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 are 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 is 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 local-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 two Las Vegas locals casinos exceeded 50% for the third quarter. In Laughlin, with only two casinos opened now versus the three 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 three 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 spending on higher-margin gaming revenue. Given the increased customer spending 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-thirds 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 provides 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 an improved total EBITDA margin of 440 basis points, again, even without the STRAT performing at 2019 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.

Our first question comes from Carlo Santarelli with Deutsche Bank.

Just for starters, Charles, as it pertains to 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 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 expand gaming across the country in six 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 pertains 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 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.

Charles, what will you do with your existing business? Do you need to find someone new, or can you continue with the current approach?

No. We have a partnership with William Hill throughout Nevada and intend to establish that same relationship in Maryland and hopefully in Montana in the future, depending on the availability of sports wagering in a favorable form in those states. These relationships focus specifically on sports wagering. We also hope that iGaming will be included in a Maryland initiative as the law is developed next year.

Our next question comes from David Bain with ROTH Capital.

Congratulations on the quarter. I would like to understand the plans for sports betting in Maryland following its approval yesterday. Specifically, from an online perspective, if you obtain a license and confirm details regarding skins, will you pursue that option or explore a different strategy? Given the limited number of casino licenses in the state, is there a chance that premiums could arise similar to what we’ve observed in other markets, or is it still too early to determine? I would appreciate any insights you have regarding sports betting in Maryland.

Yes. I mean, look, we think so. And look, we’re one of six 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 the 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 four 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, we continuously evaluate mergers and acquisitions, and it's interesting to note that there is indeed activity in the M&A space, with a robust pricing environment. This is a positive sign for the industry. However, we plan to remain disciplined in how we utilize our capital and excess cash flow. Unless a potential acquisition is significantly beneficial and aligns with our strategy, we will likely focus more on distributed opportunities rather than brick-and-mortar projects in the near future.

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. For us, we believe that marketing and labor are entirely controllable by both us and the industry. During the quarter, we saw a reduction of over 25% in both labor and our reinvestment rate. In some markets, this reduction was even more significant, especially in Laughlin, where we consolidated operations from three properties down to two. The only area within labor that we think could see an increase is at the STRAT, particularly for housekeeping and operating restaurants and other auxiliary businesses during more typical times. This would be beneficial since we have more volume coming through that property. Regarding marketing, we are the smallest player in the locals market from a local casino perspective, although that changes when accounting for taverns. Ultimately, we will not be the ones driving the reinvestment rate in town. We will focus on monitoring our own profitability closely. It seems that everyone has come to realize we do not need to spend excessively or provide so much to attract customers to our properties, which is a positive development.

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?

We did not see a drop-off in results. The STRAT is primarily a drive-in property, attracting visitors mainly from Southern California and Arizona. We recognize that some properties are closing, which could ultimately benefit the STRAT to a certain extent. Despite the circumstances, we are pleased that we achieved two-thirds of the EBITDA we recorded last quarter. This success is largely due to the property relying on OTAs for traffic rather than large direct convention bookings. The STRAT does not have 300,000 square feet of convention space, and less than 7% of its visitation and bookings are from international guests. Therefore, these factors were never a significant part of our direct business, which is reflected in our relatively stable performance compared to 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. Laughlin would perform significantly better if we were able to host concerts. We have a 10,000- to 12,000-seat arena there, depending on the configuration, where we book relatively large acts. This is not currently part of our business, so we are eager for it to return. This presents a clear opportunity for growth in the market and for our assets as frontrunners in that area. When discussing Laughlin's performance, we are making a straightforward comparison between three assets and two, even taking into account the impact of having one asset closed right now. There are ongoing fixed costs associated with maintaining the Colorado Belle that are unavoidable. Therefore, it is a very direct comparison. We are quite satisfied with our EBITDA in that market, which has increased by roughly 8% with two assets compared to three.

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.

We've observed that those trends are ongoing and growing. A significant number of people are moving from the Inland Empire in Southern California, whether it's to escape the fires or to leave more restrictive living situations. We also see this trend in Pahrump, where our RV park is one of the best in Nevada and is fully booked. The trend of RV usage and snowbirds continues, as people are looking to spend more time in Nevada away from the constraints in California.

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 trending today. 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?

In the third quarter, we observed trends extending into October. As we enter November, it's worth noting that every election cycle tends to bring about a slowdown. This includes fewer visits and less traveling, impacting attendance at local and regional casinos, which we experienced this week. However, aside from that, we do not anticipate any significant slowdown at this 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?

The STRAT has traditionally not been a strong midweek asset. Instead, it has consistently been busy on weekends, operating at about 50% capacity during the week. This is different from other properties that have benefited from high-margin midweek conventions and group business, which our property lacks. The decline we're experiencing is primarily due to a drop in visitor numbers, which affects us on weekends as well as during the week, though not as severely as it does for others. Additionally, the limited operations on the Strip, particularly in entertainment and restaurants, have actually been beneficial for our guests. We invested $100 million in the STRAT to ensure it wouldn’t just serve as a temporary lodging option for those visiting other attractions. This investment has created an environment that encourages guests to stay longer. For instance, our Top of the World restaurant has not seen any decline in revenue or performance. Last year, it ranked 7th in the nation for revenue and was the top-grossing restaurant in Las Vegas, and these trends have persisted despite limitations on capacity.

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?

I would say that the levels we are considering for our forecast benefit from having the town fully operational and citywide group business, which helps the STRAT perform better during that time. You are determining when that recovery occurs, whether it's late next year, early 2022, or later, and we will leave that to you. However, we believe the indicators are positive, especially with events like the Raiders playing and entertainment returning in a more comprehensive way. This will help drive us closer to those levels. While there is a lot of focus on the STRAT, it’s important to note that 80% of our EBITDA comes from regional and local assets, not just in Nevada but in two other markets as well. We are proud of that progress and feel we've made a modest investment in the building that is helping sustain our current EBITDA levels. We are doing our best to maintain this and believe it is a better situation than before. We are also trying to take a leadership role by reopening venues like comedy clubs with proper social distancing and bringing shows back, although this may take a bit longer compared to the rapid recovery we've seen in other parts of the business.

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?

I believe we have done a solid job managing our capital structure. We did not raise any external capital, either debt or equity, during this period. We have repaid everything related to our revolver and have significant availability. The focus now is on identifying the highest and best use of our resources. For us, that means reducing our debt to better position ourselves for future opportunities. It seems we may be undervalued, and we will closely evaluate how to efficiently return capital to our 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 in today’s conference. This does conclude your program, and you may now disconnect.