Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Golden Entertainment Third Quarter 2020 Earnings Conference Call. At this time all participants are in a listen only mode. A question-and-answer session will follow the formal remarks. Please note that this call is being recorded today, November 5, 2020.

Now I’d like to turn the conference over to Joe Jaffoni, Investor Relations. Please go ahead, sir..

Thank you, Jimmy, and good afternoon, everyone. On today’s call is Golden Entertainment Chairman, Founder and CEO, Blake Sartini; and Charles Protell, the Company’s President and Chief Financial Officer. On today’s call, we will make forward-looking statements under the safe harbor provisions of the federal securities laws.

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 are contained in today’s press release and in 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 today’s call, we will also discuss non-GAAP financial measures in talking about our performance. You can find the reconciliation of GAAP financial measures in our press release, which is available on the website.

With that, it’s my pleasure to turn the call over to Charles Protell. Charles, please go ahead..

Thanks, Joe. Our record third quarter results demonstrated that our diverse portfolio of locals oriented and regional gaming operations has rebounded quickly from the mandated shutdowns in March.

We achieved these results even with the STRAT performing below 2019 levels and the mandated closure of our Nevada bar-areas for most of the third quarter, which negatively impacted the performance of our distributed gaming business.

Our third quarter adjusted EBITDA was led by our Las Vegas locals casinos, which achieved double-digit revenue growth and collectively doubled their EBITDA contribution over last year. The combined EBITDA margin for our 2 Las Vegas locals casinos exceeded 50% for the third quarter.

In Laughlin, with only 2 casinos opened now versus the 3 last year, we grew EBITDA by 8% on lower revenue. The combined EBITDA margin for our Laughlin properties exceeded 40% for the quarter. For our 3 Pahrump casinos, EBITDA improved almost 40% on flat revenue and also achieved EBITDA margins of 40%.

The STRAT continues to improve, and we are seeing overall occupancy in the 50% to 55% range with over 90% occupancy on some weekends. STRAT’s room revenues remain approximately 50% lower than last year, but spend per guest has increased 30%, with most of that spend on higher-margin gaming revenue.

Given the increased customer spend on gaming, combined with the fact that the STRAT has never directly depended on conventions or international bookings, we believe that the STRAT is performing better than most Strip properties as it is generating two third of the EBITDA from last year.

In Maryland, we also saw improvement in performance at our Rocky Gap resort. EBITDA grew over 27% on a 4% increase in revenue. This led to a 39% EBITDA margin for the property. With Rocky Gap combined with our Nevada casinos, our total casino operations grew EBITDA by 20% and improved EBITDA margin by over 1,000 basis points to 37%.

If we excluded the STRAT, our total casino EBITDA would be up 38% over last year, and our casino margins would show more than a 1,300 basis point improvement to 44%. We believe these margin levels are sustainable, primarily based on the fundamental changes to our cost structure within property marketing and labor expenses.

Turning to our Nevada distributed business. We were significantly challenged by the mandated closure of bar areas from July 10 to September 20 as well as the associated costs with closing and reopening these areas.

These challenges cost us approximately $7 million in EBITDA for the quarter compared to last year, while revenue decreased 31% as most of our gaming activity and beverage sales obviously take place at the bar. Needless to say, we are excited to have our bar areas reopened, which is all upside going forward.

Our Montana operations continue to perform well since we opened it in May. Revenue is up over 17% through a combination of new accounts and improved performance from existing locations, while EBITDA is up 7%. In aggregate, total company EBITDA improved 5.5% year-over-year to $45.4 million despite lower revenue.

This led to improved total EBITDA margin of 440 basis points, again, even without the STRAT performing at ‘19 levels and with our Nevada tavern and bar areas closed for substantially all of the third quarter. The strong operating trends we have seen in our local and regional properties since reopening continued through October.

We are generating positive cash flow. And in the quarter, we paid the remaining $10 million of $200 million borrowed under our revolving credit facility.

With $100 million of cash on hand, our balance sheet is essentially at the same level now as it was prior to the shutdown, and we did not need to raise any additional debt or equity capital to sustain or restart our operations.

Looking forward, our near-term focus is on sustaining and improving the performance across our operations, while using excess cash flow to reduce leverage and better position us for future opportunities.

These opportunities include sports wagering in Maryland, expansion of distributed gaming in new jurisdictions as well as returning capital to shareholders. Finally, we want to thank all our team members for their continued dedication to our company and commitment to providing exceptional service to our guests.

The effort from our team has been extraordinary and has contributed greatly to our success. That concludes our prepared remarks. Operator, please open the call for questions..

[Operator Instructions] Our first question comes from Carlo Santarelli with Deutsche Bank..

Just for starters, Charles, as it pertains to kind of the expansion opportunities coming out of the pandemic with the route business, what’s the latest you could tell us in terms of what you might be hearing around kind of potential expansion opportunities in states where maybe the ball is a little bit further down? Is there anything new on that front that you guys are able to share at this time?.

Look, we think it’s going to be considered in several states, I think, now more than ever, and you just saw a referendum to expanding gaming across the country in 6 jurisdictions, sports wagering and otherwise. We think this is a likely form of revenue generation for states going forward, and we’re obviously trying to advance that.

We’ve talked about Pennsylvania for a while. We’re still very active in that market. And again, I think once we get some of the noise of the election settled out and people get to work at the start of the year, we’re going to see movement, hopefully, in that state as well as others..

Great. And then obviously, there was a disclosure that was made recently that pertain to your sports book operations in Nevada and a potential settlement that would come your way in the event there was a change in control.

Is there anything you could share with us pertaining to kind of your thoughts and expectations around that?.

Sure. I mean, look, it’s certainly our expectation that when that transaction closes, that we would receive all of that payment. But obviously, the deal has to close first. So beyond that, we wouldn’t want to make any comment. We’re obviously hopeful that it closes and look forward to that sometime next year..

And then, Charles, what do you do with your existing business? Is there -- obviously, you potentially need to find someone new? Or could you stick with the same regime?.

No. I mean, look, we do have a partnership with William Hill throughout Nevada and the intent to have that same relationship in Maryland and, hopefully, Montana, at some point in the future, to the extent that sports wagering in a form that we like comes to that state. So I think that is -- these are specific relationships around sports wagering.

Obviously, we would be also hopeful for iGaming to be part of a Maryland initiative as the law actually gets crafted next year..

Our next question comes from David Bain with ROTH Capital..

Congratulations on the quarter.

First, I was hoping to understand the plans for the Maryland sports that getting passed yesterday and understand-- from an online perspective, assuming you get a license and confirm that out in terms of skins, would you be looking to do that or go with some other sort of scheme there? And looking at the limited amount of casino licenses in the state, would there be a potential for premiums to what we’ve seen in other markets? Or is it too early to say at this point? Just any kind of thoughts around the sports in Maryland..

Yes. I mean, look, we think so. And look, we’re 1 of 6 operators. We expect that, obviously, licenses would go in a limited fashion, primarily to those operators, and that would be our hope.

Obviously, the details would get worked out in the legislative session starting in January in terms of tax rate and other fees or anything else associated with that. But certainly, for us, with our property in Rocky Gap and ability to market into the state into other populated areas, the Baltimore-D.C.

area, that is very helpful and should be a big driver of value for us and our operations in Maryland..

Okay, great. And then if I could just follow up on what Carlo was asking on Pennsylvania. I mean, clearly, there’s budget shortfalls, timing confines to get budget done. So it looks somewhat promising from our standpoint.

Is there any sort of thought on mobilization should have passed? I mean, maybe just a flavor in terms of potential number of locations or partnerships that you’ve already secured and just the way we can think about that opportunity in terms of like a rollout..

Look, obviously, we’ve been talking about this for several years. So I think it goes without saying that we wouldn’t be doing that to the extent that we felt that we had developed deep and extensive relationships within that state, both from an operating and a regulatory perspective. So we’re excited about it.

We are committed to expanding distributed gaming not only in that state, but across the country in any shape or form that we can. It’s a core part of our business.

And I think if you come back to looking at Pennsylvania specifically and you look at Illinois, which is approximately a $2 billion market, we think Pennsylvania has an opportunity to exceed that based on the number of locations. So we’re excited about it if it happens.

We think it should happen given the budget constraints within that state and others. But legislative processes are tough to call. As you see, we’ve been working on it for 4 years. But again, we’re optimistic about where it heads over the next 12 months or so not only in PA, but in other jurisdictions as well..

And I think that those opportunities are taking a front seat versus the current M&A landscape in terms of casino opportunities?.

Yes. I mean, look, we always look at M&A. I think, surprisingly, there is activity on the M&A side. And equally surprisingly, the prices that we’re seeing are fairly -- the M&A process is fairly robust. So I think that, that is good and healthy for the industry.

But for us, we’re going to be fairly disciplined in terms of how we deploy our capital resources and excess cash flow. And so unless it’s extraordinarily accretive to us and strategic in nature, we will be looking more on the distributed side than in the brick-and-mortar side going forward in the near term..

And our next question comes from Chad Beynon with Macquarie..

Last quarter, I believe you talked about some of the cost reductions. And I guess, today, you’re confirming that margins are sustainable here. Can you elaborate just a little bit more just in terms of the reductions? I believe it’s roughly split between labor and marketing.

But as revenues start to improve, maybe as some of the customers come back who currently weren’t comfortable with the current situation, how should we think about flow through beyond that and the attributable labor marketing that goes to those rising revenues?.

Yes. Thanks, Chad. So -- I mean, look, for us, we believe that those two components, marketing and labor, are entirely controllable, not only by us, but by the industry. So we saw, over the quarter, over 25% reduction in both labor and our reinvestment rate.

And in some markets, that was even higher, particularly down in Laughlin where we’ve consolidated the operations of 3 properties into two.

I’d say of the only piece within -- certainly within the labor side that we think could increase would be something that we would welcome, which would be some of the labor at the STRAT, mainly in regards to housekeeping and operating restaurants and other ancillary business at more normal times. So that would be good.

I mean we have more volume coming through that property. With respect to marketing, particularly within the locals market, we are the smallest player here from a local casino perspective, not so much when you factor in the taverns. But ultimately, we will be -- not be the ones driving the reinvestment rate within town.

We will be watching our own profitability and controlling that highly. But I’m not sure. I think everyone has kind of realized we don’t need to spend so much or offer so much to get our customers into our properties. And that’s a good thing..

Great. And then, Charles, just on the STRAT, as some of the other Strip operators, I wouldn’t even go as calling some of them competitors because I think they operate in a different market.

But as they opened up their properties throughout the quarter, did you see any degradation in the STRAT results or the occupancy levels? Or do you think it was fairly independent from others coming online?.

Well, we did not. It’s fairly independent. I mean it is primarily a drive-in property anyway, mostly from Southern California and Arizona. So again, we did not see that drop off. We understand that there’s certainly properties that are going to be -- recent announcements of properties closing.

I think that, ultimately, may help the STRAT a little bit of an extent. But again, we’re pretty pleased given the environment that we’re doing 2/3 of the EBITDA that we did last quarter. And it’s really because the property has been heavy on OTAs as a traffic driver to the asset and not really reliant on direct large convention bookings.

We do not have 300,000 square feet of convention space. And it’s less than 7% of the visitation and the bookings of the STRAT are international. So those components were never really big piece of the direct business. And so you see that in terms of the performance being sustained a little bit better than others..

Congrats on a great set of results..

Thanks, Chad..

Our next question comes from John DeCree with Union Gaming..

Just had one question on Laughlin. EBITDA performance on a year-over-year basis there was still very good. But compared to some of the other buildings, not as robust. And I was wondering if you could characterize for that.

Is that because one of the casinos is not open? Is it events that’s really missing there? What could you tell us about Laughlin? And then if you’d expect some improvements and where that would come from?.

Yes. So Laughlin would perform quite a bit better to the extent that we were allowed to have concerts at the. So we do have a 10,000- to 12,000-seat arena there depending on how we orient it, where we book relatively large acts. That is obviously not a piece of the business right now. So we’re excited for that to come back.

It’s clearly upside for the market and for our assets as being leaders within that market. When we talk about the Laughlin performance, again, we’re comparing -- we’re doing a straight comparison of 3 assets to 2, even including the drag of having that closed asset right now.

So there’s some ongoing fixed costs with just maintaining the Colorado Belle that you’re not going to be able to get away with. So it’s a really pure apples-to-apples comparison. We’re pretty pleased EBITDA for us in that market up roughly 8% with 2 versus 3 assets..

Yes. It’s great results. And on a forward look, Laughlin has quite a few snowbirds that come down and can stay for extended periods. Wondering if you have any insight into the winter in terms of those bookings, which is a nice piece of business in the winter.

Are you still seeing that same type of trend as you would in normal years? Or any of those customers behaving differently or holding out on booking? Any sense on that would be helpful..

Yes. I mean, look, we’ve seen that -- those trends are sustained and increasing. So we do get a lot of folks that are coming out of the Inland Empire in Southern California either to get away from the fires or get away from maybe more restrictive living environment than what we have.

And we also see that from an RV perspective even in Pahrump, where we have one of the best RV parks in the State of Nevada. So that is absolutely booked solid. So yes, the RV and the snowbird trend is continuing. And I think people are coming out of, again, a more restrictive living environment in California and wanting to spend more time in Nevada..

Congratulations on the strong results in spite of all the challenges..

Thanks, John..

Our next question comes from Dan Politzer with JP Morgan..

I was just hoping if there’s any detail that you could give on the 4Q today trends. Obviously, we’re through October, which is the most important month in the quarter generally for Vegas.

If there’s any kind of commentary you could give on what you’re seeing in the market just given the recent uptick in COVID cases?.

So our third quarter trends, we saw that continue through to October. Obviously, we’re just starting November right now. As you all know, in every election cycle, there’s a bit of a slowdown.

Certainly, with people visiting or spending time traveling in general and go into either their local or regional casinos, and so we’re no different in seeing that for this week. We don’t see any -- beyond that, we don’t see any other sense of slowing down at this point in time..

Okay. That’s helpful. And then on the STRAT, you’ve seen a lot of strength in leisure and on weekends.

I mean as you think about the fourth quarter, do you think that the mix changes significantly for the STRAT, given what we’re seeing across the Strip and a lot of midweek properties closing?.

I mean, look, the STRAT has never really been a midweek asset. It’s really been a tale of being full on the weekends and operating around 50% during the week anyway.

So again, it goes back to other properties, and it was a very profitable business, had a convention and group business that supplemented their weekends with very high-margin midweek convention and group business. Our property never had that. So the falloff we’re seeing is really in just straight visitor volume.

And again, that permeates to us certainly on the weekends as well as during the week, but not to the same extent it does for other properties. And I think, to some extent, not having things open across the Strip, whether it’s entertainment, and restaurant capacity is not back at the full levels, that’s helpful to our guests.

Where previously -- the reason we made our $100 million investment in the STRAT, so it would not be just a dormitory for other people visiting other amenities. I think that’s also helping us in terms of relatively maintaining some level of performance for the property because we’ve actually created an environment where people can and want to stay.

Top of the World, for example, that restaurant that we spend a lot of time with, we’ve seen no falloff in revenues or in performance of Top of the World restaurant. And last year, although it is last year, it was ranked 7th in the country from a revenue perspective and #1 grossing restaurant in Las Vegas.

Those trends have continued even with capacity limitations..

And our next question comes from David Katz with Jefferies..

Charles, I appreciate all the color. I wanted to go back to the STRAT, if I may.

Because I can recall before everything sort of came unhinged, there was a notional level of around, call it, $60 million or so of EBITDA and so much has changed, right? Has anything sort of altered that, either top line or bottom line, right, just given what we think the structure of the world is going to look like and how that impacts people’s visitation and, secondarily, the degree to which you may have been able to drive and reset margins at that property that can endure?.

So -- I mean, I would say that, clearly, those levels, as we were thinking about forecast, benefit from having the town full and having citywide group business that allows the STRAT to pick up and over index during that time.

You guys are making the forecast when that comes back, whether it’s in late next year or early 2022 or some time later, we’ll leave that a bit to you guys. But certainly, we think that the signs are positive for things like Raiders being able to play and entertainment coming back in a more fulsome manner.

And that will help drive and get us back closer to those levels. Again, I know there’s a lot of focus on the STRAT, but if you think about really the business from a run rate perspective, 80% of our EBITDA is coming from regional and local assets not only in Nevada, but in 2 other regional markets. So we’re proud of that building.

We like what we’ve done. We think we made a modest investment in the building, which is helping to sustain levels of EBITDA right now. And look, we’re doing what we can to maintain, and we think, again, that that’s better than those.

And we’re trying to take a leadership position where we can in terms of opening things like comedy clubs with the right social distancing and other things and talking to shows back and reopening those types of things.

But that may be a little bit farther time line than -- obviously than the recovery we’ve seen in the rest of the business, which has been a very sharp the -- in terms of the profile..

Understood. And you’ve obviously set yourself up and you’ve been setting yourself up to generate a lot of free cash.

With the amount of M&A activity that started to bounce around, what is your sort of appetite, temptation level to deploy some of that? Or should we just think about having you get yourself down under a certain leverage level coming out of this?.

So, I think, we’ve done a pretty good job in terms of managing the capital structure. Again, if you go back to -- basically, we didn’t raise any external capital, debt or equity, throughout this. We’ve paid back everything underneath our revolver. So we have plenty of availability.

I think it comes down to what is the highest and best use at this point in time. And for us, it’s about deleveraging the balance sheet, so that we could be positioned for better opportunities. And I’d say the extent and it clearly seems that way, even with some of the momentum that we’re undervalued.

We’re going to be taking hard looks at how we efficiently return capital to shareholders..

And I’m showing no further questions in the queue at this time. I’d like to turn the call back to management for any closing remarks..

So, thanks for joining us, and we look forward to updating you when we report our fourth quarter results..

Ladies and gentlemen, thank you for your participation on today’s conference. This does conclude your program, and you may now disconnect..