Red Rock Resorts, Inc. Q2 FY2020 Earnings Call

Good afternoon. And welcome to the Red Rock Resorts First Quarter 2020 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 Stephen Cootey, 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 today’s Red Rock Resorts’ second 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; Bob Finch, Executive Vice President and Chief Operating Officer; and Rod Atamian, Executive Vice President of Development and Strategy. 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 the 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. Before we get started, I want to take a moment to acknowledge the passing of Rich Haskins, our President. He passed away in an accident on July 4th. For over 25 years, Rich was a trusted advisor to the company through both good times and bad. He was instrumental not only in the successful growth of the company, but in the development of the Station Casinos family culture. Those who interacted with him were inspired by his steady leadership in any situation and his 'anything is possible' attitude which defined what he was all about. While Rich may have left us, his accomplishments and legacy remain and live here at Station. Now onto the quarter. Before moving on to our financial results, we will take a moment to remind you of some actions we have taken during the first two months of the quarter as we prepared for these uncertain economic times. During the closure, we re-examined and challenged every aspect of the company. We took a number of pivotal steps to prepare for a new operating environment, with a focus on health, safety, cost reductions, and liquidity. To that end and working closely with our outside medical experts, we established a very comprehensive health and cleanliness guidelines for our properties given the current environment. These new guidelines meet or exceed the highest standards set by federal, state, and local authorities and will be adapted as circumstances require. Simply put, we are committed to providing the safest and most secure environment possible for both our team members and guests. A few highlights include that all guest and team member entrances at our resort properties have been equipped with state-of-the-art thermal scanners. All team members will be required to wear masks and PPE consistent with health authority guidelines and masks are now required for all guests. We have continued to make masks available to guests upon entering the property. All team members and all vendors and partners underwent FDA-authorized COVID-19 testing prior to reopening, and we have continued to test our team members, vendors, and partners on a regular basis. We have completed over 12,000 tests as of today. During the closure period, we also took time to review and assess every property in every department. Based on that review, we had to make some very difficult but necessary decisions in order to streamline our cost structure and guide the company through this crisis in an uncertain demand environment, including significantly reducing salaries for senior executives across the company, refining and optimizing our business processes, which led to staff reductions both at the property and corporate levels, reducing costs related to outside services through termination or renegotiation of vendor and other agreements, suspending our quarterly dividend, eliminating non-essential capital spending for the remainder of the year, and opening our properties in a phased approach to maximize flexibility in meeting demand. Through these actions, we will become a much leaner and efficient company and remain confident in our ability to permanently achieve the approximately $150 million in cost reductions on an annualized run rate basis we referenced in our previous earnings call. These cost reductions do not include any labor expense savings related to those properties that did not open as part of our first opening phase, nor do they include savings related to any amenities that were not initially provided in this phase. We estimate that those additional labor expense savings are approximately $200 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 again to be provided. Now let’s turn to our financial results. As you recall, on March 17th, 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. Similarly, the Graton Casino Resort, which is managed by the company, closed on March 17th. What originally began as a 30-day shutdown on March 17th here in Nevada ended 79 days later when the Governor of Nevada allowed certain non-essential businesses including casinos to open with restrictions on June 4th. The Graton Casino Resort also partially reopened on June 18th. On June 4th, we opened 16 of our 20 properties, Red Rock, Green Valley Ranch, Santa Fe Station, Boulder Station, Palace Station, Sunset Station, and our Wildfire properties. As we noted in our previous earnings call, 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 the same period. Our Texas Station, Fiesta Rancho, Fiesta Henderson, and Palms Casino Resort properties remain closed at this time. We will not consider reopening these properties since we fully assessed both the performance of our first open properties and the health of the economy as a whole. On a consolidated basis, reported net revenue of $108.5 million, down from $482.9 million in the prior quarter, adjusted EBITDA of negative $17.3 million, down from $115.2 million in the prior quarter, and our EBITDA margin decreased to negative 15.9% for the quarter. With respect to our Las Vegas operations, we reported net revenues of $101 million, down from $457.8 million in the prior quarter, adjusted EBITDA of negative $12.1 million, down from $106 million in the prior quarter, and our EBITDA margin decreased to negative 12% for the quarter. Within these numbers are a couple items we would like to call out. As you recall, we are one of only three companies in Las Vegas that continued to pay all of our full-time team members regular pay and health benefits from the March 17th shutdown date through May 16th at a cost to the company of over $72 million. Because of our commitment to our team members through this crisis, we were able to recognize an approximate $18.6 million payroll retention benefit in the quarter under the CARES Act, bringing the total payroll benefits received to date under the CARES Act to $38.3 million. Additionally, these numbers do not reflect approximately $27 million in payroll expenses in the quarter, which were accrued in the first quarter due to our commitment to provide regular pay and benefits to all full-time team members after quarter end from April 1st to April 30th. While the severe impact of COVID-19 can be seen in our quarterly results, the company’s Las Vegas performance during the open period from June 4th through June 30th tells a different and more positive story that reflects both the resilience of our local business model and the impact of the decisive actions the management team took during the closure. Measuring based on that period, adjusted EBITDA increased 46.8% to $45.9 million, an increase of $14.6 million. This increase was achieved despite net revenues declining 23.3% to $100.1 million, a decrease of $30.4 million. Margins in this period increased 2,192 basis points to 45.9%, yielding our highest June EBITDA margin ever. In addition, while we generally do not comment on our current quarter financial performance, we are pleased with our year-over-year performance in July. However, we would caution that we are still in the middle of this pandemic and have little visibility regarding the impacts this crisis will have on our company and the economy moving forward. I will now cover a few balance sheet and liquidity items. The company’s cash and cash equivalents at the end of the second quarter were $274.5 million and the total principal amount of debt outstanding at quarter end was $3.3 billion. As of July 31st, we have had $197.5 million drawn on our revolver and have over $1 billion in liquidity in the form of cash on hand and revolver availability. This provides us with the ability to operate fully staffed for over 20 months to return to a zero revenue environment. In addition, we believe we are 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 remain well-positioned financially to handle the uncertain times ahead. Finally, an update on two Native American agreements. At Graton Casino Resort, we reported management fee revenue for the second quarter of $5.9 million, a decrease of 75% over the prior year, driven primarily by the resort closure for the majority of the quarter. Additionally, we expect to reach an agreement with the tribe on an appropriate extension of term in accordance with the terms of the management agreement. With regard to North Fork, our plans to develop a casino for the North Fork Tribe have been stalled for the last several years by litigation brought by opponents of the project. The Supreme Court of California held an oral argument on June 2, 2020 in a very similar case involving the enterprise tribe. We are expecting a decision by month-end and are hopeful that the decision will clear the way to finally develop this very attractive project on behalf of the North Fork Tribe in Central California. This quarter has been one of the most challenging in our over 40-plus-year history. We believe that the company has responded well to each of these challenges and is well-positioned to succeed going forward. We would like to extend our thanks to all of our team members for their hard work and continued focus and to our guests for standing by us during these trying times. Together we will manage through this. Operator, this concludes our prepared remarks for today, and we are now ready to take questions from participants on the call.

Thank you. The first question today will come from Joe Greff with JP Morgan. Please go ahead.

Hi, guys. Lumer Sandara on for Joe. Thanks for taking our questions. First off, the $46 million EBITDA in Las Vegas in June, what’s in the closed properties do in terms of EBITDA drag? Were you able to manage it lower in July, and can 45% margins for the reopening of the properties sustain themselves in the current environment?

I will start with the easy point. The closed properties for June had a negative impact of about $1.4 million. We expect this to remain fairly consistent in July, but we believe we can reduce it by a couple of hundred thousand dollars moving forward. Concerning the sustainability of the margins, the team has done extensive work reevaluating and adjusting the business during the closure. Our cost structure is equipped to handle the uncertain revenue environment, so we are confident in our ability to achieve margins that exceed our historical averages.

Thanks. And then, can you discuss what you have seen in July in the locals market in terms of gaming patron behavior? How much is revenue per day down versus June levels? What are you seeing with July with respect to customer mix, which you've been holding up better since the end of June, young and older, and do you get a sense of the CARES stimulus driving this?

Sure. In July, we typically don't provide updates on the current quarter, but I can share that the trends from July have been largely in line with what we observed in June. We experienced a decrease in visitation, but an increase in spending per visit and more time spent on devices. Additionally, there's been an increase in the younger demographic in our database, along with an expected rise in the older demographic due to the current pandemic and people staying at home. This is encouraging as it presents a growth opportunity for when seniors start returning as the situation improves.

Okay. Thanks. And then just the last one for us, is there a market for assets to scale up prices that you can seriously accept or is it too early? And then, lastly, what’s the future of Palms?

I think it’s too early to assess right now. Right now, we have very little clarity on our current economic environment. And so, Palms is currently undecided whether we are going to open it.

Yeah. We don’t know if or when we are going to reopen any of the closed properties. We think it’s too early to make that decision at this time. So far we are very pleased with the results that we have had. The ability to move some of the play from the closed properties to our existing properties, and we are going to continue to try to get clarity and navigate the situation to make well-informed decisions. But rest assured, whatever decisions we make will be in the best interest of shareholder value.

Okay. Thanks so much.

Thanks.

And the next question will come from Barry Jonas with Truist Securities. Please go ahead.

Hey. Thank you. First off, I just want to extend my condolences for your loss. So, I guess, the first question is, I appreciate some of the color on trends you are seeing, but is it possible to give any sense of what the drive to business maybe from California is looking like right now and any color on group? Is group pretty much non-existent? Just we would like to get one more layer down into how your segments are doing?

I think…

I think if you look at our short-haul traffic coming into Vegas, that is down, but not nearly as significantly as longer-haul business. Group business, convention business, things of that nature, are down much more significantly. I don’t know if you want to add to that, Steve?

No. I think, Frank, you are spot on in terms of how you delineate between short-haul and long-haul. As for the group business, we are suffering from group as well. I think 2020 and the beginning of 2021 will be tough sledding.

I think one important thing for people to notice is really the difference in our business model. We are primarily a gaming company that happens to have hotel, catering, and convention business as an amenity. Primarily, 80% of our business comes from the casino, so we are able to have the results like we did in the short-term without the benefit of strong hotel, catering, and conventions that hopefully will return as we get the COVID crisis under control. Our primary business is really suburban Las Vegas local business that’s in close proximity to our facilities.

Great. And I guess which of that in Nevada has closed as far as I am wondering if you have seen any tailwinds or just any impact from those closures?

It’s definitely not helpful. We have about 650 bar machines in the company in Las Vegas, all of which have been closed. We look forward to the ability to get those open as soon as possible. This is kind of an ebb and flow thing with changing requirements, whether it be at the pools, whether it be at the bars, whether it be that you have to wear a mask or you don’t have to wear a mask. Every day is about trying to navigate through a new set of circumstances, and I think our team has done a very good job so far.

Got it. And then last, just touching on the promo environment, is it fair to say that it is pretty rational? Folks are just more focused on margins at this point, or are you seeing anything heat up amongst the competition?

I think it is a very unique situation where every operator has found themselves in the exact same situation, which is that we have a lot of unknowns from the lack of visibility. As focus is made, everyone has focused on what really matters in the business. I can tell you for us, we took that 79 days or 80 days that we were closed and we probably worked more hours and longer hours just trying to unpack and really go through and think through what was meaningful in our business and what were things that were maybe just taking a lot of time and not creating a lot of results. Whether it be at the corporate level or how much labor we need or what amenities really drive the profits at the facilities, it’s led us back to where we really started in this business. Every survey you have ever done for Las Vegas local since we started in 1976 hasn’t really changed. It’s all about convenience, the value proposition, and the relationships that are important today. Sometimes we may have over-complicated it a bit too much, but I think we are definitely back to the basics. I think we have a lot of good things going for us. We have the best properties, we have the best distribution in the valley, and our properties are built for local business with great ingress and egress.

That’s great. Thank you so much, guys.

And the next question will come from Chad Beynon with Macquarie. Please go ahead.

Hi. Good afternoon. Thanks for taking my question. I wanted to dive into another metric for June. Could you see any major difference in terms of weekday versus weekend compared to what you have seen pre-COVID as you run the business, and do you think margins may have been elevated compared to prior weekday periods just because of extra traffic? Thank you.

We have seen some subtle changes in some of the traffic patterns. Most notably, Saturday, which is normally one of our busiest days has been slightly down. We believe that’s due to the COVID crisis and you are seeing a lot of that same traffic return during the midweek or Sunday. So the people coming back are choosing to stay there and spending their time and visits throughout the week.

Okay. And then from a CapEx standpoint, I don’t know if you have an updated view. Is there a new level of maintenance that we should be thinking about just to run the business? I know you have suspended all projects and really most of the maintenance CapEx, but should we think about something coming back now that your business is back to a new normal rate?

Yeah. So just to give you an update on Q2, we spent approximately $10.5 million in Q2. We still expect to be in that $50 million to $60 million CapEx range. We think around $60 million is a good number going forward for maintenance CapEx.

And I think the fact is we have maintained the properties very well. They are all in great shape. I think we still have a lot of unknowns in front of us relative to the COVID crisis and what the future is going to look like. We are going to be very diligent on any CapEx that we spend until we have more clarity.

Thank you both very much and I will pass along my condolences as well.

Thank you. Thanks.

The next question will come from Jared Shojaian with Wolfe Research. Please go ahead.

Hi. Good afternoon, everyone. Thanks for taking my question. Just going back to the $150 million of potential longer-term run rate savings, can you parse that out and help us understand what some of the biggest items are that are in there? And I guess what will be different about the operating model once we are through this pandemic that allows you to keep those costs out of the business? And do you worry about any risk of impairing the overall consumer experience?

I can…

We don’t worry about the consumer experience. I think one thing that you have to look at is that we have made significant reductions at the corporate office level, which I don’t think will affect the guest experience in any way whatsoever. Again, it’s easier to reach in the car when it’s not going 80 miles an hour down the road and we had close to three months to really focus on every aspect and challenge everyone as to what we can live with and what we can live without. Unfortunately, we have a lot of amenities that I don’t know if they will return. They were amenities that may have generated a lot of traffic but not necessarily high-margin business. We have closed properties, and we have been able to move a good portion of those revenues to some of our other facilities. I can’t predict the future, but what we have seen so far doesn’t impact the customer experience. We spend a significant amount of time and energy on health, safety, testing, and customer convenience through thermal camera scanners at all the entrances and everything. I think the customer experience is great. Our team members have done a great job and hopefully we can move forward to operate the business more efficiently. Our team member headcount today is about 50% of what it was going into this crisis. It’s forced us to really challenge and rethink everything we do.

Got it. Thank you. And then other regional operators have talked about a new and younger customer that’s driving some of the performance right now. My question is, are you seeing that in the locals market here as well, and do you have an estimate for what percentage of your guests are employed by the Vegas Strip in some form?

Look, a healthy Las Vegas Strip is super important to a long-term healthy Las Vegas economy. That being said, we have seen a very strong housing market here in Las Vegas. I think you have a lot of migration out of other states to a place like Nevada where it’s more affordable in terms of housing and cost of living. The retirement community here is growing at double the rate of the regular population growth in Las Vegas. We are still seeing population growth, I can’t tell you exactly what percentage of our business is employed by the gaming industry, but we do have a substantial retiree customer base. We have seen a significant increase in the younger demographic in our business, which we are very focused on relationship marketing, capturing the information, and being able to continue to market to them. At the same time, we have seen a decline in the older guests who are more concerned about the COVID virus. I don’t know what the future brings, but if we can retain some of these younger people who are coming into our facilities and get the COVID virus under control so our older demographic feels comfortable returning, it could be very beneficial for us.

Okay. Thank you very much, and my condolences as well for your loss.

Thank you.

And the next question will come from John DeCree with Union Gaming. Please go ahead.

Hi, everyone. Thank you for taking my questions. Like everyone else, I think my sympathies and condolences, I know Rich was a dear friend and valued colleague to all of us and you as well, and just very, very tragic, so my sympathies. Question, I know you have touched on it a little bit already and there have only been a few weeks of operation to really look at, but we are kind of grasping at consumer behavior so far. I am not sure if I’d missed it in the prepared remarks, but is there any commentary or color you could provide on some of the typical metrics what you are seeing in rated versus unrated play realizing so much of your plays local and rated? Any bifurcation there? With limited perhaps entertainment options such as bars, are you seeing an increase in new customer sign-ups or anything that might kind of give us a little bit more insight on consumer behavior so far in the first couple of weeks since reopening?

I will tell you anecdotally, if we go back to what we were just talking about, pre-COVID, a big part of our database in carded play was from an older demographic, retirees, and things like that, and they really are staying home at this point with their concerns over the virus. We have had a significant increase in the younger uncarded demographic, and our focus is basically to convert that uncarded younger play into carded play.

And perhaps a follow-up, I mean, I think, from what you have said so far, we could extrapolate, but to ask directly, is the amount of visitation from your carded customers down, but maybe their spend per visit is healthy when they come, or how has that been playing out?

Yes. John, the short answer to your question is, yes. You are seeing visitation down, spend up, and spends offsetting the visitation.

Thanks very much for taking my questions, guys.

At this time, there are no further questions in the question queue. I would like to turn it back over to management for any closing remarks.

Yeah. Thank you everyone for joining us on the call, and we look forward to talking to you in 90 days.

Thank you. This concludes today’s conference, and I would like to encourage everyone to disconnect at this time.