Good day ladies and gentlemen. Welcome to the Golden Entertainment First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time.

[Operator Instructions] As a reminder, today's conference is being recorded Thursday, May 9th, 2019. I would now like to turn the call over to Mr. Joe Jaffoni, Investor Relations. Sir, you may begin..

Thank you, Victor and good afternoon everyone. By now everyone should have access to Golden Entertainment's first quarter 2019 earnings release, which can be found on the company's 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 or uncertainties that could cause actual results to differ materially from our corporate working statements, and therefore, you should exercise caution in interpreting and relying upon them.

We refer 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 these measures to the most directly comparable GAAP measure is available in our first quarter 2019 earnings release. On the call today is Blake Sartini, Golden Entertainment's Founder, Chairman, President, and Chief Executive Officer; and Charles Protell, the company's Chief Strategy Officer and Chief Financial Officer.

Charles will review the quarterly results. Afterwards, Blake will review recent strategic and operating initiatives and then we'll open the call to your questions. With that it's my pleasure to turn the call over to Charles Protell.

Charles?.

Thanks Joe. Golden's record first quarter revenues and adjusted EBITDA benefited from growth across both our casino and distributed gaming operations. In addition, we've made progress on several strategic and operating initiatives that Blake will discuss in more detail in the call.

For the first quarter, net revenues grew 11.7% to $239.9 million and adjusted EBITDA rose 5.5% to $48.4 million. For our Nevada casinos, first quarter revenue was $135.6 million, up 17.3% from the prior year while adjusted EBITDA grew 7.3% to $42.8 million.

Growth in the quarter for our Nevada casinos primarily reflects the contribution from our two newly acquired Laughlin properties which was partially offset by construction disruption at The Strat and increased expense related to the initial rollout of our new Players Club, particularly at our two Las Vegas locals' properties.

At The Strat for substantially all of the quarter, we are completing work on our new sports book, View Lounge and Taphouse on the south area of the casino which, compared to last year, displaced both gaming devices and a full-service casino bar.

Our renovations at The Strat began at the end of Q2 last year, so we still have about one more quarter before the anniversary of any construction disruption. At Rocky Gap Resort in Maryland, revenue increased 6.2% on a year-over-year basis while EBITDA increased 1.4% to $3.8 million.

EBITDA flow through remained compressed due to increased regional competition, but we anticipate improved forward trends as we get into the summer months for the Rocky Gap. In our Nevada distributed business, total revenues during the first quarter were $71.4 million, a 3.9% year-over-year increase.

Adjusted EBITDA of $11.4 million was up 3.2% over the prior year, reflecting in part improved performance from our chain store locations. As we discussed on the fourth quarter call, we established new rent structures in approximately 50% of our chain store locations so we expect continued improvement through the balance of the year.

In addition, we opened three new taverns bringing our total to 63 at the end of the quarter. Two more taverns have already been opened since the end of Q1 and we anticipate having 66 wholly-owned taverns operational by the end of Q2.

In Montana, our distributed operations generated revenues of $17 million, up approximately 10% on a year-over-year basis. Adjusted EBITDA for the Montana distributed business grew 9% year-over-year to $2.2 million with the operations continuing to benefit from ongoing investments in proprietary new games and from our focus on adding new locations.

Corporate expense of $11.7 million in the first quarter compares to corporate expense of $10.8 million in the prior year. Corporate expenses include increased spending on marketing and IT initiatives relative to Q1 of last year, consistent with the run rate we have previously communicated.

Moving to the balance sheet, we had cash and cash equivalents at the end of the first quarter totaling $108 million and total outstanding debt of approximately $1.14 billion. In April, we completed a $375 million, seven-year, senior unsecured notes offering priced at 7.625%.

We used the proceeds from the offering to primarily repay $145 million of revolver borrowings which has funded the cash consideration for the acquisition of our two new Laughlin properties, and retired $200 million of our second lien term loan which costs about 9.5% per year.

The remaining proceeds reduced our existing first lien term loan by $18 million and paid off offering fees and expenses. We currently have no outstanding borrowings under our $200 million revolving credit facility. And in addition to the $375 million unsecured notes, we have $772 million outstanding under our first lien credit facility.

Reflecting this of financing, our LTM net leverage is approximately five and a half times, including the annual contribution from the acquisition of the Edgewater and Colorado Belle. Total capital expenditures for the quarter were $27 million with approximately $14 million spent on The Strat renovations.

The balance of our capital expenses for the new taverns, payments on our new casino management system and maintenance CapEx.

As of March, the company's total investment in The Strat renovation was approximately $38 million, and we have budgeted an additional $39 million for 2019 to renovate the second casino floor as well as ongoing renovation of additional room and suite product.

Our total budget for renovations at The Strat remains approximately $140 million, with the project targeted for completion in 2021. We expect total capital expenditures to be approximately $95 million for 2019, including $25 million for maintenance CapEx with all CapEx to be funded in cash flows from operations.

We continue to have $25 million available for share repurchases under our March authorization as we did not repurchase any shares in the first quarter.

While we are not providing formal guidance for 2019, I believe that most of the published Street estimates fairly represent our prospects for the year as a whole considering the expected disruption from the ongoing Strat renovations.

Using those estimates, our discretionary free cash flow is about 3.30 per share which is mostly generated from wholly-owned casino resorts in southern Nevada.

As we complete this year's capital plan, we will be positioned to evaluate future capital allocation between further reinvestment of the portfolio, debt reduction, M&A, or returning capital to shareholders. I'll now turn the clover to Blake to provide color on our strategic initiatives..

Thanks Charles. I'd now like to share my perspective on the progress we're making on several important strategic growth and operating initiatives starting with our renovations at The Strat.

From the beginning, we formed a disciplined and phased approach to our reinvestment in The Strat in order to minimize disruption to the property while maximizing cash flow.

Over the last nine months, we've spent approximately $38 million and we've been able to remodel over 300 hotel rooms, created a state-of-the-art sports book, add new food and beverage venues, renovated existing restaurants including our signature Top of the World menu, as well as refreshed the exterior of the property.

Over the remainder of 2019, we will complete our work on the tower renovations, remodel an additional 150 rooms and suites, add new entertainment experiences, and update the casino floor.

By the end of 2019, we will have refreshed the look and feel of the main casino portion of the property, updated a significant number of hotel rooms and suites and modernized several floors in the tower for approximately $80 million before we consider the additional investment to add group meeting space.

We strongly believe we will be able to earn an attractive return on our capital investment at The Strat.

And as such, some early highlights that support this expectation include; our renovated rooms earned a $20 ADR premium over our base room rate for Q1; our Top of the World restaurant revenues were up 13% in Q1; 108 East, the renovated food concept on the observation level of the tower, improved revenues 14% in Q1; revenues at our recently opened Taphouse and View Lounge are up two and a half times over prior venues in their first full month of operations.

In addition to the initial economic benefits we are seeing, all of our renovations have received positive feedback from our guests and the community which we believe will drive brand recognition and increased customer loyalty.

It's clear that the changes we have made at The Strat to-date are improving the guest environment and providing new opportunities for customers to increase spending at the property. Our thesis is simple; we have a captive audience between our hotel guests and tower visitation of over 2 million people each year.

To generate to our targeted returns, we are trying to capture an additional $20 spend per person with an approximate 50% pull-through. We believe our investment thesis is further supported by what we see as major future traffic drivers to Las Vegas and the north end of the Las Vegas strip.

North strip projects currently under development include the expansion of the Las Vegas Convention Center, Resorts World and The Drew, each of which we believe will increase visitation to The Strat.

As we move through our renovations in 2019, we will finalize potential group meeting space design concepts and decide if and when we add this amenity to the property.

Ultimately, we continue to believe group meeting space will allow The Strat to compete with similarly positioned strip properties for midweek guests, help build longer lead-time occupancy, reduce dependency on OTAs, and provide us with access to convention visitors.

In addition to The Strat, we're also focused on several other key initiatives to grow our business. In January, we completed the acquisition of the Edgewater and Colorado Belle, which complement our market-leading Aquarius Resort in Laughlin.

We now own approximately 40% of the market's room base, one-third of the market's gaming positions and the market's largest traffic driver at the Laughlin Event Center. Our Aquarius property operates at margins in excess of 35%, while the properties we acquired earn the low to mid-20s.

As we move through 2019 and 2020, we are confident we can materially improve the margin of these two newly acquired resorts.

Turning to our Nevada distributed gaming operations, we have demonstrated our ability to improve the economics of this business through renegotiating chain store contracts and continuing to grow our wholly-owned branded tavern footprint.

We expect year-over-year improvement throughout the balance of 2019 and in 2020 as more renegotiated chain store contracts take effect and we complete the opening of the six new taverns by June. We view our new build taverns as hyper-local casinos with proven ROIs of 25% to 30% and there is plenty of room in Nevada to continue to grow this business.

Another critical initiative we have begun is the installation of our new casino management system and the rollout of our new True Rewards Players Club loyalty program. True Rewards will be uniquely positioned as the only players club that allows redemption of points between casino properties, taverns, and chain store locations.

This network will include over 120 locations, substantially all of which are in Southern Nevada giving our players unique opportunities to earn and redeem points, which we believe will increase loyalty and our share of the customers' wallet.

We began property installations and club rollouts at the end of February and intend to complete this process by the end of June. Over the last two years, we have built the unique portfolio of gaming assets, primarily consisting of wholly-owned casino resorts in southern Nevada.

When combined with our industry-leading distributed gaming footprint, over 85% of our revenues come from Nevada.

We strongly believe that Nevada will continue to lead the nation in population growth and economic development, which ultimately creates support for the organic growth and success of our business when combined with the reinvestment initiatives I previously outlined.

Some of this reinvestment may cause near-term disruption, however, we believe that our current capital plan will position Golden Entertainment for future success and create long-term value for our shareholders. With that, operator, please open the call up for questions..

Yes sir. [Operator Instructions] And our first question comes from the line of David Katz from Jefferies. You may begin..

Hi, afternoon everyone. Nice quarter..

Thanks Dave..

I want to go back to The Strat, and I will admit that I got on a moment late because after reading the release and some of the discussions we've had, there's been just a -- I guess, a point of question around The Strat and the dollar commitments to it and whether you're taking a more gradual approach to that or if the $140 million is relatively ironclad and definitely happening by 2021..

No, I think that for the balance of this year, we are clearly committed to our capital plan. But as Blake articulated, we're going to be disciplined and in terms of how we evaluate returns in the future and we're finalizing the design for the group meeting space over the course of this year.

Our view is we'll see where we are as we get to the end of the year, both in terms of performance of the portfolio, The Strat specifically, and the economic environment that we're in..

Right.

So, if I were to follow that up and say, look, if all other things, which I -- admittedly is unlikely, but if all things remain as is, are you likely to spend it or not?.

Yes, I mean, in a forward-looking question with my forward-looking answer, I would say yes.

As we continue to see the positive early -- I will say it's early, the positive results that we are currently experiencing in the venues that we have completed, it is supporting our thesis that more touchpoints and retail points in the property are driving more revenue from -- as we've described, the captive audience that currently we have within that property between the hotel and the tower.

As we continue to see that, our confidence grows. And I think, widely the determining factor would be where we are in the broader economy at that point, where Las Vegas is at that point, that point being the end of this year. But if all of those things come together in a positive way, I would say we would begin to build out the convention space..

David, the great thing about this opportunity is we always have it. It's captive to us unlike M&A or other things. So, whether that means we're starting it in 2020 or at the end of 2020 or into 2021, we view it as an opportunity that exists within the portfolio that again, that we'll always have.

But a little too early to tell in terms of the specifics around the timing. But as Blake said, this initial indications we have on the capital we have spent has been very positive. .

All right.

And lastly, how much of your thought process is tethered to the projects that are near you, whether that's Genting or The Drew? How do they affect your decision?.

I think in regard specific to the convention space, probably not much. I think that traffic, that foot traffic that we are anticipating being driven from those new venues is going to occur whether or not we have the convention space.

I think the convention space is going to be done more in kind of our long-term view of driving revenue and profit at that property. As we look to continue to improve, the results of that property it is going to be made -- that decision would be made within that context versus the new traffic drivers that are coming north..

All right. And if I can just throw one last one in there, it is around distributed gaming, and the discussion about potential growth outside of Nevada that may occur through M&A or those sorts of things. I think when we discussed it in the past; it has been more a matter of price expectations of sellers that's been a gating factor.

What's that landscape look like and what should we reasonably expect from you in the next several quarters?.

Well, you can imagine we get all the calls from an M&A perspective, whether that's in jurisdictions that we operate or ones that we don't. So, we take a look at that and again, our view is price expectations need to get in line with our expectations for us to act on those. And we're fairly active in pursuing new jurisdictions.

I mean we do have a view that the growth in gaming in regional markets could come from this business model of distributed gaming and you're seeing more and more states take a look at that. And so we are spending a lot of time on those efforts..

Got it. Thank you very much. Appreciate you taking them..

Thank you..

And our next question comes from the line of Chad Beynon from Macquarie. You may begin..

Hi, good afternoon and thanks for taking my question..

Hey Chad..

Blake, Charles, when I look at the seasonality of your financials over the past couple of years, it's varied and there's a number of reasons for that, acquisitions, certain quarters that were better or worse than most projected.

You put up a strong quarter here and I know you don't give guidance, but as a percentage of I guess where most estimates are for 2019, it was a little bit more than 25% of where that is.

And I was wondering if you could just help us a little bit with any additional disruption at The Stratosphere or just kind of help us think about some seasonality characteristics now that your portfolio looks a little bit different than it has in prior years. Thanks..

Yes. I think, Chad, on the disruption front, we're beginning at the end of this month to start in on renovations to the casino floor. We're being very cautious in terms of how that could potentially disrupt our guests and ultimately revenues to the property, and we're doing that in phases and sections.

That said that should have some disruption relative to where we were with that asset last year. In terms of cadence and seasonality of the business, obviously, we've gone through several acquisitions over the last two years.

But if you look down at our Laughlin assets, for example, visitation in those during the summer months is stronger at those assets than in the winter months. Similarly, you have the same dynamic with Rocky Gap. And then if you look here in town, you have almost the opposite with the local assets and our distributed business.

With The Stratosphere being mostly consistent for the most -- through most of the year other than as you get into the fourth quarter which is lower..

Okay. Thank you. Super helpful. Appreciate it. And then switching gears in Montana and sports betting, there was news in the last couple of days I believe. And I know that there were a few details that still needed to be ironed out.

But could you kind of lay out exactly what the bill allows for? I believe licensed bars and restaurants will have kiosks for online sports betting, but I believe the actual system will be run by the lottery providers. So, could you just kind of help us understand that a little bit better and how this should fold into your business? Thanks..

Yes. Chad, I think you're pretty accurate with your understanding. A bill did pass. At this time, I would say it's still a bit murky. What passed was, at this point, more of a lottery-type product versus -- or a random kind of a product versus a true actual sports wagering product.

And to your point, it will -- those -- the activity that is driven through this lottery product will occur on machines, not our kiosks unfortunately, I'll get to that in a minute, but on kiosks that are provided by the lottery operator in the state. When I say a bit murky, we're still a little cloudy.

We do believe it's going to drive additional traffic to the locations in which we operate, you articulated those accurately. At this point, the Tavern distributed and liquor license locations are looking to continue to pursue more of a kind of a true sports wagering option that we've presented to the state through the legislative process.

The bill that we presented have overwhelming support. However, an outgoing governor kind of surprised everyone with this decision and left this kind of murky product in place.

So, we're working on more of a beneficial product for us, driving wagers through kiosks between ourselves and William Hill, which is a much more kind of a direct sports wagering product versus what was passed.

The good news is we do think traffic will be driven into these facilities and so we do think there is an avenue to pursue and continue to pursue rolling out more of a true wagering product that we would be supportive of going forward..

Okay. Thank you very much Blake. Appreciate it..

Thank you..

And our next question comes from the line of John DeCree from Union Gaming. You may begin..

Hi Blake, hi Charles..

Hey John..

Hey John..

Just wanted to -- just a question on the distributed giving business, particularly in Nevada. And I think historically, five to six new locations for the owned taverns per year was the target. It looks like you will hit that by midyear. Just wondering if that's timing of approvals or a change in strategy to get more active on that front.

And then a follow-up, how much more runway do you have to kind of continue to build that base of owned taverns over the next couple of years?.

Yes. John, in terms of just the cadence, it was really based on each individual location that was available to us. The permitting process, both from a real estate and build-out perspective as well as licensing, that dictated that timing.

In terms of the run rate, we'll have 66 within southern Nevada, in Clark County, there's probably close to 400 of these types of distributed locations. So, from our perspective, we have quite a ways to go to the extent we want to accelerate investment within this business model. We like our footprint now. We're clearly the largest in the valley by far.

And so again, we're comfortable with the cadence that we have and we have communicated in terms of rolling out new tavern builds going forward..

Thanks Charles, that's helpful. And a follow-up on that business, with the growth you saw in the first quarter so wondering if you could maybe provide a little bit more color, if it's not too granular, on where you think the growth is coming in the distributed business particularly on the topline.

I know you've talked about renegotiating a lot of the chain store contracts. Obviously, there is a great macro backdrop in the Las Vegas area. Just wondering if you could kind of give your comments on where you think the -- maybe the strength of the business is coming from..

So, on the topline revenue side, it's clearly within our tavern portfolio. We control that entire environment soups to nuts from both the SMB environment as well as the gaming environment. And as Blake mentioned, we view these as hyper local casinos. We have, call it, 65% to 70% of the gaming revenues is rated play within these locations.

And we're incentivizing them just as we would our local casino patrons. So, from that perspective, we're actually able to drive revenues and so you'll see that, that business will perform in line even to slightly better in some cases, than our local casino assets from a revenue growth perspective.

I think what we saw here with this quarter is what we've been articulating and trying to do for a while, which is really stabilize the chain store locations. So, we've done that through recalibrating the economics of many of those locations, more to come throughout the year. So, we do hope that, that accelerates as we're able to do that..

And if I could sneak one more in on the recent acquisitions of Edgewater and Colorado Belle.

When you think about the margin differential between those two properties and what you're doing in Aquarius now and your efforts to close the gap, is that in addition to some of the synergies that you've outlined to sort of overlap? Just any color on the outlook in terms of getting those margins [Indiscernible]..

Sure, so the property over the last -- the properties we acquired, we filed an 8-K earlier this year that outlined roughly $94 million of revenues out of those properties and call it $22 million of EBITDA. So, that's how you get to those low 20s margin that Blake was discussing.

We've also articulated in the past, call it, $3 million to $4 million of synergies over the next two years. Clearly, that synergy the number does not get you all the way to the margins that we're already operating out of Aquarius. Now, are we going to get all the way there? Probably not. Aquarius is the market-leading asset down there in Laughlin.

But we should get hopefully at least most of the way there as we integrate the properties over the next two years. .

Very good. Thanks for all the additional color. Appreciate it..

And our next question comes from the line of Steve Pizzella from Deutsche Bank. You may begin..

Hey, thanks guys. Appreciate the longer to medium term color on the Tavern business. Just wanted to see if we can get an update on trends in the Tavern business from Q2 to-date..

So, we don't provide -- trend -- what trend specifically are you -- I would tell you maybe it was a little bit of anecdotal color. So, we don't give very specifics on the operations that break out Tavern versus chain store versus our third parties.

But I will tell you that our wholly-owned Tavern business on a win per unit basis, yield performs at a meaningful premium to those other two segments, i.e., third-party bar and taverns and the chain stores. And that premium is anywhere from 30% to 40% depending on the locations.

I'd also tell you that those taverns that we operate benefit quite a bit from the Golden Knights, and so that continued. We saw it last year, continued this year and at times when the Knights are playing, whether they're home or away, or our food and beverage revenues are up 20% to 25% in the location during that time period.

So, I'm not sure if that's helpful for you or not but again, we don't give any detail in terms of the breakout between those segments..

Okay, great. Thanks. Appreciate it..

Thank you. And I am showing no further questions at this time. I'd like to turn the call back to Mr. Blake Sartini for closing remarks..

Thank you, operator and thanks to everyone for joining us today. We look forward to updating everyone when we report our 2019 second 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..