Golden Entertainment, Inc. (NASDAQ:GDEN) Q2 2020 Earnings Conference Call August 6, 2020 4:30 PM ET
Joseph Jaffoni – JCIR
Blake Sartini – Chairman & CEO
Charles Protell – President, CFO & Treasurer
Conference Call Participants
Carlo Santarelli – Deutsche Bank
Daniel Politzer – JPMorgan Chase & Co.
David Katz – Jefferies
John DeCree – Union Gaming Research
Chad Beynon – Macquarie Research
Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Golden Entertainment Second Quarter 2020 Earnings Conference Call. [Operator Instructions]. Please note that this call is being recorded today, August 6, 2020.
Now I’d like to turn the conference over to Joe Jaffoni, Investor Relations. Please go ahead, sir.
And thank you, Bridget, and good afternoon, everyone. On today’s call 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 provision 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 those forward-looking statements is contained in today’s press release and in Golden Entertainment’s 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 the website.
With that, it’s my pleasure to turn the call over to Blake. Blake, please go ahead.
Thanks, Joe. Good afternoon, everyone, and thank you for joining us today. While the markets, where we operate in the country as a whole, continue to be impacted by the pandemic, our business today is in a much stronger place compared to when we spoke on our first quarter call. Today, operations in all of our markets are open and have been performing better than expected. Our Montana distributed gaming operations reopened in early May, followed by all of our Nevada casino and distributed gaming operations on June 4 and our Rocky Gap casino in Maryland on June 19. With nearly 80% of our 2019 property EBITDA derived from locals oriented and regional properties as well as distributed gaming operations, the diversity of our business provides us with the foundation to recover quickly from mandated shutdowns.
We can see evidence of that in our financial performance since reopening. Our June total EBITDA exceeded expectations and was up 14% over the same period last year, with 3 fewer days in Nevada and 18 fewer days in Maryland, reflecting strong demand and sustained expense reduction. Despite meaningful declines in strip visitation, the STRAT generated positive EBITDA in June and continues to grow occupancy from about 40% in June to over 50% in July. The STRAT is not reliant on direct group and convention business. We expect continued improvement in occupancy as airline capacity and drive-in traffic to Las Vegas continues to recover.
Our June performance was led by our Las Vegas Locals casinos and taverns, which achieved double-digit revenue growth and collectively doubled their EBITDA contribution over last year. Our 2 reopened Laughlin casinos increased revenue by 7% and grew EBITDA by 58%. While our total Laughlin EBITDA improved 32%. Our Pahrump casinos experienced similar financial results, with revenue, up 9% and EBITDA, up 58% for June when compared to last year.
Our distributed gaming business also performed well across both our Nevada and Montana operations, which saw collective revenue growth of 6% and an EBITDA increase of more than 18%. Importantly, we have seen substantial and what we believe will be sustainable margin improvement, particularly within our Nevada Casino segment. Excluding the STRAT, our Nevada Casino EBITDA margin expanded to almost 50% in June, a 2,000 basis point improvement compared to last year. These margin improvements were primarily driven by reduced labor and marketing expenses. Currently, we have reduced the company’s total headcount and payroll by approximately 25%. Headcount and other reductions in corporate expenses has reduced our corporate overhead by over 20%. In addition, we have made significant reductions to our marketing expense compared to prior year.
Moving forward, we do not anticipate headcount to meaningfully grow, and we also expect the promotional environment and our markets to remain subdued.
The annualized run rate of these current cost reductions is in excess of $130 million. Turning to our liquidity. Last quarter, we discussed the quick actions we took at the onset of the pandemic as our properties began to close. At that time, we drew down $200 million on our revolver and have had no need to access the capital markets for additional liquidity.
During Q2, we repaid $190 million on the revolver, which remains available to us if needed in the future.
In addition, we continue to have no near-term debt maturities, no financial covenants and own most of the real estate under our casinos. As a result of our performance since reopening, we are generating cash flow, which will be used to reduce leverage in the near term and position us to act on future growth opportunities, such as expansion of distributed gaming and new jurisdictions or pursue targeted tuck-in acquisitions.
Lastly, I want to thank all of our team members for their dedication to Golden Entertainment and a fantastic job they did in getting our properties back up and running as well as their support and providing a great guest service while delivering our goal to commitment to health and safety. Our ability to ensure the health and wellness of our team members and guests is critical to our recovery, and I’m proud of the way our team members have addressed the challenges of what is for now our new normal.
Although this is certainly one of the most challenging operating environments we’ve ever faced, I am confident that our diversified business model will position us to recover and capitalize on future opportunities.
With that, operator, please open the call for questions.
[Operator Instructions]. Our first question comes from the line of Carlo Santarelli with Deutsche Bank.
Just in terms of the Stratosphere and how you guys are thinking about kind of the new operating model right now in the strip climate that you’re looking at. What have you done differently? And how much is maybe being able to kind of leverage the database of your pub customers and whatnot helped augment that property to a degree, at least on the gaming floor for the time being? And what do you expect potentially to be able to do as we move forward here, assuming that kind of the airlift optionality remains somewhat subdued?
Carlo, it’s Charles. I think, as Blake mentioned, just a reminder, it is STRAT, this property is not reliant on group business or international travel. So I think for now, we’re really focused on our core customer demographic, which has been really driven off OTAs. The property is used to having a short booking window. That has continued. As Blake mentioned, occupancy rates on average going from 40% to 50% for the month, but we’ve touched 70% on the weekends, and over the 4th of July weekend, the property was at 90% occupancy. So I think for us, the property is catering to its known demographic. We expect that to continue. On the gaming side, we have seen an increase in rated play. Although, as you recall, for the traffic from a small base. So we’re certainly encouraged by that. But we think this property is positioned better than most to breakeven and exceed expectations. And we’re seeing this incremental step-ups in occupancy are really direct flow through to the bottom line for us with the STRAT.
And then if I could, you guys talked a little bit like – mentioned the ability to potentially seek tuck-in acquisitions. As we think about that kind of – I guess the easiest way to ask it is, what do you guys consider to be something would make sense within the portfolio today? Or what type of pole would you look to fill within the portfolio today with an acquisition?
Yes. I mean, I think – let’s start with our capital structure. So I think one of the few companies out there that did not have to go out and raise external capital. So we have access to approximately $190 million under existing revolver. We have cash on the balance sheet. And we think there will be opportunities for smaller bite-size assets that become available over the next, call it, 6 to 18 months. In terms of what we’re looking for, is certainly, we’re well covered in Nevada.
We’ll get a lot of synergies for other potential Nevada acquisitions. We do not have a presence in Northern Nevada. But I’d say, we also have our property in Maryland that is performing very well. And so adding density to the eastern seaboard for us is something we’ll certainly take a look at. I would say we’re very focused on our leverage point. And so we will not be looking to do anything that meaningfully or increases leverage from this point. So we’ll be pretty focused on something where we feel we could really make a difference in improving the operations of that asset.
And your next question comes from the line of Chad Beynon with Macquarie.
Blake, I wanted to start with your comments on margin sustainability, particularly within the Nevada Casino market, where you’ve been active for decades. Can you expand on maybe some of the amenities and the labor-intensive items that could be closed right now, they could drag down margins? If we should expect these to open back up and hurt the margin profile, and then medium and longer term, and I think this message came across loud and clear, but it seems like the major players in the market, you, Red Rock, Boyd, all seem to be reducing marketing. Could this be a major change in terms of how we think about margins in that region?
Yes. Chad, I think that’s a great question. I think specifically, to the first part of your question, one of the things I’m confident is constant – is our corporate overhead being reduced to the extent that it is. And I don’t see that affecting any of our properties or guest service whatsoever. So going forward, you can expect or we can expect that our property is running with a much less – with a much smaller corporate expense. Specific to the properties, you’re right. As long as – the current – in the current marketing environment, as we see it, we use the word subdued in our prepared comments. I do think that’s sustainable. I do think we’re all learning through the course of this pandemic or exercise, if you want to call it that. That we can operate more efficiently from a marketing standpoint, target – better at targeting the appropriate customer – consumer. And going forward, as I said, I think that is sustainable. I think the market, in general – we’re all susceptible to competitive pressure, but I think the market in general is seeing opportunities in the long run to reduce the marketing cost.
In addition, I think the biggest thing that for us, and you mentioned my experience in the business, buffets are an enormous labor expense. Frankly, they’re an enormous comp expense. And the buffets are significantly – were a significant cost to our closest thing from a cost to our business. So do we see those are properties operating without buffets going forward? Yes, I think we do. And I think we can be creative in how we present that offering in the future. But combined – buffets combined with marketing costs would be the bulk of what we see being sustainable going forward. And as I mentioned, our corporate expense is certainly sustainable going forward.
Great. And then switching to the Nevada taverns could you just kind of expand on what the day-to-day looks like from a social distancing standpoint, if the machines at the bar are able to be played to the same level as before? And what’s changed in the quarter? And any differences that you’re seeing, I guess, weekends versus weekdays?
Yes. So in regards to the taverns, June – let’s go back to June when we were fully operational. We mentioned in our prepared remarks, the significant year-over-year economics that we were experiencing. We see that – we see this in the distributed gaming business. We saw it in 2008 and ’09 during the economic crisis. We’re seeing it during the pandemic. It’s a very resilient business and probably the most resilient part of our portfolio. Today, Chad, in fact, the bars are essentially closed. So there is no gaming that’s occurring across our bar tops. However, we’ve been allowed to establish a gaming presence by putting stand up games or upright games or flat up games within our restricted locations. We have done that at this point with about 25% of our tavern locations and the stand-up performance I would just say is very impactful. It’s at or exceeds what were you seeing at the bar top. And so in the – for the foreseeable future, as long as our state is restricting commerce across the bar top, whether it’s food, beverage or gaming, we will continue to roll out these standup games in these locations, where, as I mentioned, the results right now are very strong.
Our next question comes from the line of David Katz with Jefferies.
Just two short questions. Number one, look, it looks like at the segment level, you got yourself right around the RIM of breakeven. And corporate expense was kind of the driver of kind of the negative quarter. Not advocating that it should be one way or the other, just looking across the industry, there’s been a fair amount of furloughing and cutting and the like around corporate expense. I’m just curious to hear your thoughts and perspective about how you looked at the corporate expense that you have and where that is and how we should think about it in the future quarters from where it is today?
Yes, David. So we did reduce headcount across the portfolio, including corporate by about 25%. And keep in mind, on the distributed side, there’s a little less ability in terms of flexing employees on the distributed side at locations. So we cut even harder on the casino side. From a corporate perspective going forward, you probably will see our run rate down approximately $10 million on an annualized basis, right, on roughly $46 million of where we were last year. So a pretty meaningful cut. I’d also mention that there’s certain corporate costs that we don’t allocate like some of our peers do. So I might argue that some of what you see out of others is not necessarily an entirety of corporate.
And can you just, Charles, talk to us about the cadence of cash flow positivity as you see it for the rest of the year, that would be helpful as well?
Yes. I mean if you take a look at – let’s just take June, for example, that we discussed, we’re certainly very cash flow positive for that month. As Blake mentioned, we’re up 14% in terms of EBITDA. So look, we don’t want to give projections on the call. But if you think about a run rate that is at or exceeding last year, and we’re seeing that for June, and we’re seeing that certainly through July. Given if that we can maintain at least the current level of environment, i.e., the operations are open at their existing level. I’d also point out, if we looked at June, we only had 12 days of Rocky Gap, which generally does it’s over $2 million a month during the summer, and it’s on that track for July.
And the STRAT really was a little bit better than breakeven, and that’s improving that even if you’re going to – you make the arguments around sustainability of the local assets, we’re going to be believed by the improvement of those assets. So from my perspective, if you look at cash flow through the rest of the year, it’s certainly going to be positive. We have more than enough cash flow to service our debt carrying costs. And from a CapEx perspective, as we said in our last quarter, that’s basically shut down unless we have necessary maintenance CapEx for the balance of the year.
Our next question comes from the line of Dan Politzer with JPMorgan.
So I was hoping you could give a little bit more detail just on what you guys are seeing – what you saw in July and maybe into August. In trends across the portfolio. Are there any specific areas or segments you maybe highlight if you’re seeing a significant acceleration or deceleration relative to some of the positive trends that we saw in June?
I mean, Dan, for us, it’s really been a continuation of June. And I think that when people ask us about sustainability. Dan, we were probably the first public operator with operations open with our Montana distributed operations open in May. That business has continued to perform and exceeding last year. And so I think that it comes back to most of our portfolio, call it, 80% of it being EBITDA generated, that is local or regional gaming. For us, that’s going to continue to be strong even if it takes time for the strip and destination properties to grow. So for us, again, it’s a continuation of what we’ve seen in June. I think that, again, we don’t want to really have – we don’t have a ton of visibility into whether that continues going into the fall. But for now, we certainly look at and see those trends as very encouraging. And given, again, we have had a business that’s been open for two months now. We just don’t see that demand dramatically tapering off as we get into August and September.
All right. And then on this distributed gaming, I know that’s generally a fairly stable business in terms of margins, and there’s agreements with third-party vendors and things like that. Is that a business that you’ve been able to take any cost out in a significant manner? Is it fairly stable?
Yes, I would say – yes. So look, so I think there’s 2 pieces of that business. There are third-party locations that we service, where if you think about that model and how we report, we report 100% of that revenue. And the biggest cause of that is the segment where we are giving our cut to our third-party partners. So that is a highly variable piece of the business. So that’s kind of the figure in the bet, right? And as Blake mentioned, and the resiliency of the downturn, you’re really not going to have a lot of fixed costs that are into that business, but those margins are going to be a little bit better, but fairly stable in terms of how they move with the revenue up or down. The piece where we are able to see meaningful improvements on our wholly owned tavern side. So we’ve made staffing decisions around kitchens and hours of operations across the portfolio, streamlining menus, putting in processes and procedures in place, that hopefully mitigate the cost creep that happens in this F&B side of that business. So we have been able to do some things there that have been impactful to that piece.
Okay. And then one additional one. So you mentioned a $130 million, I think, of annual run rate cost takeouts. So if I’m just kind of looking at what you guys did in 2019, bearing in mind that the STRAT was under construction. There’s a lot of disruption there. I mean, is there a pathway on this current portfolio to get that 30%-plus margins given the cost take-out. Am I doing my math correctly there?
We could probably get close to that. I’d say first stop is going to be close to more to the mid-20s as a whole after corporate. Again, keep in mind that distributed piece of the business is a lower piece. I think if you look at the casino side of the business and those margins, the sustainability that is there for all the reasons Blake talked about.
We’re near 30% going into the pandemic. So we were already, give or take, 30% depending upon corporate allocation, us versus others and some of those nuances. But to your question, we are already near that number. So absolutely believe we can operate at a higher level.
Your next question comes from the line of John DeCree with Union Gaming.
I think you covered a lot of ground, but maybe wanted to stick with the VGT business. So two questions. One on Pennsylvania, it looks like you kind of fizzled out back in June, but a new bill out there. I wanted to get your view on the prospects of that. And maybe it’s not until fall, but I’m curious if there’s any added momentum there? And then the second question, and if I missed it, I apologize. How do you view VGT new markets – existing markets but new for you as possible tuck-in acquisition targets?
Yes, John. So on Pennsylvania, yes, you’re right. You have been following it. I will tell you that we continue to believe that our political as well as our management efforts to seek VGT expansion in Pennsylvania occur is going to come to fruition here at some point. We’re cautiously optimistic that it’s sooner rather than later. With the – all of the state legislatures out and working remotely as a result of the pandemic. Obviously, you can assume that the same thing is having – wreaking some havoc in Pennsylvania.
But we believe the momentum was there. I think also a catalyst that we believe not only for Pennsylvania, but other markets, in particular, is given where states stand now from an economic standpoint, we know that there are other states that are going to consider or maybe have to consider this form of gaming for additional tax revenues. So we are continuing a very strong push in Pennsylvania because of our last 2 or 3 years of activity there, obviously. But also, we believe other markets could potentially open up as a result of state’s needs for funds.
In regards to existing markets and our potential to enter that’s open to us, I think, at all times. I think we’re – some of the – we look at some of the valuations early on, some of the valuations now. And if there’s an opportunity, whether it’s Illinois or other states, certainly, we would be opportunistic in looking at one of those types of acquisitions. So we are – I would just leave it that we are active in pursuing growth in that part of the industry.
I’m not showing any further questions. So I’ll now turn the call back over to Mr. Sartini for closing remarks.
Thank you, operator, and thanks, everyone, for joining us today. We look forward to updating everyone when we report our 2020 Third Quarter Results. Thank you.
Ladies and gentlemen, this does conclude the program. You may now disconnect.