Red Rock Resorts, Inc. Q1 FY2020 Earnings Call

Thank you, operator, and good afternoon everyone. Thank you for joining us today on Red Rock Resorts first quarter 2020 earnings conference call. We hope that all of you and your families are staying safe and healthy. 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; and Robert Tamian, Executive Vice President of Development and Strategy. Before we get started, 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 the definitions and complete reconciliation of these figures to GAAP, please refer to our financial tables in our earnings press release and Form 8-K, which were filed this afternoon prior to the call. Also, please note that this call is being recorded. The impact of COVID-19 has been swift and severe and our thoughts and well wishes go to all of those who have been directly or indirectly impacted by this profound crisis. We would also like to recognize and offer a heartfelt thank you to all of our medical professionals and first responders serving on the frontline of this battle. Most importantly, we would like to thank our team members for their commitments, patience and understanding, as we navigate together through this period of uncertainty. As you’d expect this call will be different from the ones we’ve had before. While we’ll briefly discuss our first quarter results, most of our time today will be spent reviewing the decisive actions we have taken to prepare for a new operating environment, with a focus on health, safety, cost reductions, and liquidity. So let's begin with the first quarter. 2020 was off to our strongest start since 2008 at our core properties. In January and February, we experienced very solid growth on both the top and bottom lines, carrying over the momentum from Q4 of last year. During the two-month period, net revenues at our Las Vegas operations, excluding the Palms increased 5.5% and adjusted EBITDA excluding the Palms increased 9.9%. All that changed though in March, with revenues gradually slowing in the first half of the month, and then stopping entirely on March 17, when the governor of Nevada ordered a statewide shutdown of all non-essential businesses, including casinos in an effort to reduce the spread of COVID-19. Similar to the Graton Resort which is managed by the company, it closed on March 17. What originally began as a 30-day shutdown on March 17 here in Nevada has now been extended to at least May 31. While the shutdown of Graton Resort has now been extended to at least June 15. When those shutdowns are finally lifted, what our business will look like is highly uncertain, as we have no real visibility regarding the impacts that this crisis will have on our company moving forward. Despite the complete loss of revenue, we have remained committed to supporting our team members and our community during this period of uncertainty. On the team member front, just as we did after September 11, we retained our entire team for as long as we could. To that end, we are proud to have been one of only three companies in Las Vegas that continued to pay all full-time team members regular pay and health benefits from the March 17 shutdown date through May 16, at a cost to the company of over $72 million. Ultimately, though, between the shutdown, the need to reopen our business in phases and the expected impact of the state mandated occupancy and social distancing restrictions, we were forced to lay off a significant portion of our team members. This was an extremely difficult and painful decision, and one we did not take lightly as we understood the impact that it would have on the affected team members and the community. We remain hopeful that Las Vegas and our business will rebound quickly and allow us to rehire many of these valued team members when we emerge on the other side of this crisis. We're also hopeful the state and federal unemployment safety net, together with the extension through September 30, at our expense of health benefits for all those impacted team members, will support those team members through the worst of this crisis. For those who are not impacted by the layoffs, we've extended their regular pay and benefits through at least the end of May. We've also maintained our involvement on the community front. In early April, we were among the first to support the COVID-19 emergency response fund by contributing $1 million to purchase personal protective equipment and critical medical supplies, including test kits, for those used by first responders and healthcare professionals throughout Nevada. In addition, we have expanded our partnership with Three Square Food Bank during this crisis by donating over 120 pallets of food and allowing our properties to be used for emergency food distribution throughout the Las Vegas Valley. Just today, Clark County began using our Fiesta Henderson property to provide COVID-19 testing to residents of the Las Vegas Valley. The good news is that the gradual reopening of Nevada is now underway with Phase 1 having begun on May 9. While the first phase did not include casinos based on everything we are hearing, we remain hopeful that the casinos will be permitted to reopen in the coming weeks, and we are also hopeful that Graton Resort will be permitted to open by late June or early July. As expected, the loss of revenue beginning in mid-March had a substantial negative impact on the overall quarter. On a consolidated basis, first quarter net revenues decreased 15.6% to $377.4 million, adjusted EBITDA decreased 48.8% to $74.3 million, and margins decreased 1277 basis points to 19.7%. With respect to our first quarter Las Vegas operations, net revenues for the quarter decreased 15.6% to $356.5 million, adjusted EBITDA decreased 49.2% to $68.5 million, and margins decreased 1269 basis points to 19.2%. These numbers reflect a number of one-time charges related to the impact of COVID-19 on our business. The charges include a $27 million accrual in the quarter related to our commitment to provide regular pay and benefits to all full-time team members after the quarter end, from April 1 to April 30, which was offset in part by an approximate $20 million payroll tax benefit we received under the CARES Act. Let's now turn to what we've been doing during the closure. As noted earlier, we've taken a number of decisive steps to prepare for a new operating environment with a focus on health safety, cost reductions, and liquidity. As recently announced, we will be reopening our properties in phases. First to reopen will be our Red Rock, Green Valley, Santa Fe, Boulder Station, Palace Station, Sunset Station, and our Wildfire properties. If you exclude Palms from both 2019 net revenue and EBITDA, these first-to-reopen properties generated over 80% of our Las Vegas net revenue, and over 90% of our Las Vegas EBITDA during that same period. Based upon the anticipated mix of gaming and nongaming revenues of these properties and our dramatically reduced cost structure moving forward, which we'll discuss in a minute, we believe we can reach EBITDA breakeven at 35% to 45% of our overall 2019 ex-Palms Las Vegas revenues. As for the other four properties, Palms, Fiesta Henderson, Fiesta Rancho, and Texas Station, we will look at reopening these properties once we've had a chance to fully assess how our first three opened properties are performing post-crisis, as well as the recovery of the Las Vegas market and economy as a whole. As we prepare for the reopening of our properties, our number one priority has been and will continue to be the health and well-being of our team members, guests, and the entire Las Vegas community. To that end, and working closely with outside medical experts, we have put together very comprehensive health and cleanliness guidelines for our properties moving forward. Specifically, we are committed to providing the safest and most secure environment possible for both our team members and guests. Here are a few highlights of what we have planned. All team members are currently undergoing FDA authorized COVID-19 testing, which will be completed in full prior to reopening, and such team members will also be tested at regular intervals thereafter. All guests and team member entrances at our resort properties will be equipped with state-of-the-art thermal scanners. All team members will be required to wear PPE consistent with health authority guidelines, and masks will be available to guests upon entering the property. Touch-free hand sanitizing stations will be installed throughout the property. Enhanced cleaning technology, such as electrostatic sprayers and hospital-grade disinfectants will be utilized throughout the property. The visibility and frequency of cleaning will be significantly increased throughout the public and non-public areas of the property. All team members will receive rigorous training on the company's new health and cleanliness standards and protocols. Importantly, our new guidelines will meet or exceed the highest standards set by federal, state, and local authorities, and will be adapted as circumstances require. When our guests walk through our reopened doors, we want them to know that their health and safety is our first priority. At the same time, we also want our team members to know that these changes will help safeguard their health, whether interacting with guests or each other. For those who are interested, a copy of these guidelines is available on our website. Another primary focus of the company during this closure was to re-examine and challenge every aspect of the things we can control, including our cost structure. Based upon that review and the uncertain business environment we face going forward, we had to make very difficult but necessary decisions in order to manage the size of our workforce for expected business levels, in addition to instituting other cost mitigation measures that we outlined in a moment. As we talked about earlier, our plan is to reopen in phases. That approach, along with the expected impact of state mandated occupancy and social distancing restrictions, meant that we had to make meaningful staffing level reductions, both at the property and corporate level. All told, these workforce reductions reduced our number of full-time team members by just under 40%. In addition to these workforce reductions, we've also taken a number of proactive steps to streamline our cost structure and reduce cash outflow, including significant salary cuts for senior executives across the company, led by Frank and Lorenzo Fertitta who volunteered to forego 100% of their salaries for the duration of the crisis, suspending our quarterly dividend, eliminating non-essential CapEx spending for the remainder of the year, and reducing general overhead expenses by significantly reducing costs related to our outside services through the termination or renegotiation of vendor and other agreements. We are confident that these actions will position us as a much leaner and more efficient company that is better able to manage the uncertainty as we move forward. By the time this exercise is over, we expect to have reduced our operating expenses by approximately $150 million on an annualized run rate basis. Notably, that amount does not include any labor expense savings related to those properties that will not open as part of our first opening phase, nor does it include savings related to any amenities that will not be initially provided. However, we estimate that those additional labor expenses are approximately $175 million on an annualized run rate basis. That amount would decline to the extent that our closed properties were to come back online or those amenities were to again be provided. These cost mitigation efforts will enhance our already inherently resilient business model, as over 60% of our costs are variable in nature. Importantly, that operational flexibility will allow us to quickly adjust to increases and decreases in business levels as we move into the recovery phase. Let's now turn to liquidity. As a precautionary measure, we drew down almost the entirety of our $1 billion credit facility in mid-March, and as of May 18, we had approximately $950 million in cash on our balance sheet. As such, we believe that we have ample liquidity to withstand an extended zero revenue environment. Our estimated cash burn, including corporate and operating expenses, cash interest expenses, prorated principal repayment, and prorated CapEx, is approximately $49 million a month. Keep in mind that this number includes fully loaded labor costs for our first three open properties and corporate labor expenses. In an event that we are required to continue in or return to an extended zero revenue environment, the vast majority of our continued labor expenses would fall away, and our go-forward burn rate could be reduced by approximately $24 million a month. This reduced burn rate, coupled with our current cash on hand, will allow us to operate without the need for additional capital for over 36 months in a zero revenue state, giving us one of the longest runways in the gaming industry. Additionally, we believe we'll be in a position to continue to comply with all of our financial covenants for the foreseeable future, and we have no significant debt maturities until 2025. For all these reasons, we believe we will be well-positioned financially to handle the uncertain times ahead. Finally, two Native American items: first, as you will recall, our plan to develop the casino in North Fork Tribe has been stalled over the last several years due to litigation brought by opponents of this project. We are pleased to share that the Supreme Court of California has scheduled oral arguments for June 2, 2020, in a very similar case involving an enterprise tribe, and we hope that will result in a decision that clears the way to finally develop this very attractive project on behalf of the North Fork Tribe. Also, regarding the Graton management agreement, while the extension has not been determined yet, the agreement does provide for an extension of the term as a result of the current shutdown. Throughout our 40-year-plus history, we have weathered a lot of challenges and we will weather this one as well. Although these are unprecedented times, we feel very confident in our ability to manage through this crisis and succeed thereafter. Operator, this concludes our prepared remarks for today, and we’re now ready to take questions from participants on the call.

Good afternoon, everybody. Steve, thanks for providing us an EBITDA breakeven metric. I just wanted to take that one sort of operating sensitivity a step further. When we think of free cash flow breakeven or free cash flow usual levels as a percentage of prior year revenues, where would you peg that roughly?

So you have – when I started at EBITDA breakeven about 35%, you'd have basically 10% to that to cover interest costs.

Got it. And then when you think about the locals market right now, you have sort of two counterbalancing things. You have a large number of retirees, whose spending and visitation levels are independent of job security, but then you also have the potential for high unemployment for strip employees that might frequent your local establishment. How do you think about the mix and how sensitive are you to that maybe that latter at-risk category?

Well, look, our business model is, as you know, very different than the Las Vegas strip. The majority of our revenues do come from a local gaming market. Most of our customers live within three miles of our properties. You are correct that a big portion of our slot revenue does come from retirees and baby boomers who are not necessarily reliant on employment. I think in the short to mid-term, the government has definitely been out there, bridging employees that don't have jobs right now, which in the short to mid-term will provide some stability. Of course, in the long-term, the health of the Las Vegas strip is very important to the health of the overall Las Vegas economy. So we're hopeful that the government unemployment checks will help bridge to the other side of a good strong recovery on the Las Vegas strip.

Great, thank you for that, Frank. And then, Frank, while I have you here, as you sit here now, what do you think the future of the Palms Casino is? I mean, do you reopen or do you keep it closed and try to monetize or sell later on? How are you presently thinking about that?

Sure. First, we can dispel the rumors that the Palms is for sale. That is a rumor, it's not correct. The way we're evaluating the closed properties is that we felt that we took a very hard look at how much of our customer database we can cover in Phase 1 and be most efficient as possible to generate as much revenue as possible, right? The tourist part of the recovery is going to lag the recovery in the local gaming market, which we think we should be able to lead, given the geographic distribution of our properties, the quality of our properties, and frankly, the quality of our team members, who are so important to maintain relationships with our repeat customers who typically come to our properties three-plus times a week. The Palms will be reopened based on what we see from initial demand with the six properties and what we're able to see in terms of tourists coming back to Las Vegas, how the strip is doing, and everything else. But our plan is to reopen the Palms, but it's going to depend on what we see in the marketplace.

Thank you.

Hey, guys, thank you. And Steve, thanks so much for all the color that you provided in the opening remarks. If I could, just in terms of how you are thinking about the six assets that you will open, and how you would kind of position the headwinds, what keeps you up in that a little bit more? Is there tremendous concern or any concern at all about the stipulation around social distancing, or are you more thinking about this as what's going on in the local economy and even with some supply taken out of the market? What's the demand curve look like?

Look, I think there are definitely unknowns. We're not sure what this is exactly going to look like. On the other side, some of the new guidelines will create friction in terms of the customer experience. We have conducted a lot of research with our customers and I can tell you that about 80% of them were very positive about returning to visit our properties within two weeks of reopening. However, we also learned that they're very concerned about safety and health. That's why we have gone to every length possible in terms of testing all of our team members, installing thermal cameras at all of our entrances, and trying to reduce friction as much as we can to ensure a good guest experience. There will be social distancing and capacity restraints in terms of how many people can be in a restaurant or on the casino floor. We're going to have to work through that, and hopefully, as we get more testing and information, we'll see that the disease is under control, allowing us to slowly return to a normal operating environment.

Great, thank you. That's helpful. If I could just double back to the comments on cash burn. I just want to make sure I understood fully what you were saying. The $49 million a month run rate with fully loaded labor costs includes Wildfire and the six other casinos. That's a $49 million expense run rate with those properties open, but then you went on to say that if, in fact, those properties remained closed, that would then drop to a $24 million burn rate. So that implies that the labor expenses and the aspects of opening those properties add approximately $25 million, regardless of revenue. Is that correct?

That's right. But in addition, I just want to clarify that this number includes not only labor but also OpEx, interest costs, and CapEx. That's correct. The $49 million to $24 million effectively implies about $20 million of labor would fall away.

Understood. Okay, great. Thank you both very much.

Hey, guys. Any sense what the promotional environment could be as the casinos are reopened? I want to get a sense if you think it'll be elevated given potentially less demand or if folks will be more focused on costs and margins.

Look, I think this is a very unique situation in a unique environment. Fortunately or unfortunately, we’ll all find ourselves in a similar situation at the exact same time. While we had been focused on eliminating redundant marketing expenses and being more efficient in our marketing spend, the crisis has definitely accelerated and made us much more focused on what a reopened business would look like. The market is going to be rational because survival in this new environment will depend on it. So I don't know if you have anything to add to that, Steve?

No. I think that was perfect, Frank.

Great. Last quarter, we mentioned exploring land sales. The situation in the world has changed significantly since then. Where do things stand with that? Are you still considering it, or has the market shifted, putting that on hold?

No. I think we had gotten some fairly good traction on several of the pieces of land that we have. We have a significant amount of value in undeveloped real estate, and we were making pretty good progress. But as you know, in this environment, everybody's pretty much gone on pause until people see what happens in the economy and where things settle out. We're hopeful that if things get going again, we can restart that process.

Great. And then the last one for me, as we think about reopening strategies and likely reduced gaming supply for social distancing and reduced occupancy. Can you just discuss what the impact ultimately on gaming could be, given the fact you're not at 100% occupancy on your gaming floor? Help frame what reduced supply ultimately could translate to on the revenue line item.

Look, let's break it down a bit. In the slot department, we're going to be reduced to 50% of capacity. The reality of achieving over 50% capacity is primarily going to occur during peak periods. For the most part, on slot machines, you already have social distancing in place. Our properties and slot operations are spacious. However, on table games, which are more labor-intensive, cutting occupancy down to three positions per table will create some profitability challenges. We'll strive to manage that. Regarding restaurants and bars, it's also going to be more challenging. The restaurant business has thin margins, and being confined to 50% capacity will not be helpful. But the good news is our primary profit generator is slot machines, and other than some peak periods, we should be okay.

That's really helpful. Thank you so much, guys.

Hello, everyone. Just a couple of follow-up questions on the same issues. Can you go back to the mix, and it might be helpful to get a sense of what percentage of your frequent player cards or card system you believe would be retirees and perhaps less exposed to the risk of job loss?

Hey, Harry. Just for competitive reasons, we're not going to disclose details of our database on the call.

Can you provide a general overview? I'm curious if there are any positive indicators suggesting that your business mix includes more retirees or ex-retirees who are less likely to be adopting a more cautious approach.

I agree. I understand, Harry. I think a large chunk of our database consists of boomers and retirees. We feel those folks are relatively insulated from the downturn.

All right. You mentioned how well you guys were doing across the portfolio ex Palms in January and February. Can you give us some perspective on how the Palms was performing relative to not only your expectations but also in the last couple of quarters? What trends were looking favorable, so that we can gauge expectations for reopening?

Sure. In break down for the Palms, we've disclosed the numbers in the past. From a revenue perspective, we had about $37 million in net revenue in the quarter, which we thought was pretty good. On the EBITDA front, actually EBITDA came in negative 47, but when you adjust for negative hold, we actually showed a positive EBITDA of $1.8 million for those first two months. So we were trending in a very positive manner.

Got it. And my last question is, can you speak to amenities that really weren't all that profitable that could be slow to return, ultimately leading to higher margins on a lower comparable level of gaming revenue?

Sure. For one, we will not be opening any of our buffets. Buffets did generate traffic, but they were definitely loss leaders. Those will not be operating in Phase 1, as will some other specialty restaurants. We'll narrow it down to the most popular restaurants that had the highest throughput, and some will remain unopened in Phase 1. We're not going to open poker rooms in Phase 1, as it wouldn’t make sense when only three players can occupy a table. Movie theaters will likely lag the Phase 1 openings, as we don't believe there are enough appealing films available right now. We'll have to wait for a good product distribution from movie houses before those reopen.

Got it. All right, that's helpful and good luck. Thank you everyone.

Hi. Good afternoon, everyone. Thanks for taking my question. You touched on Graton a little, but can you just talk more about how we should be thinking about the November expiration date? The opportunity to extend that and how you're considering it?

Well, I mentioned in the remarks that we know it's going to be extended due to the closure, but at this time we don't know the length of that extension.

Okay, thank you. You talked about the 35% to 45% of ex-Palms revenue to achieve breakeven. You've taken out a significant amount of costs, some of which will return as demand rebounds. Do you have a sense for how much prior peak revenue you need to get back to prior EBITDA levels, recognizing some of these costs are true permanent reductions? Is that a fair way to consider it?

Yes, that's correct. As I mentioned on the call, I would say about $150 million will be viewed as something pretty permanent.

Okay, thank you. One last one for me. Has your perspective on the sale-leaseback model changed at all? Do you have a more favorable or less favorable view of it after this crisis? How are you thinking about that?

I believe it's just another way to raise capital. Thankfully, unlike 2008, all capital markets are open to the company, whether it's the debt markets or equity markets. A positive takeaway from this crisis is that we own all our real estate, giving us maximum flexibility in our options.

Hi, afternoon. Thanks for taking my question. Against the competitive Las Vegas locals market during the last downturn, can you discuss how your Phase 1 portfolio performed against that group? Were you able to gain any market share?

You're referring back to 2008. I'll need to take this offline and get back to you, Chad.

Okay. Regarding the Red Rocks refurbishment, could you provide an update on spending and completion status?

It's complete. We are just waiting for guests to occupy the properties. We have about $8 million retainage left to spend, but the work has been completed.

Good afternoon, everybody. I have two quick ones. Steve, you mentioned the Graton extension, but could you provide details? Is it based on the duration of the closure, and that's what you're measuring, or how does that mechanic work?

Yes. I'm going to have Jeff Welch, our general counsel, address that question.

Hi, Shaun. The management agreement provides that the period of the closure will effectively measure what the business was doing when it closed, and it will get back to substantially all the business that it was doing prior to closure. It’s not a defined period measured from the date of closing to the date of reopening to determine the length of the extension.

Great. If I'm understanding it correctly, does that mean it functions like a business interruption concept that compensates for the lost period, if I understand that correctly?

I'm not sure I would characterize it that way. Think of the closure effectively ending when the Graton resort returns to previous operational levels.

Exactly, when it can substantially operate the way it was before.

Understood. Thank you for providing those extra details. My second question is rather general. During your experience in the last downturn, what tends to happen on the strip? We've seen some major operators removing fees, such as parking fees, as they try to attract locals. Do you expect increased competition from the strip for local dollars? And how did that play out in 2008-2009?

I mean, we've been doing this for over 40 years, and it's no secret that every so often, the strip tries to attract locals. That said, locals do occasionally visit the strip. However, local gaming is based on convenience, product quality, and the customer experience we provide, which is tailored specifically for local customers. Our primary clients live within three miles of where we are. So I wouldn’t anticipate any material changes.

Thank you. Two quick follow-ups. First, how do recent events influence your thinking about the appropriate capitalization of the business in a normalized environment? Are you anticipating holding more cash or maintaining leverage?

Look, it's clear that unforeseen events mean the need for flexibility and runway. Less leverage is better, and more flexibility is desirable.

Fair enough. What factors will you monitor to decide when to open the Palms compared to the other assets? Is it based on specific visitation milestones on the strip or more on metrics from the other properties and your ability to attract higher-value players?

It's primarily dependent on what we observe at the six properties, and what profitability looks like for those properties. We will gauge whether we can be profitable on any additional properties we consider reopening. That will be our key metric.

Good afternoon, everyone. Thanks for taking my questions. Steve, I think you've answered this in a few different ways, but can you clarify your outlook on breakeven revenues at 35% and the flow-through beyond that level?

I mean, in the past we've communicated a range of flow-through between 50% to 70%. We expect that range to be slightly higher, but you're correct, it will depend largely on how the business opens and what revenue levels we achieve.

Yes. Fair enough. That's helpful. Lastly, you've mentioned the $20 million receivable from the CARES Act. Have you quantified any additional benefits from the CARES Act you might receive in the future?

Yes. The CARES Act has been very helpful for us. Expect to receive an additional $15 million if all goes well through payroll retention. We've also been able to defer approximately $10 million related to FICA expenses. Furthermore, we are beneficiaries of QIP, which resulted in $28 million due to a technical correction in the bill and the CARES Act that accelerates depreciation. Also, the adjustable taxable income deductible increased from 30% to 50%. These are the major benefits we're focusing on.

Great. Thanks, Steven. Good luck on the reopening everyone.

Thanks.

Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Stephen Cootey for any closing remarks.

Thank you everyone for joining us. And please be healthy and safe, and I look forward to talking to you again in 90 days. Take care.

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