Red Rock Resorts, Inc.
Q4 2020 Earnings Call Transcript

Published: 9 Feb 2021

[Operator:]

Good afternoon and welcome to Red Rock Resorts Fourth Quarter 2020 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 on Red Rock Resorts fourth quarter and full year 2020 earnings call. Joining me on the call today are Frank and Lorenzo Fertitta, as well as our executive management team.

[Operator:]

We will now begin the question-and-answer session. Our first question comes from Joe Greff with JPMorgan. Please go ahead.

[Joe Greff:]

Good afternoon, everybody. We heard from other -- one other regional not necessarily a Las Vegas local operator that January was pretty encouraging from the perspective of the 55 years and older crowd. Can you talk about Steve Frank Lorenzo, what you're seeing in that demographic first quarter-to-date? And then to what extent are you seeing a continuation of tighter restrictions in California benefiting you here in the early part of 2021?

[Frank Fertitta:]

Hey, Joe, Frank. Look, we -- since we reopened in June, I think we have surprisingly seen a nice increase in the younger demographic, especially in sign-ups in our rewards program to create these direct marketing relationships with a younger profile. We have seen, I think up until very recently that the 65-year-plus demographic has been fairly shy about coming back to the facility but I think it would go along with what you were talking about that if the vaccine has continued ramp-up and rollout we are cautiously optimistic that we're starting to see the 65-plus demographic slowly return back to our facility. So, I think we could be in a sweet spot of not only having new younger demographic profile that is coming to our facilities, but getting the return of our older tried true very loyal customers back to our facilities.

[Lorenzo Fertitta:]

Joe, and it's consistent with the research we've been doing is essentially saying that, the 65-plus-year-old demo is ready to come back, they're anxious to come back. The vaccine is kind of the key threshold there. But I think the encouraging thing like Frank said is, they seem to be in pretty good shape from a financial standpoint, because they just haven't been spending their money. There's a lot of disposable income there. So we're - as rank says constantly optimistic that things could be lining up pretty well.

[Joe Greff:]

Great. And then are you seeing incrementally more traffic coming into California? I know that was the latter part of my question.

[Lorenzo Fertitta:]

Not, anything that really sticks out that's really worth talking about. I mean, other than the fact that just -- as I'm sure you've seen that the housing market continues to be very strong here there is continual migration from California and even from other states surprisingly like Washington and Oregon and Illinois as well. So the migration -- population migration story is probably as well intact as it's ever been. Honestly, we've been doing this for a long time.

[Joe Greff:]

Thank you very much, guys.

[Operator:]

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

[Carlo Santarelli:]

Hey, guys. Thanks for taking my question. Steve in your prepared remarks, you obviously talked about the cadence of a strong October and would have generally been seasonally softer November and December periods. Just wondering as you look at kind of the way January unfolded and any evidence you're potentially seeing of some of those stimulus dollars getting back into the market and whether or not that's provided any boost for the business relative to kind of the November December period.

[Stephen Cootey:]

Yes. Carlos, I'm going to refrain from kind of giving Q1 guidance or talking about Q1. But that said, as you know stimulus checks rolled out in January. And it's just in general in our view that anytime you stimulate and increase the disposable income of Las Vegas folks in the Valley, it's good for our business.

[Frank Fertitta:]

Relative to November...

[Stephen Cootey:]

Sorry, go ahead.

[Frank Fertitta:]

Yes. Just relative to November, it was kind of a double whammy, right? I mean every four years we have the big election, we tend to see a bit of a two or three days, where people are focused on something else and things start to come back, back to normal. And I think in this situation like I said it was a double whammy, you had the election and then right on the heels of the election the governor came out and put further restrictions on our business. And typically what we've seen is when the government comes out and does this people get a little skittish. They maybe don't -- they get out of their normal patterns, they're not going to restaurants, they're not going out. And it takes them a little longer to kind of creep back into their normal patterns and that's kind of what we saw this quarter.

[Lorenzo Fertitta:]

Yes. It was a 25% capacity limitations that we saw coming to place in November that hopefully with the fact that the numbers seem to be going in the right direction relative to COVID infections, hospitalizations and deaths all those factors that are monitored in the Las Vegas market, we're hopeful to in the near future, we will be able to return to higher occupancy levels in our facilities.

[Carlo Santarelli:]

Great. Thank you, guys. And then if I could just one follow-up. Obviously, you guys over the last two quarters at least do -- and acknowledging that there's still uncertainty out there and being cognizant of the fact that you're running a company here and not running a stock, you're doing $100 million plus of free cash flow in the 3Q $100 million plus free cash flow in the 4Q. You've done a great job paying down debt. How do you think about kind of 2021 all things equal, assuming the situation is, as the base case would be right now and you continue to generate those types of numbers? As you think about kind of the potential future developments relative to taking leverage to the place where you ultimately want it to be relative to reinstating the dividend other things of that nature?

[Stephen Cootey:]

Yes. So Carlo 2021 I mean, I think let's start with where it all begins to grow margin, right? So when I think about margin, as we said in the third quarter, as you said, we just delivered in the fourth quarter, we feel very comfortable that we're going to be able to generate free cash and generate higher margin. And for all the reasons that you know of as you know our business is very different from the Strip is predominantly a high-margin slot business. We also are carrying a significant amount of costs to the tune of almost $20 million a year in COVID-mitigation costs that we expect to roll off over time. The closed company costs also burdened almost $16 million to $17 million of COVID restrictions which we expect to roll off over time.

[Frank Fertitta:]

And I think, we're hopeful that as the vaccination rolls out tourism will return back to normal. And our hotel and convention segment is very profitable to us. That's probably -- segments that have been impacted are probably worth potentially another $50 million of EBITDA that we're missing from the hotel convention movie, theater things like that. So I think as we look towards the future vaccine rollout and things normalize we think that we have similar upside.

[Stephen Cootey:]

And Carlo to kind of really hammer on your free cash flow question. Again while we don't give EBITDA guidance plug in your estimate, you know we're not going to pay taxes. We've got $383 million of NOLs and above $5 million or $6 million of credits sitting already available. We don't expect to pay working capital. Interest expense just given our debt profile should be significantly lower probably $110 million $115 million and we've already given CapEx guidance. So you can just see that we're on pace to have -- continue to generate free cash flow.

[Frank Fertitta:]

Yes. And when you go through those numbers obviously, we're generating a substantial amount of free cash flow. And the focus for us as we mentioned in the last couple of quarters, obviously has been responsible allocators and great allocators of capital. So, our priority is to delever the balance sheet, but we're either going to return capital to shareholders through the pay down of debt. We have a plan where we can buy back stock. Obviously, we can't pay dividends. And then we have multiple pieces of property here in the Las Vegas Valley. And if you go back and look historically at the projects that we've developed from the ground up, we've generated roughly about a 20% IRR. So we feel pretty good about kind of where we stand relative to free cash flow with multiple ways to increase shareholder value and what to do with it.

[Carlo Santarelli:]

Great. Thank you, guys.

[Operator:]

Our next question comes from Barry Jonas with Truist Securities. Please go ahead.

[Barry Jonas:]

Hey, guys. How are you thinking about the closed properties here? Whether that's timing on reopening them or any other options. Thanks.

[Frank Fertitta:]

Look, I think we have tried to take a very disciplined approach to this since we reopened in June. The reality is we have more restrictions on our capacity now than we did when we reopened on June 4. And so we're going to continue to be very disciplined and we want to be in a position that when we reopen any additional properties that we're going to know that it's going to be positive and accretive to our overall cash flow. And we really break that down into two buckets. I think the Palms is very oriented towards the tourist market visitation to Las Vegas, getting that business to return to normal. And in the local properties we're going to continue to look at how the older demographic response given the vaccine and get business back to normal before we do anything unless we're certain that we can be cash flow positive.

[Barry Jonas:]

Great. And then look just given the strong free cash flow profile you guys are exhibiting, is there less of an emphasis on selling some of your unused land banks? Any properties currently being marketed for sale right now?

[Stephen Cootey:]

Look, we're constantly evaluating how we maximize shareholder value and we own a significant number of gaming entitled real estate development sites. I think our primary focus right now is on -- going to be on Durango moving forward. But we're always looking at how we can basically monetize things and create shareholder value. So everything is on the table and it's all value related.

[Frank Fertitta:]

I mean Barry, I think we can monetize a number of these non-returning assets and still have an extraordinary growth profile. Yes. I mean, we'll have a number of growth opportunities. I mean we're looking at not only some of the larger sites but pieces of existing sites as well that don't necessarily take away a development opportunity. So you sort of get -- you get the best of both.

[Barry Jonas:]

Great. That’s really helpful. Thank you.

[Operator:]

Our next question comes from Steven Grambling with Goldman Sachs. Please go ahead.

[Steven Grambling:]

Thanks. This is perhaps a bit of a follow-up to some of those questions on maximizing shareholder value. And you had referenced the historical return on invested capital. I guess how does the permanent reduction in cost that you identified impact how you think about the returns on potential redevelopment opportunities?

[Frank Fertitta:]

I think it's a combination of some of the costs we've been successful at taking out of the business but also over the last, gosh what like 10 years as we've developed a number of Native American gaming opportunities, looked at some of the properties we've built historically as far as, when we move forward, we feel like that we're going to be able to build more properties that are going to be significantly more efficient, less overall square footage. And really architect these things so that we can build them to generate similar margins than what we're driving at some of our most successful properties currently within the portfolio. So really kind of taken a very focused approach. And as we move forward and to build these out, obviously more information to come on what our next development will be, but really taking our time to make sure that we're developing the most efficient box that we can develop. And at the same time get the project hard bid, get a GMP, making sure we fully understand what the cost going in are going to be so that we can make sure that we're delivering the returns that we want to or that we need to.

[Steven Grambling:]

And then as a follow-up, I think it was Joe's question, I may have missed this in your answer, but I think you referenced the golden window of both the younger and older customers coming into location. Is there any color you can provide on retaining that younger cohort? Maybe what percentage of customers converted to rated play? And if their behavior changed at all over the course of kind of reopening and then seeing restrictions come back?

[Stephen Cootey:]

I mean I think throughout the quarter and actually since the reopening, we've been quite engaged in terms of converting unrated play to carded play. And so, our new sign-up program has been quite successful. In fact in Q4, I would say over 60 -- approximately 60% of new sign-ups were under 40.

[Stephen Grambling:]

That’s helpful. Thank you.

[Operator:]

Our next question comes from Steve Wieczynski with Stifel. Please go ahead.

[Steve Wieczynski:]

Yes. Hey, guys. Good afternoon. So Frank, you talked about this a little bit already, but I want to try to dig into it a little bit more. And those restrictions that are in place at this point in terms of capacity restrictions, have you had -- or you guys had any discussions with the government there in Nevada about what they're actually looking for when they might start to reduce those capacity restrictions? And I guess what I'm getting at here is this something that could happen sooner rather than later? Or is this something that still could be a 6 months down the road kind of process?

[Frank Fertitta:]

I'm not going to get over my skis relative to the governor and what the governor's decisions are going to be relative to the restrictions, but I can tell you that all of the indicators that they have discussed and been looking at seem to be going in the right direction. We know that vaccination is rolling out and it's ramping up. And so I don't want to get over my skis with it but I am hopeful that things are going in the right direction. I think we're seeing at least light at the end of the tunnel at this point whereas going back June July August September there wasn't a lot of things to be looking towards. Indicators are that we're in a better place than they were even though we have tighter restrictions than we have. Overall, we're hopeful that they'll return to normal.

[Steve Wieczynski:]

Okay. Got you. And then second question I guess I want to get your updated thoughts around your view around sports betting. And obviously you've seen a lot of your regional peers go down the sports betting path. And clearly it's been a -- it's been positively received by investors. But is that something that you guys sit there and kind of scratch your heads by some of these moves in some of these equities? Or is this a potential opportunity for you down the road and something you still might explore?

[Frank Fertitta:]

Look we've been in the sports booking business since around 1980, 1981. I think we've always been one of the first movers when it came to phone betting mobile sports wagering we've been doing now for about 10 years. It's been a very good business for us. I believe that we're the market leader in this marketplace here and we expect to continue to be. It's been a good business a growing business and a profitable business for us. We just scratch our heads when people like to lose money because we like to make money. But overall it's a good business for us. And we expect to continue to be the dominant player in the market.

[Stephen Cootey:]

Yes, we're always going to look at various opportunities. We're continuing to study things. Obviously with the valuations that are being attributed to a lot of these opportunities, you have to pay attention to that. But like Frank said, I mean, if we were to embark into another state or another jurisdiction, we would only do it if we felt like we could do it in a profitable fashion. We wouldn't go into a crowded market and try to force our way in and essentially buy market share. It just doesn't fit with our overall operating philosophy, so we're taking a bit of a conservative approach to that. But like Frank said, we've been in the mobile sports betting business for over 10 years now. It's a very profitable business for us and our number one priority is maintaining that position here in Nevada.

[Frank Fertitta:]

I mean look the good thing for us. We have I think probably the most robust database in this marketplace. 90% of the adults in Las Vegas live within five miles of one of our locations. We know the customers. We think we're well positioned.

[Steve Wieczynski:]

Okay. Great. Thanks guys. Appreciate it.

[Operator:]

Our next question comes from Shaun Kelley with Bank of America. Please go ahead.

[Shaun Kelley:]

Hi, good afternoon everyone. Maybe just one because I think a lot has been addressed here. But if we look at the model, it looks like sort of just your non-tax operating expense cadence in the quarter was very, very flat sequentially, so fourth quarter relative to third. And just sort of thinking big picture, I mean, what's going to change your sort of run rate of expenses as we move into 2020 -- as we move throughout 2021? Is it going to be reopening some of those amenities that you mentioned that may be hotel, convention center, movie theaters? Or is it more really the step function would be with the reopening of some of the closed properties?

[Frank Fertitta:]

Are you talking about margins? Is that what you're referring to?

[Shaun Kelley:]

Well, really talking about, yes. I mean, it's -- margin's the output. I'm really talking about the operating expense trajectory of just like basically labor and marketing costs combined.

[Stephen Cootey:]

Yes. I mean, I think, -- I mean, it's really all of the above. I mean, if you just start -- you start with -- if you start bringing out amenities namely, as restrictions start getting lower. And we start bringing on some of our loss leaders that Frank talked about our theaters, our hotel, our catering these are incredibly profitable high-margin business. So we're only going to bring those on, when we make money. So we're happy to add labor in those instances. And those actually should be from a margin perspective, margin neutral to margin beneficial...

[Frank Fertitta:]

Yes. I think hotel, catering, movie theaters those should be neutral to beneficial to the margin in the business. Then, you have the -- the ability to hopefully have our 65-plus customer return. Of course, we're not going to want to open another property, unless we believe it's going to be accretive to overall EBITDA.

[Stephen Cootey:]

We're very focused on margins. We're very focused on profitability and margins. And like Frank said, I mean, the movie theaters are essentially 100% flow through, when those come back on. And there are…

[Frank Fertitta:]

And we are very focused on, also trying to capture as much of the business from our closed properties through our existing facilities, as we can. That's literally on the agenda every single week. What do we have? What are we missing? And how do we get the customers into our open facilities that were historically playing at the closed facility.

[Stephen Cootey:]

So as far as amenities that are currently closed, that could be reopened. I mean, there's really nothing that, I don't think that we see that should be de-gradating to our margin. Like for instance, we don't have any plans to open the buffets, anytime soon. In fact that's just right now, not on the table. So, obviously that would hurt our margins. We're only looking to bring on amenities that would be enhancing or at least neutral to the margins as they exist today.

[Shaun Kelley:]

That's great. I appreciate the color.

[Stephen Cootey:]

Sure.

[Operator:]

Our next question comes from Chad Beynon with Macquarie. Please go ahead.

[Chad Beynon:]

Hi. Good afternoon. Thanks for taking my question. I know, it's a small part of the business, but can you talk about any I guess meetings, groups convention outlook. Maybe for the back half of 2021 or just conversations that you've had with groups that, are encouraging? Any change versus the prior quarter? Thanks.

[Frank Fertitta:]

All right. Rob was throwing, things at me. From a median convention standpoint, as you know we're still under restrictions from the government. So the first thing first is getting that lifted. What we are seeing from groups and through discussions, there are some green shoots in the back half, namely Q4. I think right now Q2 and Q3 are somewhat of a walk. But what we are seeing, if you kind of met your drop kind of lying in the sand same time last year, 2022 right now is showing some green shoots. And we are developing traction across our properties.

[Stephen Cootey:]

It's mainly -- from a meeting standpoint, it's mainly social business. There's a lot of delayed weddings, in the marketplace. So there's a -- it's mainly things like that versus for instance, like big corporate business or anything like that.

[Chad Beynon:]

Great. Thanks. And then, for North Fork from a cash outflow standpoint, could you just remind us how this works? I believe, you make preconstruction advances to the Tribe? And then, you're going to seek traditional development financing. But could you just kind of remind us how that works in terms of money out the door? And that I believe when the property opens you get it back? Thanks.

[Stephen Cootey:]

Yes. That's usually a negotiation, between the lenders the Tribe and the management team. So yes, we have outlaid a significant amount of money to the tune if you include interest about $62 million $63 million. We'd like to get, as much of that back in the initial financing as possible. That's not guaranteed.

[Chad Beynon:]

Thank you very much.

[Operator:]

Our next question is a follow-up from Barry Jonas with Truist Securities. Please go ahead.

[Barry Jonas:]

Hey thanks. I just had a follow-up on, sports betting. I wanted to get your view on the prospect of Nevada, at some point reversing its in-person registration requirement, and any thoughts on, how impactful that could be for you?

[Stephen Cootey:]

I mean, it's a great question. I think -- I mean, it is somewhat important to us. Given the fact we have 16 locations. And we're conveniently located to 90% of the Las Vegas population.

[Frank Fertitta:]

know your customer AML ?

[Stephen Cootey:]

Exactly.

[Frank Fertitta:]

All of the above, we believe, in-person registration is an important aspect of business.

[Stephen Cootey:]

That said, Barry if it happened to go the other way. Again, we do have the deepest database. We have customers that come in four to seven times a month. And as Frank said, this business is about developing personal relationships. And there's no one better positioned in the Valley to have a personal relationship than us.

[Frank Fertitta:]

We're trusted.

[Stephen Cootey:]

That's right.

[Lorenzo Fertitta:]

And we do think that there is value creation, when you have land-based casinos along with, an online channel. And I think, probably over time you'll see that in some of these other markets as well. There is a benefit to having the land-based and the database. And then the online, all put together. So, we'll see.

[Barry Jonas:]

Great. Thank you.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to, Stephen Cootey, Executive Vice President Chief Financial Officer and Treasurer of Red Rock Resorts for any closing remarks.

[Stephen Cootey:]

Well thank you everyone for joining the call. And we look forward to talking to you in about 90 days. Take care.

[Operator:]

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