Red Rock Resorts, Inc. (NASDAQ:RRR) Q2 2023 Earnings Call Transcript

Red Rock Resorts, Inc. (NASDAQ:RRR) Q2 2023 Earnings Call Transcript August 6, 2023

Operator: Good afternoon, and welcome to Red Rock Resorts Second Quarter 2023 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 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 second quarter 2023 earnings conference call. Joining me on the call today are Frank and Lorenzo Fertitta, Scott Kreeger 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 a complete reconciliation of these figures to GAAP, please refer to our 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 that this call is being recorded. Before we get into any of the details, the second quarter represented yet another strong quarter for the company. The quarter represented our third best second quarter in the history of our company in terms of same-store net revenue, adjusted EBITDA, adjusted EBITDA margin only surpassed with the extremely strong second quarter of 2021 and 2022. Within the quarter, the month of April provided a particularly tough year-over-year comparison and accounted for the majority of the year-over-year decline in our results within the quarter, with May and June performing more in line with last year’s selling results. Despite a tough April, the management team executed on our core strategy of keeping the properties fresh and relevant for our guests and delivering another extremely strong quarter with the quarter marking the 12th consecutive quarter, as the company delivered adjusted EBITDA margins in excess of 45%.

Now let’s take a look at our second quarter results. On a consolidated basis, second quarter net revenue was $416 million, down $6.1 million from the prior year’s second quarter. Adjusted EBITDA was $175.3 million, down $13.6 million year-over-year. Our adjusted EBITDA margin was 42.1% for the quarter, a decrease of 260 basis points year-over-year. With respect to our Las Vegas operations, second quarter net revenue was $412.6 million, down $7.5 million from the prior year’s second quarter. Adjusted EBITDA was $193.1 million down $14.8 million year-over-year. Our adjusted EBITDA margin was 46.8%, a decrease of 258 basis points year-over-year. In the quarter, we converted 29% of our adjusted EBITDA to operating free cash flow generating $51 million or $0.49 per share.

Our free cash flow conversion was lower in the quarter due to the timing of our estimated tax payments. When combining the first and second quarters, it shows that we continue to generate strong cash flow converting 54% of our adjusted EBITDA to operating cash flow, generating $198.6 million to [$4.90] per share. This significant level of free cash flow was reinvested in our long-term growth strategy, including our Durango project, where it was returned to our stakeholders via debt paydown or dividends. Throughout the quarter, 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 second quarter, we continue to see upside from strong visitation in our regional and national segments.

This strength, coupled with strong – spend per visit across our entire portfolio, allowed us to enjoy near record second quarter revenue and adjusted EBITDA results across our gaming segments. Turning to our non-gaming segments. Both hotel and food and beverage continue to grow year-over-year and delivered record profitability in the second quarter. Our hotel division experienced its highest quarterly revenue and profit in our company’s history, driven by higher occupancy and ADR across our hotel portfolio. Food and beverage experienced near record second quarter revenue and record second quarter profitability driven by higher check average across our food and beverage outlets and continue strength of our catering business. Our catering revenue continues to surpass 2019 levels, as this quarter represented the eighth consecutive quarter of double-digit year-over-year growth in the business segment.

With regard to our group sales business, we continue to see positive momentum driven by growth in both room nights and ADR as our pipeline continues to grow to the back half of 2023. As we begin the third quarter, our business across our gaming and nongaming segments remain stable, but we will continue to face challenging year-over-year comparisons for the remainder of the year. On the expense side, we remain operationally disciplined and continue to look for ways to become more efficient while providing best-in-class customer service to our guests, and continue to be the top employer of choice in the Las Vegas Valley. Despite a tougher year-over-year comparable, the company was able to generate near record financial performance, and continued to return capital to our shareholders.

These results demonstrate the resilience of our business model, the sustainability of our operating margin, and the ability of our management team to execute on our long-term growth strategy, and take a balanced approach in returning capital to our shareholders. While, we remain vigilant to the macroeconomic picture, we are committed to disciplined investing in our core strategy, which includes expanding our footprint in Las Vegas and investing in new amenities to our guests – bring new amenities to our guests at our existing locations. Building upon the successful openings of our high limit table and slot rooms as well as new casino bar and a Red Rock Casino Resort. This quarter, we opened up Polaris, a high-end casino bar located at our Green Valley Ranch Resort.

The early results from this new amenity have been very promising, and we look forward to bringing additional complementary amenities to our Green Valley property later this year. 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 were $100.9 million, and the total principal amount of debt outstanding was $3.2 billion, resulting in net debt of $3.1 billion. As of the end of the second quarter, the company’s net debt to EBITDA and interest coverage ratios were 4.25 times and 4.4 times respectively. As we stated in our previous earnings calls, our leverage will continue to tick upwards as we complete the construction of our Durango project. On the completion of Durango, we expect to delever towards our long-term net leverage target of three times, net leverage.

Capital spend in the second quarter was $201.6 million, which includes approximately $172.7 million in investment capital inclusive of Durango as well as $28.9 million in maintenance capital. For the full year 2023, we expect to spend between $70 million and $90 million in maintenance capital and a total of $600 million to $650 million in growth capital, inclusive of Durango. Now, let’s provide an update on our development pipeline. Starting with our Durango development, we are excited to announce that we are targeting Monday, November 20, as the opening date for the Durango Resort. As we’ve mentioned before, we’re extremely excited about this project, which is situated on a 50-acre site ideally located off the 215 expressway in Durango drive in the Southwest Las Vegas Valley.

The project is located in the fastest-growing area in the Las Vegas Valley with a very favorable demographic profile and no unrestricted gaming competitors in the five-mile radius. This quarter, we completed the enclosure of the resort as well as powered up the central plant as we move to commence a fit out of the resort. As we progress through the current quarter, we are beginning to hand over key areas of the resort to our operational staff in order to start preparing for our resort opening. The current budget remains unchanged at approximately $780 million, which includes all design costs, construction hard and soft costs, preopening expenses and any financing costs associated with the project. The company still anticipates the return profile for Durango to be consistent with our prior Greenfield developments.

Turning now to North Fork. As we noted last quarter, after favorably resolving all of its other litigation, the tribe has a single remaining case in the California courts. We do not believe this case will interfere with the right or the ability of North Fork to conduct gaming on its federal trust land. And we continue to work with the tribe to progress our efforts with respect to this project, including working toward approval of the management agreement – continuing our work on the development and design and having preliminary talks with our respective lending partners. We will continue to provide updates on our quarterly earnings calls. On the real estate front, you may have read in the press that we have made significant progress with respect to the sale of our former Texas Station and Fiesta Rancho properties.

While we cannot disclose the terms, we believe we may be in a position to report on the closing of these two real estate parcels in the coming months. These potential transactions represent the continued execution of our long-term real estate development strategy as we look to reposition and upgrade our real estate portfolio for the next chapter of growth at Station Casinos. Lastly, on August 2, the company’s Board of Directors declared a cash dividend of $0.25 per Class A common share payable on September 29 to Class A shareholders of record on September 15. With our current best-in-class assets and locations, coupled with our development pipeline of seven owned development sites located in the most desirable locations in Las Vegas Valley.

We have 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 high barriers to entry to 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 would like again to thank them for voting as top casino employer in the Las Vegas Valley for the third consecutive year. We are also very proud to share that Forbes – selected Red Rock Casino Resort and Spa as the top overall casino resort hotel in Las Vegas, which we consider a tremendous recognition of our efforts, and those of our team members.

And finally, we’d like to thank our guests for their loyal support in each of the last six decades. Operator, this concludes our prepared remarks for today, and we’d like to turn the call over to take questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Joe Greff with JPMorgan. Please go ahead.

Joe Greff: Good afternoon, everybody. Steve, your comments about the majority – of the 2Q decline took place in April. Obviously, our friends at Boyd said the same thing when they reported. What do you think happens in April? I mean, I don’t think either one of you really kind of called that out a quarter ago on prior earnings calls, what do you think actually transpired with your consumer in April? And why do you think has changed in May and June and July? And then I have a follow-up?

Stephen Cootey: Sure. I mean, I’ll start and – I’ll hand it over to Scott. I mean, I think the first and foremost, we are dealing with incredibly tough comparables, particularly in March, I mean, particularly in April. If you look back at April 21 and April 22 in the history of our 46 years on an EBITDA per day basis, because you got a 30-day calendar, April 22 represents the best month in the history of our company. April 21 represents the second best history of the company. So, I think it’s less to do about the consumer and more to do with just a huge uphill climb we’re making.

Scott Kreeger: Yes. I think I could add a bit to that. Just the quantum of that, it represents about 85% of the decline for gaming in the quarter was in April. And there’s another piece of nuance in that – we did have unfavorable hold through the Golden Knights road to the Stanley Cup. So, we had a lot of local folks on the Golden Night side and just didn’t hold well as it relates to that, and that attributed as well. But if you parse out April and look at the May, June and even into July, we see that gaming revenues are in line with what we’ve been experiencing for the rest of the year.

Joe Greff: Great. That’s helpful. And then how do you see the relationship between year-over-year variance in revenues versus year-over-year variance and operating expenses? Obviously, you had revenues down and OpEx up in the Q2. How do you – do you see that to be more in line? Is there a way that if we are a flattish or – down a little bit in revenues can OpEx sort of match that year-over-year revenue trend? Or is there something just whether it’s labor, whether you’re carrying more costs in front of Durango, which I guess with that – those expenses will be capitalized. But can you help us understand that, Steve, going forward in terms of sort of margin trends if we’re in a revenue environment where things are down a little bit year-over-year?

Stephen Cootey: Sure. I mean, and again, I just want to reemphasize, this is the 12th quarter in a row that we’ve held margins over 45%. And yes, while we did experience a slight decline in margin, as Scott mentioned, and you pointed out as well, April was the majority of that margin decline. And you’re dealing with really just – and the majority of that decline was due to the not only the gaming issues, but also the hold issue that Scott mentioned. And additionally, we spent $2.1 million in repairs and maintenance over – year-over-year. And that’s a long – it’s not a quarter-by-quarter decision we’re making that is quote our operating strategy of keeping our properties fresh and inviting to our guests. And our view on that is dealing with small problems now prevents a larger problem down the road.

And it’s important that we own our real estate. So that’s why we take – good care of it. That said, R&M, we feel we have – our properties are in fantastic shape. There are no deferred maintenance costs. So, that is a lever that we can pull going forward, if we needed to get going down the road. The other kind of material cost, I would point out that, the graded margins slightly was we experienced roughly a $700,000 increase in utilities. And I think that’s going to be consistent across the entire Las Vegas Valley. So that’s not a station, a nuance station.

Joe Greff: Great. And then my last question with respect to the November 20 Durango opening. I’ll put my flight after I get off the call with you guys to go to that. Is that a full-fledged opening? Is that a soft opening, can you help us explain that versus opening later in the year around the years. And that’s all from me? Thanks.

Lorenzo Fertitta: Yes, so Joe. This is Lorenzo. Yes, but that will be a full-fledged opening. When we open properties, every aspect of the property is open ready to go. We’ll open the doors and let in for customers, so it will be full on that day.

Joe Greff: Great. Thanks guys.

Operator: Our next question comes from Carlo Santarelli with Deutsche Bank. Please go ahead.

Carlo Santarelli: Hi guys. Good afternoon. When you guys – and I know, look, last year was somewhat unusual, right, everybody benefited from that really strong 2Q that followed a tougher 1Q. But when you look at kind of last year in review. Obviously, in the second quarter, I would imagine, you would say was your most challenging comparison of the year. I just want to verify that, that’s the way that you’re looking at it and how you would categorize kind of the 3Q and the 4Q of ’22 in terms of the current levels of demand that you’re seeing and some of the cost headwinds that are currently involved?