Red Rock Resorts, Inc.

Good afternoon and welcome to Red Rock Resorts' first quarter 2022 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 for Red Rock Resorts' first quarter 2022 earnings conference call. Joining me on the call today are Frank and Lorenzo Vertita, 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, Form 8K, and investor deck. which were filed this afternoon prior to the call. Also, please note this call is being recorded. Now let's take a look at our first quarter results. On a consolidated basis excluding great management fees, our first quarter net revenue was $401.6 million, up 16.6% from $344.5 million in the prior year's first quarter. Our adjusted EBITDA was $178.7 million, up 19.9% from $149 million in the prior year's first quarter. Our adjusted EBITDA margin was 44.5% for the quarter, an increase of 13 basis points from the first quarter of 2021. With respect to our Las Vegas operations, excluding the impact from our closed properties, our first quarter net revenue was $399.5 million, up 18.1% from $338.4 million in the prior year's first quarter. Our adjusted EBITDA was $196.7 million, up 18.8% from $165.6 million in the prior year's first quarter. Our adjusted EBITDA margin was 49.2%, an increase of 29 basis points from the first quarter of 2021. On the same store sale basis, we achieved the highest first quarter net revenue, adjusted EBITDA, and adjusted EBITDA margin in the history of our company. And this marks the seventh quarter in a row that the company has achieved record same store adjusted EBITDA and adjusted EBITDA margin. We continue to prioritize free cash flow, converting 75% of our adjusted EBITDA to operating free cash flow, generating $134.7 million, or $1.25 per share. During the quarter, we remained operationally disciplined and stayed focused on our core mid- to high-end local customers, as well as our regional out-of-town guests. This core strategy allowed us to generate record revenue and profitability with our gaming segment in the first quarter. While a combination of Omnicron and inflationary pressures offset By the lifting of the mask mandates across the state of Nevada on February 10th resulted in a quarter over quarter reduction in visitation. This trend was more than offset by increased time on device, as well as strong spend per visit across our entire portfolio, allowing the company to enjoy record profits within the segment. Moving forward, while we remain vigilant to these trends, we will continue to stay disciplined and focused on executing and investing in our core strategy, including offering new amenities to our guests, such as the VIP high limit table table room at our Red Rock property opening later this week. Turning to our non-gaming segments, we saw continued growth in food and beverage and hotel as both segments delivered one of their most profitable first quarter results ever. With regard to group sales and the catering business segments, the recovery of these business lines was further delayed by the impact of Omnicron in January. At this point, while we are seeing our lead pipeline grow, business has been pushed into the back half of 2022 and into 2023. And finally, as mentioned on prior earnings calls, financials are still carrying approximately $2.1 million in carry costs associated with our closed properties for the quarter. On the expense side, we remain operationally disciplined and continue to look for ways to become more efficient while providing best-in-class wages and benefits to our team members and delivering best-in-class customer service to our guests. The company's actions taken over the past eight quarters to streamline our business, optimize our marketing initiatives, and renegotiate a number of vendor and third-party agreements have have led to a significant transformation of our business, which resulted in same store revenue, which now exceeds 2019 pre-pandemic levels, higher adjusted EBITDA, higher adjusted EBITDA margin, strong pre-cash flow conversion, and the return of over $875 million in capital to our shareholders since we reopened in June of 2020. On the technology front, with regard to cashless gaming, we continue to roll out this product. We are now live at all of our properties, with the exception of our Wildfire Taverns and Sunset Station, which we expect to happen over the next two quarters. While the initial focus is introducing cashless payments on the slot floor, the ultimate goal is to allow our customers to play both cash and credit from one mobile digital wallet across all of our amenities at each of our Las Vegas properties. There will be more to come as we roll out this exciting product. Now let's cover a few balance sheet and capital items. The company's cash and cash equivalents at the end of the first quarter was $336.6 million. The total principal amount of debt outstanding at the quarter end was $2.8 billion, resulting in net debt of $2.55 billion. As of the end of the first quarter, the company's net debt to EBITDA and interest coverage ratios were 3.4 times and 8.1 times, respectively. Given our low leverage, low cost of capital, and no short-term debt maturities, Our best-in-class balance sheet will allow us to focus on executing on both our longer-term growth opportunities, including the development of our six owned strategically located gaming and title properties, as well as take a balanced approach to returning capital to our stakeholders as we move forward. Also, during the first quarter, we made a distribution of approximately $52.4 million to the LLC unit holders of Station Holco, which included a distribution of approximately $30.6 million to Red Rock Resorts. The company used the distribution to make its first quarter estimated tax payment, pay its previously declared dividend of 25 cents per Class A common share, as well as purchase approximately 185,000 Class A shares at an average price of $47.77 per share under its previously disclosed $300 million share repurchase program, of which we still have $146 million remaining to spend. This brings the total number of shares purchased under the program and under the tender we completed in the fourth quarter of 2021 to approximately 10.7 million Class A shares at an average price of $47.84 per share, reducing our share count at quarter end to approximately 107.5 million shares. When combined with our first quarter dividend, we returned approximately 36.4 million to our shareholders in the first quarter. Capital spent in the first quarter was 38.9 million, which included approximately 29.2 million in investment capital, inclusive of our Durango project, as well as $9.7 million in maintenance capital. For the full year 2022, we continue to expect to spend between $75 million and $100 million in maintenance capital and an additional $300 million to $400 million in growth capital inclusive of our Durango project. Now let's provide a short update on our development pipeline. Starting with our Durango development, as we've mentioned before, we are extremely excited about this project, which is situated on a 71-acre parcel ideally located of the 215 Expressway and the Durango Drive in the southwest Las Vegas Valley. The project is located within the fastest growing area in the Las Vegas Valley with a very favorable demographic profile and no unrestricted gaming competitors within the five mile radius of the project site. The project is progressing nicely and continues to remain on schedule with anticipated construction taking approximately 18 to 24 months. When complete, the project will include over 73,000 square feet of casino space with over 2,000 slots and 46 table games, over 200 hotel rooms and suite product, four full-service food and beverage outlets and a food hall with many exciting options, a state-of-the-art experiential race and sports book, and a resort-style pool. As mentioned on our prior earnings calls, we expect to spend approximately $750 million, which includes all design costs, construction hard and soft costs, pre-opening expenses, and any financing costs associated with the project. We are pleased to announce today that we have entered into a guaranteed maximum price contract for the project, under which approximately 70% of the total project costs are now under GMP. As the project stands now, approximately 72% of the project, including the purchase of long lead FF&E items, has been bid out. We will continue to execute on our early procurement strategy in a manner which seeks to minimize supply chain and inflation-related issues. As stated on previous calls, The company expects the return profile for this project to be consistent with past Greenfield projects within our portfolio. Turning now to North Fork, as we noted last quarter, after favorably resolving all of its other litigation, the tribe has only one pending case in the California courts. As we've also noted last quarter, we do not believe that any decision by a California state court could deprive North Fork of its ability to gain on its federal trust land. We continue to work with the tribe as we progress our efforts with respect to this very attractive project, including working toward the approval of a management agreement, continuing our work on the development design, and having preliminary talks with our prospective lending partners. We will continue to provide updates on our quarterly earnings call. Lastly, on May 3, 2022, the companies announced that its board of directors had declared a cash dividend of $0.25 per share payable for the second quarter of 2022. The dividend will be payable on June 30, 2022 to all shareholders of record as of the close of business on June 16, 2022. With our current best-in-class assets and locations coupled with our development pipeline of six owned gaming and title development sites and parcels located in the most desirable locations in the Las Vegas Valley, we have an unparalleled growth story that will allow us to double the size of our portfolio and position us to capitalize on the very favorable long-term demographic trends and the high barriers to entry that characterize the Las Vegas locals market. And while the quarter presented some headwinds, our disciplined approach to running our business coupled with our unparalleled distribution and scale allowed the company to enjoy record high EBITDA and EBITDA margin, and it's allowed the company to continue to execute on its long-term growth opportunities while continuing to return capital to our shareholders. Lastly, we'd like to recognize and extend our thanks to all of our team members for their hard work. We understand and appreciate that the guest experience starts with them and they are the ones that make our property so special. We would also like to add a special note of thanks to them for voting us top employer of the Las Vegas Valley for the second year in a row. And a special thanks goes out to all of our guests for their loyal support over the past 46 years. 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 your 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. The first question today comes from Joe Gref with JPMorgan. Please go ahead.

Good afternoon, everybody. Hi. Frank, you've been in the locals market for as long as there's been a developed locals market. What's your view on higher gas prices and that relationship to visitation and spend in the locals market? And do you think that relationship historically is what's playing out right now?

I think the market is much more dynamic than it has been historically. Even as we look at the demographics here in town and the people moving to town, we're seeing... much higher household income than we've seen in the past. And, you know, that has been a big focus of the company on player development, relationship marketing, and trying to cater to that end of the business. That being said, there's no doubt that inflation with, you know, food and groceries and even gasoline has an impact on the lowest segments in the database for sure. Got it.

Okay, it sounds like I may have cut somebody off or interrupted. Thank you. Can you talk about the older demographic? Are they performing differently, better sequentially, maybe particularly after masks were done away with in the middle of the quarter? And then also, too, I'm presuming you, like everybody else, have finished more strongly towards the end of the quarter than at the beginning in January with the Omicron impact. I was hoping if you can talk about sort of margins by month and sort of how you exited the quarter versus the blend of the quarter that you reported here today. And that's all for me.

I can touch on the older demographic. I mean, Joe, as you'd expect, the older demographic tends to be a little bit more conservative. But, you know, given that once the mask mandate was lifting, they are starting to come back. You know, we're still not all the way back from our, you know, pre-pandemic levels. But that said, that group, you know, any difference of Delta in that group being more than offset by the increase in the younger demographic as well as our traction we've gained in new signups. And then in terms of the margin question, you know, as we've talked, we don't give month-over-month guidance, but I think you're spot on in this. The trends as they moved on to January, which was Omicron-affected, the trends of the company improved both gaming and non-gaming as we moved from January to February to March. And as we're seeing in April, you're seeing trends that are very similar to what we saw in March, with the exception of the lower end, we're seeing a little bit more resilience now than the lower end we have before.

Great. Thank you, guys.

The next question comes from Carlo Santorelli with Deutsche Bank. Please go ahead.

Hey guys, thanks. Steve, I just wanted to clarify something. In your prepared remarks, you kind of mentioned some challenges that you had to work around in the first quarter. I'm assuming that was, that comment was isolated to kind of January and the variant and some of the impacts that that caused, or was there something else that kind of popped up?

No, Omicron, I think in January was the biggest hurdle we had. Okay.

Okay. And then just again, in response to something that you just mentioned, you talked about kind of the lower end, a little bit more resilience. Is there something that's changed in the lower end consumer that you were referring to?

No, I think what you saw, what we did see, and this is probably due to, there was a lot of stimulus rolling off. You had some inflationary pressures, as Frank mentioned earlier, even the higher gas prices, it's going to clearly affect the lower end of the database. And then last quarter, we did see some degradation and visitation on that lower end. But this was more than offset by the increased visitation in the mid- to high-end local customers as well as the regional and out-of-town guests, which is what allowed us to achieve record profits on the gaming side.

Great. And then just lastly for me, as you guys talked about earlier, some of the group and convention stuff or group business stuff. I'm assuming you're referring to your in-house group and stuff and the impact that that will have in the second half of this year in 23. As it pertains to some of the larger events that have started, albeit are stunted a little bit on the Strip, but have started, are you guys starting to see any changes in behavior from your customers or maybe customers who would be positively impacted by the trends of group convention business that's taking place on the Strip?

A little bit. Are you talking about the group business or customers on a whole? So, you know, from a group perspective, we are seeing positive traction, as I mentioned in the script. It was just slowed down dramatically by January. But once we passed January, the mask mandates were lifting. We're now seeing, you know, green shoots. And the bigger group business, i.e., when you think of the draft of the biggest events, could only help kind of restore that luster to Las Vegas. Great. Thank you, Steve.

The next question comes from Sean Kelly with Bank of America. Please go ahead.

Hi, good afternoon, everyone. Thanks for taking my question. Steve, just wondering if you'd give a little bit more color on the recovery and the non-gaming piece of the business. Obviously, some fits and starts there, but what are you seeing in maybe the theaters, some of the spending behavior out there, and specifically as some of the other entertainment options come back online as well, kind of what maybe are you seeing on spending or foot traffic? That'd be helpful.

Sure, I think it goes without saying that we're competing against all forms of entertainment, and that's been the case for quite some time now, and Vegas has been wide open since January of 21. So from a non-gaming perspective, as I mentioned during the script, we're seeing near record profit across F&B and the hotel. And we're seeing particular strength in our regional and out-of-town business because of that. In terms of the theaters and catering, as we mentioned before, I'll start with theaters. theaters are slowly making their way back, and we're seeing a strong back half slate, which should only help the visitation return of the theaters.

Yeah, it's all product-related, content-related as to what the studios are releasing. We expect that to get better going forward.

And, Sean, as you saw from the release, while there has been inflation across many of the items related to F&B and cost of goods sold, We were able to offset the majority, if not all of that, through price increases. Thus, you saw the increased margin year over year.

That's helpful. And pricing was sort of my second question, which can you talk a little bit about the hotel side and strip compression? Maybe as we get into the second quarter here, a lot of us have rate surveys and things that track how the strip is doing. But how is that translating into the locals market, and what are you able to do with price on some of your hotel products?

From hotel, this was almost a record quarter. We almost hit $170 ADR across the system, which is up almost $50 quarter over quarter. And that's on an occupancy of roughly 77%, which, again, was up about 17 points, but is still about 15 points below our historical norm. All of that related to having midweek group business. So as we get that group business back, we can expect to yield even better. Fortunately, the team has done such an amazing job. With the lack of the group business, they've been able to fill and yield the hotel with high-spending gaming customers, and this is one of the big initiatives related to our moving into the mid- to high-end in player development.

Thank you very much.

The next question comes from Stephen Grambling with Goldman Sachs. Please go ahead.

Thanks. I know you've addressed this a bit on prior calls, but what are you looking for to reopen the other properties that were still closed during the quarter? And are there any limitations still as we think about maybe monetizing those as potentially non-casino properties? Thanks.

We're still in the process of evaluating those properties. I mean, what we look for, there's a couple of things we look for, obviously the current economic environment. And we also look at how much play we're able to capture from those existing properties in which we've mentioned before between 92% and 94% of the fee we're able to capture. And so we feel pretty good right now with the state we are, but that's something we're closely evaluating across all three properties.

And then maybe one more follow-up on Joe and Carlo's question on consumer behavior. I guess what would you typically regard as effectively a canary in the coal mine regarding the broader health of the consumer in the local market?

I mean, that's a great question. I mean, some of the things, I mean, you talked, I mean, I think Joe mentioned the first thing. We watch gas prices. We watch discretionary spend.

Population growth.

And population growth. Right. And then not just the population growth, but also the description.

Let me talk a little bit about what we're seeing. You know, the 2% is, you know, population, but when you look at the household income, That's actually growing much faster at the high end. Yeah, what slide was that on that?

Yeah, so there was a slide in the deck we posted regarding the health of the Las Vegas demographic market. So on average, what Frank's referring to is between 21 and 26, we're expecting Las Vegas to grow at roughly 2%. But when you really break that out, when you break out the households, the households with an income over $150,000 annual growth is expected to grow 32% per year.

And I saw that exhibit, which is interesting. I mean, do you think that you're, I mean, I guess historically, do you feel like your penetration was where it needed to be of that upper income consumer? And you alluded to trying to capture more of that, but maybe if you could just elaborate on maybe where you think your penetration was of those customers and how you're evolving to try to capture more of them.

Well, first of all, it goes to the location of our properties. Being out in the suburbs, I think we have A-plus locations where the majority of the growth in Las Vegas is taking place. And I think if you go back, you know, five or 10 years ago, a lot of these customers weren't in Las Vegas. I think the market overall has changed pretty dramatically with people moving from California to Las Vegas. And it's just, it's a different customer profile than what we were seeing 10 years ago.

And I think we've really focused at the properties primarily call it Red Rock and Green Valley at making sure that we have the amenities on the food and beverage side to attract those customers. And as Steve mentioned in his remarks, we're going to open up a new high limit table games room on Thursday of this week. One of the things that we noticed or we had been successful at post COVID is we've been able to attract a lot of customers that traditionally would have gone to the strip from a table game standpoint have started, we've been able to attract them up to our properties at both Red Rock and Green Valley. So we're just going to continue to build on that as well.

Thanks so much. We'll come back in the queue.

The next question comes from Steve Wisensky from Sequel. Please go ahead.

Hey, guys. Good afternoon. So, Steve, in the past, I think if I remember correctly, you talked about how margin movement moving forward would be more tied to revenue growth versus anything else. I'm wondering if that still remains the case at this point or if there's anything else you've discovered that could or we should be thinking about either from a positive standpoint or a negative side of things on the expense side that could impact your margins moving forward.

Yeah, and as you can see, the past over eight quarters, I'm still sticking to our guns that, you know, revenue and operating leverage are going to be the biggest driver of margin going forward. But I think, as all companies are seeing, you know, we're in a very unique labor market right now. And we're all experiencing, you know, inflationary pressure. So if there's one thing that we're keeping a focus on, you know, is payroll. So in general, our payroll quarter over quarter was up $9.7 million roughly, but let's call it 9%. But if you break and parse that number down, about $3.7 million of that are just more work to the system. So we brought people on either more hours, more labor, and there was a revenue associated with that labor. So really the inflationary mark is $6 million, which is about 5%, you know, a little above 5%, 5.5%, which is in line with the Valley. So that is something that we are keeping an eye on. But

still going back to the first point you know revenue is going to be the main driver and operating that operating leverage to consistent margins and we've been a pretty tight band for the past eight yeah past seven quarters okay gotcha uh thanks guys and the second question um in terms of the locals market there have you guys seen any i don't know if i'd use the word material but any you know major changes in terms of market share shifts um you know there in the market and i guess what that's kind of getting to is, you know, is the promotional environment there steady, you know, still pretty, uh, you know, rational.

Oh, sure. Market is incredibly rational. And so we haven't really seen any big, massive shifts in the market.

Okay.

Thanks guys.

Appreciate it.

The next question comes from Chad with Macquarie. Please go ahead.

Hi, good afternoon. Thanks for taking my question. Just wanted to ask about capital allocation. You had the dividend in the quarter in addition to, I guess, the small special. Just wondering with leverage at these levels, how should we think about capital allocation, I guess, dividends and share repos through the remainder of the year? Thanks.

Sure. I mean, I think going back to what we said last quarter, I mean, everything's on the table. As you know, we take a very balanced approach. We got to balance returning capital through investing in longer-term growth opportunities, i.e., the Durango project, as well as our six other strategically located properties, as well as returning capital to stakeholders. And as you saw by the dividend, we're committed to the $0.25 dividend. There was a slight slowdown in our share repurchases. We only purchased 185,000 shares this quarter. A lot of that was just being prudent with the Durango project staring us in the face. We wanted to make sure we wrapped up the GMP. before really refocusing our efforts on the share repurchase program. I think over the quarter, especially given the strong nature of our balance sheet, and as you mentioned, the low leverage, I mean, everything is on the table, and we have a lot of financial flexibility to execute both on our longer-term opportunities and returning capital to our stakeholders.

Great. Thanks. And then just on the last question regarding not much in terms of promotional environment, now that Palms has I think you've said in the past that you don't expect any impact. If there was an impact, should it be more on the non-gaming side or the gaming side? Or, again, it could be negligible in terms of how you see the business. Thanks.

Yeah, we think it's going to be negligible. To be fair, the team just opened up on April 27, so it's early days.

Okay. Thank you very much.

The next question comes from Barry Jonas of Truer Security. Please go ahead.

Hey, guys. While you've been successful with the GMP on Durango, just curious what do you think the risks are here relating to the budget, or I guess more so timing for the project?

I mean, with the GMP, we were fortunate to get about 70% of the project de-risked. And now, you know, our focus is in making sure, I think you hit on it, is making sure that our FF&E and construction materials are delivered on time when the teams need to build and the operators need to hand over. And so we've executed what we call a long-term procurement strategy in which we've identified all the long lead time items and are starting to purchase those now. So items that in a normal build we'd purchase six months out, we're starting a year out. And so we're hoping to use that to mitigate any potential delays in the supply chain.

Gotcha. Okay. And then I noticed that there were about 2.2 million of Native American losses. Just curious what that is and how should we be thinking about future losses from here?

The $2.2 million is related to the Grayton arbitration case, which we've mentioned in the past. We can assume that those losses will go away. That's important. Perfect. Thank you.

As a reminder, if you would like to ask a question, please press star, then one to rejoin you to the question queue. The next question comes from Dan from Wells Fargo. Please go ahead.

Hey, good afternoon. So most of my questions have been answered. But just in terms of the customers you're seeing come back, I know the locals market, I think it's around 20% of the population is retirees. Have you seen any impact from that segment of the database, just given they're more reliant on a fixed income?

Now, I think the question may have been touched a little bit earlier where you're seeing the older demographic being more conservative, but they're coming back. And when you think of the Omicron virus, really what that affected, that affected more the younger generation as those are the folks that got sick. And so from a spend perspective, we're seeing no change in the older demographic spend habits.

Got it. And then I know it sounds like you're further along in terms of rolling out the cashless gaming across your properties. I mean, given the reduction in friction costs, have you seen higher spend per visit from those customers that have adopted it or any kind of early takeaways there?

Yeah, I mean, this is going to be a slow migration to the technology. And, you know, given that we're not in all of our properties, we haven't started the big marketing push, but the group that has executed, we have seen a rise. We have seen more gaming velocity.

Got it. Thanks so much.

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

Well, thank you, everyone, for joining the call, and we look forward to talking to you in about 90 days. Thank you.

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