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.

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…

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

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?

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.

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.

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?

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.

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.

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.

Great. Thanks guys.

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

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?

Yes, I can take that. Carlo, this is Scott. Yes. Look, I think when we look at where we've been and where we're headed, we've been mentioning that we're up against tough comps in April, certainly was one of the tough ones. If we look at forward projections, call it, a 90-day look inclusive of July, we like where we're headed. We like where we are at the midpoint of the year, against what we expect to do for the full year. But we all, in consensus, feel like the rest of the year has tough comps as well. So, while we are encouraged with where we are year-to-date, and our operating teams are ready to face the challenge of any necessary expense management. They're already doing a great job of that when you're talking about labor, cost of sales, all of these things are being managed very well, all of these inflationary pressures. But we're very focused on what we think is going to be pretty competitive comps for the remainder of the year.

Great. Thank you for that Scott. And then, if I could, just as you guys start to - you're in the kind of 90-day stretch, maybe less until Durango opens. Could you talk a little bit about the hiring environment or the experience thus far in terms of staffing up that property?

Yes, this is Scott again. So you're right. We're down in the final stretch. I think we're inside of about 100 days. So, we have done our internal recruitment campaign. We had a lot of interested team members to come over to the new properties. So that's the base of our employment pool. And that's an employee that understands our brand is loyal to the company and really kind of brings over the D&A of what we do. We are about to kick off the external campaign on the 14th, and we're already getting unsolicited interest. So, we feel confident that we're going to be able to fill our needed employment with high-quality employees. If you go back and look at what we said in previous calls, a long time ago, we right-sized our pay ranges, our benefits. We are a best-in-class employer in the market, and we knew this was coming and we got ahead of this probably well over a year ago. So that we had competitive wages, competitive benefits. And there - not to be completely immune to - the other factors. We do have Fountain Blue coming online. We do have the sphere coming online. So, there is a competitive market out there, but we think we're going to compete very well.

Thanks again. Thank you guys.

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

Yes. Hi guys. Good afternoon. So, it's going to be another margin question. So bear with me. So Steve, you mentioned the majority of the margin pressure occurred in April. So based on what you witnessed in May and June and now you have July in your belt as well. Do you think it's possible to have margins for the back half of the year be in the range of last year? Or you called out things like higher utilities or are there other factors that might not allow you to do that? And this is assuming what you saw in May, June, and I assume July is kind of status quo?

Yes. I mean I think the top line answer is yes, we can. We've been very consistent with that message that we expect to be in that - the new historical range, right? And as Scott alluded to, we have a lot of the inflationary pressures already built in. The team is doing a fantastic job managing through them labor, for the most part, we are now driven by volume-based labor. So payrolls going up as we bring on more people to fill demand, particularly in our non-gaming segments. Cost of goods sold, relatively flat. And so, we are managing through those so. And then, as I mentioned, with R&M and there's probably a variety of other levers that we can hold. So there's a lot of controllables, that we feel we could pull out of the cost structure if need be. But right now, we feel pretty good in the business. And we don't see any reason to change our current strategy.

Yes, Steve, I mean, this is Lorenzo. I think as we have mentioned - in prior calls as well, part of the margin question is going to be determined by gaming revenue as well, right? So, if we're able to, and we believe that we will be able to maintain the current of our own, and we should be able to maintain the margins. As Steve said, we have a very laser focus on expenses throughout the company.

And one last factor is acquisition costs. We still are enjoying a very stable and rational promotional market, and we don't expect that to change through the rest of the year.

Okay. Got you. Thanks for that color. And then second question on the hotel side. I'm not sure, Steve, if you mentioned where ADRs were in the quarter, but it seems like they were probably up slightly as kind of my guess. And I don't know, Scott, if you can - yes, go ahead?

Okay. I cut you off.

Oh no, no. So - and I just wanted to see if Scott you kind of comment on how he views taking price action at this point in terms of - on the room side. And basically, just trying to understand if there's been any real pushback yet on that you guys continuing to push room rates?

So, I'll start with the facts and Scott can get at least the hard question, Scott. So I mean, ADR was up about 5.2%. So, we're almost at that $194 mark, which is - we're well above. We're pretty COVID levels go. But from an occupancy standpoint, I think that's going to lead into what Scott's going to say on pricing, is we're in that 88%, 88.5% occupancy, we're all up 340 basis points. We're still below our pre COVID. So, there's still room to grow on the occupancy side.

Yes. And I'll jump in here. Just that all comes down to RevPAR. So RevPAR was up about 9%. And then if you look at a little deeper into the components of that catering was up 40% year-over-year. And so, catering is also associated with group room nights, and there's always a question as it relates to 2019 and where are we in comparison to 2019. And I recall us saying at one point, we're about to get there to be comparable, I can tell you at this point. This year, we're about 78% above 2019 numbers in catering sales. As we look forward into what we call same time last year, meaning what's on the books now forward-looking, and what was on the books forward-looking last year. Sales revenue was up about 43%, and catering revenue is up about 56%. So, we're really encouraged not only with the quarter's performance on hotel and catering, but also the forward look.

And to add to Scott's point, again, going back to - this is that the mix of in that group sales, you're now predominantly corporate, and corporate is a great, great mix, because that leads to other ancillary revenues throughout the casino floor.

Okay. Got you. Great color, guys. Appreciate it. Thanks.

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

Hi there. This is actually [indiscernible] on for Barry. Can you talk about some - what do you think the impact will be from the event calendar with F1 and Super Bowl coming up long?

Yes, I know there's been - this is Lorenzo. There's been a lot of talk about F1 and Super Bowl. And obviously, we're excited for both of those weekends as is everybody in the industry. But when we talk about it around here, I mean, it's - Las Vegas is unbelievable in the sense that it seems like there's something major going on almost every weekend. So it's really - it's just 2, 4 [ph] data points that we're going to be great. But for us, as we see our business unfolding it just as two weekends out of a lot of great weekends that are coming up for us. So, I think that's part of why our forward look - looks as it does, as Scott kind of outlined in the last question.

Got it. And just a quick follow-up. Now that the - A's are out on the potential of Veeva land sale, what's your view on including gaming entitlements to increase value there?

Well - listen, we were obviously excited about the opportunity that we were talking to the A's about. It didn't obviously end up happening. I could tell you one thing from a positive standpoint that has come out of that is that now a lot of people are aware of how great of a site that it is with 100 acres there right off of the Las Vegas Strip on the corner of I-15 and Tropicana. The property currently has gaming entitlements associated with it, because we have the Wild West casino on that property for some time, which was a full casino license here. And we've worked on that property for a number of years, and currently in sales for development, but also we've had a number of inbounds of people that are also interested in the entire property or parts of the property. So, we'll just continue having those discussions. But like I said, I think the real big positive that came out of that is to kind of put a spotlight on how valuable that piece of property is and how rare, it is to be able to have 100 acres of property that magnitude within what is essentially the resort corridor.

Thank you so much.

Our next question comes from Dan Politzer with Wells Fargo. Please go ahead.

Hi. Good afternoon, everyone. Thanks for taking my question. I just wanted to touch on Durango. I mean after you saw that blip in April, as you think about demand maybe being a little bit more fragile than three months ago, is it still - how are you thinking about cannibalization at this point? And are you still thinking about full speed ahead in terms of Phase 2 of that property expansion?

So, we're currently working on Phase 2 from a planning standpoint, which is just kind of how we always have operated. Our anticipation is that we're going to open Durango on November 20, and it's going to be a successful opening, and there's going to be sufficient demand for that to be able to hit our targeted returns. We want to be in a position - we can pull the trigger on a potential Phase 2 as soon as it makes sense for us to do that. We would be looking to add some gaming capacity as well as some additional entertainment options. So that is one of the projects we're currently working on. As we had mentioned in the past as well, we're also working on plans and entitlements for the Inspirada project, which is located in Henderson, another great area without a lot of gaming capacity in a great location in an area that's got great demographics as well. So, those are kind of the two that of the eight, if you include the Durango Phase 2 gives us essentially eight projects for us to grow the company that we actually control as a company that we can roll out over a number of years here. But those would be the two that would be next to line in our minds. Did I answer your question?

Yes. Yes.

And the other point I would add, though, too, I mean you mentioned the blip in April, we don't view Durango as a blip in April. I mean - when I look at like Red Rock Casino Resort opened up in April 2006 and it's been growing ever since. So, these are 40-year assets. So - that one blip, which it was a blip, doesn't...

Probably isn't blip - it just like a blip from the greatest point [ph] in the history of the company.

Yes. It's right.

It's not a blip.

And you did mention cannibalization. And look, we hope everybody wants to go and check out Durango. That's our [indiscernible] and they will. But when you look at Red Rock and the dynamic growth that we're seeing in Red Rock, and the surrounding residential development. Red Rock on its own broad trajectory relative to [Summerlin West] I mean and high net worth people moving into the valley. So any cannibalization that comes…

This will be short-term.

Durango, will be short-term and backfill very quickly.

Got it. And then just for my follow-up. Obviously, there's been some pretty extreme heat out West. I mean, has there been any impact in terms of the driving customer or alternatively more locals leaving town that would result in maybe pronounce seasonality?

No. I think seasonality in Q2 is in line with what we've seen in the past.

Historically - maybe not in the past relative to '21 to '22, but historical seasonality, yes. I mean, typically, Las Vegas locals do tend to go on vacation in the summertime. It is very hot here, wherever they go to get out of the heat or just have their summer vacation. But as we mentioned, I don't think it's anything out of the norm of what we've seen outside of '21 and '22, which obviously, we didn't see any seasonality in those years.

Thanks. Appreciate all the detail.

Appreciate it.

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

Good afternoon. Thanks for taking my question. Just wanted to dig a little bit more into the gross gaming revenue. I know roughly 80% to 85% of your GGR comes from slots. And we've seen probably some stronger numbers on slots versus maybe some deteriorating numbers on tables, not sure if that is really just kind of highlighting how strong some of the table revenues were last year from a retail customer. But is that kind of what you guys were seeing in your business? Is the core slot business - did that hold up well in the months that you were talking about? Thanks.

Hi. This is Scott. I think if we look at - look on absolute dollars, the slots were the largest environment. When you look at table and - actually, from a volume that - gains drop, we're actually up. So, we had some hold [indiscernible] they were gains that contributed to the decline. And then when we look at sports, as we said, it's really a function of the Golden Knights, we can try and angulate right against that and a whole percentage issue for sports.

Okay. Great. Thanks.

It's kind of concise to our core strategy - as cable is up. We've invested a lot of money in our table rooms.

Yes. We have a new high-limit room for slots and a new high-limit room for tables coming on Green Valley Ranch towards the end of the year. And then, we also have a new high-limit room at Santa Fe coming online. So, this is all part of us investing in high net worth, high-profit customer segments.

Okay. Thank you. And then from a capital allocation and leverage standpoint, could you just kind of remind us when you would start moving forward on the next project or when you would start returning to share repurchases after Durango opens in the fourth quarter? Thank you.

I think from a leverage standpoint, as we kind of walkthrough, we're going to get Durango open. So leverage peak out Q4. And then as Durango loads up, as it ramps up, we will start to naturally delever down. The Board considers capital allocation every quarter, both from a dividend perspective and a share repurchase perspective. And we've made it very clear, we halted the share repurchase program in the past, because we're in the throes of Durango. And once that launches, to your point, I think we're going to return to a more balanced approach to returning capital to our shareholders.

Thanks Steve, looking forward to the opening. I appreciate it.

Our next question comes from David Katz with Jefferies. Please go ahead.

Good afternoon, everyone. Thanks for taking my questions. You covered a lot of ground already. What I wanted to ask about is how you're thinking about omnichannel strategy and technology, digital, et cetera, digital wallet was something you were working out, rolling out, et cetera. An update there would be helpful, too?

Yes. So it's a great time to ask that question. We're rolling out a bunch of new tech. And it all revolves around transaction ease and less friction for the customer and the mobile device. And so, we have a complement of products starting with a new mobile app. And it will bring transactional features for the customer. This would include digital cash, digital wallet. Market tracks, which is retail credit lines up to $5,000.

Microcredit.

Microcredit. We'll also add a bunch of new functionality into the app related to booking reservations and different things like that. And then it will also incorporate the new sports mobile system. And then all of this will be under a singular wallet and a singular password construct and enrollment construct that allows you to not have to enroll it separately in all of these different applications. So it was our target to have all of that online, before the opening of Durango, and we're in the throes of having either rolled those things out or rolling them out.

Thank you.

Thanks, David.

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

Thank you very much for everyone joining the call, and we look forward to talking more as the Durango approaches later this fall. Take care.

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