Red Rock Resorts Inc (RRR) 2018 Q1 法說會逐字稿

Good afternoon, and welcome to Red Rock Resorts First Quarter 2018 Conference Call. (Operator Instructions) I would now like to turn the conference over to Daniel Foley, Vice President of Finance and Investor Relations. Please go ahead.

Thank you, Sonya. Good afternoon, and welcome to Red Rock Resorts First Quarter 2018 Earnings Conference Call. Joining me on the call today from Red Rock Resorts are Frank Fertitta, Chairman and Chief Executive Officer; Rich Haskins, President; Steve Cootey, Chief Vice President, Chief Financial Officer and Treasurer; and Joe Hasson, Executive Vice President and Chief Operating Officer.

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 or implied due to a variety of factors. The risks and uncertainties related to these statements, the company's future operating results and financial conditions are detailed in our filings with the SEC. During this call, we will also discuss non-GAAP financial measures. For definitions and a complete reconciliation of these figures to GAAP, please refer to the financial tables in our earnings press release and Form 8-K, which we filed this afternoon prior to the call. Also, please note this call is being recorded.

I would now like to turn the call over to Stephen Cootey.

Thank you, Dan. And good afternoon, everyone. First, a quick note on the presentation of the company's financial information. In the first quarter, the company adopted FASB's new accounting standard for revenue recognition and elected to apply the full retrospective adoption method, which restates prior periods. Thereby, allowing for more consistent comparison of our operating results.

Now let's take a look at our solid first quarter results. For the quarter, consolidated net revenues decreased 1.1% to $421 million, adjusted EBITDA increased 2.9% to $140.1 million, and margins increased 130 basis points to 33.3%. With respect to Las Vegas operations, net revenues for the quarter increased 0.2% to $395.2 million, adjusted EBITDA increased 4.2% to $125.9 million, and margins increased 120 basis points to 31.9%. This was our highest first quarter net revenue and EBITDA performance since 2008 despite the negative impact of substantial ongoing construction disruption at both Palace Station and the Palms.

When viewing our Las Vegas performance, excluding Palace Station and the Palms, the strength we're experiencing in our core business becomes very clear. Measured on that basis, net revenues increased nearly 4%, adjusted EBITDA increased more than 9%, margins expanded by nearly 170 basis points to over 35% and flow through exceeded our targeted 50% to 70% range. These impressive first quarter results in our core business were driven by mid 6% growth in casino revenues as we saw a solid volume across every category. Moreover, the outlook for the Las Vegas County remains strong and should continue to help sustain our positive growth going forward as all key underlying economic metrics remain favorable. With respect to population, the state of Nevada remained the second-fastest growing state in the nation, with Las Vegas now designated as the fastest-growing major metropolitan statistical area in the United States, having posted a 2.2% growth in 2017. Also, the number of residents is at an all-time high, with 1/3 of new arrivals being retirees, which represent a key gaming demographic for us.

With respect to employment, the number of jobs is at an all-time high, as we've seen 85 consecutive months of broad-based job growth across the valley. And this growth is expected to continue as Las Vegas is forecast to be the third fastest-growing job market in the United States through the end of 2019. Wage growth continues to be solid, with average weekly wages up 3.8% for the trailing 12 months. In addition, taxable sales have increased 4.5% so far in 2018, with strong spending seen across multiple discretionary categories.

As for Housing, new home sales were up 17% and median existing home prices were up 16% in March. Existing home prices are now up 150% from the low, yet remain below peak levels. The outlook is also very bright on the development standpoint. Over $14 billion of new capital investment is planned or underway, including such major projects as Resorts World, the new Raider Stadium, Project Neon and the Convention Center expansion. In addition, both businesses and residents alike in high-tax states continue to be attracted to Las Vegas for its low taxes, affordability, great weather and other drawers.

From a business standpoint of view, these positive economic trends along with having the lowest gaming tax rate in the nation and a very stable regulatory environment only serve to reinforce our belief that the Las Vegas locus market is the premier gaming market in the United States. With our best-in-class locations and properties, market-leading distribution and scale, favorable supply demand dynamics and deeper -- and a deep organic development pipeline, we remain uniquely positioned to continue to take advantage of the ongoing growth in this market.

Let's move on to some of our key technology initiatives. As you may recall, in the third quarter of 2017, we began testing and rolling out our new IGT slot system upgrade. The purpose for this upgrade was to provide a more rewarding and convenient experience for our guests through, among other things, real time personalized on-device bonusing capabilities and other reward features.

At the time, we predicted that this system upgrade could ultimately prove to be a game changer from a guest perspective. And as evidenced by the approximate 6% in the casino revenues, we've seen across our nondisruptive properties since its rollout, we believe our prediction is correct. Although we are a long way from optimizing the system with a number of key enhancements still to come, we've already seen meaningful increases in key metrics that drive our slot businesses, such as carded slot win, time on device and spend per visit. As one of those additional enhancements, we'll be introducing IGT's new mobile player tracking system, Cardless Connect, across all of our large properties in Las Vegas later this month. This technology will enable our guests to participate in our Boarding Pass loyalty program by simply tapping their smartphones on a slot machine card reader, thereby, delivering a more engaging and convenient rewards' experience to our guests. We'd be the first gaming company in Las Vegas to offer this exciting new technology. We've always been a leader in innovation of the gaming industry and this is yet another example how we use our first mover technology to enhance the guest experience at our properties. And we look forward to rolling out additional enhancements in the quarters to come.

Now let's talk about our Palace Station and Palms redevelopment projects. We're continuing to be very excited about both these opportunities and the significant returns that we expect to generate from the -- for the company upon completion. At Palace Station, the project remains on time and on budget. In fact, we now anticipate that certain key enhancements will be completed ahead of schedule as the fully renovated casino floor, the new state-of-the-art buffet and 2 new restaurant concepts are all expected to be completed by the end of the third quarter as opposed to the end of the year. In addition, we've already seen extremely positive guest response to those portions of the project that have already been put into service.

Based on these factors, we now expect construction disruption at Palace Station to begin to taper off and come at the lower end of our previously stated $10 million to $15 million range for the year.

With respect to the Palms, the project also remains on time and on budget, and we are very excited about the opening of the final elements of Phase 1 of our plan later this month. These exciting upgrades and amenities at Palms include a complete renovation of the casino floor with an expanded number of table games and upgraded slot products. The addition of the new high-limit rooms for both slots and table games; a new VIP registration lounge; Scotch 80 Prime, a stylish sophisticated steakhouse that will reset the standard for Las Vegas steakhouses; Apex Social Club, a rooftop social club offered by Clique Hospitality Group, a leader in Las Vegas nightlife, which will offer unparallel views of the strip; Camden Cocktail Lounge, an exclusive high-end casino lounge experience also managed by Clique Hospitality Group; and the Unknown, an iconic center bar. Other Phase 1 elements that have already opened at the property to stellar reviews, include ACE, our innovative take on a Vegas buffet experience; Lucky Penny, our new 24-hour cafe, Send Noodles, an Asian-inspired noodle bar; the completely renovated Pearl concept theater, a fully renovated 14-screen luxury cinema, including -- which includes luxury seating and cocktail service and 18,000 net square feet of completely renovated meeting and convention space. We are very excited about the extremely high quality of these amenities and upgrades and invite you all to come see firsthand the beginning phase of our transformation of the Palms into what we believe will be one of the most compelling and dynamic properties in all of Las Vegas. We expect the fantasy tower and typical room and suite renovations as well as two additional signature restaurants to be completed by the end of 2018, with the remaining Phase II components expected to open through the second quarter of 2019 and Phase 3 expected to open in the fourth quarter of 2019.

Please note that the construction disruption at the Palms continues to be extensive and is expected to remain so through the completion of Phase 2 of the planned redevelopment of the property.

In our Native American segment, we reported management fees for the quarter of $22.1 million, down 5.2% from the prior year, primarily driven by the expiration in February 2018 of our management agreement with the Gun Lake Tribe, which was partially offset by a 12.6% increase in graded management fees. Also, with respect to the North Fork project, we continue to work through the few pieces of litigation that remained regarding this project. As previously noted, the California Supreme Court has granted the Tribe's petition for view with respect to a lower court decision involving the project and has deferred taking any further action in that matter until it has ruled on a very similar case before it involving the enterprise Tribe, which received a favorable ruling at the appellate court level. That case has been fully briefed since 2017, and we anticipate that the court will schedule a hearing on the enterprise case in the near future.

I will now cover a few balance sheet and capital items. The company's cash and cash equivalents at year-end -- at the end of the first quarter were $179.2 million and total principal amount of debt outstanding at the end of the first quarter was $2.68 billion. At the end of the first quarter, net debt to EBITDA and interest coverage ratios were 5x and 4.6x, respectively. Capital spend for the first quarter was $138 million, which includes both Palace Station and Palms redevelopment. In 2018, we anticipate capital expenditures will be between $650 million and $700 million, inclusive of the Palace Station and Palms projects. On the Investor Relation's front, we are excited to announce that we'll be holding our Investor Day in early October around the time of the G2E conference in Las Vegas, which will include tours, the latest developments at both Palace Station and the Palms. Details will follow at a later time.

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

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

This is actually Dan Politzer on for Joe Greff. The first question, I guess, you guys have said Palace would be at the high end of your disruption range and, obviously, now you're saying it at the lower end. How much was in the first quarter of that $10 million to $15 million range? And how much should we anticipate in the first half of the year?

I think the guidance speaks for itself. So this figure $2.5 million per quarter. It's probably the right way to look at that.

Okay. And then, your CapEx is pretty significant for the rest of the year. I guess, how much of your CapEx was cash versus accrued? Of your CapEx, it was cash versus accrued.

It's all cash.

Okay. And then, just the last one. The employees at the Palms recently voted to become unionized. How does this -- how do you think this impacts your return? And expected your return on investment in the cost structure at the property?

Let me tell you every individual property is required -- we're (inaudible) and negotiating in good faith, and that includes the Palms as well as other two properties we're negotiating with. The bottom line is, we do not -- we're going to negotiate in good faith, but we don't expect anything -- to do anything that won't be in the long-term interest of the company.

Our next question comes from Carlo Santarelli of Deutsche Bank.

If I could, I mean, you talked a little bit about the flow-through range of 50% to 70% that you guys have targeted for a long time and obviously talked about how your nondisrupted properties exceeded that range. When you think about the establishment of that range and you obviously think about the tax rate jurisdictions at year-end, which is obviously very favorable when you're showing 6% casino revenue growth. Is there any reason why that 50% to 70% feels appropriate at -- in store portfolio, given some of the top line growth that you're seeing in some of the promotional disciplines? Or could we expect to see, kind of, the higher end of that range or like you said in the first quarter, kind of, north of that range here in the near term?

So I think, yes, you're effectively asking me that -- so I think we like our positioning, we like the strength of the economy. We think we have the best-in-class assets across all the valley in very favorable locations, Carlo. And we generally outperformed whenever we have a good market. And so we love the way the business is going right now and do feel that we can move to the higher end of that range.

I think we have significant leverage to the upside, especially given the tax rate on the top line, which is better than any other jurisdiction in the United States. So on dollar-for-dollar revenue growth, you're going to see more leverage for the upside here in Las Vegas than any other market in the United States.

Understood, great. And then, if I could, just one follow-up. Clearly, some work has gotten started on some of the construction projects that you guys obviously -- that you guys talked about. Have you started to see any of the impact, kind of, in the numbers right now from some of the construction labor that has come into the market over the last 3 to 6 months?

This is Joe Hasson. We're in a healthy economy right now. And as both Steve and Frank mentioned, any time we can find revenue upside, it's advantageous for our business. So more people working, more construction underway simply spells good things for the local providers, like ourselves at Station Casinos and Red Rock Resorts.

Well, we also like the fact when you look at what's going on with the Convention Center, the Raider Stadium, Resorts World, Palace Station and Palms, which is going to be a completely new redone facilities, are right in the center of where all this activity is happening. And I think that there'll be good choices for people and allow us to capture the upside in the market.

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

Just maybe to kind of continue on the strong casino revenue reports. You definitely had some investor concern given the reported revenue statistics that came in for Las Vegas locals throughout the first quarter for decently lower than the 6% that you guys reported. So I'm curious, I mean, could you just help us characterize the environment? Are things pretty stable when you guys look at it on, either on volume basis or a, kind of, whole adjusted basis, month-to-month, when you adjust for kind of the things you need to -- like slot accounting or just what's the pattern or trend you're seeing from the consumer right now?

We like what we see in the market that's for sure. I think when you look at these state-reported numbers, you need to the careful looking at any individual quarter because it has a lot to do with what the end of the month is and when the drops are done. And there can be volatility unless you're looking at a sustained period of time. So maybe, if you're looking at trailing 12 months, you'll see what the real picture is, but quarter-to-quarter, you're going to have volatility. But we like what we see in the market.

Great. Second question was just be -- as we sort of went line-by-line looking at some of the operating performance, the casino side stood out, which you guys called out. There was some declines in revenue, both at food and beverage and on the room side. I imagine that's from, particularly, the nongaming component at Palms, but could you just elaborate at that pretty much the softness or weakness that we see there or anything else to call out and initiatives on those line items?

So I think in the rooms, I think you're seeing the decline primarily at the Palms, but also if you recall in 2017, we did have the 400 rooms at the Palace, which contributed about a $1.6 million in the Q1 '17. On the...

We believe, on a net basis, getting rid of those rooms that we're actually better off from a free cash flow point of view. Because the rooms were built in the early 1970s out of a timber construction, and the maintenance on the rooms were more than what we were getting out of them.

Correct. And on the food and beverage side, we're effectively -- if you take away the Palms, we're effectively flat. And if you break that down even further food and beverage itself was up about 4%. And then the main straggler was catering. And we've put new resources in place, and we're very happy with the current pipeline in the catering business moving forward.

Great. And last question would be just on Palace, anything you could elaborate on in terms of, sort of, the cadence and how things come back online, things that we should be looking out for between 3Q and 4Q? That will be helpful.

I think pretty much everything is going to be online by Q3 with the exception of the second floor restaurant as well as the movie theater. And that's the only piece of the project now that's going to be remaining through end of -- at the end of Q4.

And the like, Steve, the long term or sort of -- I know in the, kind of, long-term blueprint, there is the idea of additional hotel rooms or hotel tower there. Is that -- where does that kind of project stand right now on management's radar screen?

Right now, the focus is on the Palms and the core Palace projects. We have not looked into the new rooms. But what we are currently doing is renovating existing tower and then that's ongoing.

Our next question comes from Chad Beynon of Macquarie.

I wanted to focus on the Native American side of things. You said plus 13% in fees at Graton, you guys have done an impressive job there since the opening and the expansion. Could you kind of help us think about how the property is trending and kind of opportunities as we think about 2018 and 2019 as that's the sole asset within that segment? And then, secondarily, you kind of mentioned the North Fork opportunity. Are there other potential management contracts given your performance at this property that are on your radar screen?

Let me take the question related to Graton, Chad. First and foremost, the team there has done a terrific job recovering from the wildfire conditions that took place in the fourth quarter of 2017. And they're bringing some additional capacity online in short order at Graton. It will be primarily Class 2 gaming devices occupying additional floor space. I'm only encouraged by the recovery of that business, given how much damage was done in wine country by the wildfires. Looking forward to other development opportunities, I think Steve covered it best in his prepared comments relative to any of the North Fork opportunities.

Great. And then, just a housekeeping one. So one of your competitors mentioned that Project Neon caused some disruption, I guess, more towards downtown, not sure if that impacted Palace Station any more than what was cause for the disruption. Do you think there was any impact just because of construction kind of out on the throughway?

Look, I think it's hard to quantify. But I can tell you that from a Las Vegas locals point of view that it definitely has created traffic problems and delays in traffic to get up and down the I 15, especially through that bottleneck, called the Spaghetti Bowl. So again, it's hard to quantify but it certainly isn't helping, I can tell you that.

Our next question comes from Stephen Grambling of Goldman Sachs.

I guess, somewhat of a follow-up to Shaun's question. Can you single out, I guess, how much of the strength recently in the gaming side is driven by the slot system upgrade, specifically, in any sense for how that could continue to ramp?

Well, I think when you look at the strength of the Las Vegas economy, that's definitely a contributor. But as Steve mentioned earlier, we have the leading brand in the outstrip locals markets. We have the best locations, we have the best properties with the best amenities. We have tended to outperform in an upmarket. And clearly, the technology and the innovation in the slot system we believe has been a bit of a game changer for us. And we are in the early innings of really figuring out how to leverage that to its maximum potential, and it's a big focus of our companies. And we're -- like I said, we're in the early innings. And we think there's a lot more to come with the slot system.

And then, maybe turning to the Palms. I guess, how would you assess the health of the strip versus the locals market? And do those trends change? How do you think about positioning the property, whether it's a marketing or otherwise between locals and strip customers?

Well, it's clear that we're going to go after both markets. I mean, it's a hybrid property, and from the time that the Palms opened in 2000, 2001, it had been successful in both the tourist market and the locals market. And we're going to go after both. Clearly, the strip market with all that is going on at the Convention Center, the Raider Stadium, Resorts World, we're going to be in a perfect location to capture that traffic. And I think that when you guys come out, I would encourage you to take a look at Phase 1 of the Palms in late May, and you're going to get a glimpse what the future is going to hold for the Palms. And I think everyone's going to be pleasantly surprised to the upsize to see the quality of what we're doing there and why it's going to be a place that people in Las Vegas are going to want to go to.

Sounds good. And one more longer-term follow-up. I guess I know that you have a lot of projects underway and you mentioned that, that's the focus and that should be. But as you see the strength in the locals market, I guess, what are your latest thoughts on the developer land that you have? And how do you assess the opportunity there relative to future investments in the existing property base?

I think we're in a great position to take advantage of the continued growth in the Las Vegas market. Because as a company, we control 5 of the best locations for future development in the off-strip locals markets that are already entitled. And we're going to be disciplined. We're going to get through the Palms and Palace Station. We are going to stabilize those. We're going to make sure our balance sheet is in good shape. But we have the development pipeline within our control to turn on whenever we want to. And I can tell you, if you ever get out on 215 and look at what's going around our Durango site, it's absolutely amazing. We have 2 sites as well in the Reno market, which is growing. And then, we have the Fresno site for Native Americans. So when you look at the pipeline for the company, we have 8 development opportunities within our control.

(Operator Instructions) Our next question comes from Patrick Scholes of SunTrust.

One of your competitors in the Las Vegas locals market has, in the last several quarters, noted that they've been losing some share. Are you taking up any share in your properties that are not under renovation?

Yes, I mean, I think the numbers speak for themselves. As I reported in the remarks, I mean, revenue has been up 6%, and that's been pretty consistent in the last couple of quarters. And I believe the growth last quarter was 0.9%.

And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Stephen Cootey for any further remarks.

Well, thank you, everyone, for joining today's call. And we look forward to talking in 90 days. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.