Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Golden Entertainment Second Quarter 2022 Earnings Conference Call. At this time all participants are in listen-only mode. A question-and-answer session will follow the formal remarks. Please note that this call is being recorded today, August 4, 2022. Now I'd like to turn the conference over to Joe Jaffoni, Investor Relations. Please go ahead, sir.

Thank you very much, operator, 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 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 our website. We'll start the call with Charles reviewing details of the 2022 second-quarter results and 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. We had another strong quarter, the second highest quarterly revenue adjusted EBITDA in our history, surpassed only by Q2 of 2021. During the quarter, we delivered revenue of $289 million and adjusted EBITDA of $75 million and a 26% margin. Our adjusted EBITDA margins have remained constant over the last four quarters, which speaks to our continued operating discipline and our confidence in the sustainability of our margins going forward. While we always expected Q2 of 2021 to be a challenging comp due to the pent-up demand and stimulus impacting last year, we achieved sequential revenue and adjusted EBITDA growth of 6% and 11%, respectively, over Q1, demonstrating the positive trends of our business. Revenues for our Nevada Casino Resorts rose slightly year-over-year to $108 million, while adjusted EBITDA of $38.9 million declined from $46.6 million. Sequentially, resorts grew revenue and adjusted EBITDA 11% and 16%, respectively, over Q1. Our resorts margins declined versus prior year, primarily as a result of labor cost increases, which were largely implemented in June and July of 2021, as well as the increased cost of goods and utilities. In June, supply chain issues with our linen provider forced us to hold back significant room night inventory, limiting occupancy primarily at The STRAT. We estimate this cost us over 15,000 room nights and $2 million to $3 million of EBITDA at The STRAT during the second quarter. We have since transitioned to alternative linen suppliers and do not anticipate similar issues going forward. Given our occupancy limits during Q2 at The STRAT, we were unable to capitalize on increasing citywide midweek group business as much as we would have anticipated. We're still missing 20 points of occupancy at The STRAT relative to our 2019 levels, which offers material upside for the business as the segment continues to recover. In Laughlin, we continue to see improved attendance at our live entertainment with nearly 33,000 concert tickets sold for various events in the quarter, which has been driving visitation to our Laughlin casinos. For our Nevada Local Casinos, revenues were $39.8 million compared to $43.5 million a year ago, and adjusted EBITDA was $19.8 million for the quarter compared to $23.6 million in Q2 of 2021. Our decline reflects the challenging comparison to the second quarter last year. However, both revenue and adjusted EBITDA were flat sequentially from Q1, and we anticipate continued stability over the second half of the year. We continue to see a rational promotional environment in the locals market, which has contributed to our ability to maintain margins around 50% despite increases in labor and other costs. Turning to Maryland, revenue was $20.5 million compared to $21.2 million a year ago. And adjusted EBITDA was $7.2 million for the quarter compared to $8.3 million in Q2 of 2021. Sequentially, Rocky Gap grew revenue 15% and adjusted EBITDA 30% over Q1. At Rocky Gap, labor cost increases over last year primarily contributed to declining margins in addition to transitioning our hotel revenue management software in May. This caused some disruption, but we have already seen more effective rate and occupancy management going forward. For Distributed Gaming operations, revenue was flat to prior year at $121 million, while adjusted EBITDA declined to $22.2 million from $24.9 million last year. Sequentially, Distributed revenue was up 2% over prior quarter, and adjusted EBITDA grew 1%. Margins were modestly impacted year-over-year from increased labor costs, but more affected by increased rents within our chain store portfolio in Nevada that were established in June of last year. Our Nevada wholly owned taverns continue to perform well, with our locations continuing to benefit from the influx of new Las Vegas residents. Our Montana Distributed Gaming operations also continue to perform in line with our expectations, as we have opened new locations since last year, which should continue to benefit us throughout the year. Moving to our balance sheet. In Q2, we used $60 million of capital to repurchase $37.5 million of our senior unsecured notes and repurchased 515,000 shares of our common stock for $22.5 million. Over the past four quarters, we have paid down $140 million of our debt and repurchased nearly $50 million of our common stock. We ended the second quarter with $179 million in cash, no outstanding borrowings on our $240 million revolver. Currently, our total debt outstanding is approximately $965 million. Given our low net leverage of 2.8x, the strong level of free cash flow we generate and the continued margin strength across our operations, we expect to refocus on improving our balance sheet and opportunistically returning capital to shareholders over the remainder of this year. Despite the macro environment, our business remains stable and July has reflected the same trends of Q2. Our longer-term thesis remains the same. Our strong free cash flow is driven primarily from wholly owned gaming assets in Southern Nevada, which has many long-term favorable demand drivers for Golden and the gaming industry in general. With a portfolio comprised exclusively of cash-generating businesses, zero greenfield development projects, low leverage and over $400 million of liquidity, we are well positioned for the future and remain confident in our ability to create long-term value for our shareholders. That concludes our prepared remarks. Blake and I are now available for questions.

Thank you. At this time, we will be conducting a question-and-answer session. The first question we have is from David Bain from B. Riley.

Great, thank you so much. Congratulations on another execution quarter. I guess my first question would be, obviously, I mean the stock market has been more volatile than casino EBITDA generation that we've seen out there, and you utilized half or almost half of your $50 million share repurchase authorization. Is that something that the Board can re-up intra-quarter, if needed? Or is that sort of indicative, as we didn't see that happen now, more of a focus on continued debt paydown or another form of capital return or perhaps even being opportunistic in Nevada or other areas just given lower valuations for potential acquisitions?

Hi. Hi, David, it's Charles. Yes, so if you've seen in the last two buyback authorizations, they were actually done before we exhausted the previous authorization. So it's very easy for us to go back to the Board inter-quarter or whenever we feel like it's needed when we get through that. I'd say, in terms of things that we're looking at right now, I mean, certainly, buying back shares at these levels is a very attractive investment for us. But we are keeping our eyes out for other things, and we think that there could be opportunities that come up in the future. For us, those are going to be very selective. We obviously have a relatively low leverage point that we like to keep. We like our flexible balance sheet. And so we'll put that on the hopper and when those opportunities arise to make the right decision.

Okay. Great. I have to pick one more here. So I'm going to go with Colorado Belle because that hasn't been brought up very often. Is that an asset that you ultimately look to monetize? Or how do you view it in the portfolio at this point?

Well, we are obviously maintaining our gaming license and our ability to operate there as we consider different alternatives for that property. The way I view that down there is I think that market at some point could use a significant traffic driver. I think the capacity that we currently have with the rooms and the casino inventory is sufficient for what we see going forward down there. That is a one-of-a-kind piece of property on the riverfront that offers superior growth and egress visibility and has a multitude of potential uses. I won't get into that. We've explored a lot of those. But going forward, I see that as a valuable asset in close proximity to our two assets, which are the best located in the market that can be utilized, I think, to drive additional traffic. And we're exploring opportunities for that piece of property.

Okay, awesome. Thanks, Blake. Thanks, Charles.

Thank you.

The next question we have is from Carlo Santarelli from Deutsche Bank.

Hi. Hi, Blake. Hi, Charles.

Hi, Carlo.

Hi. Charles, I just wanted to ask you, as you kind of talked about other avenues, when you think about outside of buyback and debt reduction with the cash flow that you're throwing off, when you reference other avenues, is that more from an M&A perspective where you think you could fit something in nicely? Is it more from a potential opportunity that might arise in Distributed? I know there's been some noise in a couple of states, but I don't know if that's anything outside of the normal. Or is that taking advantage of existing assets where you think you could add on and do something from an OI, CapEx perspective?

Yes. I think, Carlo, it's a bit all of the above. I mean we obviously get – any M&A process, we get a look at when that comes across our desk. Like I said earlier, we have a pretty high hurdle rate for that given where our leverage point is and where we see value now in terms of in our own equity that we've been buying, and you could see that in the quarter. That said, we do have an infrastructure that's more geared towards Nevada Casino operations. We think we could use that in order to potentially grow the portfolio in accretive ways. Now is there something that's there on the horizon in the near term? No. But is it things that we're going to start entertaining? Yes.

Yes, I would just add to that, Carlo, that in regards to the, I think, the last part of your question, where we may invest in existing property with upside, obviously, we have a very disciplined capital budget pro forma going forward. But we do continue to see significant upside potentially at The STRAT, where we believe that some targeted and within-budget investment will be – continue to be productive. But as Charles said in his prepared comments, our goal has been to put this balance sheet in the ultimate position to be flexible with low leverage, obviously, our free cash generation with our undrawn revolver. We're in a good position, just to repeat what Charles just said, to really take advantage of something that is meaningful and strategic to me. In the meantime, I think we've done a good job with our existing assets, our balance sheet. And there is significant value to continue to be had, I think, by continuing on our course. But we are open-minded should something come along that we think fits nicely with our current portfolio.

Thanks, Blake. That all makes sense. And then if I could, just one follow-up. I believe if you kind of – depending on how you calculate it for the first time earlier this year, particularly inflation and household costs kind of increased more than wage growth. And obviously, with you guys having both the distributed tavern business as well as kind of locals casinos, you've got a weaker position to identify if anything has changed kind of if that paradigm has shifted. Is there anything that's really caught your eye? It doesn't appear there's anything significant in the numbers, obviously, and we've seen from some of your peers in Las Vegas, it doesn't appear there to be anything significant. But is there anything you've seen changed around habits or patterns?

The short answer, Carlo, is no. I mean, I think we're similar to some of the other folks that have announced prior to us that we are seeing a little bit of degradation in the lower end of our database within our player rewards program and our retail business, which is a lot normally on carded play. We think those people benefited mostly from the stimulus. However, having said that, we've done a good job of replacing those people and actually overcome that and then some with better players within that player reward program at the higher end of the tiers. So I would say that's kind of the common theme that we're seeing. But in terms of the commodity prices, inflation and just general kind of headwinds for the consumer, I think Las Vegas and Nevada, in particular, is a pretty strong place to be right now. Travel is forever. People are going to continue traveling. Las Vegas continues to provide, as everyone knows, one-of-a-kind and unique entertainment sports opportunities as well as we have significant local population growth. So we're – as Charles said, we like where our portfolio sits, and we're not seeing any material or major disruptions to our current customer patterns.

Really, appreciate it, Blake. Thank you and take care.

Thank you.

Thank you. The next question we have is from David Katz from Jefferies.

Hi, this is Cassandra Lee asking on behalf of David. Thank you for taking my questions. Could you…

No problem.

Thank you. Could you discuss the mix of maybe rated versus unrated players today or different age groups compared to pre-pandemic?

Yes, I'd say – I mean it varies a little bit property to property. But overall, the portfolio is about 65% carded play, and that's obviously higher at our regional and local assets versus The STRAT, which is materially lower than that. I'd say relative to pre-pandemic, we're about the same on the portfolio basis. So there's been some commentary about folks who are missing a certain group, customers that we've heard from other operators within our portfolio. And keep in mind, we're a Nevada-centric company. We have local and regional assets, but again, all Nevada-centric, we feel like we've gotten those customers back at this point within our portfolio. That said, we do feel like we have more ways to go within those customers in terms of their visitation trends and, quite frankly, some of their spending levels. But in terms of the actual customers that we're seeing, we're seeing those same bodies back. We're not missing players right now. We're dealing with trying to get back to the same level of frequency, in some cases, the same level of spend out of those players.

Got it. Thank you very much. And if I may follow up with one more. So with leverage at 2.8, it's already among the lowest in the industry. Is there a target you have out there that after a certain point, you will focus more on the buyback instead of debt paydown?

So we've always said we wanted to be at 3x or lower. So we're trying to maintain this level in a rising rate environment. So we do have some floating rate debt that's in the cap structure. So that, to me, necessitates a balanced approach between investing in our assets, which we're doing; reducing debt, particularly the floating rate component; and then also buying back stock at this point as a base case.

Got it. Thank you very much.

Thank you. The next question we have is from Omer Sander from J.P. Morgan.

Hi, Blake, Charles. Thanks for taking my question.

Hi, Omer.

The demand picture today still looks healthy. And obviously, there's some macro headwinds that you've talked about. Can you talk about labor across your portfolio? We've seen the unemployment data. We've heard some commentary from your peers. Has this eased? And are there still revenue-generating roles that need to be filled?

From a labor cost perspective, our labor hourly wages are up year-over-year 11%, 12%. So that still puts pressure on it. Again, like we said in our comments, most of those large wage increases went into effect in June and July of last year, which is why you see the relatively consistent operating margins that we've been running over the last four quarters. In terms of finding bodies, I'd say for the most part, we're okay. We're not scrambling like we were at this point last year. Specialized positions at higher levels are getting tougher to find. I think there's a bidding more on talent in those areas. But for the most part, we feel pretty comfortable. And we're not really short in terms of finding revenue – people who can enhance revenue-generating positions. For us, that would be about getting the occupancy back at The STRAT and actually then hiring the staff that cleans the rooms and assists with the guests in that case. So in our mind, bringing those people on would entirely be revenue-generating, and those people are out there.

Awesome. Thanks and that kind of bridges into my next question about The STRAT. You've talked about how it's punching a little bit below its weight. You're missing 20 points of occupancy. Can you talk about the path to get that occupancy back and get it back to a full run rate?

Yes. For us, it's simple, I mean we draft off of the city being full. And we'll really test that and see how that is in the fall when you have Raiders without masks, you have full-night schedules, you have the larger citywide conventions that are coming back. And so from our perspective, when we get to the end – into the end of the third quarter and into the fourth quarter, that's really going to test the thesis for us. In the meantime, we're doing some touch-up work within The STRAT, all part of our capital budget plan at this point in terms of adding some suites, some other amenities, freshening up the theater and those types of things that make the product more attractive potentially to some of those conventioners to the citywide as well as higher-end players that we are actively targeting for our Players Club.

Awesome. And then maybe if I could just sneak one more in on that last one. Can you just remind the mix of The STRAT for leisure versus group and maybe with all the development activity on the convention front on the Strip, how that changes going forward, if it does?

Yes. I'd say the mix – I mean, keep in mind, we don't have any group – direct group meeting space in any meaningful way. So it's always been relatively low. When we took over the property, the OTA mix was 75% or north. We've now whittled that down to about 60% to 65% from an OTA mix. And the rest is our direct bookings, either through directly on our website or outreach to previous guests or through our casino marketing program.

I would add to that, that's a material avenue for us, to answer your question, to generate more of our occupancy through our own resources, right, versus the OTA. So our casino marketing programs, as Charles just mentioned, we've made significant improvements. And so over time, the room night deficit that we're speaking about, we believe helps get filled significantly through a continued growth in that program.

Great, thank you both.

Thanks.

The next question we have is from Chad Beynon from Macquarie.

Blake, Charles, thanks for taking my question. We continue to reference and remind investors how stable the broader gaming industry was during prior downturns. I think a lot of people and companies are focusing on that right now. But could you kind of help us think about how you saw the business, Blake, particularly the Distributed business during the last downturn or maybe how you would see it if revenues start to tick down? Which segments do you think would be hit harder between kind of locals, destination or the distributed? Thank you.

Yes. Chad, so as you know, I've been a part of the industry now for – since 1983 and have been through various challenges, macro challenges, whatever you want to call them, over the course of that time. As you know also, Las Vegas is extremely resilient to those downturns, which is one of the reasons that our portfolio was put together with that focus in mind being in Nevada and primarily Southern Nevada. The local business, the local casino business and, in particular, our hyper-local business, which is our route and tavern business, is consistent. And I would anticipate it being consistent through any macro downturns as we lived through in the early '90s, '07 through – or '08 through '13, notwithstanding being closed, right, or forced to being closed. I think that's – the Las Vegas locals market and the hyper-local market is the most resilient part of our portfolio. I think if we were going to see any significant impact, it would be at The STRAT, but I would only put that in the context that the rest of the city was seeing a downturn in traffic. As you've seen, our airport had record visitation in the month of June, higher than it's ever had. You see the guys on the Strip talking about their group business coming back. So I think we're well positioned across the board with our portfolio with a significant portion of our business being local or regionally locally generated in terms of Laughlin. And so I think based upon my history, that consistency I would anticipate continuing in a downturn that is not a closure, right? So I like where our assets sit within the portfolio, primarily being in Southern Nevada. And the consistency, I think, I would say is going to be there.

Perfect. Thanks. And then lastly, just another follow-up on The STRAT. Charles, you touched on this and it was asked a couple of different ways, but could you kind of frame out maybe the difference in terms of what you're seeing weekday versus weekend roughly in terms of room rate? Because as you said, when the room rates are compressing in the city, particularly as international and group comes back, we'd imagine that it's really that weekday business that's a little bit softer that's going to see some nice compression. Thanks.

Yes. I mean, for us, it's definitely that's where a lot of the softness is coming from for us. So our mid – our weekend is 2.5x our midweek rates. And in occupancy, absent the linen issues that we talked about a little bit, that's typically we're sold out on the weekends. And so for midweek, when we're lagging, when we're in the 50% range from an occupancy perspective, that is the piece that's missing for the most part from what we would rely on to drive the property to the levels where we think it could get to. Yes, thanks, Chad.

That's great. Thank you very much. I appreciate it.

The next question we have is from Jordan Bender from JMP Securities.

Good afternoon. Thanks for taking my question. There's a new operator in the Nevada and Montana distributed gaming market. I was wondering if you guys have seen any impact from the new operator since they've taken over.

No. In Nevada, I would say pretty emphatically no. In Montana, it seems there's probably a little more focus from that company in Montana, and we – they are active. So we continue to grow our portfolio up there. And in Nevada, we haven't run across them.

Okay. And as you think about the opportunity in Nevada for Distributed Gaming, is there any more untapped potential to continue to expand their licenses that might come available? Or is it pretty mature and tapped out at this point?

No, I think with the growth in population and the city continuing to spread out throughout the Valley, we continue to see opportunity in what we think is the peak of the hyper-local business, which is the tavern business. So we are seeing opportunities for what we consider to be locations worthy of our brand and our investment. And we anticipate going forward that we will be taking advantage of those as they come along. We're not taking every location. Frankly, some locations, we pass. But whether it's us in a wholly owned scenario with our PT's brand or with our third-party route, which we have 40% of the Distributed Gaming business in the state, either – it's either us or one of our partners primarily taking these locations on.

Awesome. Thank you.

Thank you. The last question we have is from Edward Engel from ROTH Capital Partners.

Hi. Thank you for taking my question. You mentioned some supply chain issues impacting The STRAT in the 2Q. Have these constraints been eased yet? Or are they still impacting the current quarter?

They're very eased. So we dealt with this in July. There's probably a little bit of spillover in the beginning, but otherwise, it has been dealt with.

Great. Thank you. And then just overall, one of the bigger questions that we're getting is just, if there were to be some sort of economic downturn, how much room there is to actually reduce cost just given how tight you've already been managing expenses since the pandemic? What are some of the buckets that you think you can maybe pull a lever on in case spend per trip does decline?

Yes. The answer is yes. I mean we learned a lot during the pandemic, obviously, which levers to pull. I think there is some labor that we can pull through some of our operations that wouldn't need to be open as often as they're open now. Certainly, we can control capital, right? We can control that spend pretty easily. Our marketing continues to be disciplined, but there are probably a few levers there we can pull. So we're pretty confident that if we see headwinds that are necessitating us changing the way we're – our current business model that we have those levers to pull.

Perfect, thank you.

Thank you. Ladies and gentlemen, we have reached the end of our question-and-answer session. And I would like to turn the call back to Charles Protell for closing remarks.

Okay. Thanks, everyone, for joining and we look forward to speaking with you next quarter.

Thank you. Ladies and gentlemen, that then concludes today's conference. Thank you for joining us. You may now disconnect your lines.