Red Rock Resorts, Inc.

Good afternoon, everyone, and welcome to the Red Rock Resorts second quarter 2024 conference call. All participants will be in a listen-only mode. Please note this conference is being recorded. At this time, I'd like to turn the conference over to Stephen Cooney, 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 Resort's second quarter 2024 earnings conference call. Joining me on the call today are Frank and Lorenzo Fertitta, Scott Krieger, and 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 that this call is being recorded. Let's start off by stating that the second quarter represented another strong quarter for the company by any measure. In terms of net revenue and adjusted EBITDA, our Las Vegas operations had its best second quarter in our history. In addition, our Las Vegas operations achieved near-record adjusted EBITDA margin. In addition to showing strong financial results in the quarter, we continue to be pleased with the financial performance of our Durango Casino Resort. The team at Durango continues to execute and improve the property's operational performance, while at the same time driving incremental play from our existing customers and attracting new customers to our brand. With two full quarters under our belt, the property increased visitation and net theoretical win in the surrounding Durango area by approximately 90% and 88% respectively. while signing up over 55,000 new customers to our database over the same time period. While it's still early days, Durango continues to ramp and remains on track to become one of our highest margin properties of the medium and long term, as well as generate a return consistent with or in excess of our prior greenfield developments. That said, and as stated on past earnings calls, we continue to experience cannibalization in line with our expectations, primarily at our Red Rock property due to the Durango opening. But consistent with our past performance history, we expect to backfill this revenue given the strong long-term demographic growth profile of the Las Vegas Valley and the proximity of our properties to those high-growth areas within the valley. Based on our success at Durango, we are pleased to announce an expansion of the property. Our current plans for the next phase of Durango will add over 25,000 square feet of additional casino space, including a new high-limit slot and bar area. In total, the expansion will add to the Durango Casino floor an additional 230 slot machines, including 120 slot machines dedicated to our new high-limit room. In addition to the expanded casino space, we will be adding an additional covered parking garage with almost 2,000 convenient parking spots, significantly improving customer access to the property while providing us flexibility for future expansions at Durango. While we are still in the planning and budgeting stages of the expansion, We currently expect construction to start later this year. We provide more information on this expansion on future earnings calls. With regard to the rest of our portfolio, we continue to execute on our core strategy of reinvesting in our existing properties to deliver fresh and relevant amenities for our guests, all while remaining focused on best-in-class customer service. With the disruption we experienced at Palace Station from the road work that impacted the ingress and egress to the property and the disruption we experienced At the Sunset Station, from a major renovation upgrading the race and sports book, and casino both tailing off in the middle of the quarter, the team delivered another strong quarter across all business lines, with this quarter marking the 16th consecutive quarter that the Las Vegas operations delivered adjusted EBITDA margins in excess of 45%. Now let's take a closer look at our second quarter. With respect to our Las Vegas operations, our second quarter net revenue was $483.2 million, up 17.1% from the prior year's second quarter. Our adjusted EBITDA was 223.1 million, up 15.6% from the prior year's second quarter. Our adjusted EBITDA margin was 46.2%, a decrease of 61 basis points from the prior year's second quarter. On a consolidated basis, our second quarter net revenue was 486.4 million, up 16.9% from the prior year's second quarter. Our adjusted EBITDA was 201.7 million, up 15% from the prior year's second quarter. Our adjusted EBITDA margin was 41.5% for the quarter, a decrease of 67 basis points from the prior year's second quarter. In the quarter, we converted 58% of our adjusted EBITDA to operating free cash flow, generating 117.6 million, or $1.11 per share. This brings our year-to-date cumulative free cash flow to 246.2 million, or $2.33 per share. This significant level of free cash flow was either reinvested in our long-term growth strategy, reinvested into our existing properties, or returned to our stakeholders via debt paydown, share repurchases, and dividends. As we finish up the second quarter, we remain focused on our core local guests as we continue to grow our regional and national segments across our portfolio. When comparing our results to last year's second quarter, We continue to see upside from strong visitation and carded slot play across the majority of our database, including our regional and national segments. This strength, coupled with strong spend per visit across the database, allowed us to enjoy record second quarter revenue and profitability across our gaming segments in the quarter. Turning to the non-gaming segments, both hotel and food and beverage continue to grow year over year and deliver record revenue and profitability in the second quarter. Our hotel division experiences highest ever second quarter revenue and profit in our history, driven by our team's success on continuing to drive higher occupancy in ADR across our hotel portfolio. Not to be outdone, our food and beverage division also experiences highest ever second quarter revenue and profit, driven by higher average check and cover accounts across our food and beverage outlets. With regard to our group sales and catering businesses, as mentioned on our last earnings call, we face a tough second quarter comparable and expect to face tough comparables for the remainder of the year, mainly because of COVID sales that were postponed and rebooked into 2023. That said, we are seeing possible momentum in both of these business lines as we continue to build our pipeline into 2025. As we look ahead into the third quarter, we are seeing stability in the locals market and across our Carta database and remain confident in our business prospects moving forward. On the expense and labor side, we remain operationally disciplined and continue to look for ways to become more efficient while continuing to provide best-in-class customer service to our guests and remaining the employer of choice in the Las Vegas Valley. Within the quarter, the company continued to manage our expenses, generate record financial performance, near record margins, reinvest in our properties, and return capital to our shareholders. Our continued success demonstrates the resilience of our business model, the sustainability of our operating margins, and the ability of our management team to execute on our long-term growth strategy, all while taking a balanced approach in returning capital to our shareholders. Now let's cover a few balance sheet and capital items. The company's cash and cash equivalents at the end of the second quarter was $136.4 million, and the total principal amount of debt outstanding was $3.47 billion, resulting in a net debt of $3.34 billion. As of the end of the second quarter, the company's net debt to EBITDA ratio is 4.2 times, As we stated on previous earnings calls, our leverage has plateaued and is beginning to ramp down as we look to deliver to our long-term net leverage target of three times. Also during the second quarter, we made a distribution of approximately $53.5 million to the LLC unit holders of Station Holco, which included a distribution of approximately $31.1 million to Red Rock Resorts. The company used the distribution to make its second quarter estimated tax payment pay its previously declared dividend of 25 cents per Class A common share, as well as fund a purchase of 75,000 Class A common shares at an average price of $52.29 per share under its previously disclosed $600 million share repurchase program. The second quarter purchases bring the total number of shares purchased under the program and through our 2021 tender to approximately 14.3 million Class A common shares at an average price of $45.32 per share reducing our share count at quarter end to approximately 105.5 million shares. Capital spent in the second quarter was 78.6 million, which includes approximately 35.9 million in investment capital, inclusive of the Durango project retainage, as well as 42.7 million in maintenance capital. For the full year 2024, Not including the spend to close our Durango project, we still expect the capital spend to be between $140 and $180 million, spread between maintenance and investment capital. During the quarter, we remained committed to strategically investing and offering new amenities to our guests at our existing locations in order to drive incremental visitation and spend on our properties. During the quarter, we successfully opened Ortikia Mediterranean Grill at our Green Valley property, and opened Lindo Michon Restaurant at our Palace Station property, and completed an upgrade to our racing sportsbook and partial casino remodel at Sunset Station. We are pleased with the guest response and the early results from these new amenities. We expect to continue to invest in our existing properties throughout 2024, including adding an additional restaurant offering at our Palace Station property, as well as a new yard house restaurant at our Sunset Station property. Like our other recently introduced amenities, we expect these to be solid investments over the medium and long term, and are looking forward to moving beyond the disruption challenges of these properties as we introduce these new amenities to our customers later this year. Turning now to North Fork, we continue to move forward with the project. While we are finalizing the design and continue to work through the project budgeting process, we expect to begin preparatory site work on the project next month, with construction soon to follow in the fourth quarter of this year. The total construction time for the project is currently anticipated to be between 18 and 20 months, putting the opening of the resort into 2026. We are very excited to be making progress on this project, and we will continue to provide updates on our quarterly earnings calls. Lastly, the company's board of directors has declared a cash dividend of $0.25 per Class A common share payable on September 30 to Class A shareholders of record as of September 16. When we combine our recent share repurchases with our special and regularly-declared dividends, we've returned approximately $168.5 million to our shareholders in 2024. The company continues to have a strong year, and Durango continues to validate our long-term growth strategy and demonstrate the power of our own development pipeline and real estate bank, which consists of over 445 acres of developable land positioned in highly favorable areas across the Las Vegas Valley. This pipeline, coupled with our best-in-class assets and locations, gives us an unparalleled growth story that will allow us to double the size of our portfolio and capitalize on the very favorable long-term demographic trends and the high barriers to entry that characterize the Las Vegas locals market. We would like to recognize and extend our thanks to all of our team members for their hard work. Our success starts with them, and they continue to be the primary reason why our guests return time after time. We would again thank them recently for voting us top casino employer in the Las Vegas Valley for the fourth consecutive year. And finally, we thank our guests for their loyal support each of the last six decades. Operator, this concludes our prepared remarks today, and we are ready to take questions.

Ladies and gentlemen, at this time, we'll begin the question and answer session. If you'd like to ask a question, you may press star and then one using a touch-tone telephone. To withdraw your questions, you may press star and two. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality. Once again, that is star and then one to join the question queue. We'll pause momentarily to assemble the roster. And our first question today comes from Joe Graff from J.P. Morgan. Please go ahead with your question.