Red Rock Resorts Inc (RRR) 2020 Q4 法說會逐字稿

Good afternoon, and welcome to Red Rock Resorts Fourth Quarter 2020 Conference Call. (Operator Instructions) Please note, this conference is being recorded.

I would now like to turn the conference over to Stephen Cootey, Executive Vice President, Chief Financial Officer and Treasurer of Red Rock Resorts. Please go ahead.

Thank you, operator, and good afternoon, everyone. Thank you for joining us today on Red Rock Resorts Fourth Quarter and Full Year 2020 Earnings Call. Joining me on the call today are Frank and Lorenzo Fertitta as well as our executive management team. I'd like to remind everyone that our call today will include forward-looking statements under the safe harbor provisions of the United States federal securities laws. Developments and results may differ from those projected.

During this call, we will also discuss non-GAAP financial measures. For definitions and complete reconciliation of these figures to GAAP, please refer to the financial tables in our earnings press release and Form 8-K, which were filed this afternoon prior to the call. Also, please note that this call is being recorded.

Before discussing our financial results, we would like to take a moment to thank all of our team members who helped the company through a very challenging year. Over the past 40 years, we have always understood that our most important asset is our team members, and 2020 only exemplified their importance to both our organization and our customers. And because of this, we continue to roll out our focus-on-family initiative to all of our team members to recognize the contribution that every team member has made to the company.

A few highlights of what we've accomplished to date. We paid team members 100% of pay throughout the closure, including full medical dental and vision; offered free medical, dental and health benefits to all of our team members making less than $100,000 per year; opened 2 medical centers with free office visits, free generic prescriptions and lab services for team members and their families; implemented pay-for-performance and competitive pay rate adjustments totaling approximately $10 million, which will positively impact the vast majority of our team members; and lastly, contributed over $8.6 million to our team members' 401(k) retirement program.

These initiatives, together with a number of other positive changes, were designed to enhance the long-term health, well-being and financial security of our team members and their families as well as give us the ability to retain and recruit the best team members and make Red Rock Resorts the employer of choice in the Las Vegas Valley.

With that, let's take a look at our fourth quarter results. On a consolidated basis, we reported net revenues of $343.4 million, down from $460.8 million in the prior fourth quarter. Adjusted EBITDA of $150.5 million, up 9.4% from $137.6 million in the prior fourth quarter, and adjusted EBITDA margin increased 1,397 basis points to 43.8% for the quarter.

With respect to our Las Vegas operations, we reported net revenues of $316.2 million, down from $437.9 million in the prior fourth quarter, adjusted EBITDA of $137.1 million, up 5.5% from $129.9 million in the prior fourth quarter. And our adjusted EBITDA margin increased 1,368 basis points to 43.4% for the quarter.

When reviewing our fourth quarter Las Vegas performance on a same-store basis, which excludes our 4 closed properties, Texas Station, Fiesta Rancho, Fiesta Henderson and Palms Casino Resort, we reported net revenues of $311.8 million, down from $328.7 million in the prior fourth quarter. Adjusted EBITDA of $142 million, up 16% from $122.4 million in the prior fourth quarter, and our adjusted EBITDA margin increased 832 basis points to 45.5% for the quarter. On a same-store sales basis, both adjusted EBITDA and EBITDA margin represented our best fourth quarter performance in the history of our operations.

Now let's turn to our full year performance, which was severely impacted by the 79-day statewide shutdown, all nonessential businesses, including casinos, in an effort to reduce the spread of COVID-19.

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business which followed and continue through today. On a consolidated basis, we reported net revenue of $1.2 billion, down from $1.9 billion in the prior year. Adjusted EBITDA of $368.5 million, down from $509 million in the prior year, and our adjusted EBITDA margin increased 375 basis points to 31.2% for the year.

With respect to our Las Vegas operations, we reported net revenues of $1.1 billion, down from $1.8 billion in the prior year, adjusted EBITDA of $335.1 million, down from $472 million in the prior year, and our adjusted EBITDA margin increased 373 basis points to 30.6% for the year.

During the quarter, we continued to prioritize free cash flow, converting 76% of our adjusted EBITDA to free cash flow, generating $114.7 million of free cash flow or $0.98 per share in the fourth quarter. This brings total free cash flow generated by the company from June through year-end to $259.1 million or $2.21 per share, with virtually every dollar going to pay down debt and improve our financial flexibility as we look to emerge from the pandemic.

Taking a look behind the numbers, we saw our strong October fall by a seasonally slower November and December, which was further hampered by both the typical election year slowdown and by the implementation of 25% capacity restrictions by the government in an attempt to slow the spread of COVID-19. Despite these additional headwinds, the overall customer trends we saw in the fourth quarter were consistent with trends we've seen since our reopening in June as we continue to see strong visitation from a younger demographic, increased spend per visit, more time spent on device plus the slow but steady return of our core customer. These trends continue to be offset by higher COVID mitigation costs, carry costs associated with our closed properties and the continued government-mandated restrictions on our business. While we are hoping that the worst of pandemic is behind us, we expect these offsetting factors to exist at least over the short term as we continue to navigate an uncertain Las Vegas economy moving forward.

On the expense side, the company continues to benefit from the actions the management team took during the closure and since our reopening. Through the combination of streamlining our business, optimizing our marketing initiatives and renegotiating a number of our vendor and third-party agreements, we continue to expect to achieve over $150 million per annum of cost efficiencies as referenced in prior earnings calls. These initiatives have enabled the company to achieve and sustain higher profitability and drive more free cash flow generation going forward. In this respect, we are stronger as a company than ever before.

Now let's cover a few balance sheet and capital items. The company's cash and cash equivalents at the end of the fourth quarter were $121.2 million, and the total amount of debt outstanding at quarter end was $2.9 billion. In the fourth quarter, we paid down $102.4 million

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and since our reopening in June, we have reduced our net debt levels by almost $260 million from a peak level of $3.1 billion.

Since the close of our fourth quarter, the company's consolidated subsidiary, Station Casino, has issued a conditional notice of partial redemption of 5% senior notes due 2025. The company anticipates that $250 million in principal amount of senior notes will be redeemed. The company intends to use cash on hand and borrowings under its credit facility to pay for the redemption premium, accrued and unpaid interest in any fees or expenses related to the redemption. The transaction is expected to close on Monday, February 22 and is expected to save the company approximately $10 million per annum to the life of the senior notes, while further deleveraging the balance sheet and increasing our financial flexibility.

Capital spend in the fourth quarter was $5.1 million, bringing our total 2020 capital spend to $58.5 million. As mentioned on our previous earnings call, we anticipate our 2021 capital budget to be between $65 million and $75 million.

Finally, an update on our 2 Native American gaming projects. At Graton Casino Resort, we reported management fees for the fourth quarter of $24.8 million, an increase of 24.9% from $19.9 million in the fourth quarter of 2020. We ceased managing at Graton on February 5, 7 years and 3 months after originally opened. We are very grateful to have had the opportunity to manage at Graton, and we're very proud of how successfully the facility's performed under our management. As we have noted before, we believe the tolling positions in the management agreement, which were triggered as a result of the pandemic, should have resulted in an extended management term even beyond February 5. And we have initiated the dispute resolution mechanism in the management agreement to resolve this question.

Regarding North Fork, based on the favorable California Supreme Court decision reported last quarter, we have continued to ramp up our development efforts on this project and continue to expect to have a shovel in the ground in the second quarter of 2021, with construction expected to take 15 to 18 months. We are continuing to work through the planning and budgeting phases of the project. And when complete, we expect this project to be over 213,000 square feet, including almost 100,000 square feet of casino space, initially include 2,000 Class 3 slots and 40 table games and 2 stand-alone restaurants as well as a food hall concept. We are excited to begin the development of this very attractive project on behalf of North Fork Tribe, and we'll be providing more detail once available.

While Las Vegas has been and continues to be going through some very challenging times, there's finally a light at the end of the tunnel. Once we are on the other side, we believe that the favorable supply-demand dynamic, the positive long-term trends in population growth and the stable regulatory environment all served to support our long-term view that the Las Vegas local market is the most attractive gaming market in the United States. And with our best-in-class assets and locations, unparalleled distribution and scale, deep organic development pipeline and our status as one of the few gaming companies that still owns all its real estate and operating assets, we remain uniquely positioned to thrive in this market.

Lastly, we would like to recognize and extend our thanks, again, to all of our team members for their hard work and to our guests for their support throughout this pandemic.

Operator, this concludes our prepared remarks today, and we are now ready to take questions from participants on the call.

(Operator Instructions) Our first question comes from Joe Greff with JPMorgan.

We heard from other -- one other regional, not necessarily a Las Vegas local operator, that January was pretty encouraging from the perspective of the 55 years and older crowd. Can you talk about, Steve, Frank, Lorenzo, what you're seeing in that demographic first quarter-to-date? And then to what extent are you seeing a continuation of tighter restrictions in California benefiting you here in the early part of 2021?

Joe, Frank. Look, we -- since we reopened in June, I think we have surprisingly seen a nice increase in the younger demographic, especially in sign-ups in our rewards program to create these direct marketing relationships with a younger profile. We have seen, I think, up until very recently, that the 65-year-plus demographic has been fairly shy about coming back to the facility, but I think it would go along with what you were talking about that if the vaccine has continued ramp-up and rollout, we are cautiously optimistic that we're starting to see the 65-plus demographic slowly return back to our facility. So I think we could be in a sweet spot of not only having new younger demographic profile that is coming to our facilities, but getting the return of our older, tried, true, very loyal customers back to our facilities.

Joe, and it's consistent with the research we've been doing is essentially saying that the 65-plus-year-old demo is ready to come back, they're anxious to come back. The vaccine is kind of the key threshold there. But I think the encouraging thing, like Frank said, is they seem to be in pretty good shape from a financial standpoint because they just haven't been spending their money. There's a lot of disposable income there. So we're -- as Frank says, constantly optimistic that things could be lining up pretty well.

Great. And then are you seeing incrementally more traffic coming into California? I know that was the latter part of my question.

Not anything that really sticks out, that's really worth talking about. I mean, other than the fact that just -- as I'm sure you've seen that the housing market continues to be very strong here, there is continual migration from California and even from other states, surprisingly, like Washington and Oregon and Illinois as well. So the migration -- population migration story is probably as well intact as it's ever been. Honestly, we've been doing this for a long time.

Our next question comes from Carlo Santarelli with Deutsche Bank.

Steve, in your prepared remarks, you obviously talked about the cadence of a strong October, and would have generally been seasonally softer November and December periods. Just wondering as you look at kind of the way January unfolded and any evidence you're potentially seeing of some of those stimulus dollars getting back into the market and whether or not that's provided any boost for the business relative to kind of the November, December period.

Yes. Carlos, I'm going to refrain from kind of giving Q1 guidance or talking about Q1. But that said, as you know, stimulus checks rolled out in January. And it's just, in general, in our view that anytime you stimulate and increase the disposable income of Las Vegas folks in the Valley, it's good for our business.

Relative to November...

Sorry, go ahead.

Yes. Just relative to November, it was kind of a double whammy, right? I mean, every 4 years, we have the big election, we tend to see a bit of a 2 or 3 days where people are focused on something else, and things start to come back, back to normal. And I think in this situation, like I said, it was a double whammy, you had the election and then right on the heels of the election, the governor came out and put further restrictions on our business.

And typically, what we've seen is when the government comes out and does this, people get a little skittish. They maybe don't -- they get out of their normal patterns, they're not going to restaurants, they're not going out. And it takes them a little longer to kind of creep back into their normal patterns, and that's kind of what we saw this quarter.

Yes. It was a 25% capacity limitations that we saw coming to place in November that hopefully with the fact that the numbers seem to be going in the right direction relative to COVID infections, hospitalizations and deaths, all those factors that are monitored in the Las Vegas market, we're hopeful to in the near future, we will be able to return to higher occupancy levels in our facilities.

Great. And then if I could, just one follow-up. Obviously, you guys, over the last 2 quarters at least, do -- and acknowledging that there's still uncertainty out there and being cognizant of the fact that you're running a company here and not running a stock, you're doing $100 million plus of free cash flow in the 3Q, $100 million plus free cash flow in the 4Q. You've done a great job paying down debt. How do you think about kind of 2021, all things equal, assuming the situation is as the base case would be right now, and you continue to generate those types of numbers. As you think about kind of the potential future developments relative to taking leverage to the place where you ultimately want it to be relative to reinstating the dividend, other things of that nature?

Yes. So Carlo, 2021, I mean, I think let's start with where it all begins to grow margin, right? So when I think about margin, as we said in the third quarter, as you said, we just delivered in the fourth quarter, we feel very comfortable that we're going to be able to generate free cash and generate higher margin. And for all the reasons that you know of, as you know, our business, is very different from the Strip, is predominantly a high-margin slot business. We also are carrying a significant amount of costs, to the tune of almost $20 million a year, in COVID-mitigation costs that we expect to roll off over time. The closed company costs also burdened almost $16 million to $17 million of COVID restrictions, which we expect to roll off over time.

And I think we're hopeful that as the vaccination rolls out, tourism will return back to normal. And our hotel and convention segment is very profitable to us. That's probably -- segments that have been impacted are probably worth potentially another $50 million of EBITDA that we're missing from the hotel, convention, movie theater, things like that.

So I think as we look towards the future, vaccine rollout and things normalize, we think that we have similar upside.

And Carlo, to kind of really hammer on your free cash flow question. Again, while we don't give EBITDA guidance, plug in your estimate, you know we're not going to pay taxes. We've got $383 million of NOLs and above $5 million or $6 million of (inaudible) credits sitting already available. We don't expect to pay working capital. Interest expense, just given our debt profile, should be significantly lower, probably $110 million, $115 million, and we've already given CapEx guidance. So you can just see that we're on pace to have -- continue to generate free cash flow.

Yes. And when you go through those numbers, obviously, we're generating a substantial amount of free cash flow. And the focus for us, as we mentioned in the last couple of quarters, obviously has been responsible allocators and great allocators of capital. So our priority is to delever the balance sheet, but we're either going to return capital to shareholders through the pay down of debt. We have a plan where we can buy back stock. Obviously, we can't pay dividends.

And then we have multiple pieces of property here in the Las Vegas Valley. And if you go back and look historically at the projects that we've developed from the ground up, we've generated roughly about a 20% IRR. So we feel pretty good about kind of where we stand relative to free cash flow with multiple ways to increase shareholder value and what to do with it.

Our next question comes from Barry Jonas with Truist Securities.

How are you thinking about the closed properties here? Whether that's timing on reopening them or any other options.

Look, I think we have tried to take a very disciplined approach to this since we reopened in June. The reality is we have more restrictions on our capacity now than we did when we reopened on June 4. And so we're going to continue to be very disciplined, and we want to be in a position that when we reopen any additional properties that we're going to know that it's going to be positive and accretive to our overall cash flow.

And we really break that down into 2 buckets. I think the Palms is very oriented towards the tourist market, visitation to Las Vegas, getting that business to return to normal. And in the local properties, we're going to continue to look at how the older demographic response given the vaccine and get business back to normal before we do anything unless we're certain that we can be cash flow positive.

Great. And then look, just given the strong free cash flow profile you guys are exhibiting, is there less of an emphasis on selling some of your unused land banks? Any properties currently being marketed for sale right now?

Look, we're constantly evaluating how we maximize shareholder value, and we own a significant number of gaming entitled real estate development sites. I think our primary focus right now is on -- going to be on Durango moving forward. But we're always looking at how we can basically monetize things and create shareholder value. So everything is on the table, and it's all value related.

I mean, Barry, I think we can monetize a number of these non returning assets and still have an extraordinary growth profile. Yes. I mean we'll have a number of growth opportunities. I mean, we're looking at not only some of the larger sites, but pieces of existing sites as well that don't necessarily take away a development opportunity. So you sort of get -- you get the best of both.

Our next question comes from Stephen Grambling with Goldman Sachs.

This is perhaps a bit of a follow-up to some of those questions on maximizing shareholder value. And you had referenced the historical return on invested capital. I guess, how does the permanent reduction in cost that you identified impact how you think about the returns on potential redevelopment opportunities?

I think it's a combination of some of the costs we've been successful at taking out of the business, but also over the last, gosh, what like, 10 years as we've developed a number of Native American gaming opportunities, looked at some of the properties we've built historically as far as when we move forward, we feel like that we're going to be able to build more properties that are going to be significantly more efficient, less overall square footage. And really architect these things so that we can build them to generate similar margins than what we're driving at some of our most successful properties currently within the portfolio.

So really kind of taken a very focused approach. And as we move forward and to build these out, obviously, more information to come on what our next development will be, but really taking our time to make sure that we're developing the most efficient box that we can develop. And at the same time, get the project hard bid, get a GMP, making sure we fully understand what the cost going in are going to be so that we can make sure that we're delivering the returns that we want to or that we need to.

And then as a follow-up, I think it was Joe's question, I may have missed this in your answer, but I think you referenced the golden window of both the younger and older customers coming into location. Is there any color you can provide on retaining that younger cohort? Maybe what percentage of customers converted to rated play? And if their behavior changed at all over the course of kind of reopening and then seeing restrictions come back?

I mean, I think throughout the quarter, and actually since the reopening, we've been quite engaged in terms of converting unrated play to carded play. And so our new sign-up program has been quite successful. In fact, in Q4, I would say, over 60 -- approximately 60% of new sign-ups were under 40.

Our next question comes from Steve Wieczynski with Stifel.

So Frank, you talked about this a little bit already, but I want to try to dig into it a little bit more. And those restrictions that are in place at this point in terms of capacity restrictions, have you had -- or you guys had any discussions with the government there in Nevada about what they're actually looking for when they might start to reduce those capacity restrictions? And I guess what I'm getting at here, is this something that could happen sooner rather than later? Or is this something that still could be a 6 months down the road kind of process?

I'm not going to get over my skis relative to the governor and what the governor's decisions are going to be relative to the restrictions, but I can tell you that all of the indicators that they have discussed and been looking at seem to be going in the right direction.

We know that vaccination is rolling out, and it's ramping up. And so I don't want to get over my skis with it, but I am hopeful that things are going in the right direction. I think we're seeing at least light at the end of the tunnel at this point, whereas going back June, July, August, September, there wasn't a lot of things to be looking towards. Indicators are that we're in a better place than they were, even though we have tighter restrictions than we have. Overall, we're hopeful that they'll return to normal sale.

Okay. Got you. And then second question, I guess, I want to get your updated thoughts around your view around sports betting. And obviously, you've seen a lot of your regional peers go down the sports betting path. And clearly, it's been a -- it's been positively received by investors. But is that something that you guys sit there and kind of scratch your heads by some of these moves in some of these equities? Or is this a potential opportunity for you down the road and something you still might explore?

Look, we've been in the sports booking business since around 1980, '81. I think we've always been one of the first movers when it came to phone betting, mobile sports, wagering, we've been doing now for about 10 years. It's been a very good business for us. I believe that we're the market leader in this marketplace here, and we expect to continue to be. It's been a good business, a growing business and a profitable business for us.

We just scratch our heads when people like to lose money because we like to make money. But overall, it's a good business for us. And we expect to continue to be the dominant player in the market.

Yes, we're always going to look at various opportunities. We're continuing to study things. Obviously, with the valuations that are being attributed to a lot of these opportunities, you have to pay attention to that. But like Frank said, I mean, if we were to embark into another state or another jurisdiction, we would only do it if we felt like we could do it in a profitable fashion.

We wouldn't go into a crowded market and try to force our way in and essentially buy market share. It just doesn't fit with our overall operating philosophy, so we're taking a bit of a conservative approach to that. But like Frank said, we've been in the mobile sports betting business for over 10 years now. It's a very profitable business for us, and our #1 priority is maintaining that position here in Nevada.

I mean, look, the good thing for us. We have, I think, probably the most robust database in this marketplace. 90% of the adults in Las Vegas live within 5 miles of one of our locations. We know the customers. We think we're well positioned.

Our next question comes from Shaun Kelley with Bank of America.

Maybe just one because I think a lot has been addressed here. But if we look at the model, it looks like sort of just your nontax operating expense cadence in the quarter was very, very flat sequentially. So fourth quarter relative to third. And just sort of thinking big picture, I mean, what's going to change your sort of run rate of expenses as we move into 2020 -- as we move throughout 2021? Is it going to be reopening some of those amenities that you mentioned that may be hotel, convention center, movie theaters? Or is it more really the step function would be with the reopening of some of the closed properties?

Are you talking about margins? Is that what you're referring to?

Well, really talking about, yes. I mean it's -- margin's the output. I'm really talking about the operating expense trajectory of just like basically labor and marketing costs combined.

Yes. I mean I think -- I mean, it's really all of the above. I mean, if you just start -- you start with -- if you start bringing out amenities, namely, as restrictions start getting lower and we start bringing on some of our loss leaders that Frank talked about, our theaters, our hotel, our catering-- these are incredibly profitable, high-margin business. So we're only going to bring those on when we make money. So we're happy to add labor in those instances. And those actually should be from a margin perspective, margin neutral to margin...

Yes. I think hotel, catering, movie theaters, those should be neutral to beneficial to the margin in the business. Then you have the the ability to hopefully have our 65-plus customer return. Of course, we're not going to want to open another property unless we believe it's going to be accretive to overall EBITDA.

We're very focused on margins. We're very focused on profitability and margins. And like Frank said, I mean, the movie theaters are essentially 100% flow through when those come back on.

And we are very focused on also trying to capture as much of the business from our closed properties through our existing facilities as we can. That's literally on the agenda every single week. What do we have? What are we missing? And how do we get the customers into our open facilities that were historically playing at the closed facility.

So as far as amenities that are currently closed, that could be reopened. I mean there's really nothing that I don't think that we see that should be degradating to our margin. Like, for instance, we don't have any plans to open the buffets anytime soon. In fact, that's just right now not on the table. So obviously, that would hurt our margins. We're only looking to bring on amenities that would be enhancing or at least neutral to the margins as they exist today.

(Operator Instructions) Our next question comes from Chad Beynon with Macquarie.

I know it's a small part of the business, but can you talk about any, I guess, meetings, groups convention outlook maybe for the back half of 2021 or just conversations that you've had with groups that are encouraging? Any change versus the prior quarter?

All right. Rob was throwing things at me. From a median convention standpoint, as you know, we're still under restrictions from the government. So the first thing first is getting that lifted. What we are seeing from groups and through discussions, there are some green shoots in the back half, namely Q4. I think right now, Q2 and Q3 are somewhat of a walk. But what we are seeing, if you kind of met your drop kind of lying in the sand same time last year, 2022 right now is showing some green shoots, and we are developing traction across our properties.

It's mainly -- from a meeting standpoint, it's mainly social business. There's a lot of delayed weddings in the marketplace. So there's a -- it's mainly things like that versus, for instance, like big corporate business or anything like that.

Great. And then for North Fork from a cash outflow standpoint, could you just remind us how this works? I believe you make preconstruction advances to the Tribe, and then you're going to seek traditional development financing. But could you just kind of remind us how that works in terms of money out the door and that I believe when the property opens, you get it back?

Yes. That's usually a negotiation between the lenders, the Tribe and the management team. So yes, we have outlaid a significant amount of money to the tune, if you include interest, about $62 million, $63 million. We'd like to get as much of that back in the initial financing as possible. That's not guaranteed.

Our next question is a follow-up from Barry Jonas with Truist Securities.

I just had a follow-up on sports betting. I wanted to get your view on the prospect of Nevada at some point, reversing its in-person registration requirement. And any thoughts on how impactful that could be for you?

I mean it's a great question. I think -- I mean, it is somewhat important to us. Given the fact we have 16 locations and we're conveniently located to 90% of the Las Vegas population.

(inaudible) know your customer AML?

Exactly.

All of the above. We believe in-person registration is an important aspect of business.

That said, Barry, if it happened to go the other way, again, we do have the deepest database. We have customers that come in 4 to 7 times a month. And as Frank said, this business is about developing personal relationships. And there's no one better positioned in the Valley to have a personal relationship than us.

We're trusted.

That's right.

And we do think that there is value creation when you have land-based casinos along with an online channel. And I think probably, over time, you'll see that in some of these other markets as well. There is a benefit to having the land-based and the database and then the online all put together. So we'll see.

This concludes our question-and-answer session. I would like to turn the conference back over to Stephen Cootey, Executive Vice President, Chief Financial Officer and Treasurer of Red Rock Resorts for any closing remarks.

Well, thank you, everyone, for joining the call, and we look forward to talking to you in about 90 days. Take care.

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