Q2 2019 Earnings Call

Afternoon, well Red rock resorts second quarter 2019 conference call.

All participants will be in listen only mode.

Please note this conference call is being recorded.

Oh no it converts over to Stephen Cootey Executive Vice President Chief Financial Officer, and Treasurer of Red Rock Resorts. Please go ahead Sir.

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 <unk>, Chairman and Chief Executive Officer for Casegoods, President, Bob Bench, 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 or results may differ from those projected the risks uncertainties related to these statements are detailed in our filings with the FCC.

During this call. We also discuss non-GAAP financial measures definitions and complete reconciliation of these figures to GAAP. Please refer to the financial tables in our earnings press release and form 8-K, which 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 the properties National branding and marketing campaign adjusted EBITDA on a consolidated basis increased 1.5% to 226.5 million and margins decreased by 370 basis points to 26.2%.

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.

The margins decreased 640 basis points to 22.2%.

Excluding the impact the palms onetime 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.

[noise] net revenue performance was driven by significant growth at the palms and power station across both gaming and non gaming segments of their business.

As a reminder, both of these completely transform properties are still in the process a process of ramping up and we continue to expect these investments to generate significant returns to the company over time.

Not to be overlooked the overall performance of the remaining properties in our portfolio was solid with net revenues adjusted EBITDA and margins all up for the quarter and on a same store basis that is including power 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 grown at more than double that rate.

The remainder of the remainder of the market over that time.

Let's now take a look at some of the key economic indicators, which confirmed that the Las Vegas economy remains robust in support of a future growth.

[noise] population is at an all time high in Las Vegas remains the second fastest growing M. A C in the nation.

Employment also remains at record levels, and we have 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 a 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 a 7.4% increase in taxable sales during the trailing 12 months ended April 29th team.

Housing also remain solid as median homesale prices were up 5.8% in jail and finally, there are now over 20 billion new capital investment projects planned in Las Vegas, 14 billion, which have already broken ground led by the new rate or Stadium project me on the Convention center expansion and multiple strip development all of which will further expand the local economy.

This positive economic outlook combined with very favorable supply demand dynamics stable regulatory environment and the lowest gaming tax rate. The nation explain why we continue to view the Las Vegas locals market as most attractive gaming market in United States.

And with our best in class assets and locations Unparalled distribution at scale and deep organic pipeline 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, while these completely reimage properties are in the process of wrapping up we are already seeing significant revenue growth at both properties as a result of our investments made there.

In addition, the great guest feedback we received to date has been extremely positive 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 a new venues and offerings that those properties are clearly appealing to both of these key customer segments.

With respect to the palms redevelopment are $690 million plan remains on time and on budget and is rapidly nearing completion.

The final component of phase II, our world class Wellness bond Salon open to stellar reviews in late June .

And the key and final component of phase three.

Michelin starred dim sum restaurant, San Juan from Hong Kong, and the addition of 16, new gaming tables and the West Expansionary are expected to finish in mid September .

Once fully completed this one of a kind reinvestment what passionately every aspect of the iconic property and we are confident that the policy one of the Premier gaming entertainment destinations in all of Las Vegas.

Taking a quick look now at our technology initiatives, the new identity slots system continues to play a pivotal role with respect to gaming revenue growth and a related ability to continue to outperform the market as we saw increases once again in key slot metrics such as card 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 and the former personalized on device marketing and messaging, which we continue to optimize and refine we'll also be introducing a number of other system enhancements throughout the remainder of the year.

We believe that these system enhancement, providing even more engaging rewarding and convenient experience for our guests 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 Great and Casino resort.

With respect to the North where project we continue to progress with a few remaining litigation related related to the project as previously noted the California Supreme Court has granted the tries petition for review of the key lower court decision involving the project, but as deferred taking further action toward us ruled on a very similar case involving the enterprise trod, 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 companys cash and cash equivalents at the end of the second quarter.

$100.2 million and the principal total 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 5.6 times and 4.4 times respectively.

Capital spend in the second quarter was up 111.6 million inclusive of the palms redevelopment project.

In addition on July Onest 2019, we purchase 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 will be between 80 to 105 million inclusive of the remaining costs related to the palms redevelopment project.

Following the completion of the palms redevelopment September we reject the key inflection point as a company and expect to generate significant accelerating free cash flow beginning in fourth quarter.

As we exit out of this development cycle, we will be intently focused on maximizing the financial performance of our existing properties, reducing our net leverage ratio target level of four times or less or a combination of paying down debt and increasing EBITDA.

Lastly on August six the company announced that its board of directors have declared a cash dividend of 10 cents per share payable for the for the third quarter of 2019.

The dividend will be payable on September 27, 2019 to shareholders of record on September 13th 2019.

We are the operator, operator this concludes our prepared remarks for today.

We are now ready to take questions from participants on the call.

Yes. Thank you we will now begin the question and answer session.

To ask a question you May press Star then one on your telephone keypad.

If you're using a speakerphone please pick up your handset before pressing the keys.

Thanks, Tom Your question has been addressed and we're talking to withdraw please press Star then too.

And this time, we will pause momentarily to assemble the roster.

And the first question comes from Joe Greff with JP Morgan.

On for Joe Thanks for taking the question.

Regarding the palms, how large of negative EBITDA at the palms generate these onetime expenses from Twoq you go away completely and Rick you and do you think you could generate positive EBITDA in the Threeq and Fourq.

Well as you know, we don't really break out probably won't break of distinct properties, but to your point about the $11.3 million onetime expenses. They go away completely.

Great talents to do grow to cure revenues and EBITDA year over year at faster pace than the one Q.

Yes, we did.

And then lastly, I did your same store locals.

Excluding palms in palace, a faster than boys in the second quarter.

I'm not sure do it for us thank you.

Yes, I think what we said in the last call is that.

And we said that we alluded to in the comments.

That we continue to outperform the market.

Okay.

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

Hi, Thanks for taking my question.

Your room revenues were up 15% year over year.

Well your room EBITDA was actually up 23% I'm guessing most of this is being driven by by Palace and then also palms.

So understanding that palms, we 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 thats ramping at palms, and if we should expect this to further ramp in the back half of the year. Thanks.

I think were only four months into this investment right now.

So we are still in very early days that said and I think as you noted I think from a from a hotel standpoint, we're moving in the right direction.

The team is intently focused on how do we actually increase 80 are going you know going forward. So we're still not quite there yet.

But we're tracking we're tracking the right direction.

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 to a certain level.

That you would explore.

Some some organic growth potentially some M&A.

Maybe some other options with the balance sheet.

Given that it looks like you are ramping up pretty fast here.

Has your view in terms of external initiatives changed at all.

No I think again I think we're going to reiterate what we said last call that our primary focus right now is to make sure the palms the palace ramp up effectively.

And then once we reach that inflection point, which we said would start we'd start seeing in the fourth quarter. We really are intent on reducing our leverage that four times or less that said theres M&A opportunity that exists, we're always going to look at opportunities to maximize shareholder value.

Thank you very much.

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

Hi, Thanks, So there's been lots of noise is on some of the changes going on with the palms and the PRASK can you just discuss some of the optimization that has taken place and maybe outline what the path is here too.

Taking that kind of target ROI and the property.

That's a good question I mean, you have to be a little bit more specific on the.

Things you mentioned that you've seen the press.

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

Hi, So yes, we'll get yeah 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 is going to be constant reevaluation of staff is going to be constant reevaluation of opportunities the way to increase our return as well as improve the customer experience.

Fair enough.

So.

Got it.

Saying all of these the intent here is to drive toward our low digit.

Return, we've said we're going to hit.

I'm, sorry, low double digit my body.

Great and then I guess, maybe a 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 do you think that there's levers that you can pull to kind of take advantage of the recent correction more real time.

Well as you know we gave the board approved last quarter $150 million share repurchase, but that said I keep going back to the you know it is really about.

Making sure the properties ramp properly.

And our focus is really de leveraging the balance sheet.

Great I'll jump back in the queue. Thanks.

Thank you and the next question comes from Stephen Zinski with Stifel.

Hey, good afternoon guys.

So so the 11.3 million expenses you called out can from an accounting standpoint can you just tell us where those kind of flow through your <unk> flew through your income statement.

Sure about 3.7 million flu went through SMB.

And then the remainder is yes, DNA like the genuine.

Okay, and then where I I guess, we do look at that I I would assume that when we looked at the FNB.

Where do you think you can get those margins in the you know in the near term.

Let me start as you I mean, you're seeing from the balance sheet. Once we exclude the onetime charge was definitely not where we want to be.

The focus there is mainly we've opened up a bunch of new restaurants at the palms in the palace think there's opportunities on both sides. One two and we're not there from a revenue perspective at any of the boxes, yet even though they are all tracking well and then from an expense structure is about.

Grinding and optimizing optimizing expense side of the business.

So I don't think we I don't see any issue with returning to our historical or slightly below our historical margins on FMT perspective.

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 you know the flow from a customer standpoint in terms of where these folks are coming from and what I'm, what I'm getting at here is.

Is it more kind of a local's customer or is it more folks coming from the from the strip or is it a combination of both.

Let me a combination of both when you break down the carded play at the palms is roughly 60% out of town, 40% local which is really kind of in line with our investment thesis for hybrid property.

In terms of locals is coming from all over the valley, we're actually see it. So your next logical question. As you know is there cannibalization at any of the existing properties. We're actually seeing the reverse we're seeing the addition of the palm systems actually increasing organic growth.

We're seeing increased planned crossover I'd say the second stop.

And so we're pretty happy with it from a local his perspective and out of town. We as you know we are.

We're taking them from the strip properties.

And one more if I could sorry is the promotional environment.

Pretty rational out there at this point.

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

Okay. Thanks, guys appreciate it.

Thank you and the next question comes from Barry Jonas with Suntrust.

Hey, Thanks, just following up on Steve's question, I think Boyd talked about some heightened promotional Oh, Hi Inn promos in the market in Q2, which has since normalized is that something that that you guys saw.

Now were right within our historical reinvestment rates.

As we have them for as long as I can remember.

Understood. Okay. Thank you very much.

[noise].

Thank you and the next question comes from John Decree with Union 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 onetime expenses did that include the national brand campaign as well.

Yes. It did it include the portion that was some portion of that we are able to.

Push into pre open as you are aware, we kind of got rolling opening. So you can see some of the branding.

Got it Okay, and then just another housekeeping item maintenance Capex once the project at palms fully done with Tim Hawaiian opens can you give us a.

An outline of what that could look like for 2020 and going forward.

Yes, I think roughly maintenance capex, excluding any onetime refurbishment is going to be approximately $100 million on an annual basis.

Okay, great. Thanks, Steve.

Thank you and the next question comes from Joe children with 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 was some one time revenue benefits in the period just from call it the Grand reopening.

Well I think it 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 them non pals and palms is going to grow we feel that we're going to consistently take share because of our asset quality high asset quality. So we should perform double the market or at market or above as we have been 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 continue we see this property the property will continue to ramp faster than the market.

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.

I'd love to in about 90 days.

All right I'll I'll 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.

Yes, I think we've always said that I think I referred to the last call that the palms because of its complexity its scope and size is 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 your trying to increase customer awareness you trying to make sure that the customer service is actually the top notch. So as we start ramping the first phases capture and then we're going to start you start optimizing the resort from an expense side. So there are expenses that.

That will be reduced as time moves on.

Okay. Thank you very much.

Thank you and once again. Please press Star then one if you would like to ask your question.

[noise] all right as there are no more questions at the present time I'd like to return the floor to Stephen Curry for any closing comments.

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

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