Golden Entertainment, Inc. (NASDAQ:GDEN) Q4 2022 Earnings Call Transcript

Golden Entertainment, Inc. (NASDAQ:GDEN) Q4 2022 Earnings Call Transcript March 2, 2023

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

Charles Protell: 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 spend 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 expense 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 detail on 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.

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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 2 Laughlin assets. Further contributing to the lower EBITDA in our Nevada Casino Resorts for the fourth quarter Laughlin had 1 less concert, resulting in approximately 10,000 less visitors to our 2 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 .

We have since focused on building out a more diverse player database and attracting higher spend 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 spend 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 was 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 resume 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 4 to 6 new taverns per year. And to that end, we have agreed to acquire 4 taverns, have 1 additional tavern under construction, all 5 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 to 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 2 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 prepurchases 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 additional 537 rooms, hallway corridors in our pool areas, which should be completed in the first half of the year at 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 opening in Q4.

For Atomic Golf, we are not contributing cash capital to 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 5 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.

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Q&A Session

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

David Bain: Great. I guess, firstly, on the labor increases in 4Q 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: There will be a derivative of that from one of our assets. That’s The STRAT. We do have 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: 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: 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: Yes, it’s a great question. And we share your observation obviously that the growth in these new jurisdictions has not met the pace at which we had originally anticipated. And so if you look at our portfolio of distributed assets, we actually operate in 2 distinct kind of rails if you will. One is the third-party distributor in which we support non-owned or separately owned locations with our route operations. The other side is our wholly owned tavern operations here in Nevada, which, frankly, could be transported to other states, which are currently involved in Distributed Gaming, whether it be Illinois, Pennsylvania or others that we’re aware of. That side of the model can certainly be transported. Specifically, to answer your question, we are pursuing, we do believe, the growth in the tavern side of the portfolio, where we actually outperformed in terms of machine work per units and so on, is an area that we are extremely focused on, particularly obviously here in Nevada with the leading franchise.

And as well, should Distributed open up — the pace continues to open up or the pace begin to quicken in terms of new jurisdictions opening, we would see us potentially looking at that side of the business to pursue some — the growth in that Distributed business. So good question. We are focused on it. We’re committed to it, and we like where we’re at in our wholly owned side of the distributed portfolio.

Charles Protell: 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: Yes, I agree.

Operator: Next question will come from Carlo Santarelli with Deutsche Bank.