Q3 2020 Red Rock Resorts Inc Earnings Call
Good afternoon, and welcome to the Red Rock Resorts third quarter 2020 conference call.
All participants will be in listen only mode.
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 <unk>.
Please go ahead Sir.
Thank you operator, 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 in the rest of <unk> 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.
For definitions and complete reconciliation of these figures to GAAP. Please refer to the financial tables in our earnings press release on form 8-K, which we 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.
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 2171 basis points to 45.6% before.
With respect to our Las Vegas operations, we reported net revenues of 320.8 million down from 440.7 million in the prior quarter.
Adjusted EBITDA of 141.7 million up 38.6% from 102.2 million in the prior third quarter and our EBITDA margin increased 2997 basis points to 44.2% for the quarter.
[music] represent our highest third quarter, adjusted EBITDA and our highest margins in any quarter in the history of <unk> 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 close properties, Texas station Fiesta Rancho Yes, the Henderson and palms Casino resort had.
On the third quarter.
When viewing our third quarter Las Vegas performance, excluding the still close properties from each reporting period, we reported net revenue of 316 million up 23% 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 1304 basis points.
46.2% for the quarter.
Taking a look behind the numbers the customer trends, we saw in gym 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 co bid related costs costs associated with our closed properties and good.
You koby related restrictions on our business.
We expect these cross currents will continue 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 have little visibility regarding taxes 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 a decisive actions a management team took during the closure there.
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 removed from the business to be greater than 150 million in annual cost reductions we referenced on our prior call.
These initiatives have resulted in a leaner and 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 companys 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 debt and since the end of the third quarter, we paid down an additional $53 million in debt, reducing our debt to below pre couldn't make 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.
One dollar and six cents per share in the quarter and every dollar that free cash flow went to pay down debt as we continue to focus on our de leveraging our balance sheet, increasing our financial flexibility during these uncertain times.
Capital spend in the third quarter was $12 million can 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 it will be between 65 million and 75.
Finally, an update on our two native American projects at Green Casino Resort reported Madison fees for the third quarter of 30.7 million an increase of 31%.
23.5 million in the third quarter of 2019.
Additionally, the tribe has agreed that the management agreements will be extended through February 4th 2021, and we hope to reach an agreement with the tribe on appropriate additional extension of a turn past February 4th 2021 in accordance with the terms of the management agreement.
Regarding north work during the quarter, the California Supreme Court finally decided the key issue in the enterprise tribes case favoring that tried.
The Supreme Court, then remanded the North Fork case to the Appeals court with the direction to vacate its early decision against the North where 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 build expected to take an additional 15 to 18 months.
Well, we were still working through the planning and budgeting phases of the project complete we expect this project to be over 213000 square feet, including almost 100000 square feet of Casino space. Initially include 2000 class three slots and 40 table games, two standalone restaurant concepts in a food Hall concept.
We're excited to begin that development is very attractive project to be half the north Fork tried and we provided more detail is it becomes evident that would help.
Well 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 locals market is the most attractive gaming market in the United States.
And with our best in class assets and locations unparalleled distribution and scale.
Organic development pipeline and our status as one of the few gaming companies are 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 an 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 that for today and we're now ready to take questions from participants on the call [laughter] Q2 like those are questions. Please proceed spoken one on your Touchtone phone.
If you are using a speaker phone we asked for you. Please bigger perhaps I would personally like Hughes, Georgia.
George Your question. Please press Star then too.
Your first question comes from Joe Greff with JP Morgan. Please go.
Good afternoon everybody.
I think we're all trying to figure out is you know the sustainability of some of these impressive excel.
Expense reductions and margin gains.
Can you talk about Steve and Frank how you're thinking about the sustainability of that <unk> well comes back as revenues recover.
I'm guessing you would say you know, 44.2% margin Las Vegas locals market might not be sustainable.
Yeah, what's what's the how do you think about the sustainability of maybe from a percentage perspective, and then the second part of my question also related to the locals market is you can talk about how you're thinking about you know reopening some of the foreclosed properties what are the guide posts and things that you're looking at to evaluate.
And that's all for me thanks.
Hi, John I'll start in L., Frank Lorenzo probably jump in but I can tell you we're gaining confidence each month tend to operate a higher margin. We have historically seen out there for the foreseeable future I mean throughout the quarter, we could very disciplined being our labor market expenses in check and we understand this is really the new normal in this uncertain demand.
Environment.
As you also know yeah. The majority of our mix right now is from.
Comedy from gaming, which is high high margin business, which helps helps sustain those margins, though that said you know we are looking forward to the return of some of the business the cost of the cobot such as hotel in catering and some of our Red revenues, which are also high margin. Yeah. I think we believe that there's been a permanent trip and the cost structure during the show.
Down and gave us the ability for question everything we're doing.
And to be very cautious reopening.
And I don't think we see buffets coming back anytime in the near future.
We really looked at de layering marketing costs can become 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 is a per permanent reduction and the cost of operating the business.
And then I think your second question regarding the reopening the properties, but we still don't have a definitive timeline. It we're still taking the time to gain the visibility. This the other factor. This pandemic may have on our company as well as the other Las Vegas economy, but we have good distribution throughout the market right. Now we are seeing good crossover play from the properties that are close.
And the facilities that we currently available.
And maybe just a follow up to that Frank It's it's this.
Revenue in expense environments. It seemed it sustains itself for the next six months. It six 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 liked what we saw this last quarter I can tell you about the rosary everything up yeah. If you look at consolidated gaming revenues I think they were up a tick versus last year. We had 10 property. So when you're driving that gaming revenues through sales.
Facilities versus 10, you're getting that NAV.
Natural flow through which obviously drives margin and profitability. So we.
We like what we're seeing a week that we saw in the third quarter.
And we will continue to reevaluate as as things move ahead.
Thank you.
Your next question today comes from Carlos.
<unk>. Please go ahead.
<unk>.
Hey, guys. Thank you for taking my questions Steve.
Steve You had mentioned the supply and demand dynamic I'm not sure. 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 to be in the Threeq, you or what that looks like in terms of units online units offline properties older properties closed.
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.
We clearly the market has shrunk, but I'll get you I can come back to you with specific detail when just US alone. We've kept foreclosed properties closed and you heard yes on yesterday's call that our you know one of our main competitors also had several properties clubs. So locals market has shrunk, but what we're talking about demand I mean, you have growing population you have tax records.
She is moving from neighboring states and to Las Vegas home sales or unbelievably strong, there's very little supply of homes on the market worldwide demand.
And its population continues to grow we control literally almost all the supply where you could even go up a new office casino throwing <unk>. It's a very interesting dynamic to have the limits on supply with growing demand at the same time.
Yeah for sure. Thank you for that.
If I could just ask one follow up.
If you guys speak about it just in the open pit assets I'm not talking about that the portfolio that's offline, but if you think about the opened assets.
The revenue by vertical are you if you're thinking about the casino footprints 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 29 P. same store revenue is it are you able to get 95% 95% of revenue with sales closed it maybe more limited after be offering at some of the other added east close if everything else kind of escalate. It back to you know 100% of what it was in 29 P.
Albeit the gaming floor hotel stuff like that.
Yes, I think you can see we're close to almost 80% right now right out of the way. The sales. This all stands and we're still dealing with capacity constraints on the restaurants and also wanted to think about some of the more profitable lines of business that have been really restrain relative to cold. It when you think tell catering theaters, but those represent a significant.
Portion of our revenue, but also would be a significant portion of our profit almost to the extent about $12 million. When you think of all the let's call. It <unk> lines of business had been restricted to the cobot.
Understood. Thanks, Steve Thanks, everyone.
And our next question do they will just be worse since you with Stifel. Please go ahead.
Hey, guys good afternoon.
So not sure of your comment on this or not but can you can you talk about maybe what you sell through or what you're seeing so far through October and has that been kind of similar trends to what you saw throughout the third quarter.
Yeah, Steve This is gonna be tough one to answer because as you recall, we did give some guidance on July but it was really very specific yeah kinda situation time, where we only had 26 operating days Oh, yeah throughout that took the core to comment on so I think back to our current policy and not talk about operating performance in the current quarter.
Okay understood. The second question that 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 the significant lower room count than where you were a year ago, but is there anybody help us think about maybe choose using those rooms at this point and how much are those are you know.
Being used has not been a promotional basis versus kind of a catch rate.
It's very little cost and so what you have seen is kind of a natural transition as you know we've lost a lot of group nights and so group nights are down significantly in the third quarter, but what they have been really replaced or replaced by there's been a lot of transients and F.I.T. business, which has been very great for the business. So it's really the driver one of the things you know this is a business.
Really relying on airlift, it's not relying on conventions are meeting and so we're really rely on local and drive in traffic, which is why we're missing profit from Oh traveling catering, we're really a German company Amsterdam, I mean were 80%, 70%, 80% of our revenues and profits come from slots and table games.
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.
Okay, great. Thanks, guys appreciate it.
I know this worsening where it comes from Shaun Kelley with Bank of America. Please go ahead.
Hi, good afternoon, everyone I'm just two.
Two questions first kind of stick with the piano you know Steve when we look at the casino operating expenses I mean, they were they were down 35% year over year, but obviously you know revenues are flat you know for the whole company, it's pretty astounding. He can just give us any more color on you specifically, maybe whats going on in the casino.
Floor is that purely labor is there anything else that you're able to do I mean, obviously the close properties are gonna factoring here, but it just seems pretty starting 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 location for the best properties and went back to focusing on just direct operation relationships with the customer and really focused on de layering and being more efficient and or promotions or marketing.
No I would agree with that and any shot at you touched on the the other pieces right. Yeah, we've become much more efficient on the labor floor and weve been able to funnel quite a bit of crossover play from what was 10 large properties and the sex, yes, we have become more efficient from a labor 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 covert you know so every insurance. We have you know somebody taking temperatures and 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 lay.
Labour side that we're doing that at the same time, all bearing a higher expense due to go there and we're obviously, hoping that doesn't last forever and.
To go back to the fact that our gaming revenues are basically up slightly but we have four less facilities and expenses associated with those facilities are nimble operating in Nevada is the one state where you have the most operating leverage of every dollar and gaming win.
You know flow through down to the EBITDA line width of the tax rate that you have here in Nevada.
Thank you for all the color and then my follow up would just be you know the free cash flow conversion was also you know really was it was quite high in the quarter. You know how should we think about sort of that ratio of let's call. It EBITDA free cash flow going forward you know specifically I think Steve you called out a big Capex.
Plan, which doesn't sound dramatically different so can we see these types of ratios kind of going forward anything we should be aware of and not.
Yeah, 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, you know, we're not going to be a tax parent 2020, most likely not be a taxpayer from 2021 working capital should be almost a zero to positive sum game as we're still receiving some benefit from the cares act in terms of cash.
As we mentioned Capex about 65 to 75 million cell Lorenzo Frank we have no deferred and create these assets. There is no deferred capital maintenance and so now I think we're reaping the rewards of that program. We've done in the past that's what I'd be very disappointed by the capital focus and a cash interest expense as we are starting to pay down debt should be in that 110 to one twice.
Any range in terms of millions. So you can kind of figure that in but yeah, we should have a.
Very high free cash flow to EBITDA yield.
Thank you all.
And our next question comes from Barry Jonas with <unk> Securities.
Hi, guys.
For starters, where are you guys on potential land sales I think someone didn't read it was poorly for sale at one point.
What's the latest there and overall I guess.
Barry This is rod a team and were.
We're we're gradually making a 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 will will notify you when we actually close on land sales you know these things there can tend to have some long entitlement periods of time.
Yes, and we want to make sure that.
We're sure they're closing before we make any announcements so what.
With respect to the Convention Center site, specifically in Reno, we are still.
Valuating not 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 greed and extension just curious if you can give more color you know I think.
Stuff like that is usually last comment in terms of longer term extensions. So it is the intent something more short term to get through <unk> or <unk>.
Thanks, you something really more long term I want to know if you're going to turn that over to my esteemed colleague, Jeff Welsh Oh, Hi, Yeah.
So we're not expecting any kind of pull on re upped the management agreement not not even remotely all we are talking about is the provision and the management agreements and their gaming and non gaming management agreements agreed and basically say that the term of the management agreement will be.
Extended.
I appeared equal to.
For a period that starts on the date of the original closure and went substantially all the amenities are turned back on and high grading or we do not believe or substantially all of the amenities have been turns back on yet. So you know an eccentric much longer than the three month 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 our cashless gaming.
I think what you know.
Through this crisis is one thing is that as to.
Give the customers what they want and you know cashless is definitely something they want. So 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.
Great. Thanks, so much and congratulations.
And on this question comes from George <unk> with Wolfe Research. Please go ahead.
Hi, good afternoon, everyone. Thanks for taking my question.
Can you just tell us if you've seen any impact on demand or revenues 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 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 theres 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 fairly recent since that's gone in place, but we would expect that to.
We had net positive for us moving forward again in 21.
Okay. Thank you 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 risks that capacity limitations get tightened again or even worse brings together another shutdown.
I think the latest that we have heard I think the governor came out yesterday and in fact talked about you know in early 21 potentially bring to 50% capacity for meetings convention and groups and things of that nature. So we took that has a a a positive sign looking forward into 21 other.
For the now we haven't I haven't heard anything relative to any restrictions.
Or anything like that.
Okay. Thank you very much.
Just to add to the of the flip side of that chart as you as we mentioned we paid down pretty much the entire revolver. So we have about over $1 billion liquidity 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 rate south of $30 million, which gives us almost three three years at run rate.
Thank you. Our next question comes from Chad Beynon with Macquarie. Please go ahead.
Hi, good afternoon, Thanks for taking my question.
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. So I think that what the board evaluates the payment of the reallocation of capital particular, the dividend every quarter right. Now there is no definitive timeline, but I can rest assured that no.
Our large or larger shareholders are aligned with everyone else.
In terms of the covenants.
There are significant ways to move the dividend to two to restart the dividend.
As our specific carve outs related to the dividend.
Okay, great. Thanks, 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 you know still not really participating.
At the at the properties at this point.
It's Lorenzo we did start to see the older age 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.
Thank you guys nice quarter.
And ladies and gentlemen, as a reminder to ask a question. Please first of all the one our next question comes from Stephen Grambling with Goldman Sachs. Please go ahead.
Hey, Thanks, 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 you know look elsewhere and that marketing math to come back can you expand on how that customer profile is changing and how they may be engaging with your mark.
Cutting similar or different to what has historically been the core rated player [noise].
[noise] sure I mean, we have seen a younger demographic a shore.
Doing a good job on getting them to sign up for the loyalty program. So that we can have relationship orphan.
With them going forward I think if you look at the amenity packages that we have particularly at Red rock and Green Valley, the food and beverage offerings, there already kind of cater to.
At younger crowd, whether it be blue ribbon Sushi had red rock Hearthstone, New Italian restaurant that we have there tivo owned and then a number of restaurant that click hospitality has put in place for US a green Valley Ranch. So we do feel like that relative to the locals market that we have the best amenities really to a try.
Correct that upper end younger I'm kind of.
Working mobile mobile demographic so.
And would you generally say that the way that they're engaging from a place standpoint, followed a similar path to that older demographic when they first come in.
Just as one quick follow up.
And that's I mean, that's a tough one to answer I can't tell you that that segment of the market as our fat one of our fastest growing segments of all the other segments in our database.
Got it that's helpful except for me thanks, so much.
Ladies and gentlemen. This concludes our question answer session I'll turn the conference back over to the management teams, we bought a little worse.
Well. Thank you everybody for joining us and we look forward to talking about 90 days.
Thank you Sir This concludes today's conference call you over attending today's presentation. You may now disconnect your lines another wonderful day.