NEW ROYAL HOLDCO I INC. Q4 FY2020 Earnings Call

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Golden Entertainment Fourth Quarter 2020 Earnings Conference Call. Please note that this call is being recorded today, March 11, 2021. Now I'd like to turn the conference over to Joe Jaffoni, Investor Relations. Please go ahead, sir.

Thank you, Towanda, and good afternoon, everyone. On the call today is Blake Sartini, the company's Founder, Chairman, and Chief Executive Officer, 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 our filings with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to update these statements as a result of new information or otherwise. During the 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 our website. On this afternoon's call, Charles will first review details of recent results and provide a business update. Following that, Blake and Charles will take your questions. With that, it's my pleasure to turn the call over to Charles Protell. Charles, please go ahead.

Thanks, Joe. Before talking about the quarter, we want to thank all of our team members for their continued dedication to our company and commitment to providing exceptional service to our guests. Twelve months after the start of the pandemic, the extraordinary effort from our team members continues and has contributed greatly to our success in managing through the unprecedented challenges of 2020. Similar to other operators, our fourth quarter began very strong with record EBITDA in October, which accounted for roughly half our total EBITDA for the period. As you are probably aware, capacity and other regulatory restrictions became significantly more stringent in November and December, which impacted the full quarter results. Even so, we generated over $200 million in revenue and almost $40 million in EBITDA for the quarter. Despite increased restrictions, our fourth quarter performance provides strong evidence that our operational efficiencies are driving sustained margin improvement at our properties. While two months don't make a trend, January and February were much better than November and December, leading us to believe that this was the low point for our properties and that loosening restrictions will continue to support improvement in our business. Fourth quarter EBITDA for our Las Vegas local casinos increased more than 21% year-over-year as our local casinos EBITDA margin improved by more than 1,000 basis points. In Laughlin, which is highly dependent on California driving customers, EBITDA was lower, but the EBITDA margin was up over 700 basis points. For our Pahrump casinos, EBITDA improved more than 14%, and we achieved a 650-basis point margin improvement. Looking at all our Nevada Casino Resort operations, excluding the Strat, EBITDA was up 5.6% on an 840-basis point margin improvement. Our Rocky Gap casino operations were hindered by weather and increased restrictions, but we still generated over $4 million in EBITDA for the quarter. When looking at our combined casino operations, excluding the Strat, casino property level EBITDA grew nearly 3% with a 670-basis point margin improvement. While the increased capacity limitations and other restrictions impacted all of our properties, it should be no surprise that the biggest impact was felt at the Strat given that California, our largest driving market, was implementing stay-at-home orders and even further restrictions than Nevada. With our room base and fixed cost structure, occupancy needs to be above 30% for the property to breakeven, and we saw occupancy fall from about 50% in October to just about 30% in December. The Strat still generated positive EBITDA for the quarter. And for March, occupancy is forecast to be above 50%, reaffirming our view that we hit the low point in December with the property. Turning to our distributed business, in Nevada, fourth quarter EBITDA improved 2.5% year-over-year, mostly due to EBITDA growth from our wholly owned Tavern portfolio as we simplified our menus and streamlined labor to offset capacity restrictions. In addition, our Montana operations continued to perform well, with revenue up over 5%, while EBITDA was up more than 4% year-over-year. Our Nevada and Montana distributed businesses also grew year-over-year in January and February, and we see this trend continuing as our operating environment becomes less restrictive. Moving onto our balance sheet. We have a strong liquidity position with more than $100 million in cash on hand and no borrowings on our $200 million revolving credit facility. If you were a shareholder during last year, you know that we did not need to raise any dilutive new equity or debt or sell our real estate to get through 2020. So our capital structure is essentially the same place now as it was prior to COVID. Looking forward, our near-term focus is on improving the performance of all our operations while prioritizing free cash flow for debt reduction. At 2019 EBITDA levels, we would generate over $3.50 per share in free cash flow. And excluding the Strat, all our other businesses collectively already exceeded 2019 EBITDA in Q4. We are confident sustained margin improvement from our casino properties, which generated over $600 million in revenues in 2019, and continued growth from our distributed business will further build on our free cash flow. We are also positioned to capitalize on future opportunities, such as sports wagering in Maryland through our partnership with William Hill and the potential for expansion of distributed gaming in new jurisdictions. While we are very comfortable with our debt structure, which is long-dated with no financial covenants, prioritizing leverage reduction will provide us with more flexibility to pursue accretive opportunities and the return of capital to our shareholders. This concludes our prepared remarks. Blake and I are available for questions.

Our first question comes from the line of Carlo Santarelli with Deutsche Bank.

Hey, Charles and Blake. And Charles, thank you for the comments. Just in terms of kind of the candor around the monthly sequencing, obviously you noted that October was roughly half of your fourth quarter. And you also noted January, February much better than November, December. Any color you could kind of provide around how January and February compared relative to October from an EBITDA perspective?

Yes. From our perspective, EBITDA in October was just a monster month for us. So we're not at those levels. But I would say trending quite frankly higher than where we were in 2019 at this point. So we're highly encouraged by what we're seeing so far.

Great. And then, Charles, you did talk a little bit about kind of capital returns to shareholders. Could you kind of talk maybe just and provide a little bit of color around what you'll use as kind of a guidepost as to when you feel you're there and at that point when you could start doing so?

Yes. I think for us right now, we're on the trend. And I think we've said in the past, Carlo, that we're going to get to 2019 levels and exceed those faster than people think. This year, we intend to prove that out. And as we do that, as we get towards the back half of the year, we'll be generating cash, deleveraging the business, and we should be in a position where we think about potential returning capital to shareholders.

Could you provide an update on what you're observing in terms of reservation demand for October, which seems to be a significantly better month compared to previous trends? I'm aware that booking windows are quite lengthy, but I’m interested in your insights regarding reservation activity over the past few weeks as the pandemic appears to have eased somewhat.

Yes. So Carlo, your question is specific to the Strat?

Yes, more of that.

We're seeing improving trends for sure. January better than obviously the last of the fourth quarter last year, February better than January. We're seeing weekends this month that are in the 80% occupancy range, which is highly encouraging. And we're seeing the trends continue into March. As you mentioned, and we've talked about before, our booking windows with the lack of the convention business or business travel in general, is a fairly short booking window. So although I'm confident in seeing these early trends, January, February, March and somewhat into April at this point, that we're seeing demand ramp up pretty nicely going forward here.

Our next question comes from the line of David Bain with B. Riley.

Congrats on the margin and really overall execution. I guess, kind of following up on the Strat, even with the known challenges, clearly it's been more resilient than many of the other strip properties with some structural advantages. But I'm wondering how much you believe the remodel completed right before COVID really worked to sustain certain levels of business. And looking at 2019, if you could speak to maybe your confidence level now in a 15%, maybe even 20% return on CapEx after the environment hits pure normalization?

Yes, David, to be perfectly honest, it's hard to say whether or not the $100 million investment or so, the remodel of the property, had much to do with our performance. As you said, maybe better than other strip operators during the year. I will say because COVID was so unpredictable, and the restrictions were so variable on an ongoing basis managing through those, it's really hard to say. But I can tell you that during this time period, this challenged time period to your question, guest spend was up. We are seeing people stay on the property longer, even at these lower occupancy rates, which bodes well for our thesis for investment in the first place. I can tell you those two things pretty clearly. And to your one thing I would mention, actually, is our Top of the World restaurant is outperforming even in this environment. As we've revamped menus and offerings and environment, it's become a certain attraction here in Las Vegas, a must see, if you will, or a must attend. We're seeing very large numbers. So the property, the remodel, kept people on the property longer, and they're spending more. Top of the World is being a real driver. And to your point about 2019, the property at that time, pre-COVID, ran at about 90% occupancy on a year-round basis. Given we're seeing customers spend more, they're sticking around the property more, we feel confident that as things normalize, I think we've said in previous calls, that 15% return we targeted on that capital, I feel very bullish on our ability to generate that return on this remodel property once things return to normal.

Okay. Fantastic. As a follow-up, it seems that the change of control for William Hill is expected to occur around April, triggering a cash payment of up to $75 million to you. It’s somewhat challenging for an outsider to gauge the potential cash infusion's amount, and whether it will fall on the lower, mid, or upper end of the spectrum. Can you provide some insight into where that might land?

Yes. I'd say, look, based on the public information and the valuation that we see, we'd expect to get substantially all of that $75 million. So at this point, we have to wait for that deal to close to really engage with that. But from my perspective, the valuation parameters are clear.

Our next question comes from the line of David Katz with Jefferies.

Charles, in your remarks, you made a comment about cash flow and doing a little bit better than you have historically?

That's right.

So if I look at 2019 and see that revenue converted to cash from operations, just using that as a proxy for the moment, it was around 12%. Is there anything you can talk about of sort of order of magnitude as to how revenue turns into CFO and actually better?

There's a little bit of feedback on your line, David, but what I was trying to get at in my comments, are yes, if you took our 2019 level EBITDA of roughly $184 million, and you subtract CapEx and interest expense, you're left with about $100 million in free cash flow. We have roughly $200 million in NOLs, so I don't expect to be a taxpaying entity for quite some time. And so if you take that divided by our share count, it's roughly $3.50 a share in free cash flow. And if you look forward at what could add to that, we've talked about margin improvement in a very big and meaningful way over the last two quarters. So even if you don't want to underwrite 1,000-basis point margin improvements and you talk about a 500-basis point margin improvement on a conservative side, for $600 million of casino revenues, that's an extra $30 million in EBITDA and $30 million in cash flow. Or more than $1 per share. So that's kind of, at least in our mind, again, the sustainability of the margins that we've now seen for the better part of the last two quarters and continuing into Q1 of this year that we think is a tremendous opportunity for us if we just focus on that to provide the company with a substantial amount of cash throughout this year that will allow us to de-lever and think about some other opportunities.

Perfect. And if I can follow that up, which you've nicely segued for me, just thinking about target leverage or comfortable ranges of leverage before you would start to return capital through buybacks or look through other alternatives, how are you thinking about that?

Yes. I mean, look, I think those options present themselves to us really when we get below 5x on a leverage basis, which I intend would be under that by the end of this year if we're on this trajectory. And so again, I think as we said earlier, I think our goal is to prove out what we think will happen, which is margin expansion and cash flow generation for the first half of this year. We'll have cash on our balance sheet which will be deleveraging in itself, and then we'll be positioned to look at how to deploy that capital through debt reduction, return of capital to shareholders is our number one and number two priorities before we move onto other opportunities.

Our next question comes from the line of Chad Beynon with Macquarie.

I wanted to ask about the Montana routes portfolio that was sold last week. Looked like it was a pretty full multiple from our standpoint. I know you guys have talked about obviously growing more in distributed, whether it's organically through new markets or inorganically through M&A. But wondering if you could just kind of chime in on what the market looks like, what's happened to multiples, how you're thinking about this? And then also kind of a sidebar on that, how should we think about the Nevada Tavern market? Are there properties that are closing and you could grow moving into those assets or maybe just gain share in those markets as well? Thanks.

Yes, Chad. Regarding the Excel Century transaction you mentioned, it was sold at full price for a business that's about one-third the size of our restricted business in a competitive market. This reinforces our view that size and scale are important for valuing these businesses. You can see the math as clearly as we can; they paid full price for a business that was significantly smaller. We were not part of those discussions, and it's likely they didn’t want to involve a major competitor. However, we are well positioned in that area with a centralized competitive advantage and have experienced organic growth every year. In Nevada, Century isn't a significant factor for us, so we feel secure in our position. In general, we have put significant effort into Pennsylvania over the last three to four years. As you know, VGTs are legal at truck stops in Pennsylvania, and the state is facing challenges with skill games that benefit only the operators. We remain active in Pennsylvania, where there is ongoing movement around draft bills for expanding that business. We're also targeting specific states with promising momentum for this type of business, which may see short-term or longer-term results. The process can take time, but I am confident that as one of the leading distributed gaming companies, we will see progress in the legislative areas we are focusing on, leading to growth in that business. The timeline is uncertain, but Pennsylvania offers a good model for what we can expect.

Okay. Great, thanks, Blake. And then with respect to your traditional casino customer, the demographic, I know everyone has talked about that 55-year-old and older age group, which I believe for you guys accounts for a little over 50% of the casino business, still not really coming back to the properties. Can you just kind of confirm that you were able to put up these results in the fourth quarter with that piece of the database still largely at home? And then did you see any encouraging signs in the past couple of weeks as people are getting more comfortable getting vaccinated? And are there any signs that we should be heartened by this recovery?

It's a great question. To take the second part of your question first, we're beginning to see that part of the database, that 65 and older, if you will, database starting to trickle back in. As vaccinations become more widespread, I think people feel at that age safer in going out. You're right. The fourth quarter, as Charles mentioned, all of our assets performed better year-over-year except for the Strat, and that was without this substantial part of this database which was missing. I think in our case, it was about 40% of that portion of the database had still not returned in the fourth quarter. And so as that continues to come back, and as I mentioned, that's beginning to trickle in here as we see vaccinations and people's attitudes towards getting out loosening up a little bit. We see that as a very positive sign along with the margin improvement and the other things that we're doing within the business to improve it. We see that as a great catalyst going forward. So when I say trickle, it is kind of trickling in now, but we're seeing that trend build, and that's going to be, I think, it's going to be highly advantageous for us as they come back.

It's great to hear. Thank you very much. Best of luck.

Our next question comes from the line of John DeCree with Union Gaming.

Blake, if I could ask you a follow-up, and I know there's going to be very little data, but perhaps a little bit. I think your comments on that older demographic trickling back seems to be about footfall and getting that customer back in the door. I'm curious if even anecdotally you could kind of talk about how that customer is spending. We're all kind of thinking about the notion of pent-up demand, and this particular customer has been on the DL or the sidelines for the better part of a year. Curious if you're seeing them spend more than they typically do or if they're kind of spending similar patterns, it's a little early, but any insight would be interesting.

That's a good question. As a matter of fact, we are seeing more spend from the database that's coming in. And I see that continuing with this portion of the database that's yet to come back into our properties, if you will. I think there are some national stats that savings accounts in general and savings for people are at all-time highs or close to it. I would say that a lot of these people that have not entered the casino yet are part of that group that have some of these larger savings accounts than maybe they've had in the past. So I think yes, I think we're seeing in some cases about 25% per visit more in spend than we had pre-COVID, if you will, or prior. Your question is clairvoyant. We're confident that we'll continue to see that, particularly as the new stimulus package gets released here shortly.

Thanks, that's helpful. That's good to hear. If I could ask one more on the Strat and your perspectives on a recovery in Las Vegas as it relates specifically to your business at the Strat. There's a school of thought that a lot of folks waiting for the convention business to really bounce back and the Strat doesn't have much convention space here. So what do you think about your customer demographic and the road to recovery into Las Vegas? What are your kind of perspectives on how that might play out over the next 6 or 9 months as people get back and airlift starts to come back to Vegas? Do you really need to see that big convention mid-week business come back? Obviously, it helps everyone, but curious how you look at your business specifically.

Yes. Look, I think it's hard to ignore the fact that big conventions and large groups in town benefit everyone. In our case, certainly they benefit the Strat as room rates associated with those groups trickle down and allow everyone to generate a better yield on their rooms. So that's not to be ignored. But as we've talked about in the past for the Strat, the Strat is not reliant upon that business specifically. We do get a lot of foot traffic, a lot of flow-through from that business into our tower in our restaurant at Top of the World, which is a good thing. But we are not dependent upon that. And as we've mentioned in the past, our drive-in business is really where that property is going to see the upswing. So as Las Vegas continues to recover in general, the Strat I think is going to be well positioned, particularly as our city reopens with sports events, the NFL, the NHL, and entertainment. All those things tend to fill this basket, if you will, of Las Vegas entertainment options. Our base businesses, the leisure travel is the drive-in, and that's where our bread and butter is going to be made at that property. I do think that that part of the Las Vegas visitor may recover more quickly. We'd seen before the restrictions late in the fourth quarter that people are willing to drive and come to town, and our property was faring very well at that time. So I think we will pick that up maybe earlier than some of the other properties as conventions are maybe weighted later in the year.

Thanks, everyone, for joining us. We look forward to updating you with our first quarter results.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.