Red Rock Resorts, Inc.

Good afternoon and welcome to Red Rock Resorts' fourth 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 Coote, 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 on Red Rock Resorts' fourth quarter and full year 2020 earnings calls. 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 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 and Form 8-K, which were filed this afternoon prior to the call. Also, please note that this call is being recorded. Before discussing our financial results, we would like to take a moment to thank all of our team members who helped the company through a very challenging year. Over the past 40 years, we have always understood that our most important asset is our team members, and 2020 only exemplified their importance to both our organization and our customers. And because of this, we continue to roll out our Focus on Family initiative to all of our team members to recognize the contribution that every team member has made to the company. A few highlights of what we've accomplished to date. We paid team members 100% of pay throughout the closure, including full medical, dental, and vision. Offered free medical, dental, and health benefits to all of our team members, making less than $100,000 per year. Opened two medical centers with free office visits, free generic prescriptions, and lab services for team members and their families. Implemented pay for performance and competitive pay rate adjustments, totaling approximately $10 million. which will positively impact the vast majority of our team members. And lastly, contributed over 8.6 million to our team members 401k retirement program. These initiatives, together with a number of other positive changes, were designed to enhance the long-term health, well-being, and financial security of our team members and their families, as well as give us the ability to retain and recruit the best team members and make Red Rock Resorts the employer of choice in the Las Vegas Valley. With that, let's take a look at our fourth quarter results. On a consolidated basis, reported net revenues of $343.4 million, down from $460.8 million in the prior fourth quarter, adjusted EBITDA of $150.5 million, up 9.4% from $137.6 million in the prior fourth quarter, and adjusted EBITDA margin increase to 1,397 basis points to 43.8% for the quarter. With respect to our Las Vegas operations, we reported net revenues of $316.2 million down from $437.9 million in the prior fourth quarter, adjusted EBITDA of $137.1 million up 5.5% from $129.9 million in the prior fourth quarter, and our adjusted EBITDA margin increased 1,368 basis points to 43.4% for the quarter. When reviewing our fourth quarter Las Vegas performance on a same-store basis, which excludes our four closed properties, Texas Station, Fiesta Rancho, Fiesta Henderson, and Palms Casino Resort, we reported net revenues of $311.8 million down from $328.7 million in the prior fourth quarter, adjusted EBITDA of $142 million up 16% from $122.4 million in the prior fourth quarter, and our adjusted EBITDA margin increased 832 basis points to 45.5% for the quarter. On a same-store sales basis, both adjusted EBITDA and EBITDA margin represented our best fourth quarter performance in the history of our operations. Now let's turn to our full-year performance, which was severely impacted by the 79-day statewide shutdown of all non-essential businesses, including casinos, in an effort to reduce the spread of COVID-19, a business which followed and continued through today. On a consolidated basis, we reported net revenue of 1.2 billion down from 1.9 billion in the prior year, adjusted EBITDA of 368.5 million down from 509 million in the prior year, and our adjusted EBITDA margin increased 375 basis points to 31.2% for the year. With respect to our Las Vegas operations, we reported net revenues of 1.1 billion down from 1.8 billion in the prior year, adjusted EBITDA of $335.1 million down from $472 million in the prior year, and our adjusted EBITDA margin increased 373 basis points to 30.6% for the year. During the quarter, we continued to prioritize free cash flow, converting 76% of our adjusted EBITDA to free cash flow, generating $114.7 million of free cash flow or $0.98 per share in the fourth quarter. This brings total free cash flow generated by the company from June through year end to $259.1 million, or $2.21 per share, with virtually every dollar going to pay down debt and improve our financial flexibility as we look to emerge from the pandemic. Taking a look behind the numbers, we saw a strong October followed by a seasonally slower November and December, which was further hampered by both the typical election year slowdown and by the implementation of 25% capacity restrictions by the government in an attempt to slow the spread of COVID-19. Despite these additional headwinds, the overall customer trends we saw in the fourth quarter were consistent with trends we've seen since our reopening in June as we continue to see strong visitation from a younger demographic, increased spend per visit, more time spent on device, plus the slow but steady return of our core customer. These trends continue to be offset by higher COVID mitigation costs, carry costs associated with our closed properties, and the continued government-mandated restrictions on our business. While we are hoping that the worst of the pandemic is behind us, we expect these offsetting factors to exist at least over the short term as we continue to navigate an uncertain Las Vegas economy moving forward. On the expense side, the company continues to benefit from the actions the management team took during the closure and since our reopening. Through the combination of streamlining our business, optimizing our marketing initiatives, and renegotiating a number of our vendor and third-party agreements, we continue to expect to achieve over $150 million per annum of cost efficiencies as referenced in prior earnings calls. These initiatives have enabled the company to achieve and sustain higher profitability and drive more free cash flow generation going forward. In this respect, we are stronger as a company than ever before. Now let's cover a few balance sheet and capital items. The company's cash and cash equivalents at the end of the fourth quarter were $121.2 million, and the total amount of debt outstanding at quarter end was $2.9 billion. In the fourth quarter, we paid down $102.4 million, and since our reopening in June, we have reduced our net debt levels by almost $260 million from a peak level of $3.1 billion. Since the close of our fourth quarter, the company's consolidated subsidiary, Station Casino, has issued a conditional notice of partial redemption 5% senior notes due 2025. The company anticipates that $250 million in principal amount of senior notes will be redeemed. The company intends to use cash on hand and borrowings under its credit facility to pay for the redemption premium, accrued and unpaid interest in any fees or expenses related to the redemption. The transaction is expected to close on Monday, February 22nd and is expected to save the company approximately $10 million per annum to the life of the senior notes. while further deleveraging the balance sheet and increasing our financial flexibility. Capital spent in the fourth quarter was $5.1 million, bringing our total 2020 capital spend to $58.5 million. As mentioned on our previous earnings call, we anticipate our 2021 capital budget to be between $65 and $75 million. Finally, an update on our two Native American gaming projects. At Grayton Casino Resort, we reported management fees for the fourth quarter of $24.8 million, an increase of 24.9% from $19.9 million in the fourth quarter of 2020. We ceased managing at Grayton on February 5th, seven years and three months after it originally opened. We are very grateful to have had the opportunity to manage at Grayton, and we're very proud of how successfully the facilities performed under our management. As we have noted before, we believe the tolling positions in the management agreement, which were triggered as a result of the pandemic, should have resulted in an extended management term even beyond February 5th, and we have initiated the dispute resolution mechanism in the management agreement to resolve this question. Regarding North Fork, based on the favorable California Supreme Court decision reported last quarter, we have continued to ramp up our development efforts on this project and continue to expect to have a shovel in the ground in the second quarter of 2021, with construction expected to take 15 to 18 months. We are continuing to work through the planning and budgeting phases of the project, and when complete, we expect this project to be over 213,000 square feet, including almost 100,000 square feet of casino space, initially include 2,000 class three slots and 40 table games, and two standalone restaurants, as well as a food hall concept. We are excited to begin the development of this very attractive project on behalf of the North Fork Tribe, and we'll be providing more detail once available. While Las Vegas has been and continues to be going through some very challenging times, there's finally a light at the end of the tunnel. Once we are on the other side, we believe that the favorable supply-demand dynamic, the positive long-term trends in population growth, and the stable regulatory environment all serve to support our long-term view that the Las Vegas local market is the most attractive gaming market in the United States. And with our best-in-class assets and locations, unparalleled distribution and scale, deep organic development pipeline, and our status as one of the few gaming companies that still owns all its real estate and operating assets. We remain uniquely positioned to thrive in this market. Lastly, we would like to recognize and extend our thanks again to all of our team members for their hard work and to our guests for their support throughout this pandemic. Operator, this concludes our prepared remarks today, and we are now ready to take questions from participants on the call.

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Joe Greff with JP Morgan. Please go ahead.