Joe Jaffoni - IR Blake Sartini - Chairman, President and CEO Charles Protell - CSO and CFO.

John DeCree - Union Gaming Patrick Scholes - SunTrust.

Good day, ladies and gentlemen and welcome to the Q2 2017 Golden Entertainment Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Joe Jaffoni, Investor Relations. Please go ahead..

Thank you, Candice and good afternoon, everyone. By now, everyone should have access to our second 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 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 all these measures to the most directly comparable GAAP measures is available in our second 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 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 second quarter conference call. We had a very active and productive second quarter, as we continued to benefit from strong financial performance in our distributed gaming businesses as well as at our Rocky Gap resort in Maryland.

Our combined business generated consolidated net revenue growth of 7.7% and healthy adjusted EBITDA growth of 12.8%. Additionally, as you all know by now, we also announced our planned acquisition of American Casino & Entertainment Properties.

Charles will go over the 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, some additional color on the acquisition, our thoughts on the Illinois distributed gaming market, and our view of the second half of 2017.

Our distributed gaming businesses in Nevada and Montana generated solid growth, as trends we saw at the start of the year continued into the second quarter.

In Nevada, our business mix continues to transition towards our higher-growth and higher-margin branded tavern locations and away from contracted locations and the routes that are less profitable. We also continued to execute our expansion plan on the tavern front, opening our 55th and 56th locations during the quarter.

Golden remains on pace to open a total of seven taverns in 2017, and these businesses continued to represent an exciting, long-term growth opportunity for the company. In Montana, we benefited from full integration of the two businesses we acquired last year, and we expect current performance trends to continue throughout the balance of the year.

Positive metrics related to the long term health of Las Vegas fueled continued optimism for our existing and soon–to-be-added operations throughout the market.

Existing home inventory in the Valley is trending at historic lows, and statewide unemployment in Nevada was at 4.7% through May, which is its lowest level since before the economic downturn began. Strip Properties are investing in room renovations and new amenities, while new properties are under construction.

The state recently approved a $1.4 billion project to add 600,000 square feet of new meeting space to the Las Vegas Convention Center; and through June, passenger traffic at McCarran Airport was up more than 2% over last year.

All in, these and other indicators point to the long-term potential of Nevada, and with our operations in the state, we're well positioned to benefit from those macro factors.

Turning to our casino operations, Rocky Gap again competed very effectively in the Greater DC market, generating healthy net revenue and double digit EBITDA growth during the quarter.

We recently completed the purchase of the state-owned gaming devices on the Rocky Gap floor, which allows us to benefit from a 10% reduction in our slot tax beginning on July 1. In the Pahrump market, while we see some softness in the quarter, we continue to increase market share and are seeing nice recovery in July.

Beyond our operational progress and financial growth, in June, we announced our $850 million acquisition of American Casino & Entertainment Properties, which will greatly expand our presence in the very healthy Southern Nevada market, creating a portfolio of gaming assets with $850 million of pro forma revenue and $180 million of pro forma EBITDA for 2017, including synergies.

The four properties; Stratosphere Casino, Hotel & Tower, Arizona Charlie's Decatur, Arizona Charlie's Boulder, and the Aquarius Casino Resort in Laughlin are highly complementary to our distributed gaming assets in Las Vegas and will seamlessly fit into our marketing and promotional strategies.

In particular, our mid-market customer base winds up nicely with the American Casino & Entertainment Properties customer, and we believe we can effectively promote across Nevada, Montana, and Maryland and create a dynamic, market leading business.

Finally, late in the second quarter, the Illinois Gaming Board granted us a terminal operator license that marks Golden Entertainment's fourth licensed jurisdiction.

We have said for some time that we want to be a larger player in the distributed gaming marketplace and believe that Illinois represents an attractive long term growth opportunity for the company.

Golden is very well suited to become a leading provider in Illinois, thanks to our deep experience, operating the largest distributed gaming platform in the country and we expect to become the partner of choice for existing and new distributed gaming locations throughout Illinois.

Looking to the second half of 2017, we remain well positioned to generate continued strong financial performance, thanks to our healthy existing operations and our ongoing efforts to evaluate further opportunities to expand our footprint.

With the organic growth in our leading businesses and the growth coming from our acquisition of American Casino & Entertainment Properties, we are rapidly transforming Golden Entertainment’s scale, diversifying our sources of revenue and positioning the company to create further significant value for our shareholders.

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

Thanks, Blake. In the second quarter, Golden Entertainment generated net revenues of $110.5 million, representing a increase of 7.7% over last year. Adjusted EBITDA in the quarter was $15 million, up 12.8% year-over-year.

In our distributed gaming business, total net revenues during the second quarter were $84.2 million, a year-over-year increase of 8.3%, while adjusted EBITDA of $13.5 million was up 18.6% from a year ago, as we benefited from broad based growth in both our Nevada and Montana businesses.

Net revenues from our Nevada distributed gaming operations grew 6% in the quarter to $68.7 million, while adjusted EBITDA grew 17.8% year-over-year to $11.3 million. In the quarter, we saw the continued shift of this business to our growing base of wholly-owned branded taverns.

Also as Blake alluded to, we remain focused on managing our portfolio of 700 locations and continue to exit unprofitable or underperforming locations, thus leading to improved financial results. Our Montana distributed gaming operations generated net revenues of $15.4 million and adjusted EBITDA of $2.2 million in the quarter.

Montana benefited from the addition of a full quarter of one of our businesses, which was acquired in April of 2016. Moving on to the casinos, net revenues for the quarter were $26.2 million, a year-over-year increase of 6.1%, while adjusted EBITDA of $6.9 million was up 1.3% over the prior year period.

At Rocky Gap, net revenue grew 8.3% in the quarter to $17.4 million, while adjusted EBITDA grew 19% year-over-year to $4.6 million. The second quarter growth at Rocky Gap reflects strength across the business as we continue to gain share and compete effectively.

As we noted previously, Maryland law allows us to benefit from a 10% slot tax reduction in exchange for our purchase of the state-owned slot machines at Rocky Gap.

We recently completed the purchase of machines and expect this shift to increase Rocky Gap’s property EBITDA by approximately $3 million annually, with the benefits of this slot tax reduction taking full effect in our third quarter results.

In Pahrump, net revenues grew 1.9% in the quarter to 8.8 million, while adjusted EBITDA declined approximately 600,000 year-over-year to 2.4 million. The year-over-year decline in adjusted EBITDA from our Pahrump casinos was driven by increased marketing costs as we grew our market share.

For July, we have seen Pahrump profitability improved and we expect this for the balance of the year. Looking quickly at corporate and other expenses, adjusted corporate expense was up year-over-year in the second quarter to $5.4 million, driven primarily by our increased scale as well as by our recent strategic initiatives.

For the quarter ended June 30, Golden Entertainment reported net income of $1.7 million or $0.07 per diluted share compared to $2.8 million or $0.12 per diluted share in the prior year period. Looking at our balance sheet, we have 49.8 million of cash and cash equivalents as of June 30.

Total debt outstanding of approximately 178.7 million included 144 million in senior secured term loans and 27 million of revolver borrowings.

Our continued strong financial performance allowed us to further reinvest in our business and reduce leverage, all while pursuing the significant strategic acquisition of American Casino & Entertainment Properties. We reduced total borrowings under existing credit facility by 3 million, while also allocating 5.4 million in capital expenditures.

As it relates to the acquisition and financing, the American Casino and Entertainment Properties transaction is not subject to a financing condition and we have committed financing totaling 1.1 billion from J.P.

Morgan, Credit Suisse, Macquarie Capital and Morgan Stanley to fund the cash consideration as well as to refinance our existing credit facilities. The financing commitments also include a 100 million revolving credit facility to support our future organic and strategic growth initiatives.

Last week, we launched the syndication of our underwriters' commitments for these credit facilities. With a pro forma combined company issued a debt rating of B2B Moody's and S&P respectively. Both agencies noted our outlook is stable.

As previously stated we look forward to closing the transaction later this year and will continue to evaluate all strategic and capital markets opportunities to increase shareholder value. That includes our prepared remarks, operator please open the line for questions..

[Operator Instructions] And our first question comes from John DeCree of Union Gaming. Your line is now open..

I wanted to kick a quick question as we've seen the Nevada Distributed Gaming business perform really well, you highlighted the mix shift to your wholly owned taverns with seven on deck to open this year, I was wondering if you could comment on what the pipeline might look like for 2018 and going forward given how strong the growth is and how helpful it is to have that mix shift?.

So we've stated that we intend to pursue 6 to 8 per year going forward in the future, so that’s on the docket, it's part of just our ongoing investment in that portfolio. And again, our focus is shifting that mix from some of our unprofitable locations and lower margin locations into our wholly owned businesses, which are these taverns..

For the balance of the year, any color you can kind of give us on the cadence of new openings.

I mean are they relatively spaced out or will be likely they come more in the 4Q or 3Q, any kind of guidance there?.

We've got four that are going to be opening for the balance of the year, they are going to be more towards the end of the third quarter and the beginning of the fourth quarter..

one, kind of expected timing; two, it's only been about a month or so since you've announced the transaction, but wanted to check if those assets are still performing in line with expectations..

I think the assets are performing in line with expectations, we're not changing the guidance that has been out there since our investor presentation from when we announced the deal as you pointed out. From a timing perspective, we do still expect to close the transaction in the fourth quarter.

We've filed all regulatory applications at this point in time. So we see no reason not to expect that to happen..

Thank you. [Operator Instructions] And our next question comes from Patrick Scholes of SunTrust. Your line is now open..

A number of sort of a laundry list of questions here, once the deal is closed you've laid out you'll be at 5.5 times net debt to EBITDA..

Listed at 5.2 actually..

5.2, okay.

Where ideally after that would you like to be?.

I mean look, I think that any operator in the space and we're going to emulate that should be right around 4.5 times on a net leverage basis. And so that’s the goal for us to get to that level as quickly as possible..

And would you consider issuing equity to get there quicker?.

Potentially, I mean look like I said, we'll look at all types of capital markets activity in order to create shareholder value. So look maybe at a point in time we will do that, but it's obviously going to depend on market conditions and how we are thinking strategically about growing the business..

And related to that, can you give us sort of a ballpark of what a B2B rating would be on interest rate for the debt that you're issuing?.

So, with the debt syndication right now, I’m not going to comment on potential pricing of that, but I will issue an 8-K when that is priced and allocated, so everyone can have a view and understand where we end up..

Okay, let's move on here. On Illinois, what are the sizes of the opportunity or opportunities here.

I mean if you do purchase something in Illinois, is that you know given the transformative size of your current acquisition, is -- can Illinois really still be a needle mover for you folks?.

Illinois is important to us. I mean we obviously started that process. We’ve moved down the path with American. We are licensed there, it is a huge distributed gaming platform with 25,000 machines.

So we think we should be in that market, and we think we could still be a consolidator in that market, so we will look to enter into that market as soon as practical and soon as we find something strategically that makes sense for us to pursue..

So Patrick, in the context of moving the needle. After you get, you know, there's about six or seven companies that have a large share of that market there, and the rest is very fragmented.

So as Charles said, it's important to us there, and the answer is I think given that fragmentation and given the way to the top of the list in terms of operators that, yeah, clearly there is an opportunity for us to move the needle in identifying the right situation..

And then, lastly, I have a number of questions around the actual property of the Stratosphere. Can give us a - I sort have a general idea, but I'd like to hear from you.

What is the customer mix today and by that I mean how much is it convention - in-house conventions, how much is it citywide convention, how much is local, and how much would be flying and driving? Any just sort of a rough idea to see what the customer segments are that move the needle for that property?.

So, the property does not have convention space, we think that's a huge opportunity given we have excess acreage and there's certainly plenty of white space in the facility right now. Most of the customer base is coming from outside a 500 mile radius, which means they're coming into Vegas obviously from other areas.

This demographic skews younger, it is a perfect fit with our tavern business, and we think it adds to our hub-and-spoke model. I mean that's one of the pieces behind our acquisitions.

So we're pretty excited about the opportunities that we see within their existing customer base and the ability to actually increase the penetration and the synergies with what we have going on with Golden's existing operations..

So that answered my question on what you might be doing with the 15 acres next door.

And lastly, can you touch on I believe that the Stratosphere now has a linkage or an agreement with Best Western, is that correct?.

It does, it does. It just puts us in this part of a reservation system, white label, gets us better visibility on Expedia and other online bookings. But it’s a nice benefit, it's a good pick up and then obviously we're excited to have as part of the business going forward..

Would you consider doing anything with Best Western, with any of your other properties that have hotel rooms?.

Not sure. Currently evaluating that, but we’ll get to that as we get to closing the transaction..

And one last question here.

Can you - moving onto another topic, can you split out what the EBITDA was for third-party versus own taverns in Nevada?.

We’re not reporting on distributed business that way and in fact we don't actually even manage it that way, actually our distributed service side has a machine and conducts drops in those service treats our third parties the same way they treat our taverns.

So that is - we run the business as one integrated Nevada Distributed Gaming Platform and that's how we are reporting it..

Thank you and that concludes our question-and-answer session for today. I'd like to turn the conference back over to Mr. 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 as we report our third quarter results in November..

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