Red Rock Resorts, Inc. (NASDAQ:RRR) Q1 2024 Earnings Call Transcript

Red Rock Resorts, Inc. (NASDAQ:RRR) Q1 2024 Earnings Call Transcript May 7, 2024

Red Rock Resorts, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, and welcome to Red Rock Resorts’ First Quarter 2024 Conference Call. [Operator Instructions]. Note, this event 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.

Stephen Cootey: Thank you, operator, and good afternoon, everyone. Thank you for joining us today for Red Rock Resorts First Quarter 2024 Earnings Conference Call. Joining me on the call today are Frank Lorenzo Fertitta, Scott Kreger in 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 8-K and investor deck, which were filed this afternoon prior to the call.

Also, please note this call is being recorded. Let’s start off by stating that the first 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 first quarter in our history. And in terms of adjusted EBITDA margin, our Las Vegas operations experienced near record adjusted EBITDA margin. In addition to showing strong financial results in the quarter, we continue to be pleased with the customer feedback and the financial performance of our Durango Casino Resort. While we are still in early days, 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.

In past earnings calls, we have stated that we believe Durango will be one of our highest margin properties over the medium to long term and will generate a return consistent with or in excess of our prior greenfield developments. With one full quarter under our belt, we are confident that Durango is well on its way to achieving both its margin target and to return goal even faster than originally planned. That said, and as stated in the past earnings calls, we expect to experience and we have experienced cannibalization, primarily at our Red Rock property due to the Durango opening, but this has been largely in line with our expectations. 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 with the Valley.

With regard to the rest of the portfolio, we continue to execute on our core strategy of reinvesting in our existing properties to deliver fresh and relevant amenities to our guests, all are remaining focused on best-in-class customer service. Despite this disruption, we experienced a Palace Station from the roadwork that significantly impacted the ingress and egress of the property and the significant disruption we experienced at Sunset Station from a major renovation upgrading the racing sports book in the casino, the team delivered another strong quarter across all business lines with this quarter marking the 15th consecutive quarter of the Las Vegas operations delivered adjusted EBITDA margins in excess of 45%. Now let’s take a look at our first quarter.

With respect to our Las Vegas operations, our first quarter net revenue was $485.6 million, up 12.9% from the prior year’s first quarter. Our adjusted EBITDA was $229.8 million, up 7.3% from the prior year’s first quarter. Our adjusted EBITDA margin was 47.3%, a decrease of 247 basis points from the prior year’s first quarter. On a consolidated basis, our first quarter net revenue was $488.9 million, up 12.7% from the prior year’s first quarter. Our adjusted EBITDA was $209.1 million, up 7.7% from the prior year’s first quarter. Our adjusted EBITDA margin was 42.8% for the quarter, a decrease of 200 basis points from the prior year’s first quarter. In the quarter, we converted 64% of our adjusted EBITDA to operating free cash flow, generating $128.6 million or $1.22 per share.

This significant level of free cash flow was either reinvested in our long-term growth strategy, including our Durango project, reinvested in our existing properties or return to our stakeholders via debt paydown and dividends. As we begin 2024, we remain operationally disciplined and focused on our core local guests as well as continue to grow our regional and national segments. When comparing our results to last year’s first quarter, we continue to see upside from the strong visitation and play in our local, regional and national segments. This strength, coupled with strong spend per visit across the majority of our carded play allowed us to enjoy near record first quarter revenue and profitability across our gaming segments despite both the Super Bowl and the NCAA termit not being so kind to us in the quarter.

Turning to the nongaming segments. Both hotel and food and beverage continue to grow year-over-year and deliver record revenue and profitability in the first quarter. Our record division experienced its highest quarterly revenue and profit in our history, driven by our team’s success and continuing to drive higher occupancy and ADR across our hotel portfolio. Not to be outdone, our Food & Beverage division also experienced its highest ever quarterly revenue and profit, driven by higher average check and cover counts across our food and beverage outlets as well as continued growth in our catering business within the quarter. With regard to our group sales business, this — we continue to grow this segment within the quarter, driven by growth in both room nights and ADR as we continue to work to grow our pipeline in 2024 and beyond.

While both our group sales and catering revenues grew in the first quarter, as we mentioned on our prior call, we expect tougher comparables in both these business lines for the remainder of 2024, driven mainly by COVID sales that were postponed and booked into 2023. As we look ahead, we are seeing stability in the locals market and across our entire database and remain confident in our business prospects moving forward, but we will continue to face disruption in our Palace Station and Sunset Station properties for the majority of the second quarter. On the expansion 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 remain 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 results demonstrate 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 while taking a balanced approach to 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 first quarter was $129.7 million, and the total principal amount of debt outstanding was $3.5 billion, resulting in net debt of $3.4 billion. At the end of the first quarter, the company’s net debt-to-EBITDA ratio was 4.4x.

As we stated on previous earnings calls, our leverage has peaked and is now beginning to ramp down as we look to delever to our long-term net leverage target of 3x. During the quarter, the company completed 2 refinancing transactions. The first transaction involved a $500 million offering of senior notes due 2032 at an interest rate of 6.5% per annum. The proceeds of this offering were used to pay down a portion of our revolving credit facility as well as our term loan A credit facility. The second transaction involves an amendment to our senior secured credit facilities pursuant to which various lenders will provide a revolving credit facility of $1.1 billion maturing in 2029, bearing interest at 1.5% over SOFR and a term loan B credit facility at $1.57 billion maturing in 2031, bearing interest at 2.25% over SOFR.

The Agri proceeds of this amendment were used to refinance our revolving credit facility and term loans outstanding under our existing credit agreement. These refinancings increased our financial flexibility by strengthening our balance sheet, extending our debt maturities and modestly decreasing our interest expense. In May, our Board authorized an extension to our existing share repurchase program to December 31, 2025. The program has $313 million remaining available for future purchases. As a reminder, since we began purchasing shares either through our share repurchase program or the 2021 tender, we have purchased approximately 14.2 million Class A shares at an average price of $45.29 per share, reducing our share count to approximately 105.6 million shares.

Capital spend in the first quarter was $98.1 million, which includes approximately $77.3 million in investment capital, inclusive of Durango Project Rotanage as well as $20.8 million in maintenance capital. For the full year 2024, not including the spend to close out our Durango project, we still expect capital spend to be between $140 million and $180 million spread between maintenance and investment capital. During the quarter, we remain committed to strategically investing in offering new amenities to our guests at our existing locations in order to drive incremental visitation and spend to our properties. During the quarter, we successfully opened a new high-limit slot room and Blue Ribbon Sushi Bar and Grill, our Green Valley Ranch property and opened a federal donut chicken restaurant as well as remodeled the Sandbar Grill, which is our pool bar and outside Eatery in our Red Rock property.

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 additional restaurant offerings at our Green Valley Ranch and Palace Station properties as well as an upgraded race and sports book and a partial casino remodel plus a new Yardhouse restaurant at our Sunset Station property. Like our other recently introduced amenities, we expect these to be solid investments over the medium to long term, and I look forward to moving beyond the challenges created by construction disruption at these properties as we introduce these new amenities to our customers later this year. Turning now to North Fork. As we mentioned on our February call, our management agreement with the Tribe was approved by the Chairman of the National Indian Gaming Commission in early January with clearing the last hurdle to the development of this project, which will be located on the Tribes 305 acre parcel of trust land.

The site is located north of Fresno, California and offers convenient, ingress and egress and excellent visibility from Highway 99. Design is near complete, we have retained a general contract, and we expect to break ground on the project in the third quarter of this year. We are very excited to moving forward with this project, and we’ll 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 June 28 to Class A shareholders of record as of June 14. The company is off to a strong start in 2024. And with the opening of Durango, we continue to validate our long-term growth strategy and demonstrate the power of our own development pipeline and real estate bank, which now consists of over 441 acres of developable land position in highly favorable areas across the Las Vegas Valley.

This pipeline, coupled with our current best-in-class assets and locations, gives us an unparalleled glove 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’d 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’d also like to thank them for recently voting us a top casino employer in the Las Vegas Valley for the fourth consecutive year. We’d also like to make a special shout out to our Sunset Station team members for placing their trust in us.

Finally, we thank our guests for their loyal support in each of the last 6 decades. Operator, this concludes our prepared remarks today, and we are now ready to take questions.

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Q&A Session

Operator: [Operator Instructions]. The first question today comes from Joe Greff with JPMorgan.

Joe Greff: Steve, I heard you on your comment about stability in the entire database, which is great. We thought maybe you have a proactive prepared comments about that in light of the comments from your peers and competitors. I was hoping maybe you can cut it a little bit differently and maybe if there’s a way to sort of isolate is located for Red Rock cannibalization, but if you look at your higher-end properties versus that are more middle or lower price point properties, has that disparity widened within your portfolio? I mean, it’s another way of, I guess, asking the low end versus the high end customer within the database, but maybe cut differently by property.

Stephen Cootey: Well, generally, we kind of look at the customers as a Red Rock brand as they hop around from place to place, Joe. So let’s start from there. But generally, what we’re seeing is we like what we’re seeing across the database from all players. So we’re seeing stability. From a Durango perspective, we’ve seen growth in the Durango zone, both from a net to perspective as well as visitation, which is consistent with our strategy from a new sign-ups perspective. We’ve had our highest growth in new sign-ups since the fourth quarter of 2021, including almost 37,000 people signing up at Durango, so we’re bringing new customers into the brand. I don’t know do you want too.

Scott Kreeger: Yes, Joe, this is Scott. Maybe I can provide a little more detail. And as Steve said, we like to look at it from a brand level versus a property level. But when we kind of look at each segment in the database, we’re encouraged by what we’re seeing across all of those segments, inclusive of all of the demos. So not only are we up in wind, visits and spend for visit across our segments, but we’re also seeing positive growth in all demos. We saw our active database grow in the mid-teens percentage. And as Steve said, we saw a strong increase in new member sign-ups and — sorry, Durango ended up being about 25% of that growth in the quarter.

Stephen Cootey: And again, Joe, just to kind of articulate it, we’re seeing that across all properties as well as Al demos to add to what Scott said.

Lorenzo Fertitta: And we’re seeing continued strong growth in our out-of-can business as well.

Stephen Cootey: But Lorenzo, I will point out that… On the low end of the business, it’s actually up for the last 2 quarters in a row.

Lorenzo Fertitta: Yes.

Joe Greff: And okay. And what do you think is driving that lines that sort of maybe [indiscernible] either- what maybe others are experiencing potentially or kind of what maybe people on this call listening to you guys probably believe the opposite? What do you think is driving it?

Scott Kreeger: So I think a lot of it has to do with the location of our properties. I mean, if you guys go and look at where all the growth in Las Vegas is occurring, in Summerlin West and the Southwest part of the valley where Durango is I mean they’re growing at 2x to 3x what the growth rate of the city gets. So we have a little bit of a wind at our back with new customers coming online literally every month.

Joe Greff: Great. And then just a little follow-up to some of the comments you made before. You’re not the only one with the sports book hold issues, but you said Super Bowl and NCAA weren’t kind to you and you also referenced in general terms, Palestation, construction disruption as well as at Sunset Station. Are you to quantify maybe in the aggregate, what the EBITDA impact from those 3 items were in the quarter as we look at those as sort of onetime and not recurring in the future?

Stephen Cootey: Yes. I mean sports — it’s sports for those particular events, it probably cost about $4.4 million for the quarter. In terms of disruption, as I mentioned in our script, that we expect some disruption to extend into Q2. So it’s not a onetime event, but probably cost us, let’s call it about $4 million all in.

Operator: The next question comes from Carlo Santarelli with Deutsche Bank.

Carlo Santarelli: I wanted to just more or less follow up on Joseph’s questions. And I guess a different way of maybe asking is, if you took the subset of properties ex Red Rock, what’s happening there in Durango and ex the 2 disrupted properties, Sunset and Palace Station. What is kind of the rest of the portfolio look like from a year-over-year perspective, whether if you could talk about that from a revenue EBITDA perspective, however you would approach it?

Scott Kreeger: Yes, Carlo, this is Scott. I think probably the best way to categorize our feeling of our performance and where we’re headed is that we see stability across all of our properties with a slight bit of upside. So we’re seeing absent the disruption that that Steve spoke about a strong performance. We’re pretty confident with where we’re at right now.

Carlo Santarelli: Okay. Great. And then just one quick follow-up. Corporate expenses tend to be a little bit higher in the first quarter. Is kind of that $18 million to $20 million a quarter for the rest of the year, a decent place.

Stephen Cootey: Yes. I think I’d add more to the higher side. And we’re looking to consolidate our warehousing. So one of the ups in this quarter was the warehouse coming online.

Operator: The next question comes from Steve Wieczynski with Stifel.

Steve Wieczynski: So Steve, you obviously talked a lot here about how you’re still seeing the Las Vegas Valley, and it still seems pretty healthy in terms of consumer spending trends and Durango is clearly off to a very solid start. We’ve also heard from your competitors about the — there has been a slight change in the promotional environment across the valley. It seems like there might be some competitors out there that are trying to more disrupt the market? And just wondering what you guys would say on that front.

Scott Kreeger: Yes. This is Scott. I think I’d take it in two categories. One, the dynamic growth in the Valley that you can see not only in our investor deck, but even as recently as today, Arcline viewed Journal about the growth of the Vale and the inbound new residents bolstering our performance and our look forward. I think when we talk about competition from our view, we’re not seeing anything in the market that would change our strategy or we’re not seeing anything in the market that we haven’t seen over the last couple of years. We’ve said before that there are some one-off single operator properties within the local market that are competitively promotionary and have been, but we’re not seeing anything out of the norm there.