing no further questions. I would like to turn the call back over to Blake Sartini for closing remarks..

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

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