Red Rock Resorts Inc (RRR) 2020 Q2 法說會逐字稿

Good afternoon, and welcome to the Red Rock Resorts First 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 today's Red Rock Resorts Second Quarter 2020 Earnings Conference Call. We hope that all of you and your families are staying safe and healthy. Joining me on the call today from Red Rock Resorts are Frank Fertitta, Chairman and Chief Executive Officer; Bob Finch, Executive Vice President and Chief Operating Officer; and Rod Atamian, Executive Vice President of Development and Strategy.

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 the 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 we get started, we wanted to take a moment to acknowledge the passing of Rich Haskins, our President, who passed away at an accident on July 4. For over 25 years, Rich was a trusted adviser to the company through both good times and bad. He was instrumental not only in the successful growth of the company but in the development of the Station Casinos family culture. Those who interacted with him were inspired by his steady leadership in any situation and his anything-is-possible attitude which defined what he was all about. While Rich may have left us, his accomplishments and legacy remain and live here at Station.

Now on to the quarter. Before moving on to our financial results, we will take a moment to remind you of some of the actions we have taken during the first 2 months of the quarter as we prepared for these uncertain economic times.

During the closure, we reexamined and challenged every aspect of the company. We took a number of pivotal steps to prepare for a new operating environment with a focus on health, safety, cost reductions and liquidity. To that end and working closely with our outside medical experts, we established very comprehensive health and cleanliness guidelines for our properties given the current environment. These new guidelines meet or exceed the highest standards set by federal, state and local authorities and will be adapted as circumstances require. Simply put, we are committed to providing the most safe, secure environment possible for both our team members and guests.

A few highlights include all guests and team member entrances at our resort properties have been equipped with state-of-the-art thermal scanners. All team members are required to wear masks and PPE consistent with health authority guidelines. And as masks are now required for all guests, we've continued to make masks available to guests upon entering the property. All team members and all vendors and partners underwent FDA-authorized COVID-19 testing prior to reopening, and we have continued to test our team members, vendors and partners on a regular basis. We have completed over 12,000 tests as of today.

During the closure period, we've also taken time to review and assess every property and every department. Based upon that review, we have had to make some very difficult but necessary decisions in order to streamline our cost structure and guide the company through this crisis in an uncertain demand environment, including significantly reducing salaries for senior executives across the company; refining and optimizing our business processes, which led to staff reductions both at the property and corporate levels; reducing costs related to outside services through termination or renegotiation of vendor and other agreements; suspending our quarterly dividend; eliminating nonessential capital spending for the remainder of the year; and opening our new -- our properties in a phased approach to maximize flexibility in meeting business demand.

Through these actions, we have become a leaner and efficient -- much more leaner and efficient company as we remain confident in our ability to permanently achieve the approximate $150 million in cost reductions on an annualized run rate basis we referenced on our previous earnings call. These cost reductions do not include any labor expense savings related to those properties that did not open as part of our first opening phase nor does it include savings related to any amenities that were not initially provided in this phase. While we estimate that those additional labor expense savings were approximately $200 million on an annualized run rate basis, that amount would decline to the extent that our closed properties were to come back online or those amenities were again to be provided.

Now let's turn to our financial results. As you recall, on March 17, the governor of Nevada ordered a statewide shutdown of all nonessential businesses, including casinos, in an effort to reduce the spread of COVID-19. Similarly, the Graton Casino Resort, which is managed by the company, closed on March 17. What originally began as a 30-day shutdown on March 17 here in Nevada ended 79 days later when the government of Nevada allowed certain nonessential businesses, including casinos, to open with restrictions on June 4. The Graton Casino Resort also partially reopened on June 18.

On June 4, we opened 16 of our 20 properties: Red Rock, Green Valley Ranch, Santa Fe Station, Boulder Station, Palace Station, Sunset Station and our Wildfire properties. As we noted on our previous earnings call, if you exclude Palms from both 2019 net revenue and EBITDA, these first-to-reopen properties generated over 80% of our Las Vegas net revenue and over 90% of our Las Vegas EBITDA during the same period. Our Texas Station, Fiesta Rancho, Fiesta Henderson and Palms Casino Resort properties remain closed at this time. We will not consider reopening these properties once we fully assess both the performance of our first open properties and the health of the economy as a whole.

On a consolidated basis, we reported net revenue of $108.5 million, down $482.9 million (sic) [down from $482.9 million] in the prior quarter; adjusted EBITDA of negative $17.3 million, down from $115.2 million in the prior quarter; and our EBITDA margin decreased to negative 15.9% for the quarter. With respect to our Las Vegas operations, we reported net revenues of $101 million, down from $457.8 million in the prior quarter; adjusted EBITDA of negative $12.1 million, down from $106 million in the prior quarter; and our EBITDA margin decreased to negative 12% for the quarter.

Within these numbers, there are a couple of items we'd like to call out. As you recall, we are one of only 3 companies in Las Vegas to continue to pay all our full-time team members regular pay and health benefits from the March 17 shutdown date through May 16 at the cost to the company of over $72 million. Because of our commitment to our team members through this crisis, we were able to recognize an approximate $18.6 million payroll retention benefit in the quarter under the CARES Act, bringing the total payroll benefits received to date under the CARES Act to $38.3 million. Additionally, these numbers do not reflect approximately $27 million in payroll expenses in the quarter, which were accrued in the first quarter due to our commitment to provide regular pay and benefits to all full-time team members after quarter end from April 1 to April 30.

While the severe impact of COVID-19 can be seen in our quarterly results, the company's Las Vegas performance during the open period from June 4 through June 30 tells a different and more positive story that reflects both the resilience of our locals business model and the impact of the decisive actions the management team took during the closure. Measured on the basis of that period, adjusted EBITDA increased 46.8% to $35.9 million, an increase of $14.6 million. This increase was achieved despite net revenues declining 23.3% to $100.1 million, a decrease of $30.4 million. Margins in this period increased 2,192 basis points to 45.9%, yielding our highest June EBITDA margin ever.

In addition, while we generally do not comment on our current quarter financial performance, we are pleased with our year-over-year performance -- financial performance in July. But we would caution, however, that we are still in the middle of this pandemic and have little visibility regarding impacts that this crisis will have on our company and the economy moving forward.

I will now cover a few balance sheet and liquidity items. The company's cash and cash equivalents at the end of the second quarter were $274.5 million, and the total principal amount of debt outstanding at quarter end was $3.3 billion. As of July 31, we have -- we've had $197.5 million drawn on our revolver and have over $1 billion in liquidity in the form of cash on hand and revolver availability, which provides us with the ability to operate fully staffed for over 20 months should we return to a 0 revenue environment.

In addition, we believe we are in position to continue to comply with all of our financial covenants for the foreseeable future, and we have no significant debt maturities until 2025. For all these reasons, we believe we remain well positioned financially to handle the uncertain times ahead.

Finally, an update on our 2 Native American agreements. At Graton Casino Resort, we reported management fee revenue for the second quarter of $5.9 million, a decrease of 75% over the prior year driven primarily by the resort closure for the majority of the quarter. Additionally, we expect to reach agreement with the Tribe on an approximate appropriate extension of term in accordance with the terms of the management agreement.

With regard to North Fork, our plan to develop a casino for the North Fork Tribe had been stalled for the last several years by litigation brought by opponents of the project. The Supreme Court of California held an oral argument on June 2, 2020, in a very similar case involving the Enterprise Tribe. We are expecting decision by month end and are hopeful that the decision will clear the way to finally develop this very attractive project on behalf of the North Fork Tribe in Central California.

This quarter has been one of the most challenging quarters in our over 40-plus-year history. We believe that the company has responded well to each of these challenges and is well positioned to succeed going forward. We would like to extend our thanks to all of our team members for their hard work and continued focus and to our guests for standing by us during these trying times. Together, we will manage through this.

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

(Operator Instructions) The first question today will come from Joe Greff with JPMorgan.

Omer Sander on for Joe. First off, the $46 million EBITDA in Las Vegas in June, what did the closed properties do in terms of EBITDA drag? And were you able to manage it lower in July? And can 45% margins for the reopened group of properties sustain themselves in the current environment?

Okay. So I'll start with the easy one. And so the closed properties for June had a drag of about $1.4 million. That remained fairly consistent in July, though we think we can get it a couple of hundred thousand dollars lower going forward.

Regarding the sustainability of the margins, I think we've done -- the team has done a great amount of work reevaluating and retooling the business during the closure. And our cost structure, it is in a position to deal with these very uncertain times from a revenue perspective. So we feel confident that we can deliver margins in excess of our historical margins.

And then can you discuss what you've seen in July in the locals market in terms of gaming paper and behavior there? How much is revenue per day down versus June levels? What are you seeing with July with respect to customer mix? Which has been holding up better since the end of June, younger or older? And do you get a sense that the CARES is driving it?

Sure. What we did with July -- generally don't comment on, again, our current quarter. But to give you some general sense, the trends in July have been basically consistent with what we've seen in June. We've seen less visitation. We've seen more spend per visit. We've seen more time on device. We've seen a younger demographic in our database show up. Our older demographic, to be expected, due to the current pandemic has stayed at home. I think this point here is encouraging because it's an opportunity for growth when our seniors start returning when the situation subsides.

Awesome. And then just one last one for us. Is there a market for assets for sale at prices that you can seriously accept? Or is it too early? And then lastly, just what's the future of Palms?

I think it's too early to assess right now. Right now, we have very little clarity on our current economic environment. And so we currently -- Palms is currently undecided whether we're going to open right now.

Yes. We don't know if or when we're going to reopen any of the closed properties. We think it's too early to make that decision at this time. I think so far, we're very pleased with the results that we've had, the ability to move some of the play from the closed properties to our existing properties. And we're going to continue to try to get clarity and navigate the situation to make well-informed decisions. But rest assured, whatever decisions we make will be in the best interest of shareholder value.

And the next question will come from Barry Jonas with Truist Securities.

First off, I just want to extend my condolences for your loss. So I guess the first question is, I appreciate some of the color on trends you're seeing. But is it possible to give any sense of what the drive-to business maybe from California is looking like right now? And any color on group? Is group pretty much nonexistent? Just would like to get one more layer down into how your -- how the segments are doing.

I think if you look at our -- the short-haul traffic coming into Vegas, that is down. It's down, not nearly as significantly as longer-haul business, group business, convention business. Things of that nature are down much more significantly.

I don't know if you want to add to that, Steve.

No. I think, Frank, you're spot on in terms of how you delineate between short haul and long haul. And from a group business, I think just like the Strip, we're suffering from group. And so I think 2020 and the beginning of '21 will be tough sledding.

I think one important thing for people to notice is really the difference in our business model, though. I mean we are primarily a gaming company that happens to have hotel, catering and convention business as an amenity. Primarily, 80% of our business comes from the casino. And so we're able to have the results like we did in the short term without having the benefit of strong hotel, catering and conventions that hopefully will return as we get the COVID crisis under control. But our primary business is really suburban Las Vegas local business that's close proximity to our facilities.

Great. And I guess with that, given Nevada has closed bars, I'm wondering if you've seen any tailwinds or just any impact from those closures.

It's definitely not helpful. We have about 650 bar machines in the company in Las Vegas, those of which have been closed. So we look forward to the ability to get those open as soon as possible. This is kind of an ebb-and-flow thing with changing requirements, whether it be at the pools, whether it be at the bars, whether it be that you have to wear a mask or you don't have to wear a mask. And so every day is trying to navigate through kind of a new set of circumstances. And I think our team has done a very good job so far.

Got it. And then last, just touching on the promo environment, is it fair to say pretty rational folks are just more focused on margins at this point? Or are you seeing anything heat up amongst the competition?

I think it is a very unique situation where every operator has found themselves in the exact same situation, which is that we have a lot of unknowns and lack of visibility. And it's focused -- it's made everyone, I think, refocus on what really matters in the business. And I can tell you for us, we took the, I don't know, 79 or 80 days that we were closed. And we probably worked more hours and longer hours on just trying to unpack and really go through and think through what was meaningful in our business and what were things that were maybe just taking a lot of time and not creating a lot of results. And I can tell you, whether it be at the corporate level or how much labor we need or what amenities really drive the profits at the facilities, it's led us back to where we really started in this business. And every survey you've ever done for Las Vegas local since we started in 1976, for the most part, hasn't changed. It's all about convenience, the value proposition and the relationships at the end of the day. And sometimes maybe we have all overcomplicated it a bit too much.

But I think we're definitely back to the basics. I think we have a lot of good things going for us. We have the best properties. We have the best distribution in the valley. If you take the 6 properties that we have open today, 5 of those are all in the suburbs with growing population off of major interstates, great ingress/egress. They were purpose-built for the local business with the exception -- Palace was built the same way, but it is in the center of town. But as the town has grown into more of a suburban town, I mean I think that's where we're going to rely on great properties, great service, great relationships and great value. And we're going to be much more laser-focused on marketing and advertising and things that we can really measure and know that they work.

And the next question will come from Chad Beynon with Macquarie.

Wanted to, I guess, dive into another metric for June. Did you see any major difference in terms of weekday versus weekend compared to what you have seen, I guess, pre-COVID as you've run the business? And do you think margins may have been elevated compared to prior weekday period just because of extra traffic?

We have seen kind of a change, at least the subtle changes in some of the traffic patterns. Most notably, Saturday is kind of -- which is normally one of our busiest days, has been slightly down. We believe that's due to the COVID crisis, and you're seeing a lot of that same traffic return during the midweek or Sunday. So the people coming back, they're just choosing -- they're spreading their time and visits throughout the week.

Okay. And then from a CapEx standpoint, I don't know if you have an updated view. Is there a new level of maintenance that we should be thinking about just to run the business? I know you've suspended all projects and really most of the maintenance CapEx, but should we think about something coming back now that your business is back to a new normal rate?

Yes. So just to give you an update, on Q2, we spent approximately $10.5 million in Q2. We still expect to be in that $50 million to $60 million CapEx range. We think 60 -- around $60 million is a good number going forward for maintenance CapEx.

And I think the fact is that we have maintained the properties very, very well. They're all in great shape. And I think we still have a lot of unknowns in front of us relative to the COVID crisis and what the future is going to look like. And so we're going to be very, very diligent on any CapEx that we spend until we have more clarity.

I'll pass along my condolences as well.

Thank you.

And the next question will come from Jared Shojaian with Wolfe Research.

Just going back to the $150 million of potential longer-term run rate savings, can you parse that out and help us understand what some of the biggest items are that are in there? And I guess what will be different about the operating model once we're through this pandemic that allows you to keep those costs out of the business? And do you worry about any risk of impairing the overall consumer experience?

We don't worry about the consumer experience. I think one thing that you have to look at is that we've made significant reductions at the corporate office building, which I don't think will affect the guest experience in any way whatsoever. Again, it's easier to retune the car when it's not going 80 miles an hour down the road. And we had close to 3 months to really focus on every aspect and challenge everyone as to what we could live with and what we could live without.

And the other thing is that unfortunately, we have a lot of amenities that I don't know if they'll return. They were amenities that maybe generated a lot of traffic but not necessarily a high-margin business. And we have foreclosed properties, and we've been able to move a good portion of those revenues to some of our other facilities. So I think -- I can't predict the future, but I can tell you that what we've seen so far doesn't impact -- I think we have a great customer experience. We spent a significant amount of time and energy on health, safety, testing, convenience for the customers through thermal camera scanners at all the entrances and everything. And I think the customer experience is great. I think our team members have done a great job. And hopefully, we can move forward and be able to operate the business in a much more efficient basis. But our team member headcount today is about 50% of what it was going into this crisis. It's, like I say, forced us to really challenge and rethink everything we do.

Got it. And then other regional operators have talked about a new and younger customer that's driving some of the performance right now. My question is, are you seeing that in the locals market here as well? And do you have an estimate for what percentage of your guests are employed by the Vegas Strip in some form?

Look, a healthy Las Vegas Strip is super important to the long-term healthy Las Vegas economy. That being said, we have seen a very strong housing market here in Las Vegas. I think you have a lot of migration out of other states and everything to a place like Nevada and -- where it's more affordable housing, cost of living. I think the retirement community here is growing at double the rate of the regular population growth here in Las Vegas. We're still seeing population growth.

I can't tell you exactly what percentage of our business is employed by the gaming industry. I can tell you we do have a fairly substantial retiree customer base. I can tell you that we have seen a pretty significant increase in the younger demographic in our business, which we're very focused on relationship marketing, capturing the information and being able to continue to market to them. And we have seen a decline in the older guest that is more concerned about the COVID virus.

So I don't know what the future brings, but if we can get some stickiness and retain some of these younger people that are coming into our facilities, get the COVID virus under control to where our older demographic feels comfortable coming back, it could be a very good thing for us.

My condolences as well for your loss.

Thank you.

And the next question will come from John DeCree with Union Gaming.

Like everyone else, my sympathies and condolences. I know Rich was a dear friend and valued colleague to all of us but then you as well. And just very, very tragic, so my sympathies.

Question. I know we've touched on it a little bit already, and there's only been a few weeks of operation to really look at, but kind of while grasping at consumer behavior so far. And I'm not sure if I missed it in the prepared remarks. But is there any commentary or color you could provide on some of the typical metrics, what you're seeing in rated versus unrated play, realizing so much of your play is local and rated. But any bifurcation there? And with limited perhaps entertainment options, such as bars, are you seeing an increase in new customer sign-ups or anything that might kind of give us a little bit more insight on consumer behavior so far in the first couple of weeks since reopening?

I'll tell you anecdotally that if we go back to what we were just talking about, pre-COVID, a big part of our database and carded play was from an older demographic, retirees and things like that, that really are staying home at this point with their concerns over the virus. We've had a pretty significant increase in younger uncarded demographic, but our focus is basically to convert that uncarded younger play into carded play.

And perhaps a follow-up is -- I mean I think from what you've said so far, we can extrapolate, but asked directly, is the amount of visitation from your carded customers down but maybe spend per visit healthy when they come? Or how has that been playing out?

Yes, John. The short answer to your question is yes, you're seeing visitation down, spend up. And spends offsetting the visitation.

At this time, there are no further questions in the question queue. And I would like to turn it back over to management for any closing remarks.

Thank you, everyone, for joining us on the call, and we look forward to talking to you in 90 days.

Thank you. This concludes today's conference. And I would like to encourage everyone to disconnect at this time.