Good day, ladies and gentlemen and welcome to the Q2 2019 Golden Entertainment, Inc. Earnings Conference Call. [Operator instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Mr. Joe Jaffoni, investor relations. Mr. Jaffoni, you may begin..

Thank you very much, Josh, and good afternoon, everyone. By now, everyone should have access to our second-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 on 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 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 our most directly comparable GAAP measure is available on our second-quarter 2019 earnings release. On the call today is Blake Sartini, the company's founder, chairman, president, and chief executive officer; and Charles Protell, the company's chief strategy officer and chief financial officer.

Charles will start the call with a review of the quarterly results, while Blake will review recent strategic and operating initiatives, after which we'll open the call to questions. Thank you for your patience with that. And with that, it's now my pleasure to turn the call over to Charles Protell.

Charles?.

Thanks, Joe. Golden delivered its second straight quarter of record revenue and adjusted EBITDA as we generated growth in both our casino and distributed gaming operations. We also made further progress across several initiatives that we will discuss after reviewing the numbers.

For the second quarter, net revenue grew 14.6% to $248.1 million and adjusted EBITDA rose 7.6% to $49.8 million, which includes a full quarter of operations from the two Laughlin properties acquired in January.

For our Nevada casinos, second-quarter revenue was $140.3 million, up 24.2% from the prior year while adjusted EBITDA grew 16.7% to $42.6 million.

Growth in the quarter for our Nevada casinos primarily reflects a full quarterly contribution from the Edgewater and Colorado Belle at Laughlin, partially offset by ongoing construction disruption at The Strat.

For our two new Laughlin properties, we are on track to realize roughly half of our targeted $4 million cost synergies by year-end and we will capture the balance in the first half of 2020. We also completed the rollout of our new TrueRewards 1 card player loyalty program and related casino management system at all of our casino properties.

We expect to see benefits from increased cross-play in targeted marketing toward the end of the year.

At The Strat in the second quarter, we continued to see evidence of improved performance in areas we have renovated, such as our new taproom and lounge connected to our renovated sports book, as well as some upgrades we've completed to the SkyPod and several F&B outlets.

In addition, we continue to see approximately $20 ADR premium over the standard room rate in our renovated rooms. At the end of May, we began renovations on the casino floor, which will continue throughout the balance of the year.

With our push to complete the remaining casino floor renovations by year-end, we expect to see increased disruptions to property's operations over the second half of the year. In addition, we started remodeling approximately 250 rooms with about half expected to be finished in Q3 and the other half completed in Q4.

At the end of this year, almost 900 out of 2,400 Strat hotel rooms will have been renovated within the last three years. This includes about 300 rooms renovated immediately prior to our acquisition of the property in 2017. At Rocky Gap in Maryland, revenue increased 2.5% on a year-over-year basis while EBITDA declined 5.4% to $5.4 million.

Competitive pressure has increased from legal sports wagering in neighboring jurisdictions which is resulting in higher marketing and promotional expenses at Rocky Gap. Turning to our Nevada distributed business. Total revenues during the second quarter were $71.4 million, a 2.8% year-over-year increase.

Adjusted EBITDA of $11.3 million was up 6.7% over the prior year, reflecting improved performance from our chain store locations as a result of renegotiated rents across roughly 50% of those types of locations, as well as the opening of six new taverns since the end of 2018 second quarter. We also opened our 66th tavern in July.

And as the largest operator in the state, we believe, their current infrastructure can support meaningful future expansion. In Montana, our distributed operations generated revenues of $17.7 million, up 11.4% year over year. Adjusted EBITDA for the Montana distributed business grew 5.9% year over year to $2.3 million.

Our growth in Montana reflects the addition of new locations, as well as our proprietary games which are generating higher location revenues. Corporate expense of $11.8 million in the second quarter was in line with our previously communicated expectation of approximately $12 million per quarter. Moving to the balance sheet.

In April, we completed a $375 million, seven-year senior unsecured notes offerings priced at 7.625%. Proceeds from the offerings were used to repay a $145 million of revolver borrowings, $18 million of our first-lien term loan and to retire our $200 million second-lien term loan, which had an interest cost of 9.5%.

Currently, we have no outstanding borrowings under our $200 million revolver and have a $772 million outstanding of first-lien term loans. We ended the second quarter with cash and cash equivalents totaling $117 million and total outstanding debt of approximately $1.15 billion. As of June 30, our LTM net leverage was approximately 5.6 times.

Total capital expenditures for the quarter were $26 million with approximately $15 million spent on our ongoing renovations at The Strat. Other than maintenance capex, our capex for the quarter also includes costs related to new tavern builds and the install of our new casino management system.

We expect to spend approximately $45 million of additional capex this year, of which approximately $30 million is related to the Strat renovations. All of our capital expenditures will be funded with cash flow from operations.

By the end of this year, we will have spent approximately $84 million on The Strat since starting work last year and will have remodeled almost 600 rooms, completed the renovation of the entire casino floor, built the state-of-the-art sports book, added new SMB concepts and refreshed existing venues, remodeled SkyPod and Sky Jump experience, created a new entertainment venue on excess land and updated the lightning and exterior features of the property.

As we look to future phase renovation projects for The Strat, we continue to consider group meeting space design and other uses for the mezzanine level of the property. We don't anticipate any spending on the mezzanine level until mid-2020 at the earliest.

It feels that The Start can operate cohesively with the investments we've made by the end of this year. While we don't provide formal guidance, we remain comfortable with the full-year consensus estimates for 2019, which factors in our current view on future disruption at The Strat.

As we move to the back half of the year, we're evaluating discretionary free cash flow allocation between the reinvestment in our portfolio of wholly owned casino assets, debt reduction, returning capital to shareholders and acquisition opportunities that continue to present themselves to us.

Based on this year's consensus estimates, we generated over $3.40 per share in discretionary free cash flow, which positions us well when considering future opportunities to create long-term value for our shareholders. I'll now turn the call over to Blake to provide additional color on our initiatives..

Thanks, Charles. I'd like to share with everyone my perspectives on the continued progress we are making across several key strategic growth and operating initiatives. Starting first with our ongoing renovations at The Strat. Despite the construction disruption, the feedback we receive from guests and team members has been extremely positive.

Early results from our completed renovation projects continue to reinforce our expectations that the capital spend at The Strat will drive improved financial performance and meet our return expectation. Renovated rooms continue to generate a premium over standard room rate.

The newly opened or refreshed food and beverage venues are producing more revenue and our sports book and View Lounge have become popular gathering spot for our guests. Our investment thesis remains simple. Approximately 2 million guests visit The Strat each year, obviously stay at the hotel or experience our restaurants and rides in the SkyPod.

We want to give every one of these people a reason to stay in our property a little longer by offering experiences that give them a chance to spend a little more. A pull-through on just a small level of incremental spend will significantly improve The Strat's operating results.

In the second half of the year, we will focus on updating the casino floor and the remodel of additional hotel rooms. We started the casino renovations at the end of May and are now working on the central part of the floor.

This will be a bit more disruptive than other property construction, given the need to temporarily remove a number of table games through August, as we complete this section. That said, we have staged the casino remodel to complete no more than 20% of the casino floor at any one time, which should mitigate disruption.

However, this extended the time needed to complete the casino renovation through the end of this year. We will continue to be disciplined at balancing cash flow with construction as we progress through these renovations.

By the end of the year, we intend to finalize group meeting space design and will evaluate the appropriate timing if and when to add this amenity to The Strat. Even ahead of this potential project, I believe the targeted upgrades to the property we will complete by year-end will allow us to compete more effectively with other Strip assets.

Based on our current investment, The Strat will be well-positioned to take advantage of citywide traffic drivers in 2020 such as Conexpo, the NFL Draft and the Raiders pick-up season in Las Vegas. Turning to our efforts at Laughlin, we have completed the integration of the Edgewater and Colorado Belle that we acquired in January.

As Charles noted, we expect to begin to benefit from the realization of about 50% of our targeted synergies for these properties in the second half of this year. We are pleased with our initial progress with these assets and remain very confident that we can improve operations and drive margin expansion.

Our Nevada casino is operating at over a 30% EBITDA margin while our hottest property in Laughlin operates at close to a 40% EBITDA margin. The Edgewater and the Colorado Belle operate at margins below 25%, highlighting our confidence in the upside of the acquisition.

In regards to the rollout of our new TrueRewards player loyalty program, it has been very well received by our players, particularly in our Arizona Charlie's Las Vegas locals properties.

Pending regulatory approval, we intend to integrate our loyalty program with our taverns and certain distributed gaming locations to create a network of 130 total locations, including casinos, taverns and grocery stores, which will represent the largest location network of any players carving the industry. Moving on to distributed gaming.

We're encouraged by improved profitability in our Nevada business and the continued growth of our Montana operations. We have a dominant position in Nevada and growing market share in Montana. As the largest distributed location operator across multiple jurisdictions, Golden is well-positioned to expand our business into existing or new markets.

By design, our portfolio of gaming assets is Nevada-centric. The regulatory environment is stable, the population is growing and the future gaming supply is limited.

We have deliberately pursued an acquisition strategy of wholly owned casino properties in Southern Nevada and are reinvesting where we see the highest return on capital over the long term.

I have no doubt the favorable economic trends supporting Las Vegas and Nevada will support the growth of our business, positioning Golden for future success and increase value for our shareholders. With that, operator, please open up the call for questions..

Thank you. [Operator instructions] Our first question comes from Chad Beynon with Macquarie. You may proceed with your question..

Good afternoon. Thanks for taking my questions.

Blake, Charles, regarding The Strat room renovations that you talked about for the back half of the year, will the design and product be similar to what you've already renovated? And should we expect a similar type of ADR lift on these rooms once they're fully open? And then secondly on that, will you able to do anything with the resort fees or there's something that you want to be a little bit more cautious on until you have more of the updated rooms?.

To answer your first question, the short answer is, yes. The rooms will be consistent with the current product we're producing. We are going to initiate some suite product, obviously, which would be differentiated a bit from the design and FIT type of product.

And yes, we anticipate to continue to receive the premium that we're currently receiving on the new room product. So I would say the answer is, yes, to that part of the question.

As far as the resort fees, we've always said and I continue to be true to the fact that The Strat is a mid-market property that represents a solid value with a five-star experience is how we're approaching this property.

We mean -- I think it's a pragmatic and disciplined spend of capital on a property that really has been touched significantly for 19, 20-ish years. And given this, the overall positioning of the property and our approach to the renovation, we're going to be cautious and stay the course at this point with our resort fees.

We have free parking, which we will continue with as well. And I think that positioning of that property along with our renovations if our early results in the new revenue -- in the product is an indication are going to be very well-received..

And then on Illinois, I guess a two-parter. Firstly, we all saw the gaming build expansion, which makes the route operations in Illinois potentially more attractive. And then secondly, there was a large acquisition that what some of you had a pretty full multiple.

Does this change your outlook on potentially acquiring someone in the route operations? Or does it just kind of justify the business that you've built over the years? Thanks..

Look, I think it's a little bit of both. I think this is probably a bit more the latter than the former in terms of justifying. We believe that that piece of our business is significantly undervalued.

I say in terms of -- for us, we have an ability through our two business units, whether it's casinos or distributed, we're looking at what's the best place to deploy capital.

So we can look at acquisitions in Illinois pretty full multiples or we can look at wholly owned casino assets right next to the assets that we operate where we have synergy opportunities at a better-blended multiple. And that was the decision that we made at that time.

So we are watching and seeing what happens there and say that Illinois gaming expansion build is probably better for some than for others within that market. And so you have to really see how that plays out as more supply gets developed, who really uses more machines and if there's any potential for future tax increases in the future..

Thanks, Charles. Thanks for the results, guys..

Thanks, Chad..

Thank you. And our next question comes from David Katz with Jefferies. You may proceed with your question..

Are you there, David?.

If your line is on mute, please unmute..

Maybe we'll circle back to Mr. Katz..

No problem. Our next question comes from John DeCree with Union Gaming. You may proceed with your question..

Just a question, I guess, on high-level on Las Vegas market, overall.

It sounds like what we're hearing from some of the larger operators on the Strip that things are looking better in 3Q than maybe they did last time we were on the phone for these earnings calls and realizing you have some disruption at The Strat and don't have as much of a booking window, but wanted to get your thoughts on how Las Vegas looks for you or broadly speaking for the market in the back half of the year?.

Yes. Sure, John. So from our perspective, as you know, The Strat's got limited visibility into forward bookings given its high reliance on RTA channel. So you're going to have -- for us, a significant amount of bookings coming within a 30-day window. That said, The Strat performs well when the rest of the Strip performs well.

And so we've seen that from a room occupancy and room rate perspective within that property. That being said, that's offset with disruption that's going on with the renovation that we're making..

I think, generally speaking, John, to answer your question, in the short-term window, things feel pretty consistent. I mean, if you look at ADR and RevPAR on Strip in Q2, ADR up a little over 3%, RevPAR up almost 5%. The Strat was may have been pretty close or even little bit better in the second quarter in terms of the rooms.

I think Las Vegas is feeling good. We've always said that. There are going to be some ups and downs, but as far as the booking window, I think Charles has addressed our limited visibility into that.

But my general feeling and what I am hearing and talking to people around town is this kind of second-quarter consistency they feel like is continuing into the third quarter, and we're feeling it somewhat as well..

That's helpful. I appreciate the additional color. And to kind of stay on The Strat, I think, Blake, in some of your prepared remarks, you talked about the disruption at Stratosphere as you kind of move from table games around being pretty impactful through August.

I'm wondering if you guys could give us a sense if back half more impacted than first half, but that split between 3Q and 4Q, will that disruption start to abate as we get into 4Q a little bit? Or pretty steady for the rest of the year?.

So I think that there's -- I'd say this -- we'd mentioned we're still comfortable with consensus estimates for full-year EBITDA. We are starting on the renovations at casino floor. We're in the need of this. We're doing it in phases, so we'd expect that to be fairly linear in terms of the disruption over the balance of the year.

To give a sense of context, if you look at first half of the year versus last-year first half, the disruption is about 5% to 6% of EBITDA for The Strat so far. So that's within the realm of our expectations, maybe even a little bit better. So we're doing a good job of managing that.

And again, we expect to see that similar type of cadence through the back half of the year..

Got it. Really helpful. Thanks for the questions, guys..

Thank you. [Operator instructions] Our next question comes from David Katz with Jefferies. You may proceed with your question..

Hi. Good afternoon, gentlemen. Sorry, we're jumping around quite a bit this afternoon..

Okay..

What I wanted to try and get at is the degree to which you can affect some change or improvement or impact on the OTA levels within the property as the renovations are ongoing, right? Are there any sort of infrastructures or strategies that you have put in place or put in place now? And I guess the last part of my question is to the degree that you -- I hope you haven't addressed this already, but when we get to 2020, can you paint us a qualitative picture of what The Strat looks like then?.

Yes. So David, on the OTA litigation, I guess, to your first question, while we're under construction. We have and are continuing to attack that part of our business and have begun through adding a more robust casino marketing program, adding some high-level casino team members and hosts. We have implemented the one-card program.

I think we're signing up about 6,000 people a month now at The Strat for the one-card, for our casino card. So through that program and through more connectivity to our guests between the front desk and the SkyPod in terms of their information, we are initiating a beginning of that program.

So that will only ramp up as our casino program gets close to being finished.

At that point in time, with the larger new room inventory of 600 of our hotel rooms in our remodel and about 900 of the rooms that have been remodeled prior to our ownership, we anticipate a continued improvement in displacing OTAs with FIT and other more retail-oriented room customers.

So that is ongoing and it's happening as we are under construction. As far as 2020, I think, that's a pivotal year for the Stratosphere. Our anticipation is our construction disruption and our remodel program on what is visible for the consumer from the time we enter the property pretty much through the entire first floor will be complete.

New slot product, our one-card program, our casino marketing program, room remodels, as we mentioned, about 600 rooms. And in 2020, with a clean slate, I think, The Strat is going to look and feel a lot differently.

And as a result, our expectations for that property, assuming the macro environment continues to be consistent, the property is going to -- I think, the 2020 is going to result in a change in look, change in feel and from my perspective, change of performance of the property..

Got it. Thank you very much..

Thank you..

Thank you. And I am not showing any further questions at this time. I would now like to turn the call back over to Mr. Sartini for any further remarks..

Thank you, operator, and thank you, everyone, for joining us today. We look forward to updating everyone when we report our 2019 third-quarter results..

Thank you, ladies and gentlemen. Thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone have a wonderful day..