Q1 2022 Red Rock Resorts Inc Earnings Call
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Right.
Good afternoon, and welcome to Red Rock Resorts' first quarter 2022 conference call.
All participants will be in a listen only mode.
Please note this conference is being recorded.
I would now like to turn the conference over to Steven Zaccone, 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 us today for Red Rock Resorts first quarter 2022 earnings Conference call. Joining me on the call today are Frank and Lorenzo Fertitta as well as our executive management team.
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 definitions and complete reconciliation of these figures to GAAP. Please refer to the financial tables in our earnings press.
Release form 8-K, and Investor deck, which were filed this afternoon. Prior to the call also please note. This call is being recorded.
Now, let's take a look at our first quarter results on a consolidate basis, excluding great management fees. Our first quarter net revenue was $401 6 million up 16, 6% from $344 5 million in the prior year's first quarter.
Our adjusted EBITDA was $178 7 million up 19, 9% from $149 million in the prior year's first quarter. Our adjusted EBITDA margin was 44, 5% for the quarter, an increase of 13 basis points from the first quarter of 2021.
With respect to our Las Vegas operations, excluding the impact from our closed properties. Our first quarter net revenue was $399 5 million up 18, 1% from $338 4 million in the prior year's first quarter. Our adjusted EBITDA was $196 7 million up 18, 8% from 160 <unk>.
$5 6 million in the prior year's first quarter.
Our adjusted EBITDA margin was 49, 2% an increase of 29 basis points from the first quarter of 2021.
On a same store sale basis, we achieved the highest first quarter net revenue adjusted EBITDA and adjusted EBITDA margin in history of our company and this marks the seventh quarter in a row that the company has achieved record same store adjusted EBITDA and adjusted EBITDA margin.
And we continue to prioritize free cash flow converting 75% of our adjusted EBITDA to operating free cash flow generating $134 7 million or $1 25 per share.
During the quarter, we remained operationally disciplined and stayed focus on our core mid to high end local customers as well as our regional out of town guests. This core strategy allowed us to generate record revenue and profitability with our gaming segment in the first quarter.
Well, a combination of <unk> and inflationary pressures offset by the lifting of the mass mandates across the state of Nevada on February 10th resulted in a quarter over quarter reduction in visitation. This trend was more than offset by increased time on device as well as strong spend per visit across our entire portfolio, allowing the company enjoy record profits within the segment.
Moving forward, while we remain vigilant to these trends, we will continue to stay disciplined and focused on executing and investing in our core strategy, including offering new amenities for our guests such as the VIP high limit table table room at our Red Rock property opening later this week.
Turning to our non gaming segments, we saw continued growth in food and beverage and hotel as both segments delivered one of their most profitable first quarter results ever with regard to group sales and the catering business segments. The recovery of these business lines was further delayed by the impact of Omicron in January at this point, while we are seeing our lead pipeline grow business has been pushed at them.
Back half of 2022 and into 2023 and finally as mentioned on prior earnings calls financials are still carrying approximately $2 1 million and carry costs associated with our closed properties for the quarter.
On the expense side, we remain operationally disciplined and continue to look for ways to become more efficient, while providing best in class wages and benefits to our team members in delivering best in class customer service to our guests.
The company's actions taken over the past eight quarters to streamline our business optimize our marketing initiatives and renegotiated number of vendor and third party agreements have led to significant led to a significant transformation.
All of our business, which resulted in same store revenue, which now exceeds 2019 pre pandemic levels higher adjusted EBITDA higher adjusted EBITDA margin strong free cash flow conversion and the return of over $875 million in capital to our shareholders. Since we reopened in June of 2020.
On the technology front with regard to cashless gaming, we continue to roll out. This product. We are now live in all of our properties with the exception of our wildfire taverns and Sunset station, which we expect to happen over the next two quarters. While the initial focus is introducing cashless payments on the slot floor. The ultimate goal is to allow our customers to play both cash and credit.
From one mobile digital wallet across all of our amenities at each of our Las Vegas properties and there'll be more to come as we roll out this exciting product.
Now, let's cover a few balance sheet and capital items, the company's cash and cash equivalents at the end of the first quarter was $336 6 million. The total principal amount of debt outstanding at quarter end was $2 8 billion, resulting in net debt of $2 55 billion.
As at the end of the first quarter, the company's net loss net debt to EBITDA and interest coverage ratios were 3.4 times and eight one times respectively.
Given our low leverage low cost of capital and no short term debt maturities are best in class balance sheet will allow us to focus on executing on both our longer term growth opportunities, including the development of our six owned strategically located gaming entitled properties as well as take a balanced approach to returning capital to our stakeholders as we move forward.
Also during the first quarter, we made distributions of approximately $52 4 million to the LLC unit holders a station Holdco, which included the distribution of approximately $36 million to Red rock resorts. The company use the distribution make its first quarter estimated tax payments pay its previously declared dividend of <unk> 25.
<unk> per class, a common share as well as purchase purchase approximately 185000 class a shares at an average price of $47 77 per share under its previously disclosed $300 million share repurchase program of which we still have 146 million remaining to spend.
This brings the total number of shares purchased under the program and under the tender we completed in the fourth quarter of 2021 to approximately $10 7 million class a shares at an average price of $47 84 per share reducing our share count at quarter end to approximately 107 5 million shares.
When combined with our first quarter dividend, we returned approximately $36 4 million to our shareholders in the first quarter.
Capital spend in the first quarter was $38 9 million, which included approximately $29 2 million in investment capital inclusive of our Durango project as well as $9 7 million of maintenance capital.
For the full year 2022, we continue to expect to spend between $75 million and $100 million in maintenance capital and an additional 300 to 400 million of growth capital inclusive of our Durango project.
Now, let's provide a short update on our development pipeline.
Starting with our Durango development as we've mentioned before we are extremely excited about this project, which is situated on 71 acre parcel ideally located off the $2 15 Expressway and the Durango driving the southwest Las Vegas Valley.
The project is located within the fastest growing area in the Las Vegas Valley with a very favorable demographic profile and no unrestricted gaming competitors within a five mile radius of the project site.
The project is progressing nicely and continues to remain on schedule with anticipated construction, taking approximately 18 to 24 months.
When complete the project will include over 73000 square feet of casino space with over 2000 and slots on 46 table games over 200 hotel rooms, and suite product for full service food and beverage outlets and a food hall with many exciting options.
Date of the art experiential race and sports book in a resort style pool.
As mentioned on our prior earnings calls, we expect to spend approximately $750 million, which includes all design cost construction hard and soft costs preopening expenses at any financing costs associated with the project.
We are pleased to announce today that we've entered into a guaranteed maximum price contract for the project under which approximately 70% of the total project costs are now under GMP.
As the project stands now approximately 72% of the project, including purchase the purchase of long lead <unk> items has been bid out we will continue to execute on our early procurement strategy in a matter, which seeks to minimize supply chain and inflation related issues.
As stated on prior calls previous calls the company expects to return profile for this project to be consistent with past greenfield projects within our portfolio.
Turning now to North Fork as we noted last quarter after favorably resolving all of its other litigation the trial, there's only one pending case in the California courts. As we've also noted last quarter. We did not believe that any decision by a California State court could deprive north for it because its ability to gain on its federal Trust land.
We continue to work with the tribe as we progress our efforts with respect to this very attractive project, including working towards the approval of the management agreement continuing our work on the development design and having preliminary talks with our prospective lending partners. We will continue to provide updates on our quarterly earnings call.
Lastly on May three 2022, the company has announced that its board of directors had declared a cash dividend of <unk> 25 per share payable for the second quarter of 2022.
The dividend will be payable on June 32020 to all shareholders of record as of the close of business on June 16 2022.
With our current best in class assets and locations coupled with our development pipeline of six owned gaming entitled Development sites in parcels located in the most desirable locations in the Las Vegas Valley, we have an unparalleled growth story that will allow us to double the size of our portfolio position us to capitalize on the variable very favorable long term demographic trends and.
High barriers to entry that characterize the Las Vegas locals market.
While the quarter presented some headwinds our disciplined approach to running our business coupled with our unparalleled distribution and scale allow the copper you enjoy record high EBITDA and EBITDA margin and it's allowed the company to continue to execute on its long term growth opportunities, while continuing to return capital to our shareholders.
Lastly, we'd like to recognize and extend our thanks to all of our team members for their hard work, we understand and appreciate that the guest experience starts with them and they are the ones that make our property so special.
I'd also like to add a special note of thanks to them for voting as top employer of the Las Vegas Valley for the second year in a route and.
And a special thanks goes out to all of our guests for their loyal support over the past 46 years.
Operator. This concludes our prepared remarks today and we are now ready to take questions from participants on the call.
We will now begin the question answer session to ask a question you May Press Star then one on your Touchtone phone.
You are using a speakerphone please pick up your handset before pressing the keys.
Is it any time your question has been addressed and you would like to withdraw your question. Please press Star then two at.
At this time, we will pause momentarily to assemble our roster.
The first question today comes from Joe Greff with Jpmorgan. Please go ahead.
Good afternoon everybody.
Hi.
Frank you've you've been in the locals market for as long as there's been a developed locals market.
What what's your view on higher gas prices.
And that relationship to visitation and spend in the locals market.
And do you think that relationship historically is what's playing out right now.
I think the market is much more dynamic than it has been historically.
Even as we look at the demographics here in Chile, and the people moving to tell were seeing.
Much higher household income than we've seen in the past.
That has been a big focus of the company on player development relationship marketing and trying to cater to that end of the business.
That being said there is no doubt inflation.
Food and groceries, and even gasoline has a impact on the lowest.
From a database for sure.
Got it.
Oh, Okay. So look I know you may have somebody else were interrupted.
Thank you could you talk about the older demographic are they performing differently better sequentially, maybe particularly after masks, where we're we're done away with in the middle of the quarter.
Then also chew.
Presuming you like everybody else. Yeah. That's finished strongly more strongly towards the end of the quarter than at the beginning in January with the AUM. Upon impact I was hoping if you can talk about sort of margins by months and sort of how you exited.
In the quarter versus the blended the quarter that you reported here today and that's all from me.
I mean I could touch on the older demographic I mean, Joe as you would expect the older demographic tends to be a little bit more conservative, but given the Matt once the mass mandate was lifting they are starting to come back.
We're still not all the way back from our pre pre pandemic levels.
That said that group any difference or delta in that group is being more than offset by the increase in the younger demographic as well as our traction we have gained a new sign ups.
And then in terms of the margin question as we've talked we don't give month over month guidance, but I think youre spot on and lets say the trends the trends as they moved on to January which was on the Corona affected.
This.
The trends of the company improve both gaming and non gaming as a set as we moved from January to February to March.
We're seeing in April Youre seeing trends that are very similar to what we saw in March.
With the exception probably the lower end, we're seeing a little bit more resilience now than the lower end we have before.
Okay.
Okay, great. Thank you guys.
The next question comes from Carlo Santarelli with Deutsche Bank. Please go ahead.
Hey, guys. Thanks, Steve I, just wanted to clarify something in your prepared remarks, you mentioned some challenges that you had to work around in the first quarter I'm, assuming that was that comment was isolated to kind of January and end the variant and some of the impacts that that caused or was there something else that that kind of popped up.
<unk> I think in January was the biggest the biggest hurdle we had.
Okay, and then just again in response to something that you. Just mentioned you talked about kind of at the lower end a little bit more resilient is there something that's changed in the lower end consumer that you were referring to.
No I think what you saw what we did.
We did see and this is probably due to at least there was a.
A lot of stimulus rolling off you added some inflationary pressures as Frank mentioned earlier, even the higher gas prices, it's going to clearly effect of lowering a database and then last quarter. We did see some degradation in visitation on that lower end and as but this was more than offset by the increased visitation in the mid to high end local customers as well as the regional and out of town guests.
This is what allowed us to achieve record profits in the gaming side.
Great and then just lastly for me as you guys talked about earlier some of the group and convention Stuffer group business.
I'm, assuming you're referring to your in house group and stuff and the impact that that will happen in the second half of this year and 23 as it pertains to some of the larger events.
That have started I'll, albeit our stunted a little bit on the on the strip, but have started or are you guys starting to see any changes in behavior from your customers or maybe customers, who would be positively impacted by that by the trends of group convention business, that's taking place on the strip.
I'm, a little bit you're talking about the group business our customers on a whole so from a group perspective, we are seeing positive traction as I mentioned in the script.
It was just slowed down dramatically by January but once we pass January the mass mandates. We're lifting we're now seeing green shoots and the bigger group business. When you think of the draft of the biggest events could only help kind of restore that last year, the Las Vegas great.
Great. Thank you Steve.
Okay.
The next question comes from Shaun Kelly with Bank of America. Please go ahead.
Hi, good afternoon, everyone. Thanks for taking my question, Steve just wondering if you could give a little bit more color on the recovery in the non gaming piece of the business, obviously, some fits and starts here, but what are you seeing maybe the theaters some of the spending behavior out there and specifically as some other some of the other entertainment options.
Back on line as well kind of what maybe are you seeing on spending or foot traffic that'd be helpful.
Sure I think I think it goes without saying that we're competing against all forms of entertainment and Thats been the case for quite some time now in Vegas has been wide open since January of 'twenty, one so from a non gaming perspective as I mentioned during the script.
We're seeing near record profit across F&B and the hotel people are and we are seeing particular strength in our regional and out of town business because of that in terms of the theaters and catering as we've mentioned before I'll start with theaters, here's a slowly making their way back and we're seeing a strong back half slate, which should only help.
Sure.
The visitation returned to the theaters.
Yes, it's all product related content related as to what the.
Studios are releasing.
Expect that to get better going forward.
And as Sean as you saw from the lease.
Well there has been inflation across many of the items related to F&B and cost of goods sold.
And we were able to offset.
All the majority of if not all of that through price increases. Thus you saw the increased margin year over year.
That's helpful and pricing was sort of my second question, which can you talk a little bit about the hotel side and strict compression maybe as we get into.
The second quarter here, we've got a lot of us have rate surveys and things that track how the strip is doing but how is that translating into the locals market and what are you able to do with price on some of your hotel products.
Okay.
Hotel this was almost a record quarter, we almost hit a $170 ADR across the system, which was up almost $50 quarter over quarter and thats on an occupancy of roughly 77%, which again was up about 17 points, but is still above.
15 points below our historical norm all of that related to having midweek.
Midweek group business, so as we get that group business back we can expect to yield even better.
Fortunately the team has done such an amazing job.
With the lack of the group business they have been able to fill their fill in yield the hotel with high spending gaming customers and this is one of the big initiatives related to our moving into the mid to high end and player development.
Thank you very much.
The next question comes from Stephen Grambling with Goldman Sachs. Please go ahead.
Thanks, I know you've addressed this a bit on prior calls, but what are you looking forward to reopen the other properties that were still closed during the quarter and are there any limitations still as we think about maybe monetizing those.
As potentially non casino properties.
Okay.
We're still in the process of evaluating those properties.
What we look for there's a couple of things we look forward.
The current economic environment, and we also look at how much play we're able to capture from those existing properties in which we've told we've mentioned before between 92%, 90% or 94% of the theory able to capture.
As we feel pretty good right now with the state we are but that's something we're closely evaluating across all three properties.
And then maybe one more follow up on John Carlos question on consumer behavior, I guess, what would you typically regard as effectively a canary in the coal mine regarding the broader health of the consumer in the locals market.
That's I mean, that's.
Great question.
Some of the things I think you've met you talked I mean, I think Joe mentioned, the first thing we watch gas prices, we watch discretionary spend.
Population growth and population growth track right.
And then not just the population growth, but also the.
The script is I wonder if you talk a little bit about what we're seeing.
The 2%.
Population, but when you look at the household income that's actually growing much faster at the high end was language yes.
So there was a slide in the deck, we posted regarding the health of the Las Vegas demographic market. So on average with what Frank is referring to is between 21 and 26.
We're expecting Las Vegas to grow at roughly 2%, but when you really break that out.
Can you breakout the households household with an income over $150000 annual growth expect to grow 32% per year.
And I saw that.
Which is interesting.
Do you think that your.
Well I mean, I guess historically do you feel like your penetration was where it needed to be of that upper income consumer and you alluded to trying to capture more of that but maybe if you could just elaborate on maybe where you think your penetration was of those customers and how you are evolving to try to capture more of them.
Well first of all it goes through the location of our properties.
Hang out in the suburbs I think we have a plus locations where the majority of the growth in Las Vegas was taking place and I think if you go back five or 10 years ago, a lot of these customers warrant and Las Vegas.
The market overall has changed pretty dramatically with people moving from California to Las Vegas.
And it's just it's a different customer profile than what we were seeing 10 years ago.
We've really focused at the properties primarily.
Call It Red rock and Green Valley at making sure that we have the amenities on the food and beverage side to attract those customers and as Steve mentioned in his.
Remarks.
We're going to open up a new high limit table games.
Room.
On Thursday of this week one of the things that we noticed or we had been successful at post COVID-19 as we've been able to attract a lot of <unk>.
Customers that traditionally would have gone to the strip from a table games standpoint.
Have started we've been able to attract them up to our properties at both Red Rock and Green Valley. So we're just going to continue to build on that as well.
Thanks, so much I'll jump back in the queue.
Yes.
Your next question comes from Steve Steve Wyman from Stifel. Please go ahead.
Yeah, Hey, guys good afternoon.
So Steve in the past.
I think if I remember correctly, you talked about home margin.
No movement moving forward.
We're tied to revenue growth versus versus anything else I'm wondering.
Is that still remains the case at this point or if there's anything else you discovered that could or we should be thinking about either from a positive standpoint, or a negative side of things.
On the expense side.
Impact.
<unk> moving forward.
Yes, as you can see the pass over eight quarters, we're still sticking to our guns that revenue and operating leverage going to be the biggest driver of margin going forward, but I think as all companies Youre seeing we're in a very unique labor market right now.
And we're all experiencing you we're all experiencing inflationary pressures. So if there's one thing that we're keeping a focus on payroll so in general our payroll quarter over quarter was up $9 $7 million, roughly but let's call it 9%.
But if you break and parse that number down about $3 $7 million of that are just more work to the system. So we brought people on either more hours more labor and there was a revenue associated with that labor. So really the inflationary market is $6 million, which is about 5% five of about 555%, which is in line with with what.
Valley. So it's something that is something that we are keeping an eye on but still going back to the first point revenue is going to be the main driver in operating and operating leverage to a consistent margins and we've been on a pretty tight band.
The past seven quarters.
Okay got you. Thanks, guys and then second question in terms of the locals market there.
I don't know if I'd use the word material, but any major changes in terms of market share shifts.
They are in the market and I guess, what that kind of getting to it.
The promotional environment there.
Still pretty rational.
Moshe market is incredibly rational.
So we haven't seen any big massive shifts in the market.
Okay. Thanks, guys appreciate it.
The next question comes from Chad Beynon with Macquarie. Please go ahead.
Hi, good afternoon, Thanks for taking my question.
I just wanted to ask about capital allocation you had the dividend in the quarter. In addition to.
I guess the small special just wondering with leverage at these levels, how should we think about capital allocation dividends and share repos through the remainder of the year. Thanks.
Sure I mean, I think go back to what we said last quarter when everything's on the table as you know we take a very balanced approach.
We got to balance returning capital through investing in longer term growth opportunities either Durango project as well as our six other strategically located properties as well as returning capital to stakeholders and as you saw by the dividend we're committed to the 25 cent dividend there was a slight slowdown in our share repurchases. We only purchased a 185000 shares this quarter a lot of that was just being.
Prudent with the Red the Durango projects staring us in the face we wanted to make sure we wrapped up the GNP before it really got a refocusing our efforts on the on the share repurchase program I think over the quarter, especially given the strong nature of our balance sheet. As you mentioned the low leverage I mean everything is on the table and we have a lot of financial flexibility to execute both on a longer term opportunities.
Returning capital to our stakeholders.
Great. Thanks, and then just on the last question regarding not much in terms of promotional environment now that palms has reopened.
<unk> said in the past that you don't expect any impact if there was an impact as you should it be more on the non gaming side or the gaming side or again, it's it could be.
Negligible in terms of how you see the business. Thanks.
I think it's going to be negligible, let's be fair.
Team just opened up on April 27, so it's early days.
Okay. Thank you very much.
The next question comes from Barry Jonas of tourists security. Please go ahead.
Yeah.
Hey, guys.
While <unk> been successful with the GNP on Durango, just curious what do you think the risks are here relating to the budget or I guess more so timing for the project.
Okay.
I mean with the GMP. It we were fortunate to get about 70% of the project de risked.
And now our focus is making sure I think you hit on it is making sure.
That are <unk> and construction materials are delivered on time, when the teams need to build and the operators need to handover.
So.
We are <unk>.
Executed what we call a long term procurement strategy in which we have identified all the long lead time items and are starting to purchase those now so items that in a normal build we purchased six months out we're starting a year out and so we are hoping to use that to mitigate any potential delays in the supply chain.
Gotcha, Okay, and then I noticed that there were about $2 $2 million of native American losses.
Just curious what that is and how should we be thinking about future losses from here.
The $2 $2 million is related to the great an arbitration case, which we've mentioned in the past.
We can assume that those losses, which will go away.
That's perfect. Thank you.
As a reminder.
Linda if you would like to ask a question. Please press Star then one Disney joined into the question queue.
Next question comes from Dan <unk> from Wells Fargo. Please go ahead.
Hey, good afternoon.
So most of my questions have been answered, but just in terms of.
In terms of the customers Youre seeing come back I know the locals market I think it's around 20% in the populations retirees have you seen any impact from that segment of the database just given there are more relying on a fixed income.
No I think the question may have been touched a little bit earlier, where youre seeing the older demographic being more conservative.
But they're coming back and when you think of the omicron virus really what that effect is that more of the younger generation is those are the folks who got sick.
And so from a spend perspective, we're seeing no change in the in the older demographic spending habits.
Got it and then I know it sounds like you're further along in terms of rolling out of the cashless gaming across your properties.
Given the reduction of friction costs have you seen higher spend per visit from those customers that have adopted it or any kind of early early takeaways there.
Yes, I mean, this is going to be a slow migration to the technology and given that we're not in all of our properties, where we haven't started the big marketing push but the group that has executed we have seen.
Arrived we have see more gaining velocity.
Got it thanks, so much.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Stephen <unk> for any closing remarks.
Well. Thank you everyone for joining the call and we look forward to talking to you in about 90 days. Thank you.
Yes.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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