Red Rock Resorts Inc (RRR) 2020 Q3 法說會逐字稿

Good afternoon, and welcome to the Red Rock Resorts Third 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, sir.

Thank you, operator, and good afternoon, everyone. Thank you for joining us today on today's Red Rock Resorts' Third Quarter 2020 Earnings Conference Call. Joining me on the call today are Frank and Lorenzo Fertitta as well as members of our executive management team.

I'd like to remind everyone that our call today will include forward-looking statements under the safe harbor provision 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.

Let's now turn to our third quarter results. On a consolidated basis, we reported net revenue of $353.2 million, down from $465.9 million in the prior third quarter. Adjusted EBITDA of $160.9 million, up 44.8% from $111.1 million in the prior third quarter, and our EBITDA margin increased 2,171 basis points to 45.6% for the quarter.

With respect to our Las Vegas operations, we reported net revenues of $320.8 million, down from $440.7 million in the prior third quarter. Adjusted EBITDA of $141.7 million, up 38.6% from $102.2 million in the prior third quarter, and our EBITDA margin increased to [2,097] basis points to 44.2% for the quarter.

These results represent our highest third quarter adjusted EBITDA and our highest margins in any quarter in the history of our operations. In order to better understand our third quarter Las Vegas performance, we think it's important to look at our results, excluding the impact of our still closed properties, Texas Station, Fiesta Rancho, Fiesta Henderson and Palms Casino Resort had on the third quarter.

When viewing our third quarter Las Vegas performance, excluding the still closed properties from each reporting period, we reported net revenue of $316 million, up 0.3% from $314.9 million in the prior third quarter; adjusted EBITDA of $146.1 million, up 39.7% from $104.6 million in the prior third quarter, and our EBITDA margin increased 1,304 basis points to 46.2% for the quarter.

Taking a look behind the numbers, the customer trends we saw in June continued throughout the third quarter as we saw strong visitation from a younger demographic, increased spend per visit, more time spent on device plus increased return of our core customer. These positive trends were offset by higher COVID-related costs, costs associated with our closed properties and continued COVID-related restrictions on our business.

We expect these crosscurrents will continue to exist for a while. And while certain of these trends clearly helped drive our record third quarter results, we should note that we are still in the middle of this pandemic and have a little visibility regarding the impacts this crisis will have on our company and the Las Vegas economy moving forward.

On the cost side, the company's performance continues to benefit from the decisive actions the management team took during the closure. Through a combination of streamlining our business, optimizing our marketing initiatives and renegotiating a number of our vendor and third-party agreements, we now expect annual cost reductions that will be permanently moved from the business to be greater than the $150 million in annual cost reductions we referenced on our prior call. These initiatives have resulted in a leaner, more efficient company, which will enable us to achieve and sustain higher margins and drive more free cash flow to the bottom line going forward.

I will now cover a few balance sheet and capital items. The company's cash and cash equivalents at the end of the third quarter were $108.9 million and the total principal amount of debt outstanding at quarter end was $3 billion.

In the third quarter, we paid down $285.6 million in debt. And since the end of the third quarter, we've paid down an additional $53 million in debt, reducing our debt to below pre-pandemic levels even while carrying our team members throughout the crisis. It should be highlighted that the company was able to generate approximately $124.4 million of free cash flow or $1.06 per share in the quarter, and every dollar of that free cash flow went to pay down debt as we continue to focus on deleveraging our balance sheet, increasing our financial flexibility during these uncertain times.

Capital spend in the third quarter was $12 million, and we anticipate the capital expenditures for the balance of the year to be approximately $9 million, bringing our projected 2020 capital spend to be between $60 million and $65 million. And although we are still in the process of finalizing our 2021 capital budget, we anticipate that will be between $65 million and $75 million for the year.

Finally, an update on our 2 Native American projects. At Great Casino Resort, we reported management fees for the third quarter of $30.7 million, an increase of 31% from $23.5 million in the third quarter of 2019.

Additionally, the Tribe has agreed that the management agreements will be extended through February 4, 2021, and we hope to reach an agreement with the Tribe on an appropriate additional extension of a turn past February 4, 2021, in accordance with the terms of the management agreements.

Regarding North Fork, during the quarter, the California Supreme Court finally decided the key issue in the enterprise Tribe's case favoring that Tribe. The Supreme Court then remained in the North Fork case to the Appeals Court with a direction to vacate its early decision against the North Fork Tribe and reconsider it in light of the enterprise decision.

Based on the favorable Supreme Court decision, we have ramped up our development efforts on this project and expect to have a shovel in the ground in the second quarter of 2021, the build expected to take an additional 15 to 18 months. While we were still working through the planning and budgeting phases of the project to 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, 2 stand-alone restaurant concepts and a food hall concept.

We're excited to begin the development of this very attractive project on behalf of the North Fork Tribe and we'll be providing more details as it becomes available.

While Las Vegas is going through some very challenging times, we believe that the very favorable supply-demand dynamic, the stable regulatory environment and the lowest gaming tax rate in the nation, all serve to support our long-term view: 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 of its assets, we remain uniquely positioned to take advantage of and thrive in this market.

Lastly, we'd like to recognize and extend our thanks 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 for today, and we are now ready to take questions from participants on the call.

(Operator Instructions) Today's first question comes from Joe Greff with JPMorgan.

I think what we're all trying to figure out is the sustainability of some of these impressive expense reductions and margin gains. Can you talk about, Steve and Frank, how you're thinking about the sustainability of that? What comes back as revenues recover? I'm guessing you would say 44.2% margins in Las Vegas locals market might not be sustainable. What's the -- how do you think about the sustainability maybe from a percentage perspective? And then the second part of my question also related to the locals market is, can you talk about how you're thinking about reopening some of the foreclosed properties, what are the guideposts and things that you're looking at to evaluate the reopening? And that's all for me.

Joe, I'll start and then Frank and Lorenzo will probably jump in. But I can tell you, we're gaining confidence each month that we continue to operate a higher margin we have historically seen in the foreseeable future. I mean throughout the quarter, we've been very disciplined, keeping our labor and marketing expenses in check. And we understand this is really the new normal in this uncertain demand environment. As you also know, the majority of our mix right now is from -- predominantly from gaming, which is high-margin business, which helps sustain those margins. Though that said, we are looking forward to the return of some of the business that we lost due to COVID such as hotel and catering and some of our rent revenues, which are also high margin.

Yes. I think we believe that there's been a permanent shift in the cost structure. During the shutdown, it gave us the ability to question everything we were doing and to be very cautious in reopening. And I don't think we see buffets coming back anytime in the near future. We really looked at delayering marketing costs and being more efficient on the marketing side, much more focused on direct relationship marketing, more of the mass market promotions and things of that nature.

So I think we believe that there's a permanent reduction in the cost of operating the business.

And then I think your second question was regarding the reopening of the properties. While we still don't have a definitive time line, we're still taking the time to gain the visibility of this -- the effect that this pandemic may have on our company as well as the Las Vegas economy.

But we have good distribution throughout the market right now. We're seeing good crossover play from the properties that are closed and the facilities that we currently have opened.

And maybe just a follow-up to that, Frank. If this revenue and expense environment sustains itself for the next 6 months, is that an environment in which you would then consider reopening? Or you would just continue maintaining the status quo in terms of the number of properties?

We're going to continue to reevaluate, but we really like what we saw this last quarter. I can tell you that. Lorenzo, do you have anything to add?

Yes. No. If you look at consolidated gaming revenues, I think they were up a tick versus last year when we had 10 properties. So when you're driving that gaming revenue through 6 facilities versus 10, you're getting that natural flow-through, which obviously drives margin and profitability. So we like what we're seeing that we saw in the third quarter. And we'll continue to reevaluate as things move ahead.

Our next question today comes from Carlo Santarelli with Deutsche Bank.

Steve, you had mentioned the supply and demand dynamic. I'm not sure if this is exactly what you were referring to, but do you guys have any sense of what kind of gaming supply in the locals market looks like on a year-over-year basis kind of in the 3Q or what that looked like in terms of units online, units offline, properties open, properties closed from your peers and maybe some of the other kind of outside of the core casino, slot machines, things like that, what that looks like year-over-year?

I mean, clearly, the market is shrunk, but I'll get you -- I can come back to you with specific detail. With just us alone, we've kept 4 properties closed. And you heard on yesterday's call that one of our main competitors also had several properties closed. So the locals market has shrunk.

But when we're talking about demand, I mean, you have growing population, you have tax refugees moving from neighboring states into Las Vegas. Home sales are unbelievably strong. There's very little supply of homes in the market with high demand. And as population continues to grow, we control literally almost all of the supply where you could even build a new locals casino. So it's a very interesting dynamic to have the limits on supply with growing demand at the same time.

Yes, for sure. And if I could just ask one follow-up. If you guys think about -- just in the opened assets, not talking about the portfolio that's off-line. But if you think about the opened assets and the revenue by vertical, i.e. if you're thinking about the casino footprint relative to the restaurants, relative to the hotels, et cetera, with the changes that you've made from a cost structure perspective, what do you think the headroom is kind of relative to 2019 same-store revenue? Are you able to get 95% -- 90%, 95% of revenue with your buffets closed and maybe more limited F&B offering and some of the other amenities closed? If everything else kind of escalated back to 100% of what it was in 2019, albeit the gaming floor, hotel, stuff like that.

Yes. I think you can. I mean we were close to almost 80% right now, right, the way this all stands and we're still dealing with capacity constraints in the restaurants. And I also wanted to think about some of the more profitable lines of business that have been really restrained relative to COVID. When you think about hotel, catering theaters, those represent a significant portion of our revenue, but also would be a significant portion of our profit, almost to the extent of about $12 million when you think of all the, let's call it, lines of business that have been restricted due to COVID.

And our next question today comes from Steve Wieczynski with Stifel.

So I'm not sure if you commented on this or not, but can you talk about maybe what you saw through or what you've seen so far through October? And has that been kind of similar trends to what you saw throughout the third quarter?

Yes. Steve, this is going to be a tough one to answer because as you recall, we did give some guidance on July, but that was really very specific kind of situation in time where we only had 26 operating days throughout the quarter to comment on. So I think we can go back to our current policy and not talk about operating performance in the current quarter.

Okay. Understood. The second question, I think the casino revenue side makes sense in terms of why that was so strong. But I think what was somewhat surprising to us was actually the hotel side of things, obviously, with a significant lower room count than where you were a year ago. But is there anybody to help us think about maybe who's using those rooms at this point? And how much of those are being used on a promotional basis versus kind of a cash rate?

It's very little comp. And so what you have seen is kind of that natural transition of -- we've lost a lot of group nights. And so group nights were down significantly in the third quarter. But what they've been really replaced by has been a lot of transient and [FIT] business, which has been very great for the business. So it's really the drive -- one of the things, this is a business that's been really relying on airlift. It's not relying on conventions or meeting. And so we're really relying on local and drive-in traffic, which is better.

And while we're missing profit from hotel and catering, we're really a gaming company at the end of the day. I mean we're 80% -- 70%, 80% of our revenues and profits come from slots and table games and gaming. So we look forward to the hotel and the catering returning and they're profitable for us. But the results show you that we can still make money even in this environment.

And our next question today comes from Shaun Kelley with Bank of America.

Just 2 questions. First, to kind of stick with the P&L. Steve, when we look at the casino operating expenses, I mean, they were down 35% year-over-year, but obviously, revenues are flat for the whole company, it's pretty astounding. Could you just give us any more color on specifically, maybe what's going on in the casino floor? Is that purely labor? Is there anything else that you're able to do?

I mean, obviously, the closed properties are going to factor in here, but it just seems pretty stunning to get that much operating leverage on the casino line items specifically.

We basically went back to the basics of the fact that we have the best locations and the best properties, and we're back to focusing on just direct relationships with the customer and really focused on delayering and being more efficient in our promotions and marketing. Steve?

No, I would agree with that. And Shaun, you touched on the other pieces, right? We've become much more efficient on the labor floor. And we've been able to funnel quite a bit of crossover play from what was 10 large properties into 6.

Yes. And we have become more efficient from a lever and a scheduling standpoint. But at the same time, we're also bearing the cost of additional operating expenses and labor due to the safety precautions related to COVID. So every entrance, we have somebody taking temperatures and, obviously, a significantly higher crew of people going through the casino constantly cleaning as well. So while we're able to be more efficient on the labor side, that's -- we're doing that at the same time while bearing a higher expense due to COVID and we're obviously hoping that doesn't last forever.

And you go back to the fact that our gaming revenues were basically up slightly, but we have 4 less facilities and expenses associated with those facilities and then operating. And Nevada is the one state where you have the most operating leverage of every dollar and gaming win being flow-through down to the EBITDA line with the tax rate that you have here in Nevada.

And then my follow-up would just be the free cash flow conversion was also really -- it was quite high in the quarter. How should we think about sort of that ratio of, let's call it, EBITDA to free cash flow going forward? Specifically, I think, Steve, you called out a bit of the CapEx plan, which doesn't sound dramatically different. So could we see these types of ratios kind of going forward? Anything we should be aware of in that?

Yes. I mean I think -- I mean you're talking about a 78%, I think, ratio is what you're referring to. So when you think about our cash flow, from a tax perspective, we're not going to be a taxpayer in 2020 and most likely not be a taxpayer from 2021. Working capital should be almost a 0 to positive, some game as we're still receiving some benefit from the CARES Act in terms of cash.

And as we mentioned, CapEx, about $65 million to $75 million, so Lorenzo, Frank -- we have no deferred -- created these assets as no deferred capital maintenance. And so now I think we're reaping the reward of that program what we've done in the past. And so we're going to be very disciplined about the capital focus.

And then the cash interest expense as we're starting to pay down debt should be in that $110 million to $120 million range in terms of million. So you can kind of figure that in, but we should have a very high free cash flow to EBITDA yield.

And our next question today comes from Barry Jonas with Truist Securities.

For starters, where are you guys on potential land sales? I think some land in Reno was reportedly for sale at one point. What's the latest there and overall, I guess?

Barry, this is Rod Atamian. We're gradually making good progress on those sales. You mentioned the Reno property, in particular. We have an 88-acre piece up there at the Mt. Rose property that's been on the market. And again, we're making progress there. We'll notify you when we actually close on land sales. These things are contend to have some long entitlement periods at times, and we want to make sure that we're sure they're closing before we make any announcement.

So with respect to the convention center site, specifically in Reno, we are still evaluating that for future development. But overall, very positive and constructive on the unsolicited interest we're getting across our portfolio for excess property.

Got it. Great. And then, Steve, in your comments, you talked about maybe a second agreement extension. Just curious if you can give more color. I think stuff like that is usually less common in terms of longer-term extensions. So is the intent something more short term to get through COVID? Or are you hoping to do something really more long term...

That I'm going to turn over to my esteemed colleague, Jeff Welch.

So we're not expecting a kind of full on re-up of the management agreement, not even remotely. All we are talking about is a provision in the management agreements, and there are gaming and nongaming management agreements at Graton that basically say that the term of the management agreement will be extended by a period equal to a period that starts on the date of the original closure and ends when substantially all the amenities are turned back on. And at Graton, we do not believe substantially all of the amenities have been turned back on yet. So an extension much longer than the 3 months that the Tribe has already agreed to, we believe, is warranted.

Great. And then just last one for me. You guys have always thought of as a leader in gaming floor technology. Curious to get your views on cashless gaming.

And I think through this crisis is one thing I said is to give the customers what they want. And cashless is definitely something they want. You can anticipate that we are working heavily to produce a cashless solution and a one-wallet solution for the casino. And we expect to introduce that next year.

And our next question today comes from Jared Shojaian with Wolfe Research.

Can you just tell us if you've seen any impact on demand or revenue since the capacity limit was raised from 50 people to 250 people? Because I could see an argument for being positive, obviously, but even negative, frankly, if it opens up other leisure alternatives, has that been meaningful in any way over the last few weeks?

It's really just happened recently. I think we do think it certainly is a positive for us moving forward, particularly in the social catering side. There's been a lot of delayed weddings, small groups, things of that nature, which we typically cater to, especially here, obviously, in the local regional market. So once again, it's been fairly recent since that's gone in place. But we would expect that to be a net positive for us moving forward and in '21.

Okay. And then I guess along the same line of thinking there, can you just give us some insight into the talks you've been having with governmental officials or maybe what you've been hearing, just concerning the risk that capacity limitations get tightened again or even worse risk of another shutdown?

I think the latest that we have heard, I think the governor came out yesterday and, in fact, talked about in early '21, potentially moving to 50% capacity for meetings, convention and groups and things of that nature. So we took that as a positive sign looking forward into '21. Other than that, we haven't heard anything relative to any restrictions or anything like that.

And just to add to the flip side of that, Jared, as we mentioned, we've paid down pretty much the entire revolver. So we have a lot of -- over $1 billion of liquidity. And as mentioned on previous calls, even with carrying all of our employees, our burn rate was a little bit south of $50 million. If we went to something more draconian, our burn rates to the south of $30 million, which gives us almost 3 years of run rate.

Our next question today comes from Chad Beynon with Macquarie.

Given your free cash flow generation and really just the recovery that we're talking about here, how are you guys thinking about returning to paying a dividend? And can you just remind us on the restrictions from a covenant standpoint?

Yes. Sure. And so I think what the Board evaluates the payment of the reallocation of capital, particularly the dividend every quarter. Right now, there's no definitive time line, but I can rest assured that our largest shareholders are aligned with everyone else. In terms of the covenants, there are significant ways to move the dividend -- to restart the dividend as those specific carve-outs related to the dividend.

Okay. Great. And then regarding your older-aged customer cohort, did you see any recovery in that segment as we kind of moved through the quarter? Or is that older age customer still not really participating at the properties at this point?

This is Lorenzo. We did start to see the older-aged customer start to come back to the properties, particularly kind of around Labor Day and after Labor Day. We really started to see more of a pickup. So the answer is yes.

(Operator Instructions) Our next question comes from Stephen Grambling with Goldman Sachs.

Perhaps the flip side of Chad's question on the older customer, I think one of the concerns out there is that if other forms of entertainment come back, the new younger customers are going to get a look elsewhere and that marketing may have to come back. Can you expand on how that customer profile is changing and how they may be engaging with your marketing similar or different to what has historically been the core rated player?

Sure. I mean, yes, we have seen a younger demographic for sure.

We've been doing a good job on getting them to sign up for the loyalty program so that we can have a relationship working with them going forward.

And I think if you look at the amenity packages that we have, particularly at Red Rock and Green Valley, the food and beverage offers, they're already kind of catered to that younger crowd, whether it be Blue Ribbon Sushi at Red Rock, Hearthstone, new Italian restaurant that we have there, T-BONES. And then a number of restaurants that Clique Hospitality has put in place for us at Green Valley Ranch. So we do feel like that relative to the locals market that we have the best amenities really to attract that upper end, younger kind of working mobile demographics.

And would you generally say that the way that they're engaging from a play standpoint follows a similar path to that older demographic when they first come in? Just as one quick follow-up.

That -- I mean, that's a tough one to answer. I can't tell you that, that segment of the market is one of our fastest-growing segments of all of the segments in our database.

And ladies and gentlemen, this concludes your question-and-answer session. I'd like to turn the conference back over to the management team for your final remarks.

Well, thank you, everybody, for joining us and we look forward to talking to you in about 90 days.

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.