Good afternoon, and welcome to Red Rock Resorts First 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' first 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 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 that this call is being recorded. On a consolidated basis, the first quarter net revenue was $433.9 million, up $32 million, or 8% from the prior year first quarter. Adjusted EBITDA was $194.2 million, up $15.4 million or 8.6% year-over-year. Our adjusted EBITDA margin was 44.8% for the quarter, an increase of 28 basis points year-over-year. This represents the best first quarter adjusted EBITDA and adjusted EBITDA margin results in the company's history. With respect to our Las Vegas operations, the first quarter net revenue was $430 million, up $30.3 million or 7.6% from the prior year's first quarter. Adjusted EBITDA was $214.1 million, up $15.9 million or 8% year-over-year. Our adjusted EBITDA margin was 49.8%, an increase of 19 basis points year-over-year. This represents the second best quarter for Las Vegas operations in the company's history in terms of both adjusted EBITDA and adjusted EBITDA margin, and marks the eleventh consecutive quarter that the company delivered adjusted EBITDA margins in excess of 45%. In the quarter, we converted 78% of our adjusted EBITDA to operating free cash…

[Operator Instructions] The first question today comes from Joe Greff with JP Morgan. Please go ahead.

Good afternoon, everybody. Very strong results here and, as you mentioned, particularly in the non-gaming side of things. How broad based was this non-gaming revenue growth? I guess where I'm going with this is how even or uneven or concentrated is this non-gaming growth, at maybe some of your higher-end properties like Red Rock and Green Valley Ranch versus maybe some of what I would call sort of your core property?

Hi, this is Scott. Thanks for the question. Really, it's across the board. So when you look at the company as a whole, whether you're looking at food and beverage revenue, catering revenue, and the dynamics of average check and covers in food and beverage, it's across the board. So we saw about a 20% growth in food and beverage and about a 78% growth in catering revenue and we saw our profit in food and beverage go up 44%, so really strong numbers in the food and beverage side. And then on the hotel side, equally strong numbers, hotel revenue was up about 20%, ADR was about 18%, and RevPAR overall was up about 34%, so really strong numbers. And then if you look at bowling, we were up by 25% and spa and so on about the same percentage at 24.6%. So we're really happy with the blend of results there. As you drop into properties, you are going to see some upside benefit at Red Rock because of the capital investment that we've done there. So with the new inclusions of restaurants and lounges, we are seeing upside revenue increases there but it really is across the board when you look at a property by property basis.

Great, thank you very much. And then, for anybody who wants to take this next question, how are you thinking about the timing of the next development beyond Durango, phase one, say Inspirada and Henderson? How much time or what do you want to see to give Durango time to ramp or breathe before investing elsewhere? How does the phase two at Durango fit in the priority list? And then finally, I guess what we would consider increased land asset monetization impact the timing of your next development?

Hi, Joe. This is Lorenzo. I'll take that. I think our thought process is similar to what we said in the past. I mean, our focus right now is getting Durango open. We will open that in the fourth quarter. We would want to make sure that Durango is as stable and marching toward the expected return on investment, obviously that we talked about and that we've been able to achieve historically. With that said, we have been working pretty diligently on plans and entitlements, for the balance of the land that we own, the land bank for future development. Also, we've been working on a potential phase two for Durango, working on what that programming could look like, what it would be and trying to work out all the details on that. I will tell you that historically, once you have a property up and open and cash flowing and doing very well, the spend to go to a phase two, or an incremental expansion tends to be very high return on investment and very efficient. So while we haven't committed anything yet, I mean, it's exactly what we had said before. I mean, we just want to get the Durango open, we expect it to be successful, as we open it, and we want to get it stable and then we'll be in a position because of the work that we've done to be able to have multiple options, whether we pull the trigger on phase two, whether we break ground on one of the other properties, we'll make that decision, but we're in a really good spot for that from that standpoint.

Great. Thanks, guys.

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

Hey, guys, thank you. I guess, Steve, maybe you could opine on this one. But when you look at kind of the Las Vegas shifted [inaudible] expenses.

You're cutting out a little bit, Carl.

I'm sorry, Steve, do you hear me better now?

Yes, I do.

I was saying when you look at the Las Vegas segment, flow through was kind of in that 50% to 55% range. Obviously, the growth in FD and the growth in some of your other revenues and hotel is coming in stronger than the casino revenue growth right now. But as we move forward, how do you guys think about what normalized flow through can look like in the local segment?

I mean, I think this is going back to the days, so again, from a margin perspective, we feel very comfortable with the overall margins; again, we delivered consecutive quarters of margin over 45%. So when we think of what normalized margins are, that were here, and we think we can sustain these margins through good times and bad. When you're asking about flow through, I mean, we think flow through and I think we've always historically use a target of 50% to 70% flow through, there's going to be some quarters where timing may prevent that from happening but we're sticking with that target.

Understood. And then if I could just a follow up. As you guys kind of talked earlier, and I know Frank and Lorenzo, you guys have often talked about a return in the high teens on investment commensurate with what you've done historically at the greenfield developments. Does that estimate encapsulate any impact on the existing portfolio that could come from [inaudible] when you add it? Are you thinking about that holistically on what this project will add to aggregate EBITDA relative to the spend?

Yeah, this is Lorenzo. We do. Now when we talk about the returns, we're talking about stabilized returns, which, we expect to take roughly about three years to kind of hit those targets. But that would include even if there was some degradation early on for opening a new property that there would be backfill at existing properties that so when we talked about the returns, it is holistic, with the new supply in the market affecting everything. And that's what we've seen historically, as we've opened new casinos. The overall market tends to backfill and grow overall, as we add new products, so that would be our expectation.

Great, thank you guys.

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

Hi, good afternoon, everyone. Thank you for taking my questions. Actually, just wanted to build on that last point. I think, Lorenzo, you mentioned about three years to hit, stabilized returns, but if I caught it correctly, could you just talk a little bit more about the maybe the opening cadence? You would anticipate it's been a number of years since I think we've seen a major opening in the local market and just kind of curious about, what programming is needed, kind of upfront? Is there is an investment period around marketing that you would expect? I mean, generally speaking, I would think awareness is very high in this market already. So, you just kind of walk us through a little bit of the playbook and any sense of maybe how you'd expect debuts and then, like, percentages wise what it might -- what the debut may look like relative to that to that stabilized time period?

So historically, for the locals market here, as we've opened properties, they tend to be profitable out of the box and it really becomes an exercise of expense management at that point. I mean, obviously, when we open in Durango or any other property, we're going to be, probably overstaffed, and we're going to be overrun with business. And the number one priority is not going to be margin, for the first couple of quarters, it's going to be making sure that we're taking care of every guest, we've got great customer service on the slot floor, on the table games, as well as in the restaurants and hotels. So I think it's just a matter of kind of shaking out the service end of it and then figuring out how we get the most efficient operation and then really start to drive margin and continue to build revenue. I mean, these are dynamic enterprises and growing markets, and you have new people move into town all the time. I would, I mean -- based upon our marketing plans, we opened this thing, we're going to have a very high level of recognition of Durango and what it is, where it is, and that it's opening. So we're expecting to be busy from the time we open up, but it may take us a little bit to kind of shake things out and get the operations as efficient as we need them to be whether that takes 18 months or three years, we don't know. Obviously, we're going to shoot for the earliest date possible but I think historically, as we've looked at how these properties grow and settle in, it's usually like a two to three year period for these things to kind of stabilize the way we look at it.

Very helpful, and then is my follow up, and you kind of alluded to like a little bit of the staffing side of things. Just kind of wanted to get the thoughts on the upcoming union, renegotiations that are going on, I think across Vegas. What impact if any, does that have on Red Rock? And then more importantly, I think, kind of when you think about just matching and prevailing wages across the valley, how do you see kind of the wage or expense growth trending, as you kind of move throughout this year and maybe the next couple of years once that contract is in place?

Yeah, this is Scott. So certainly, that contract gets negotiated that will set a new bar and have some effect in the valley, across the valley. But how we look at labor today and into the future is, we've set a couple of orders now that, one, we've been able to be a best-in-class selection for employees based on our comps and benefits. And we've priced in to our margins very current wage and hour rate. We think we're set up well for Durango. We're out in the market now, testing those numbers and we think that those numbers are solid on an hourly wage basis. And so we think that that labor pressure is starting to subside a bit but we do want to be cautious that in the last part of the year, there are several major projects opening in Las Vegas that may cause a bit of inflation over, say, a six month period as we open up Durango. So you have the MSG sphere opening up and the Fountain Blue opening up, so there will be some competition for labor around those openings.

Perfect, thank you very much.

The next question comes from Jordan Bender with JMP Securities. Please go ahead.

Great, thanks for taking my question. If I caught it correctly, I believe you guys said you'll keep some of the acreage tied to the parcel you're selling to the A's. Does it make sense or could you or would you potentially build a casino on that parcel kind of next to the stadium?

I think what we've really talked about the last few quarters is, getting a better lay for our future growth pipeline. And you've seen that we've acquired a few sites out where all the growth is off the beltway. In the Las Vegas Valley, we think we're well positioned. And I think we're looking really to monetize the Viva parcel and we think that the A's was a really good thing to actually increase the value of the remaining property. So we're pretty bullish that we're going to be able to monetize the Viva site, basically, and we wind up with all these new sites out in the suburbs that we've acquired over the last 12 months.

Great. And then just for my follow up. It looks like corporate expense kind of ticked up in the quarter. Was there anything kind of one-time in nature? Is that kind of the right way to think about that moving forward?

You are within that range, there's probably going to be a half a million. That's more maybe one-time, it was basically bonus related to 2022 and the great year we had so.

Great, thanks. Best quarter.

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

Hey, guys. Good afternoon. So, staying on there -- going back to the non-gaming side of the business and specifically on the hotel side, it seems like you've been able to push rate there pretty aggressively and I think Scott said, ADRs were up 18% in the first quarter. So can you help us think about how forward room bookings, essentially had been trending as you've continued to take that price? I mean, basically, what I'm trying to understand here is, if you start to see any pushback, as you push those rates?

Hi, Steve. This is Scott. I think I can help you here. So let's take a look at forward bookings, same time last year compared to now and we'll also kind of look at 2019. Because we do get asked frequently, are we back to 2019 levels. So when you look at the pace for sales room nights right now, same time last year, we're up about 41%. So very encouraging numbers there, when you look at total room nights, and the revenue associated with that were up 53% and correspondingly catering on the books, same time last year is up almost 70%. So as we look into the future, we're very encouraged about the booking pace. You mentioned ADR, when you look at overall ADR in comparison to 2019, we're about 21% above 2019 ADR numbers, and we have surpassed 2019 numbers as it relates to catering in group this going into the rest of this year

So maybe piggyback on what Scott said, I think not only we're seeing a robust pipeline, but the mix is shifting. So we're seeing predominantly a corporate [Phonetic] group enter the mix and in our pipeline and that's a great thing, because you get multiple revenue streams from them, not only rooms, but also food and beverage.

Yeah, that’s one other thing. Relative to the mix, we're actually seeing quite an increase between now and 2019 in our casino mix; we went from 24% to 31%. And so really what that says is a lot of the growth we're seeing is in ADR.

Thanks for that, guys. And to add on to that, as you start to see more on the on the corporate side, I would assume that, if corporate continues to roll in, there'll be more opportunity to push price, especially midweek? Is that kind of the right way to think about it?

That's the right way to think about it. That's what we're seeing in the trends.

Okay, great. Thanks, guys. Appreciate it.

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

Great. Last year, you guys talked about seeing some impact at the low end of the database. I know, you also said it's less of a focus. But can you maybe just talk about how that's playing out right now?

Yes, this is Scott. So I think what we've said in the past is, we focus on our core customer, that being national, regional VIP core customers. When we look at the performance for the quarter, we see strong growth across all of those areas. When we look at overall of carded, we were up about 2.6%, so we're pretty happy with that. And so when we talk specifically about the lowest end of our database, I think we've mentioned before, a lot of our core strategy is focused on the mid to high and out of town customer, and that we've shifted away from that low profit, low contribution customer. So you're not seeing anything more than we've reported in the past in relation to that database performance.

Great, that's helpful. And just for a follow up, I know there are limits to what you can say. But are there any notable conditions for the A's land sale to close and with that are gaming entitlements included with the A's parcel as well as would it remain with the second parcel that you want to monetize?

Hey, Barry, unfortunately, we're under confidentiality, so we can't really answer any of these questions at this time.

Understood. Thanks so much, guys.

Thank you.

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

Hey, good afternoon, everyone. I wanted to talk about the food and beverage side of the business just as it relates to more your kind of high level strategy there. It seems like you've been moving more towards third party, higher-end product. Can you help us, maybe better understand the rationale for doing this is the mid-to-high end customer, you just kind of reference in more out of town? And how should we think about the impact of free cash flow and EBITDA margins?

Yeah, this is Scott, I think I'll start it and maybe Lorenzo can add some color. I think to say that we're solely focused on that might be a misrepresentation or better or a misunderstanding. I think in certain properties we are looking at more third party and more higher end outlets, but we're really looking across our food and beverage platform, based on the specific demographic of the customer at that property. So while you do see us doing a lot of stuff with notable food and beverage operators at Red Rock, what's less talked about are the properties like boulder and power station and sunset station, where we're doing equally as dynamic things, but at a different level of average check or food type.

And we've seen, so far, a very positive effect, particularly at Red Rock with the re-racked that we've done there by replacing the buffet with a high limit table game area, Greek restaurant and Lotus of Siam. And you literally almost see a transformation of what that end of the building looks like now, with the pace of customers that we have, we've seen a positive impact on our table games, we've seen our occupancy at peak periods on our table games go up considerably and obviously, it's helped our high end slots as well. So overall, that return on investment for us has exceeded what our expectations are. And we're in the process now of kind of doing -- executing a similar strategy at Green Valley Ranch where what was the buffet is now under construction, where we will be adding some food and beverage concepts and a high limit table games and a future new high limit slot area. So that playbook seems to be working really well for us, and definitely is a positive impact on margin for us as well, so.

Got it. Thanks. And then as you think about capital return, Stephen, I know you mentioned you should return back to that three times leverage falling during those opening. I mean, as you think about getting back to returning capital to shareholders via repurchases or any change in the dividend policy, is this something you need to get to or could we see it kind of along the way as Durango ramps?

I think right now we've paused the share repurchases because we were right in the kind of -- we are in the runway of getting Durango up and running. I think once Durango gets up and running then we're going to see rapid deleveraging, as Lorenzo mentioned, we expect local casinos typically come out of the box very cash flow positive. And so we'll start immediately taking -- going back to -- we will be taking a very balanced approach to returning capital to shareholders. And so as our balance sheet stronger as we roll out Durango, the Board will start evaluating both dividends and share repurchases.

Understood, thanks for the color.

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

Afternoon, thanks for taking my question. I wanted to ask about your retention levels, free play in promos if that has been stable, or with the influx of maybe some new people moving into the area, if you've had to step up with any of that, just trying to figure out kind of where that's headed next. Thanks.

It's been extremely stable. I mean, ever since we reopened, post-COVID in 3Q of 2020, as Steve said, we've had 11 quarters with margins above 45%. I think this quarter was probably the second or third best margin that we've had in the company's history. So we see absolutely no changes there. I mean, we're focused on the fact that we have the best locations where all the population is growing. We're focused on customer service, customer recognition, and the things that really matter to people. We're not seeing any changes in the promotional environment.

Great. Thank you and then a follow up. You talked about a stable customer, particularly at the high end. Are you still seeing nice growth in I guess your neighborhood properties? I guess that would probably be more of a tail on that low end or was the growth fairly balanced with the different levels of properties that you offer in the valley? Thank you.

Yeah, this is Scott. We would characterize it as fairly balanced and stable across the platform.

Okay, thank you very much. Nice result.

[Operator Instructions] The next question comes from David Katz with Jefferies. Please go ahead.

Hi, afternoon, everyone. Thanks for taking my question. I'll date myself a bit, and maybe a few of us, when you look at the economic makeup of the valley, and how that relates to your portfolio these days. If you could talk a bit about what kinds of economic data and other kinds of information you're looking at, and how that makeup of the valley today differs from where it was 10 or 12 years ago, and how you're different your strategies in conjunction with that?

It starts with the migration of population from primarily California is the number one market that are people moving to Las Vegas, I think you also see the number one migration coming from California for business relocation, as well. And it's really, I think, much different than it was say back in the ’80s. ’90s and 2000s, where most people moving to Las Vegas, were either looking for a construction job or a dealer's job or cocktail waitress, bartender. And now it's not that you still don't have people looking for those kinds of jobs here but you have a totally different mix of people that are moving here to run their business from here to retire here. And you have people that are not hourly employees, they're bringing their wealth with them to Las Vegas and I think it's a completely different dynamic than what we've seen in the past. I think,

And I think to add to what Frank is saying, when you look at the wealth of these customers, and where they're moving into the valley, this is part of our core strategy of development and growth, that we have locations in all of these high network, high growth areas slowing [Phonetic] down and we don't see that slowing down anytime soon.

I mean, you can talk, Steve, a little bit about these recent land purchases that we have in the balance of the portfolio are all within the fastest growing communities in Las Vegas.

Yeah, David, even if you look past even last quarter, from a housing perspective, when you take a look at the fastest growing master plan communities in the Las Vegas Valley, they're all via property; Summerlin, Cadence, Sky hills, Skye Canyon, and Inspirada. Those names should be familiar because we all land named after most of them. Yes, I think that bodes well for Frank in the rental strategy.

Understood, and if I can follow that up. This is also the odd circumstance where it feels as though we've been waiting around for quite some time for a recession to show up. How do you go about keeping your fingers on the pulse of that, and I know many of the companies we're talking to this earnings season aren't seeing anything yet but are cognizant of its potential.

This is Scott, I think as far as reading the tea leaves, that's a difficult thing to do. But understanding the macroeconomic pressures, I think our management teams at the properties are the best in the business at keeping a pulse on the daily efficiency of the property. So whether you're talking about labor control, cost of goods sold control, any kind of operating expense pressures, I think it's seen in our margins that our operating teams know how to control these macro-pressures and come out with great results. So we've shown consistently that we know how to manage those things. Steve, you may want to talk about some of the energy costs and other things that are less under our control.

Yeah, I mean, I think from a -- the two things that is tough to manage, one is out of our control and one defines really who we are, and you see that in some of the increases in SG&A. As Scott mentioned, utility costs, they are up almost $1.5 million, almost 30%. That's something we're trying to work through, through various energy initiatives, but that's one of those where the team has done an excellent job fading through. And then the other really boost to SG&A is repairs and maintenance and this goes back to the core philosophy and how we differentiate ourselves from our competitors. Not only it is about location, location, location, but the quality of asset and that helps keep our guests coming back and so you'll see that consistently throughout our financial year.

While we can't read the tea leaves on the macroeconomy, we can tell you that we really like our position based on what we see happening in the Las Vegas Valley. Come on over the next one to five years, with professional sports teams relocating here with the sphere opening up, with Formula One coming here, with the Super Bowl coming here. Las Vegas has a lot of things that are here that can buffer what else might be little things that happened in the macroeconomy, as well as the population growth and the limits on supply in our market.

Understood. Appreciate the answers and thanks for including me.

The next question comes from John DeCree with CBRE. Please go ahead.

Good afternoon, everyone. Thanks for taking my questions. We covered a lot of ground, but it may be kind of revisit two topics in a different way. One is on wage inflation. I think we discussed a lot earlier in the call about cost pressures but given wage inflation, I think, a couple quarters ago or a year ago, we had a conversation about the importance of wage growth for your customers. So when we think about the upcoming wage inflation, whether it's union contracts, or what have you -- how do you evaluate the puts and takes? Is it a net benefit as the population earns more or does that more than outweigh the cost? Just curious if you guys have a view?

Hi, John. This is Steve. I think there are always -- there are more of them than there are of us. I think as wages go grow through the valley, for variety means, whether it is the union contracts, or the sphere or Durango launching or [Indiscernible] launching. The more money in the system benefits our property as they're uniquely located throughout the valley and the strip's employees are generally our customers.

Fair enough. Thanks, Steven. Maybe it's a specific question. You've already mentioned teams relocating with A's potentially coming. If you look at maybe the Knights, if you seem direct benefit on game nights, I mean, obviously it draws population and feeds into the broader economic story, but was there a closer more tangible benefit around those sporting events that you would expect or would compare if the A's do come?

Yeah, this is Scott. We see across the valley that people come out for the Knights games and so you can see that in our casinos, you can see it in small pubs and taverns. And we also have a strategic relationship with the Golden Knights that we benefit from within our marketing division. So we are big fans of organized sports in Las Vegas, we're big fans of both the football team, the hockey team and eventually the baseball team as well.

It is great for tourism and creating demand for the hotel rooms in the city here.

Perfect. Thanks so much for all the color guys. Congratulations on another great quarter.

Thanks, John.

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

Thank you everyone for joining the call and we look forward to talking again in 90 days. Take care.

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