Earnings Call Transcript - GDEN Q4 2022

Operator, Operator

Good day, and welcome to the Golden Entertainment Incorporated 2022 Fourth Quarter Results Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Mr. Joe Jaffoni of Investor Relations. Please go ahead, sir.

Joe Jaffoni, Investor Relations

Thank you very much, 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 this 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 fourth 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.

Charles Protell, CFO

Thanks, Joe. We had another solid quarter, the second highest Q4 revenue and EBITDA in our history, surpassed only by Q4 of 2021. For the quarter, we delivered revenue of $280 million and EBITDA of $64 million, lower than last year but still significantly higher than the fourth quarter of 2019, with revenue up 16% and EBITDA up 48% compared to that period. For the full year 2022, we generated record revenue of over $1.1 billion, up 2% to the prior year, highlighting strong customer spending at our properties since the pandemic. We generated full-year EBITDA of $267 million, our second highest annual EBITDA on record other than 2021. Relative to 2021, margins were largely pressured by higher payroll expenses and other inflationary costs. However, relative to 2019, our operating margins maintained a 500-basis-point improvement, and our full-year EBITDA is up 45%. Before getting into more specifics on our operations, in our press release, we detailed new segment reporting that now breaks out the results of our Nevada-branded tavern operations. The results of our third-party distributed gaming operations for both Montana and Nevada will continue to be reported within our Distributed Gaming segment. This breakout provides further insight into the largest branded tavern portfolio in Las Vegas and highlights that the vast majority of our total revenue and EBITDA is derived from our owned casinos and taverns. Within our segment results for Q4, we saw mostly flat revenue comparisons to last year with $3.5 million of additional property-level labor costs being incurred across the portfolio. These increases were mostly in the Nevada Resorts segment, where we had to make the largest adjustments to keep up with the labor market at The STRAT and our two Laughlin assets. Further contributing to the lower EBITDA in our Nevada Casino Resorts for the fourth quarter Laughlin had one less concert, resulting in approximately 10,000 fewer visitors to our two properties compared to Q4 2021. For the first half of 2023, we have already booked 11 events, which should drive more visitation to our Laughlin properties than in 2022. At The STRAT, revenue increased 3% for the quarter, while occupancy remained comparable to Q4 of 2021 at 77%. In addition to increased labor costs, margins were negatively impacted by decreased gaming revenue, which was driven by our decision to move away from volatile local baccarat. We have since focused on building out a more diverse player database and attracting higher spending levels from retail guests. We have seen some recent success in these efforts with new card sign-ups up 47% in January. We still see a lot of potential for improvement at The STRAT. For the full year of 2022, we're still missing 144,000 midweek room nights relative to 2019 when the property maintained occupancy close to 90%. This implies potentially over $30 million of additional revenue and almost $20 million of EBITDA based on our current midweek room rates, guest spending and margin flow-through. We expect to get closer to 2019 occupancy levels in the back half of 2023 with the continued recovery of conventions and international travel as well as the anticipated benefit from Formula One. Our Nevada local casino saw continued strong year-over-year performance, increasing revenue and EBITDA over last year's record Q4 numbers. Margins remained at 48% for the quarter, which is up slightly from last year and still up 1,400 basis points over 2019. Our improved local performance is a testament to the continued resilience of the economy and a stable promotional environment in Las Vegas. For our Nevada tavern operations, fourth quarter revenue and EBITDA were down from last year, reflecting 64 operating in Q4 compared to 66 last year as we pruned some underperforming locations from the portfolio. In addition, we saw some extended seasonal trends as our top tavern players resumed travel in the fall for the holidays that we hadn't seen coming out of COVID and in 2021. We intend to continue to grow the tavern portfolio and believe we can get 90 to 100 locations without adding additional infrastructure costs. We will target at least four to six new taverns per year. And to that end, we have agreed to acquire four taverns, have one additional tavern under construction, all five of which will be added to the portfolio this year. Total third-party distributed revenue was flat compared to last year, while EBITDA increased slightly. Our third-party distributed operations spanned over 1,000 locations across all of Nevada and Montana, and our results reflect our market leadership in the states where we operate and the stability of the distributed model even in an inflationary environment. Turning to Maryland. Revenue and EBITDA were both down compared to the prior year, primarily due to weather impacting visitation in December. We have seen visitation rebound in January with more moderate weather and with the implementation of our new hotel revenue management system for the property. Last August, we announced the sale of Rocky Gap for $260 million and expect the transaction to close by the end of the second quarter. Moving to our balance sheet. In Q4, we repaid $25 million of our term loan and retired $2 million of our unsecured notes, taking our total debt repayments to $116 million in 2022 and nearly $250 million over the last two years. Currently, our total debt outstanding is approximately $910 million, and we ended the fourth quarter with $142 million in cash and no outstanding borrowings on our $240 million revolver. We repurchased 329,000 shares of common stock in the fourth quarter and 1.1 million shares during the full year. As of December, we had $61 million remaining under our current share repurchase authorization. Our current net leverage is 2.9x, and we intend to maintain our net leverage below 3x going forward. To support that target, we anticipate using the majority of the proceeds from the sale of Rocky Gap to reduce debt. We believe maintaining low leverage and owning our own real estate provides maximum flexibility to invest in our assets, explore strategic alternatives and return capital to shareholders. In 2021, our CapEx totaled approximately $30 million as we were cautious on spending coming out of the pandemic. For 2022, we finished the year at about $50 million of CapEx, which included about $10 million spent at The STRAT for renovated suites, a new Asian restaurant and some pre-purchases for anticipated CapEx in 2023. So our normalized CapEx for the portfolio is about $40 million per year. In 2023, we intend to renovate more rooms at The STRAT to provide a more competitive product in order to capture demand from group business and citywide events like F1 and the Super Bowl. We are currently renovating an additional 537 rooms, hallway corridors in our pool areas, which should be completed in the first half of the year at an expected cost of approximately $30 million in 2023. This will bring the total rooms and suites that we have renovated to 1,200 out of 2,400 rooms at the property, with most of the others having been updated prior to our acquisition of The STRAT in 2017. In addition, Atomic Golf, a new $75 million 100-bay golf entertainment facility is under construction on our excess land behind The STRAT that we are targeting to open in Q4. For Atomic Golf, we are not contributing cash capital to the project. We are only contributing a land lease in exchange for revenue participation in the project. We expect our 2023 STRAT projects to add approximately $10 million of annualized EBITDA to the property when complete. Additionally, we are actively pursuing new tavern opportunities in Las Vegas. Taverns are uniquely positioned to benefit from the growth of Las Vegas since we can target adding locations to areas with upcoming residential development with a modest investment. For 2023, we anticipate spending approximately $20 million on identified tavern acquisitions and development sites with $11 million already allocated to the five locations previously mentioned, which we acquired and are building in 2023. We anticipate a 20% to 25% return on our new tavern investment. We expect to spend a total of $90 million to $100 million in CapEx for 2023, including the growth projects at The STRAT and our targeted additional new taverns. We will be able to reduce CapEx as we did post COVID should we see a material slowdown in the business environment. Given the significant and sustained margin improvement we have achieved in our operations, the strong outlook for visitation in Las Vegas and the healthy economic conditions of Southern Nevada, our company is well positioned for future success. That concludes our prepared remarks. Blake and I are now available for questions.

Operator, Operator

And the first question will come from David Bain with B. Riley.

David Bain, Analyst

Great. I guess, firstly, on the labor increases in Q4 that you noted, just to be clear, the kind of higher profile union issues that some of the Strip chains will be negotiating later this year, that doesn't directly impact you, correct? You've already seen that impact?

Charles Protell, CFO

There will be a derivative of that from one of our assets. That's The STRAT. We do have a Culinary Union within that one property but not the others. So it is an important but smaller part of our labor workforce and some of those other companies you mentioned.

Blake Sartini, CEO

Yes. And just maybe for further clarification, David. I think Charles has mentioned our contract with the union labor force at The STRAT is a hybrid between a strip contract and a downtown contract. So in the past, our terms have not mimicked what they do on the South Strip.

David Bain, Analyst

Okay. Great. And kind to choose one here. I guess it seems like some of the new potential markets for distributed expansion have stalled a little bit. Maybe North Carolina is still on. Maybe I'm wrong there. If you could help with that. But beyond jurisdictional growth, after the Rocky Gap sale, you're almost all in Nevada Casino and the Nevada tavern focused. You reviewed growth initiatives and taverns. How do you view that segment, the distributed segment strategically at this point? I mean there's M&A appetite out there. Resiliency valuations are reflected maybe in other companies, but I'm not sure it's reflected here or appreciated. So do we look to grow this business? Are there alternatives? Just kind of a big picture question on that division if I could.

Blake Sartini, CEO

Yes, it's a great question. We recognize that the growth in these new jurisdictions has not aligned with our earlier expectations. Our portfolio consists of two main areas: one is the third-party distributor, where we assist independently owned locations through our operations, and the other is our fully owned tavern operations in Nevada, which can potentially expand to other states involved in Distributed Gaming, such as Illinois and Pennsylvania. We are particularly focused on growing the tavern segment, where we have seen strong performance in terms of machine utilization. We are committed to this effort, especially in Nevada, where we have a leading franchise. Additionally, if new jurisdictions start to open up more rapidly, we would consider pursuing growth in the Distributed business as well. We are dedicated to this growth and are pleased with our position in the fully owned segment of our distributed portfolio.

Charles Protell, CFO

Yes. And I would just add quickly to that. Like if you look at the third-party results in the fourth quarter, they're very stable to up. So I mean that really highlights the resiliency of that model, and we agree with you. It's been underappreciated in the public markets.

David Bain, Analyst

Yes, I agree.

Operator, Operator

Next question will come from Carlo Santarelli with Deutsche Bank.

Carlo Santarelli, Analyst

So I'm kind of going to just go along the same lines as David's prior question, but can't help but notice, obviously, you guys decided to kind of split out the Nevada taverns from Distributed Gaming. Obviously, more disclosure is more helpful. But strategically, is there anything to the rationale of splitting it out right now? And when you think about the tavern business as a feeder for you guys throughout Nevada, is that maybe a little bit more strategically sensitive than we give credit for?

Charles Protell, CFO

Yes, I believe so. The taverns are primarily located in Las Vegas, and when we consider the scale of that business, it functions as a significant local casino that complements the rest of our portfolio. We treat them accordingly, marketing them to our players as part of our integrated casino rewards programs. From our perspective, there is a clear distinction between our owned businesses and those we service for others, and we strive to excel in both. However, when analyzing the third-party Distributed business from an EBITDA perspective, it accounts for less than 15% of our overall operations. While it is essential and played a crucial role in the foundation of our public company, the areas where we see growth opportunities are primarily within other business units rather than the third-party distributed segment currently operating in the states we serve.

Carlo Santarelli, Analyst

Great. And then just to rehash the color you provided, it was $30 million on The STRAT project. It was $20 million on the taverns and then that incremental $40 million to $50 million circles back to the kind of regular maintenance that you'll spend. Is that accurate to get to that $90 million to $100 million?

Charles Protell, CFO

Yes. Yes, that’s right.

Operator, Operator

Your next question will come from Cassandra Lee with Jefferies.

Cassandra Lee, Analyst

Charles, you just said that owning your real estate gives you maximum flexibility. But given the misallocation of valuation between kind of private market, public marketing and kind of the OpCo, PropCo how are you thinking about potentially pursuing sale leaseback?

Charles Protell, CFO

Well, right now, we think about it as optionality. I mean I think if you look at us as well as some of our peers, owning your own real estate provides you with the cash flow to actually execute on investing in your own assets, reducing leverage as well as returning capital to shareholders. I think that if we were potentially a larger scale portfolio or we were looking at strategic M&A, where synergies far outstripped the incremental rent increases that you'd see on an annualized basis, that it'd be something that we would be pursuing more earnestly. That being said, I think there's an ultimate backstop to the value of the company that's embedded in the underlying real estate. And I think that over time to the extent that we are not able to see the appreciation of the value in our shares from a multiple expansion perspective, it's something that we will consider more strongly.

Blake Sartini, CEO

Yes, I would like to build on Charles' previous comments. As I have mentioned in earlier calls, I believe that owning our real estate gives us significant flexibility. By managing a balance sheet that is less than 3x leveraged, we have many opportunities to create value within the company while enjoying the benefits of owning our real estate. I think Charles conveyed that very well. As he mentioned, we view this as a kind of optionality or safety net. At this moment, we feel that our current balance sheet allows us to enhance the company's value without needing to monetize the real estate right now.

Cassandra Lee, Analyst

Could you provide a quick follow-up on the strategic M&A front? Have you noticed any changes in the industry's M&A dynamics? Have valuations gone down or up since our last discussion?

Charles Protell, CFO

I think that the private valuations are still disconnected from the public valuations. I think you see private transactions, i.e., the private marketplace taking a longer-term view around value that we’re seeing in the public markets right now given where multiples are in the sector. And that is still continuing. I think you’ll still see transactions that are accretive or at premiums to where the current sector trades. I think there will still be consolidation in the sector despite higher rates as strategics and private partners take a longer-term view on the strength of this business.

Operator, Operator

The next question will come from Ricardo Chinchilla with Deutsche Bank.

Ricardo Chinchilla, Analyst

You mentioned that some of the proceeds from the sales will be used to reduce debt. Have you determined how the capital structure will evolve by the end of the year? Are you planning to pay off the bonds and adjust the mix of fixed and variable debt? What are your thoughts on potential debt repayment?

Charles Protell, CFO

Yes. I mean, look, I think it's a little early for that. We've certainly been thinking about it quite a bit. I think we'll have more color around that when we have more visibility on the specific timing on the closing of Rocky Gap. I would say that having a less-than-3x-levered company doesn't make it a discussion about can we do a refinancing in any way, shape or form we want to, it's a question about what is the optimal refinancing for the company at the right time.

Operator, Operator

The next question will come from John DeCree with CBRE Securities.

John DeCree, Analyst

I wanted to circle back to The STRAT. Charles, I think you gave a little bit of color in your prepared remarks. But if you wouldn't mind rehashing where occupancy was in Q4, I think you maybe said high 70s and where '19 was and your kind of view on getting back to there. This year, we obviously have a pretty busy convention calendar in Q1. So just kind of how you're looking at the bridge and occupancy recovery and maybe some forward-looking commentary on your bookings for what looks like a pretty busy convention season in Q1.

Charles Protell, CFO

I'll provide an overview, and Blake will likely add to it. We achieved about 77% occupancy for the quarter, which is similar to last year. The significant difference lies between weekends and midweek; we were nearly full on weekends but had less than 70% occupancy during the week. We feel confident about our rates and our direction. This confidence leads us to believe we should renovate more rooms, as we observed a $15 to $20 premium on renovated rooms from the first batch. With major events like F1, the Super Bowl, and various conventions, we need a competitive offering to capitalize on the expected traffic. Currently, we're missing 144,000 midweek room nights compared to 2019. If we consider the midweek rate of around $110, including the resort fee, and average expenditure per visitor, we see a potential opportunity for $30 million in revenue and $20 million in EBITDA just to recapture those visitors. We hope the convention schedule and other drivers will help us achieve that this year. Even recovering half of that would be significant, alongside our noted growth initiatives.

Blake Sartini, CEO

Yes, I believe what Charles is conveying is that we have been concentrating on citywide developments to increase our room bookings this year, along with focusing on The STRAT and its individual components as we enhance each aspect. When we first acquired that property, there were minimal direct bookings; it was primarily dependent on OTAs and online platforms, in addition to what Las Vegas itself offers. We have implemented a comprehensive casino marketing strategy and established direct communication with our guests through these investments. This component is expected to grow over time, particularly boosting our midweek occupancy. It's difficult to pinpoint a precise timeframe, but we are aware of the special events and activities coming to Las Vegas, which are easier to forecast. Our main focus is on midweek bookings, and we believe that a significant part of our success is tied to how we promote the property as we work on enhancing amenities that will attract guests for longer stays.

John DeCree, Analyst

That's helpful. I think you both addressed most of my thoughts and questions. But maybe one. When you have full occupancy on the weekends, are you able to increase rates similarly to what we see in the LVCVA monthly data? Or do you require some mid-week occupancy to improve rates across the entire property on all days?

Charles Protell, CFO

No, we are pushing rates on the weekend. I mean, so that is comparable to what we see in the LVCVA. This property will potentially hurt more than others on the south side of The Strip when that midweek and convention group business isn’t filling up the convention center, isn’t filling up the entire town. So we will probably hurt more in the midweek than they will, but we could actually flex just as much or more on weekends with the room base.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Charles Protell for any closing remarks. Please go ahead, sir.

Charles Protell, CFO

Thank you all for joining the call. We’ll speak with you for our Q1 results.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.