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spk01: Good afternoon, and welcome to Red Rock Resort's second quarter 2021 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.
spk06: Thank you, Operator, and good afternoon, everyone. Thank you for joining us today for Red Rock Resort's second quarter 2021 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 and Form 8-K, which were filed this afternoon prior to the call. Also, please note this call is being recorded. Before we get started, I'd like to note that we will be comparing our 2021 second quarter results against our 2019 second quarter results. Given that our properties were closed for a portion of 2020 second quarter due to the COVID-19 pandemic, we believe that this financial comparison provides clear insight into our performance this past quarter. Please also note that in 2019, we had all 10 of our large properties open, whereas in the second quarter, only six of the 10 were operating. Now let's take a look at our second quarter results. On a consolidated basis, our second quarter net revenue was 428.2 million, down 11.3% from 482.9 million in the second quarter of 2019. Our adjusted EBITDA was 210.2 million, up 82.4% from 115.2 million in the second quarter of 2019. Our adjusted EBITDA margin was 49.1% for the quarter, an increase of 2,522 basis points, from the second quarter of 2019 and up 466 basis points from the first quarter of 2021. With respect to our Las Vegas operations, excluding the impact of our foreclosed properties, our second quarter net revenue was $420.7 million, up 32.1% from $318.5 million in the second quarter of 2019. Our adjusted EBITDA was $224.8 million, up 108.7% from $107.7 million in the second quarter of 2019. Our adjusted EBITDA margin was 53.4%, an increase of 1,964 basis points from the second quarter of 2019 and up 450 basis points from the first quarter of 2021. On the same store sales basis, we achieved the highest net revenues, highest adjusted EBITDA, and highest adjusted EBITDA margin in the history of our company. During the quarter, we continue to prioritize free cash flow, converting 72% of our adjusted EBITDA to operating free cash flow, generating $150.1 million, or $1.29 per share. This brings cumulative free cash flow generated by the companies since our June 2020 reopening to the end of the second quarter to almost $500 million, or $4.28 per share, with virtually every dollar being returned to our stakeholders. Taking a look behind the numbers, the overall customer trends we saw in the second quarter were consistent with the trends we've seen since our reopening in June 2020. We continue to see strong and consistent visitation from our younger demographic, increased spend per visit, more time spent on device, plus the continued return of our core customer. And as the government mandated capacity restrictions rolled off during the quarter, we begin to see the return of our non-gaining segments as both hotel and food and beverage revenue ex-buffet has returned to pre-COVID levels. Our sales and catering business continues to ramp up as we continue to build out our book of business in the back half of this year into 2022. These trends were all positively impacted by the continued role of the COVID-19 vaccination program, the removal of capacity restrictions for Clark County on June 1st, and federal stimulus money. These positive trends were offset by approximately 3.2 million of COVID-19 mitigation costs for the quarter and approximately 2.2 million in carry costs associated with our closed properties for the quarter. On the expense side, we continue to expect to achieve approximately $200 million per annum of cost savings compared to our pre-pandemic cost structure. The company continues to benefit from the actions we took to streamline our business, optimize our marketing initiatives, and renegotiate a number of vendor and third-party agreements. These initiatives, along with maintaining a disciplined operational focus, have enabled the company to achieve and sustain higher profitability and drive more free cash flow. Now let's cover a few balance sheet and capital items. Companies cash and cash equivalents at the end of the second quarter were $91 million and total principal amount of debt outstanding at quarter end was 2.72 billion. In the second quarter, we paid down 150.5 million in debt and since the end of the second quarter, we've paid down an additional 31 million which represents the repayment of all drawings under our revolving credit facility. Since our June 2020 reopening, we have reduced our net debt levels by approximately 518.8 million from a peak level of 3.1 billion. David Wiltshire- Capital spent in the second quarter was 12.1 million as mentioned in our previous earnings call we anticipate our 2021 maintenance capital spend to be between 65 and $75 million. David Wiltshire- Also during the second quarter, we had a tax distribution of approximately 55.8 million to the LLC unit holders of station whole call which include conclude the distribution of approximately 32 million to Red Rock resorts. The company elected to use 26.6 million of its distribution to purchase slightly over 682,000 Class A shares at an average price of $38.92 per share under its previously disclosed 150 million share repurchase program. When combined with our debt repayment, we've returned 177.1 million to our stakeholders during the second quarter. With a huge reduction in our net debt level over the past year, we are well on our way to having one of the most solid balance sheets in the industry. which gives us the ability to focus on longer-term growth opportunities as well as consider additional ways of returning capital to our stakeholders as we move forward. Now let's provide a short update on the development pipeline. Starting with our Durango development, we are extremely excited about this project, which is situated on a 71-acre parcel ideally located off of 215 Expressway and Durango Drive in southwest Las Vegas Valley. The project is located in the fastest growing area in the Las Vegas Valley, and there are no unrestricted gaming competitors within a five-mile radius of the project site. We are working through the planning and budgeting phases of this project with the goal and expectation to have a shovel in the ground in the first quarter of 2022. Once the project is started, we anticipate construction will take approximately 18 to 24 months. When complete, the project will include over 100,000 square feet of casino space with over 2,000 slots and 40 table games, a state-of-the-art sportsbook, over 200 hotel rooms and sweet product, and four full-service food and beverage outlets. Now turning to North Fork, as you may know, not long after our last earnings call, the tribe received an unfavorable decision from the same California State Appellate Court that had earlier ruled against North Fork and the State of California, a decision which in August 2020, the California Supreme Court had effectively reversed and remanded to the lower court with the instructions to reconsider its prior decision against the tribe. We believe that this lower court decision contravened the California Supreme Court's instruction as well as California law. Both the tribe and the state of California have already filed and completed the briefing on their separate petitions for review with the California Supreme Court. We expect to hear whether these petitions will be granted in the next five to nine weeks. In the meantime, we've continued to progress our efforts with respect to this very attractive project, including the development and design and initial talk to the prospective lending partner. we expect to be in a position to provide an update at or prior to our next quarterly earnings call. Lastly, and as previously disclosed on prior earnings call, on May 3rd, we entered into a definitive agreement to sell the Palms Casino Resort and Palms Place for an aggregate price of $650 million in cash to the affiliate of the San Manuel Band of Mission Indians. The closing of this transaction is subject to customary closing commissions, including regulatory approvals, and is expected to be completed before the end of the year. In conclusion, as government mandated restrictions fell away and more of our population became vaccinated, this last quarter we saw the continued return of our core customer while continuing to retain our share of the younger customer demographic. A significant pent-up leisure demand led the company to historic revenues. This, coupled with our disciplined operating approach to running our business, allowed the company to enjoy record high EBITDA, EBITDA margin, and free cash flow conversion. While we are happy with these results for the quarter, our primary focus continues to be the health and safety and well-being of our team members and guests. On both counts, we continue to believe that even brighter days are ahead. With our best-in-class assets and locations, unparalleled distribution and scale, and our own pipeline of six strategically located gaming and title properties, we believe that we are uniquely positioned to capitalize on the very favorable long-term demographic trends and high barriers to entry that characterize the Las Vegas locals market. Lastly, we'd like to recognize and extend our thanks again to all of our team members for their hard work and for their support us and to our guests for their support throughout this pandemic. Operator, this concludes the prepared remarks for today. We're now ready to take questions from participants on the call.
spk01: We will now begin the question and answer session. To ask a question, you may press star, then 1 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 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Joe Greff with J.P. Morgan. Please go ahead.
spk09: Good afternoon, guys. Great, great results here. Given that the locals market is in this great scenario where demand is accelerating and you know, capacity, you know, has gone the other way. Maybe, Frankie, if you can give us an update on how you're thinking of some of these closed properties, the three properties that are closed, you know, how you're thinking about potentially layering them on reopening then. And then if you are thinking of opening one of the three, how challenging is it right now to find staff and just labor at your presently open properties as revenue keeps coming back?
spk04: Phil Kleisler- What the labor market is more challenging that it had been pre coven but we got well ahead of the market in terms of wanting to be the preferred employer. Phil Kleisler- In the Las Vegas locals market and get ahead of what we saw coming with resorts world. So we also kept all of our employees on during the crisis. So it's put us in a better position. Phil Kleisler- Then, if we would have closed the properties and and had to reopen them. so overall we've done very good and we haven't had any problems having all of the amenities you know open um seven days a week um that's been good i think we continue to evaluate you know these closed properties we've come to no conclusion at this point in time the the if and or when which property we would open um our primary focus right now has really been on durango which we think is a great development opportunity in the most underserved part of the Las Vegas Valley. So that's really where our primary focus has been, but we'll continue to evaluate, you know, the three properties that are closed and if and when we think they can add to the absolute profitability of the company going forward.
spk09: And Frank, just adding on to your comment about Durango, I didn't hear a Project CapEx number there, so obviously, maybe you're not prepared to disclose it. What's holding back on finalizing that estimate internally? Is it bringing in partners? Is it monetizing part of that 71-acre parcel to a partner? Is it monetizing other land bank or other parcels to net that cost down? I guess, what's sort of the gating issue?
spk06: I mean, Joe, I think I'll break that up into two pieces. The first, I think, is pretty straightforward. We're going through the budgeting and planning process right now, so we're going through detailed design drawings, completing those drawings, and getting them out to our construction partners who are waiting to finalize bids.
spk04: We want to come to you guys with the right number. We want to get bids and GMPs and understand where we are. I think we'll be there by hopefully the next earnings call. Exactly.
spk06: And I think the second piece, I think you touched on it, The 781-acre parcel of land, we do believe there's an opportunity to parse off a portion of that land and look for development partners to help and help net that cost down. Great.
spk09: Thanks, guys. Good work.
spk01: The next question comes from Carlos Santorelli with Deutsche Bank. Please go ahead.
spk08: Hey, guys. Good afternoon. Thank you. obviously, you know, Steve and Frank, when you guys look at kind of the free cash flow the business is throwing off right now and you kind of extrapolate out to the end of this year, Steve's coming in or whatever it will look like, something like sometimes. At what point do you think you take a more firm view beyond kind of the pay for for Durango and whatever that proves to be And, you know, perhaps start a capital return strategy. And how do you guys kind of think about, you know, put some buyback here?
spk04: You broke up a little bit, but you were breaking up a little bit. But I think your question was relative to start thinking about other ways to return capital to shareholders. Is that what it was? Yeah.
spk08: Yeah. Sorry. I was just, I was noting that kind of at your end leverage looks like it'll be around two times and with the free cashflow you're throwing off, obviously Durango will be able to be built and you'll probably have some optionality as well. So just kind of, how do you think about that?
spk04: Yeah. So I'll let, you know, I'll say a few words and I'll let Steve and Lorenzo add in if they want to. Going forward, I think we want to have a more conservative balance sheet. Um, we want to have flexibility in the company. to be able to take advantage of all of these high-return development opportunities that we have in the Las Vegas market, which we think is the best gaming market in the United States. And then we also want to have the ability to take a balanced approach to paying down debt, buying back stock, and paying dividends. We want to have a balanced approach. I don't know, Lorenzo, if you have anything to add.
spk05: No, that's it.
spk08: Thank you, guys.
spk01: The next question comes from Barry Jonas with Truist Securities. Please go ahead.
spk07: Oh, great. Thank you. Maybe to start, can we get your thoughts on the new indoor mask mandate in Nevada? We'd love to get your perspective on what kind of impact that could potentially have on your business.
spk05: You know, obviously it's hard to predict. the effect that it's going to have. Anytime that you see, you know, new headlines and people talking about COVID or COVID restrictions, it's certainly not a positive.
spk04: Although the last 12 months we did navigate a lot of mandates.
spk05: As you say, we navigated some much more difficult situations than we currently have in front of us here. And I will say that when the mask mandate came off, which I think was early June, we didn't really see any change in our business, meaning there was no significant upside when people didn't have masks or didn't have to wear masks. So, you know, I can say that our employees obviously have all complied without any issues. And, you know, in Q1 and part of Q2 where customers were wearing masks, there didn't seem to be an issue there either. But, We'll have to wait and see how that plays out.
spk06: If there is an impact, it's most likely short-term, right? In long-term, we still feel very strongly about the long-term favorable trends in Las Vegas, as well as the strength of our platform.
spk05: We're feeling the positive trends in the growth in the population. Particularly, we're seeing a lot of new faces and growth in our VIP and higher-end segments. We've seen growth on Q2 over Q1, even in our younger segmentation. So general trajectory of those areas have been positive to us and we're seeing the effects of the overall supply-demand dynamics that we've been talking about for decades now.
spk04: I think minus the mask and the new cycle of the Delta variant and all the business, it feels very good. And I think we have no crystal ball in terms of short-term revenue, but I can tell you from a long-term perspective, We think that we have the best locations in the best gaming market and control six great development sites in the market. So we're pretty bullish on the long-term viability of the platform.
spk07: That's incredibly helpful. Maybe just tackling that in a more direct way, another outstanding quarter EBITDA margins in Vegas record levels. Just curious to get your thoughts on whether these levels are sustainable.
spk04: I think that we believe that the margins can be sustained within the zip code that we're in. Quarter to quarter, you may have a little variation of a few hundred basis points one way or the other. We think the cost side of the business has made a permanent shift. And then it really is dependent on where the revenues come from. And every incremental dollar that we get through an existing property, the flow through is extremely high. So I don't know if you guys have anything to add to that.
spk06: No, you still got, I mean, some margin enhancing items coming down the pipe, right? We're still bearing about 3.2 million of COVID costs. We've got 3.6 million inclusive of the palms, 1.4 million of, of closed company costs. Um, we're just starting and we're still the sales and catering businesses while building up are still lagging as well as the theater businesses. So we expect those high margin businesses to contribute positively. And I think, as we touched on earlier, we've opened up all of our amenities June 4th, with the exception of the buffet, which we don't think will ever open again. So every dollar of incremental volume, as Frank said, should have a positive impact, given we're already carrying the fixed cost of those amenities.
spk05: Yeah, that's why we're pretty confident on the margins going forward. We don't see any other business lines that are not already online that would be coming online that would be taking away from margins. Only areas that could potentially
spk07: where they are now great apologies just one quick follow-up if 50 to 70 percent flow through was historically what you guys guided are we structurally like at the higher end or even beyond that now yes it depends where the revenue is coming from obviously if it's from slots it's going to be at a much higher rate you know if it's from food and beverage it'll be lower than that so helpful thank you so much guys and congrats on a great quarter Thank you.
spk01: The next question is from Sean Kelly with Bank of America. Please go ahead.
spk00: Hey, good afternoon, everyone. You know, maybe keeping along with the last comment, I just wanted to get a little bit more color on some of these amenities that were, you know, I guess when we started the second quarter, not fully online but definitely reopened, you know, once you were allowed to in June. Could you just give us any sense of, you know, either how quickly some of those are coming back, be it on the hotel side, the theater side, the convention side. Did those go from zero to 100, or do we have room for some of those to ramp sequentially as we move through the third and fourth quarters, even from what we saw in Q2 on a revenue basis?
spk06: I mean, to start with theaters, theaters just really ramped up in May when you had – you're just starting to get a film slate, which has really been the big item that's held them back. The theaters are ramping, but they're ramping up slowly, Sean, so – We expect there's a lot of room to run in the tiers going forward. And sales and catering, same thing. While we're building up a big business, building up that book takes some time. So we're seeing on the social side, most likely in the back half of this year. And then the group business is starting to come back in 22 and 23. In terms of the other amenities, the hotel business, as I mentioned in the remarks, the hotel has really snapped back. um, very well. So I think we have, there's, you know, we're getting our rate back rate back as pre, you know, pre at pre COVID levels, giving this for this quarter, um, we're slightly behind occupancy. So there is a lot of room to run in terms of filling the rooms. I think that goes hand in hand with the sales, you know, the sales and group business, because we really do need that midweek room to kind of boost that occupancy.
spk00: And maybe one other high level and you've covered plenty of ground on the call, but I would say, um, If we rewind the kind of history lesson here, there was a time back last cycle, and there were probably parts of the good times where you'd get compression or spillover from the strip. Do you see that on weekends at some of your core properties? Let's say whether it's Green Valley or Red Rock. Are you seeing that? Are you seeing it on weekends? Can you just describe a little bit about that environment or that fact, and where do you expect it to go from here?
spk05: I would say that a couple of things. One, Mr. Lorenzo, we have taken, we have been less reliant upon what the Strip has done recently, meaning we have kind of set our own tone and our own sales rate and relative to, you know, rates that we're publishing and that we're able to get. And again, the casino segment has been higher than it ever was really historically, and the OTA segment has been lower. So we're kind of getting a nice double whammy there where we're getting, you know, a nice rate, and we think getting a better customer in our rooms as well.
spk00: Thank you very much.
spk01: The next question is from Chad Baynon with Macquarie. Please go ahead.
spk03: Hi, good afternoon. Thanks for taking my question, and congrats on the quarter. Given some record cap rates that we've seen, particularly in southern Nevada, has anything changed in terms of your thoughts around owning all of your assets versus selling a rent stream at near record multiples?
spk05: I don't think anything's changed. I mean, certainly we take notice of some of the cap rates and we like it. You know, we think the fact that we own all of our real estate continues to be a very compelling investment opportunity for people who want to own our name. We're one of the few companies left that, you know, provides that structure that's completely intact. And I don't know, me and Frank as large shareholders kind of like owning the real estate over the long haul. So that's where we think the value is.
spk06: But it's good. I think, Chad, I think it's good to know that you're right. We're at near record cap rates. And it seems that since the birth of the gaming REIT several years ago, every quarter has been near record cap rates.
spk04: So it's benefited us from waiting because it seems like we like the fact that we own the real estate and we also own the upside as Las Vegas market continues to grow on the upside. So we like having both. Great.
spk03: Thanks. And then just in terms of seasonality, normally Q3 in the Valley, people start to head out of town for vacation, and I think seasonally it comes down by about 3% or 4% on a sequential basis. I know you're not giving guidance for the back half of the year, but do you expect normal seasonality to kind of set in, or do you think this year could be a little bit more pronounced given the the lack of vacations people were taking and now they might be out of town more this year than in prior periods.
spk06: We think it's going to be about the same, but it's tough to tell. That's one where we don't have a crystal ball in terms of what our guests are going to be doing.
spk03: Okay. Thank you very much.
spk01: The next question is from John DeCree with CBRE. Please go ahead.
spk02: Good afternoon, everyone. Thanks for taking my questions. Just two, perhaps, on the database and customer segmentation. Over the past three or six months, have you seen a significant increase in new customer signups? I guess, how has your database growth trend been recently through the reopening compared to maybe historical pre-COVID
spk06: From a new sign-up perspective, it's been not only just extremely – we've done extremely well. We've focused on this from an operations standpoint. It's up – you quarter the quarter as well as, let's call it, now based on pre-COVID levels, not just in terms of the number of new sign-ups but how active they are with the card. So when they get a card, more of them are using it immediately, and then when they use it, they're much more valuable to the casino.
spk02: Yeah, that's helpful. And, Steve, I think in your prepared remarks, you mentioned that the older customer segment had started to come back more meaningful. Could you give us a sense of, you know, how close to normal that customer segment has returned, perhaps exiting the quarter, and how much more room there could be ahead?
spk06: That's, I mean, a good question. We've made a headway not only just across the older demographic, but all, you know, all eight segments. You know, from a customer standpoint, probably 55 to 65% of our customers have returned, but our most vying customers have returned. So there is still wood to chop on bringing our older customers back.
spk02: Got it. Thanks for the additional color and congratulations on the quarter, guys. Thank you.
spk01: This concludes our question and answer session. I would like to turn the conference back over to Stephen Coote for any closing remarks.
spk06: I'd like to thank you for taking the time to join our call, and we look forward to talking to you next quarter. Thank you very much.
spk01: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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