Red Rock Resorts Inc

NASDAQ:RRR

Earnings Call Transcript 2019-Q2

[Operator]

Good afternoon, and welcome the Red Rock Resorts' Second Quarter 2019 conference call. [Operator instructions] Please note, this conference call 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.

[Stephen Cootey, EVP, CFO & Treasurer]

Thank you, operator. Good afternoon everyone, and welcome to Red Rock Resorts' second quarter 2019 earnings call. Joining me on the call today from Red Rock Resorts are Frank Fertitta, Chairman and Chief Executive Officer; Rich Haskins, President; Bob Finch, Executive Vice President and Chief Operating Officer.

Our call today will include forward-looking statements under the Safe Harbor Provisions of United States Federal Securities Laws. Developments and results may differ from those projected. The risks and uncertainties related to these statements are detailed in our filings with the SEC. During this call, we will also discuss non-GAAP financial measures. For the definitions and complete reconciliations of these figures to GAAP, please refer to the financial tables on 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.

Let's turn now to our second quarter results. On a consolidated basis, net revenues increased 16% to $482.9 million, adjusted EBITDA decreased 7.6% to $115.2 million and margins decreased 600 basis points to 23.9% for the quarter. Excluding the impact of approximately $11.3 million of one-time expenses related to the Palms grand opening weekend in April and the property's national branding and marketing campaign.

Adjusted EBITDA on a consolidated basis increased 1.5% to $126.5 million and margins decreased by 375 basis points to 26.2% for the quarter. With respect to our Las Vegas operations, net revenues for the quarter increased 16.3% to $457.8 million, adjusted EBITDA decreased 9.7% to $101.7 million and margins decreased 640 basis points to 22.2%.

Excluding the impact of Palms' one-time expenses described above, adjusted EBITDA for the Las Vegas operations was effectively flat at $113 million and margins decreased 390 basis points to 24.7% for the quarter. This net revenue performance was driven by significant growth of the Palms and Palace Station across both gaming and non-gaming segments of their business.

As a reminder, both of these completely transformed properties are still in the process of ramping up, and we continue to expect these investments to generate significant returns for the company over time. Not to be overlooked, the overall performance for the remaining properties in our portfolio was solid with net revenues, adjusted EBITDA and margins all up in the quarter. And on a same-store basis, that is including Palace Station, but not including Palms, this represents our highest second quarter net revenue and adjusted EBITDA performance since 2008.

Notably, the Las Vegas locals market has been the fastest-growing regional gaming market in the United States over the last 24 months on a same-store basis, and our locals market gaming revenues have predominantly more than doubled that rate of the remainder of the market over that time.

Lets now take a look at some key economic indicators, which confirm that the Las Vegas economy remains robust in support of a future growth. Population is at an all-time high and Las Vegas remains our second fastest-growing MSA in the nation look. Employment also remains at record levels, and we've now seen 97 consecutive months of broad-based employment growth.

Wage growth as measured by weekly earnings per employee is also strong with Las Vegas reporting net increase of 3.1% for the trailing 12 months, ended June 2019. Moreover, total earnings, which takes into account both employment and wages, have increased approximately $2.5 billion over that time.

In addition, discretionary spending has accelerated as evidenced by 7.4% increase in taxable sales during the trailing 12 months ended April 2019. Housing also remains solid as median home sales prices were up 5.8% in June. And finally, there are now over $20 billion new capital investment projects planned in Las Vegas, $14 billion of which have already broken ground by the new Raiders Stadium, Project NEON, the convention center expansion and multiple Strip developments, all of which will further expand the local economy.

This positive economic outlook, combined with very favorable supply/demand dynamics, a stable regulatory environment and the lowest gaming tax rate in the nation explain why we continue to view the Las Vegas locals market as the most attractive gaming market in United States. And with our best-in-class assets and locations, unparalleled distribution and scale and deep organic pipeline, we remain uniquely positioned to take advantage of the ongoing growth in this extremely vibrant market.

Turning next to our redevelopment of the Palms and Palace Station, as noted earlier, we will lease completely reimaged properties during the process of ramping up, we are already seeing significant revenue growth at both properties as a result to our investments made there. In addition, the guest feedback we’ve received, the data has been extremely positive and we remain very focused on building additional awareness and trial with respect to both of these properties.

We remain bullish on these opportunities based on their hybrid ability to appeal to both residents and tourists alike as the new venues and offerings of those properties are clearly appealing to both of these key customer segments. With respect to the Palms redevelopment, our $690 million plan remains on time and on budget and is rapidly nearing completion.

The final component of the Phase 2, our world-class wellness spa and salon open to stellar reviews in late June. And the key and final components of phase 3, Michelin-starred dimsum restaurant, Tim Ho Wan from Hong Kong and the addition of 16 new gaming tables in the west expansion area are expected to finish in mid-September.

Once fully complete, this one of a kind reinvestment will touch nearly aspect of the iconic property, and we are confident that the Palms will be one of the premier gaming and entertainment destinations in all of Las Vegas.

Taking a quick look now at our technology initiatives. The new IGT slot system continues to play a pivotal role with respect to gaming revenue growth and our related ability to continue to perform the market. As we saw increases, once again, in key slot metrics such as carded slot win, time on device and spend per visit.

At the end of last year and as we previously discussed, we introduced our latest system enhancement in the form of personalized on-device marketing and messaging, which we continue to optimize or refine. We will also be introducing a number of other system enhancements throughout the remainder of the year. We believe that these system enhancements will provide an even more engaging, rewarding and convenient experience for our guest that will, in turn, drive additional gaming revenue.

Turning to our Native American segment. We reported management fees for the second quarter of $22 million, an increase in 10.9% over the prior year, driven by outstanding performance at Graton Casino and Resort. With respect to the North Fork project, we continue to progress, with a few remaining litigation related to the project.

As previously noted, the California Supreme Court has granted the tribe's petition for review of the key lower court decision involving the project as deferred, taking further action until it's ruled on a very similar case involving the Enterprise Tribe, which received a favorable ruling at the appellate court level. We continue to anticipate, the court will schedule a hearing on the Enterprise case in near future.

I will now cover a few balance sheet and capital items. The company's cash and cash equivalents at the end of the second quarter was $100.2 million and the principal amount of debt outstanding at quarter end was $3 billion. At the end of the second quarter, the company's net debt to EBITDA and interest coverage ratios were 5.6x and 4.4x, respectively. Capital spend in the second quarter was $111.6 million inclusive of the Palms redevelopment project.

In addition, on July 1, 2019, we purchased a 20-acre parcel of land, on which the Wild, Wild West is located, for $57.3 million. We anticipate capital expenditures for the balance of the year will be between $80 million and $105 million inclusive of the remaining cost related to the Palms redevelopment project.

Following the completion of the Palms redevelopment in September, we reached a key inflection point as a company and expect to generate significant accelerating free cash flow, beginning in the fourth quarter. As we exit out of this development cycle, we will be intently focused on maximizing the financial performance of our existing properties and reducing our net leverage ratio to the target level of 4x or less through a combination of paying down debt and increasing EBITDA.

Lastly, on August 6, the company announced that its Board of Directors have declared a cash dividend of $0.10 per share payable for the third quarter of 2019. The dividend will be payable on September 27, 2019, to shareholders of record on September 13, 2019.

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

[Operator]

Yes, thank you. [Operator instructions] And the first question comes from Joe Greff with J.P. Morgan.

[Unidentified Analyst]

[Indiscernible] for Joe. Thanks for taking the question. Regarding the Palms, how large of negative EBITDA did the Palms generate? Are these one-time expenses from the 2Q go away completely in the 3Q? And do you think you are going to be positive EBITDA in the 3Q and 4Q?

[Stephen Cootey, EVP, CFO & Treasurer]

Well, as you know, we don't really break out distinct properties, but your point about the $11.3 million one-time expenses, they go away completely.

[Unidentified Analyst]

Great. And at Palace, did you grow 2Q revenues in EBITDA year-over-year at faster paces than the 1Q?

[Stephen Cootey, EVP, CFO & Treasurer]

Yes, we did.

[Unidentified Analyst]

And then lastly, did you go same-store locals, excluding Palms and Palace, faster than Boyd in the second quarter? And how should you do it [indiscernible]? Thank you.

[Stephen Cootey, EVP, CFO & Treasurer]

Yes. I think what we said in the last call is that -- and we said -- we alluded to in the comments that we continue to outperform the market.

[Operator]

Okay. Thank you. And the next question comes from Chad Beynon with Macquarie.

[Chad Beynon, Macquarie Research]

Hi. Thanks for taking my question. Your room revenues were up 15% year-over-year, while your room EBITDA was actually up 23%. I’m guessing most of this is being driven by Palace and then also Palms. So understanding that Palms will take a little while to ramp on the mid-week business, could you elaborate a little bit just in terms of if you are happy with the weekend rates? Kind of how that’s ramping at Palms? And if we should expect this to further ramp in the back half of the year? Thanks.

[Stephen Cootey, EVP, CFO & Treasurer]

I think we are only four months into this investment right now. So we are still in very early days. That said, and I think as you noted, from a hotel standpoint, we are moving in the right direction. The team is intently focused on how do we actually increase ADR going forward. So we are still not quite there yet, but we are tracking in the right direction.

[Chad Beynon, Macquarie Research]

Okay. And then from a medium-term standpoint, when you think about -- I think last call you talked about leverage, and then once you get through a certain level that you would explore some more organic growth, potentially some M&A, maybe some other options for the balance sheet. Given that it looks like you are ramping pretty fast here, has your view in terms of external initiatives changed at all?

[Stephen Cootey, EVP, CFO & Treasurer]

No, I think we are going to reiterate what we said last call that our primary focus right now is to make sure the Palms and Palace ramp up effectively. And then once we reach that inflection point, which we said we start to see in the fourth quarter, we really are intent on reducing our leverage debt four times or less. That said if there's M&A opportunity that exist, we are always going to look at opportunities to maximize shareholder value.

[Chad Beynon, Macquarie Research]

Thank you very much.

[Operator]

Thank you. And the next question comes from Stephen Grambling with Goldman Sachs.

[Stephen Grambling, Goldman Sachs]

Hey, thanks. So there's been a lot of noises on some of the changes going on with the Palms in the press. Can you just discuss some of the optimization that is taking place? And maybe outline what the path is here to obtain the, kind of target ROI on the property?

[Stephen Cootey, EVP, CFO & Treasurer]

That’s a good question. You’ve to be a little bit more specific on the things you've mentioned and you see in the press.

[Stephen Grambling, Goldman Sachs]

So between some of the changes in management at the club to not having it open on Thursdays, it just seems like there's a couple of thing, tweaks that are going on here and there.

[Stephen Cootey, EVP, CFO & Treasurer]

I see, yes. Going back to the investment, I mean, the team takes a very long-term view of these assets. And so as I mentioned, we're four months into a long-term investment in this project. It is going to be constant reevaluation of staff. It's going to be constant reevaluation of opportunities as a way to increase our return, as well as improve the customer experience.

[Stephen Grambling, Goldman Sachs]

Fair enough. Maybe -- go ahead.

[Stephen Cootey, EVP, CFO & Treasurer]

I was saying all of these -- the intent here is to drive toward our low-digit return that we've said we are going to hit double-digit -- sorry, low double-digit, my apologies.

[Stephen Grambling, Goldman Sachs]

Great. And then, I guess, maybe changing gears a little bit here, but in light of the pullback in the stock, I guess, has your prioritization of how you think about capital allocation changed? And you think that there's levers that you can pull to kind of take advantage of the recent correction more real time?

[Stephen Cootey, EVP, CFO & Treasurer]

Well, as you know, we get the Board approved last quarter $150 million share repurchase. But that said, I keep going back to -- it's really about making sure the properties ramp properly, and our focus is really deleveraging the balance sheet.

[Stephen Grambling, Goldman Sachs]

Great. I will drop back in the queue. Thanks.

[Operator]

Thank you. And the next question comes from Steven Wieczynski with Stifel.

[Steven Wieczynski, Stifel Financial Corp.]

Hey, good afternoon, guys. So the $11.3 million expenses you called out, from an accounting standpoint, can you just tell us where those kind of flew through your income statement?

[Stephen Cootey, EVP, CFO & Treasurer]

Sure. About $3.7 million went through F&B and the remainder at the SG&A line, the G&A line.

[Steven Wieczynski, Stifel Financial Corp.]

Okay. And then where -- I guess, when we do look at that, I would assume that when we looked at the F&B, where do you think you can get those margins in the near-term?

[Stephen Cootey, EVP, CFO & Treasurer]

I mean, as -- I mean, you've seen from the balance sheet, once we exclude the one-time charges, it's definitely not where we want to be, the focus there's mainly -- we've opened up a bunch of new restaurants at the Palms and the Palace. I think there's opportunities on both sides. We are not there from a revenue perspective at any of the boxes yet, even though they’re all tracking well. And then from an expense structure, it's about grinding and optimizing the expense side of the business. So I don't think we -- I don't see any issue returning to our historical or slightly below our historical margins on an F&B perspective.

[Steven Wieczynski, Stifel Financial Corp.]

Okay, got you. And the last question, I know it's still early with the Palms and all, but can you maybe help us think about the flow from a customer standpoint in terms of where these folks are coming from? And what I'm getting at here is, is it more kind of a locals customer? Is it more folks coming from the Strip, or is it a combination of both?

[Stephen Cootey, EVP, CFO & Treasurer]

Maybe a combination of both. When you break down the card at play at the Palms, it's roughly 60% out of town, 40% local, which is really kind of in line with our investment pieces for hybrid property. In terms of locals, it's coming from all over the valley. We are actually see -- your next logical question, is there cannibalization at any of the existing properties? We are actually seeing the reverse. We are seeing the addition of the Palms systems actually increasing organic growth. We are seeing increased play and cross over, i.e., the second stop. And so we are pretty happy with -- from a locals perspective. And out of town, we are taking them from the Strip properties.

[Steven Wieczynski, Stifel Financial Corp.]

And one more, if I could, sorry. Is the promotional environment pretty rational out there at this point?

[Stephen Cootey, EVP, CFO & Treasurer]

It's incredibly rational. We remain within our historical range as we’ve the last -- since I've been here.

[Steven Wieczynski, Stifel Financial Corp.]

Okay. Thanks, guys. Appreciate it.

[Operator]

Thank you. And the next question comes from Barry Jonas with SunTrust.

[Barry Jonas, SunTrust Robinson Humphrey]

Hey, thanks. Just following up on Steve's question, I think Boyd talked about some hide-in promotional -- hide-in promos in the market in Q2, which has since normalized. Is that something that you guys saw?

[Stephen Cootey, EVP, CFO & Treasurer]

No, we are right within our historical reinvestment range as we’ve been for as long as I can remember.

[Barry Jonas, SunTrust Robinson Humphrey]

Understood. Okay. Thank you very much.

[Operator]

Thank you. And the next question comes from John DeCree with Union Gaming.

[John DeCree, Union Gaming]

Hey, guys. Most of my questions have been answered, but just two housekeeping items. Steve, I'm sorry if I missed earlier, the $11.3 million one-time expenses. Did that include the national brand campaign as well?

[Stephen Cootey, EVP, CFO & Treasurer]

Yes, it did, accretively included portion, there was some portion of it that we are able to push into pre-open. As you're aware, we kind of did rolling opening. So you can see some of that is branding.

[John DeCree, Union Gaming]

Got it. Okay. And then just another housekeeping item. Maintenance CapEx, once the project at Palms is fully done with Tim Ho Wan, can you give us an outline of what that could look like for 2020 and going forward?

[Stephen Cootey, EVP, CFO & Treasurer]

Yes, I think roughly maintenance CapEx excluding any one-time refurbishment, is going to be approximately $100 million on an annual basis.

[John]

Okay, great. Thanks, Steve.

[Operator]

Thank you. And the next question comes from Jared Shojaian with Wolfe Research.

[Jared Shojaian, Wolfe Research]

Hey, good afternoon, everybody. Thank you for taking my questions. So just on the Vegas revenue, the 16% growth in the quarter, how should we think about that into year end? And by that, I mean, do you expect the growth rate to accelerate from here as the property continues to ramp, or do you think there were some one-time revenue benefits in the period just from, call it, the grand reopening?

[Stephen Cootey, EVP, CFO & Treasurer]

I think, kind of, you can break it up in a couple of pieces. I mean, we've always stated that the core business, let's call it the non-Palace and Palms is going to grow. We feel that we are going to consistently take share because of our asset quality -- high asset quality. So we should perform double the market or at the market or above as we have in the last 24 months. And from a Palace and Palms, we didn't see any one-time snap during the opening weekends. So we continually see this property -- the property will continue to ramp faster than the market.

[Jared Shojaian, Wolfe Research]

Got it. Okay. Thank you. And can you share what you've seen so far in July, and maybe, early August in terms of how that relates to the growth you saw in the second quarter?

[Stephen Cootey, EVP, CFO & Treasurer]

I would love to in about 90 days.

[Jared Shojaian, Wolfe Research]

All right. I' will try another then. On the cost side, excluding the $11.3 million, should we assume that costs are going to need to ramp from here, or do you feel like there's expenses that were in the quarter that you would expect to sequentially get better as we progress into year-end and next year?

[Stephen Cootey, EVP, CFO & Treasurer]

Yes. I think we've always said -- I think I referred to the last call that the Palms because of its complexity of scope and size, it's going to track like a new build. So we've always given that 18-month ramp. Like any new project expenses open much higher than you would normally expect just a refurbishment that's due to you try to increase customer awareness, you try to make sure that the customer service is actually the topnotch. So as we start ramping, the first stage is capture and then we are going to start -- you start optimizing the resort from its expense side. So, there are expenses that will be reduced as time moves on.

[Jared Shojaian, Wolfe Research]

Okay. Thank you very much.

[Operator]

Thank you. [Operator Instructions] All right. As there are no more questions at the present time, I would like to return the floor to Stephen Cootey for any closing comments.

[Stephen Cootey, EVP, CFO & Treasurer]

Well thank you very much for everyone for joining us and we look forward to talking to you in about 90 days. Thank you.

[Operator]

Thank you. The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.