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Edited Transcript of RRR earnings conference call or presentation 30-Apr-19 8:30pm GMT

Q1 2019 Red Rock Resorts Inc Earnings Call

LAS VEGAS May 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Red Rock Resorts Inc earnings conference call or presentation Tuesday, April 30, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Stephen Cootey

Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer

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Conference Call Participants

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* Barry Jonathan Jonas

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* Carlo Santarelli

Deutsche Bank AG, Research Division - Research Analyst

* Chad C. Beynon

Macquarie Research - Head of US Consumer, SVP and Senior Analyst

* Harry Croyle Curtis

Nomura Securities Co. Ltd., Research Division - MD and Senior Analyst of Gaming, Leisure & Lodging

* John G. DeCree

Union Gaming Securities, LLC, Research Division - Director and Head of North America Equity & High Yield Research

* Joseph Richard Greff

JP Morgan Chase & Co, Research Division - MD

* Shaun Clisby Kelley

BofA Merrill Lynch, Research Division - MD

* Stephen White Grambling

Goldman Sachs Group Inc., Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good afternoon, and welcome to Red Rock Resorts First Quarter 2019 Conference Call. (Operator Instructions) 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.

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Stephen Cootey, Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer [2]

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Thank you, operator. Good afternoon, everyone, and welcome to Red Rock Resorts First Quarter 2019 Earnings Call. Joining me on the call today from Red Rock Resorts are Frank Fertitta, Chairman and Chief Executive Officer; Richard Haskins, President; and Bob Finch, Executive Vice President and Chief Operating Officer.

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. The risks and uncertainties related to these statements are detailed in our filings with the SEC.

During this call, we will also discuss non-GAAP financial measurements. For definitions and complete reconciliation of these figures to GAAP, please refer to the financial tables in our earnings press release and Form 8-K, which were filed this afternoon prior to the call. Also, please note this call is being recorded.

Let's turn now to our solid financial results. On a consolidated basis, net revenues increased 6.2% to $447 million. Adjusted EBITDA increased 3.6% to $145.1 million and margins decreased 80 basis points to 32.5%.

With respect to our Las Vegas operations, net revenues for the quarter increased 6.9% to $422.4 million. Adjusted EBITDA increased 3.7% to $130.5 million and margins decreased 100 basis points to 30.9%. Despite these results being negatively impacted by substantial construction disruption at the Palms throughout the quarter, we achieved our highest first quarter net revenue and adjusted EBITDA performance on a same-store basis in over a decade. Notably, ex our 2 redevelopment properties' flow-through was within our targeted range of 50% to 70%.

Because the Palace Station redevelopment is now fully complete and the Palms redevelopment is rapidly nearing completion, we will no longer be in a position to discuss financial performance of our Las Vegas operations on a disrupted versus nondisrupted basis. We will, however, provide additional color with respect to both those properties later in the call.

The solid first quarter numbers were driven by growth across both gaming and nongaming segments of our business. As for the overall strength of Las Vegas locals market, we've now seen gaming revenues in this market grow on a trailing 12-month basis at its fastest rate at any regional market in the United States on a same-store sales basis, with our gaming revenues growing at more than twice the rate of the remainder of the market during that same period.

Let's take a look now at some key metrics related to the Las Vegas economy, which remains very robust and supportive of future growth. Population is at an all-time high and Las Vegas is now the second fastest-growing MSA in the nation. Additionally, Las Vegas is currently forecasted to add nearly 200,000 new residents by 2022, an increase of almost 10% from today. Employment is also at record levels and we have now seen 94 consecutive months of broad-based employment growth. March employment, which was up an impressive 2.8%, led by a 10.8% increase in construction job growth.

Wage growth as measured by weekly earnings is also robust with Las Vegas reporting an increase of 3.6% for the trailing 12 months ended March. In addition, discretionary spending has accelerated, as evidenced by a 7% increase in taxable sales for the trailing 12 months ended in January.

Housing remains very solid as median home prices were up 9.6% in March, well above the national average. More importantly, over 95% of homeowners now have a positive home equity compared to a low of 22% during the downturn. Since that time, more than $64 billion of home equity value has been created in the Las Vegas market. In addition, there are now over $18 billion in new capital investments planned or underway in Las Vegas, led by the new Raiders stadium, Project NEON, the convention center expansion and multiple Strip developments, all of which will further expand the local economy. This impressive economic backdrop combined with very favorable supply/demand dynamics, a stable regulatory environment and the lowest gaming tax rate in the nation explain why we view the Las Vegas locals market is the most attractive gaming market in the United States. And with our best-in-class assets and locations, unparalleled distribution and scale and deep organic development pipeline, we remain uniquely positioned to take advantage of the ongoing growth in this extremely vibrant market.

Turning now to our technology initiatives. The new IGT slot system continued to play a pivotal role in accelerating the gaming revenue growth and we continue to see meaningful increases in key slot metrics such as carded slot win, time on device and spend per visit. Back in December, we introduced the latest system enhancement in the form of personalized on-device marketing and messaging, which has been extremely well received by our guests. At the beginning of the second quarter, we are introducing our newly developed time-based bonusing engine, which allow us to more effectively personalize company-wide bonusing programs for individual guests. In addition, we will be introducing a number of other system enhancements including new company-wide bonusing programs throughout the remainder of the year. We are confident that these system enhancements along with the additional branding relationships such as Wheel of Fortune and Monopoly will provide an even more engaging, rewarding and convenient customer experience that will in turn further accelerate gaming revenue growth.

Turning next to our Palace Station and Palms redevelopment projects. We remain very bullish on both these opportunities based on their hybrid ability to appeal to both residents and tourists alike and expect them to generate significant returns for the company upon completion. With respect to Palace Station redevelopment, as noted on our last call, the $191 million project was completed on time and on budget in December. That redevelopment added nearly 180,000 square feet of exciting new gaming and nongaming amenities to Palace Station along with a number of exterior improvements. The guest response to this property-wide enhancements has been very enthusiastic and we are already experiencing double-digit revenue growth at the property as a result of these changes.

With respect to the Palms redevelopment, our $690 million plan to completely reimage and reposition the property remains on time and on budget. In early April, we debuted several key element of Phases 2 and 3 of that plan as part of our grand reopening weekend including Shark, a high-energy seafood restaurant with James Beard award-winning celebrity chef Bobby Flay; Green Street Kitchen, a New York-inspired eatery developed in partnership with Clique Hospitality, a leader in West Coast hospitality and nightlife; KAOS, a spectacular entertainment experience consisting of a fully integrated 73,000-square-foot dayclub and a 29,000-square-foot nightclub, which is already redefining the daylife and nightlife experience in Las Vegas. Notably, combined, the venue's going to accommodate up to 8,000 guests, making it the largest club in the city. And with its seasonal dome cover, the dayclub will be the only one in Las Vegas to be open on a year-round basis.

Completion of the final ultra luxury suites in the Fantasy Tower including the critically acclaimed Damien Hirst-inspired Empathy Suite; a casino floor expansion that adds approximately 300 new slot machines and will also add 16 table games in connection with the opening of the Michelin-starred dim sum restaurant, Tim Ho Wan, from Hong Kong in late Q3; a casino connector seamlessly integrating the adjacent 599-room Palms Place Tower directly into the property's newly expanded casino floor; an indoor connector to the preexisting self-park garage with ingress directly into the newly expanded casino floor; and a state-of-the-art 270-foot tall LED sign spanning the entire east side of the Ivory Tower exterior, which is visible across the Las Vegas Strip.

At the same time, we unveiled to rave reviews on status quo our nationwide rebranding and marketing campaign designed to drive further trial and awareness of the completely transformed property. Initial feedback on the completed components of these projects from both locals and tourists alike has been extremely positive as the property's unique and differentiating offers are clearly appealing to both of these key customer segments. As noted earlier, the project is rapidly nearing completion with the final components of Phase 2, a world-class wellness spa and salon, expected to be complete in late Q2 and the final component of Phase 3, Tim Ho Wan, expected to be completed in late Q3. Once fully complete, this once-at-a-time reinvestment will touch nearly aspect of the iconic property, and we are confident that it will become a must-see gaming entertainment destination in Las Vegas.

Turning to our Native American segment. We reported management fees for the quarter of $21.5 million, down 2.8% from the prior year, primarily driven by the exploration of the Gun Lake management agreement in February of last year. That negative impact was partially offset by a 14.3% increase in fees from the Graton management agreement as the property's performance remains robust.

With respect to the North Fork project, we continue to progress with the few remaining pieces of litigation related to the project. As we've previously noted, the California Supreme Court has granted the tribe's petition for review with respect to a key lower court decision involving the project, but is deferred, taking further action into that -- on that matter until it's ruled in a very similar case before involving the Enterprise Tribe, which received a favorable court ruling at the appellate court level. We continue to anticipate that the court will schedule a hearing on the Enterprise case in the near future.

I will now cover a few balance sheet and capital items. The company's cash and cash equivalents at quarter end were $109.2 million and total principal amount of debt outstanding at the end of the first quarter was $3 billion. At the end of the first quarter, net debt to EBITDA and interest coverage ratios were 5.1x and 4.3x, respectively. Cap spend in the first quarter was $160 million. For the full year 2019, we anticipate capital expenditures will be between $350 million and $400 million inclusive of the Palms redevelopment project. Following the completion of the Palms redevelopment project, we expect to be a significant -- generate a significant amount of free cash flow beginning in Q4 this year. As we exit this development cycle, our focus as a company moving forward will be on maximizing the financial performance of our existing properties and deleveraging the balance sheet with a target leverage ratio 4x or less.

Lastly, on April 30, 2019, the company announced that its Board of Directors had declared a cash dividend of $0.10 per share payable for the second quarter of 2019. The dividend will be payable on June 28, 2019, to shareholders of record on June 14, 2019.

Operator, this concludes our prepared remarks for today, and we're now ready to take questions from the participants on the call.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from Joe Greff of JPMorgan.

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Joseph Richard Greff, JP Morgan Chase & Co, Research Division - MD [2]

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I know it's early days here with the latest phase opening at the Palms. But maybe you can just talk a little bit about the mix between locals and nonlocals. And again, realizing it's super early here, can you talk about maybe what, if any, impact you have experienced at some of your other properties, notably Red Rock and GVR?

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Stephen Cootey, Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer [3]

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Yes, sure. Well, Joe, you're right. We're less than 30 days into the project. I'll try to address the last question first. From a cannibalization perspective, we've actually seen no cannibalization on any property. In fact, we've seen an increasing crossover play in the last quarter, which is very promising.

And the -- I forgot the first question was? Not that I'm ignoring you, Joe.

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Joseph Richard Greff, JP Morgan Chase & Co, Research Division - MD [4]

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Just in terms of, I guess, the last 4 weeks, the mix between tourists and, say, locals?

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Stephen Cootey, Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer [5]

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I mean, and this one, it's completely too early to tell. So give me another 6 to 9 months...

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Unidentified Company Representative, [6]

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Both segments are up considerably.

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Stephen Cootey, Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer [7]

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Yes.

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Joseph Richard Greff, JP Morgan Chase & Co, Research Division - MD [8]

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I totally get it. And then just with respect to 1Q, just given, I guess, some of the costs hitting the Palms that may have been included in CapEx, was there -- do we see the Palms maybe retrenching in profitability 1Q versus 4Q, knowing that both relative contributions are small?

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Stephen Cootey, Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer [9]

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I mean, I'm sorry. So you broke up a little bit there, Joe. So if you could maybe repeat the question.

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Joseph Richard Greff, JP Morgan Chase & Co, Research Division - MD [10]

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Did the Palms in 1Q retrench a little bit on EBITDA versus whatever it contributed in the 4Q?

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Stephen Cootey, Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer [11]

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Actually -- and Joe, I mean, you understand both projects are ramping up. I mean, again, we take a very long-term view on these projects and it's very, very much at the beginning stages. So both the Palace and Palms were a little bit of a drag on margin. The core business margins are actually up, but from a profitability standpoint, I don't think there was any retrenching at all.

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Operator [12]

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The next question comes from Carlo Santarelli of Deutsche Bank.

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Carlo Santarelli, Deutsche Bank AG, Research Division - Research Analyst [13]

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So my question is kind of along the same lines as Joe's, but thinking more about it's a little bit easier when you're doing a greenfield development to have a better sense of how to think about both the revenue and the margin ramps. But I guess with Palms, and acknowledging it's kind of unique from both aspects, how should we think about kind of your ability to get Palms to the margins that you guys believe it will stabilize wherever that may be in terms of the time line from completion? And when do you expect to kind of achieve the run rate revenue level and -- as well as kind of run rate margins for the property?

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Stephen Cootey, Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer [14]

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Yes. I think, Carlo, that's a good question. We've actually treated this as a completely new project, whether greenfield or not. I mean, we've completely touched every aspect of this project. So this is going to take no different than the same ramp as a new project, about 18 months.

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Carlo Santarelli, Deutsche Bank AG, Research Division - Research Analyst [15]

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Okay. Great. And then if I could, just one follow-up. Have you guys seen -- obviously, there's been some -- it seems like some pressure on Strip trends and granted more so in different higher-end segments of the business, which will be less impactful, but have you guys seen any evidence at all in your locals portfolio of maybe some of the softness that we're seeing on the Strip spilling over into some of your locals customers' spend habits?

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Stephen Cootey, Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer [16]

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No, actually. No, we haven't -- we've actually seen it pretty much at every property with the exception of, one, positive revenue growth; and two, our 2 properties closest to the Strip, we've seen extraordinary growth. So we've seen no change in our customer behavior.

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Operator [17]

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The next question comes from Shaun Kelley of Bank of America.

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Shaun Clisby Kelley, BofA Merrill Lynch, Research Division - MD [18]

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Steve, from the prepared remarks, it sounds like you kind of want to move away from the same-store metric or some -- or as you start to include, I think, Palace pretty much for the full quarter here. But can you just give us a sense on this (inaudible) you said sort of no cannibalization that was identifiable. But just directionally versus the market, I think, you characterized on a trailing basis, Steve, that you guys are down almost 2x the market. Did you continue in the 1Q, excluding Palace, to outperform what we see overall for the kind of market revenues? Or how would you characterize the broader portfolio ex Palace at a high level, if you don't want to give out the numbers?

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Stephen Cootey, Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer [19]

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That's all right. I mean, I think, growth in the core business moderated a little bit after the exceptional Q4. I think we've seen the same trends as all the other operators and we had a weaker January. But we saw sequentially meaningful improvement in both February and March, and we -- and then we expect -- and we continue to perform in line with the market. That said, growth is never going to be linear here. Some quarters are going to be exceptional. You're going to have exceptional growth like we saw in Q4. Others, the growth is going to be a little bit more modest. But as I mentioned in the prepared remarks, as we look at our core business over the past 12 months, which is the way we kind of view things as growth tends to normalize, we've significantly outperformed the market and we expect to continue to do that going forward.

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Shaun Clisby Kelley, BofA Merrill Lynch, Research Division - MD [20]

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Great. And then just one -- for a little bit more detail on the Palms as we start to move forward on the ramp-up here. Can you just talk a little bit about the marketing progression? And is there anything specifically outside of, I think, the area you've highlighted which is primarily the -- some of the Asian baccarat areas that you're sort of left to turn on or market? Or like just what's going to be the cadence as we move through second and third quarters here in terms of -- any amenities that sort of aren't online, take a little bit longer to market, or how do you expect a little bit of the kind of marketing cadence to work from here?

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Stephen Cootey, Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer [21]

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I mean, I think, you're going to see in Q2 because we have the opening weekend and the launch of on status quo some significant marketing expenses, as you'd see with any project. We've put $690 million into this project, so we want to make sure that it's rebranded correctly. But that -- once we go forward, you'll see kind of a steady cadence of marketing as we go throughout the year. And then, yes, as we start launching into our more Asian-centric theme with Tim Ho Wan, I would expect some additional spend to happen -- to occur there.

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Shaun Clisby Kelley, BofA Merrill Lynch, Research Division - MD [22]

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Did any of that get in the way of sort of at least some sort of modest sequential improvement as we move quarter-to-quarter throughout the year? Anything we should be aware of?

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Stephen Cootey, Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer [23]

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Again, I'd go back to what I answered with Carlo's, this is a long -- we're going to take this long-term view, right? So I think an 18-month view of getting this to stabilization. So there's no doubt there's going to be some bumps in the road, but I don't think the marketing programs are going to get in a way of sequential improvement. And if we do well, I'll point them out.

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Operator [24]

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The next question comes from Harry Curtis of Nomura Instinet.

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Harry Croyle Curtis, Nomura Securities Co. Ltd., Research Division - MD and Senior Analyst of Gaming, Leisure & Lodging [25]

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If we could shift gears to the Palms. As you introduced this, the new -- the property, can you address how you're approaching your entertainment differently than others on the Strip that tend to have a single star focus? It's pretty expensive, but what's the ROI on it? And what sort of incremental or broader distribution advantages do you get by doing it your way?

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Stephen Cootey, Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer [26]

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I mean, it's a tough question to answer in terms of ROI in every single performer. I'm not sure I'm going to go into that level of detail as we don't really comment on individual deals. But the idea was we built on one -- kind of a venue that's unparalleled in the market. We had to come up with a talent profile or a group of people that actually helped perform there. We want it to appeal to across all markets, and so that's why we went out pretty broad with in terms of who we actually brought in. The idea there, Harry, is to not just to appeal to kind of the EDM crowd, but to appeal to a wider music audience.

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Harry Croyle Curtis, Nomura Securities Co. Ltd., Research Division - MD and Senior Analyst of Gaming, Leisure & Lodging [27]

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Okay. And is this part of the initial marketing ramp and reintroduction of the Palms? Or is this a strategy that you intend to employ for some time?

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Stephen Cootey, Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer [28]

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This is a continued strategy.

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Unidentified Company Representative, [29]

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I mean, we're in the early days, Harry. I mean, we're just trying to reintroduce the property to both tourists and locals and get trial for the facility. So step one is the reintroduction, rebranding of the property, giving as much trial as we can. And then once we get through that initial launch, we'll start focusing on expenses and (inaudible) everything. It's the same thing we do every time we open a new property.

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Harry Croyle Curtis, Nomura Securities Co. Ltd., Research Division - MD and Senior Analyst of Gaming, Leisure & Lodging [30]

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Shifting gears. Given the lift that Las Vegas locals population is enjoying, are you seeing a similar kind of lift in your frequent player sign-ups?

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Stephen Cootey, Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer [31]

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We are seeing increases of player sign-ups, along with -- I mean, listen, Harry, across all metrics within slot. I mean, you look at any of our metrics, hours played, spend per visit, new slot sign-ups, uncarded, carded slot win, all out. Is that what you're getting at?

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Harry Croyle Curtis, Nomura Securities Co. Ltd., Research Division - MD and Senior Analyst of Gaming, Leisure & Lodging [32]

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Yes. What I'm trying to get at is your sense of new customers versus older ones that are just playing more.

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Stephen Cootey, Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer [33]

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Yes. No, we are seeing both.

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Operator [34]

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The next question will come from Stephen Grambling of Goldman Sachs.

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Stephen White Grambling, Goldman Sachs Group Inc., Research Division - Equity Analyst [35]

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This is maybe a broader question, but the overall Strip GGR and RevPAR numbers have clearly been choppy and sluggish for a couple of years now, even as locals has been solid. What do you think has been the biggest challenge facing the Strip? And can the locals market continue to outperform for a prolonged period of time or at some point the two become correlated?

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Stephen Cootey, Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer [36]

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I mean, listen, we -- I think they're indirectly correlated, right? So from a Strip perspective, our customers are their employees. But beyond that, our particular business is we're not as hotel-centric as most of the Strip. We're more gaming-centric. And I've kind of mentioned right about a dozen different economic indicators in local business and why we think we're going to continue to see the growth.

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Unidentified Company Representative, [37]

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I think they're 2 totally different markets at the end of the day. The locals market is going to be focused on population growth, how the economy here is doing, wage growth, retirees coming into the market. And all the indicators for the Las Vegas economy are positive, and that's where our business primarily comes from, and we're very bullish in the Las Vegas locals market.

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Stephen White Grambling, Goldman Sachs Group Inc., Research Division - Equity Analyst [38]

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Last one, and maybe as a more micro follow-up. And you went through a little bit of this, but any additional color you can give on the magnitude of disruption either on a dollar basis and how should we be thinking about that both in the quarter and as the year progresses. And also, if there's any kind of hold or calendar shift that we should think about?

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Stephen Cootey, Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer [39]

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You're talking the -- I mean, the Palms? I mean, there was -- I mean...

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Stephen White Grambling, Goldman Sachs Group Inc., Research Division - Equity Analyst [40]

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No, just across the portfolio.

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Stephen Cootey, Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer [41]

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No. I mean, I think, as I mentioned, Palace, we're now beyond the disruption. Starting April, we're still at the Palms, we're pretty much beyond the disruption, though. There's going to be continued elevated expenses at the Palms as kind of we work through the opening process. But from a calendar perspective, again, I don't see any holds there.

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Operator [42]

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And next, we have a question from Barry Jonas of SunTrust.

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Barry Jonathan Jonas, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [43]

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You've given some great color on how you see the Strip versus the locals market. I'm just curious -- I mean, how do you think about the -- any potential backlash around rising resort fees, parking fees? Has that driven any upside? I believe you recently offered some no-resort fee promotion at some of your properties.

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Stephen Cootey, Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer [44]

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I think there's -- I think that's an opportunity, particularly for our resorts near the Strip. I mean we don't enforce our guests to pay for parking and our resort fees are very manageable, particularly relative to the Strip.

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Barry Jonathan Jonas, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [45]

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Great. And then, I believe, in February, the Board authorized a $150 million share authorization. Just curious, have you given any color? Have you bought anything? And what do you prioritize share repurchases in terms of capital allocation?

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Stephen Cootey, Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer [46]

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So no, we haven't bought anything just yet. This is really built on suspenders. This goes back to kind of the meltdown in December 24. We did not have (inaudible) place. We realized that, that would -- possibly could have been an opportunity to buy stock at that point. But right now, our focus, as I mentioned on the call, is to pay -- one, focus on ramping up our properties; and two, paying down debt and deleveraging.

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Barry Jonathan Jonas, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [47]

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Sure. And then last for me, the Wild, Wild West land purchase for 20 acres, is that still on target to close in June?

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Stephen Cootey, Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer [48]

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Yes, it is.

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Operator [49]

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And next, we have a question from Chad Beynon of Macquarie.

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Chad C. Beynon, Macquarie Research - Head of US Consumer, SVP and Senior Analyst [50]

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Regarding the Graton management fee growth, I think you said 14% up in your prepared remarks, and sequentially, that was up pretty significantly as well. Should we assume that based on what's going on at that property now, you could continue to see improvement from that from a year-over-year perspective? I think that was one area that came in surprisingly above most expectations.

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Stephen Cootey, Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer [51]

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I think that's -- I mean just to keep the explanation short, your assumption is fair. Yes.

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Chad C. Beynon, Macquarie Research - Head of US Consumer, SVP and Senior Analyst [52]

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Okay. Great. There's nothing special about the seasonality of those fees. That's just kind of improvement in the quarter and they're distributed that way?

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Stephen Cootey, Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer [53]

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Correct.

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Chad C. Beynon, Macquarie Research - Head of US Consumer, SVP and Senior Analyst [54]

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Okay. The $23 million write-down, could you elaborate as to what that was attributable to?

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Stephen Cootey, Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer [55]

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Well, you're talking -- yes, sequentially the $23 million write-down, I'm sorry, yes, it's weirdly put in my P&L. That's actually pretty open. So that's all related to the Palms.

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Operator [56]

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(Operator Instructions) Our next question will come from John DeCree of Union Gaming.

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John G. DeCree, Union Gaming Securities, LLC, Research Division - Director and Head of North America Equity & High Yield Research [57]

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Just one high level for me. Steve, I think you've hit it directly on in your prepared remarks about focusing on deleveraging the balance sheet. I think you mentioned the target leverage ratio of about 4x. Looking at how these properties could ramp and the amount of cash flow that you'll generate might not take all that long to get there. So I was wondering if you could comment on how you think about capital allocation once you achieve your leverage target. And then just a quick question, how you think about just EBITDA growth relative to actual principal paydown in obtaining that target.

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Stephen Cootey, Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer [58]

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Well, the last question is an easier one because you're going to get a little bit of both. As I think you rightfully said, the properties are expected to ramp. So we're going to get some natural deleveraging and not just from the core property growth, but through the ramp-up of Palace and Palms, and then we'll complement that through -- you got your normal debt amortization and any -- as I've mentioned and you've alluded to, once you head to 2020, you'll expect to be a significant free cash generator.

And so the great thing is we're going to have a lot of options available to maximize value to our shareholders, which could include buying back shares, returning dividends and potentially looking at new developments/M&A.

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Operator [59]

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

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Stephen Cootey, Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer [60]

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Well, thank you everyone for joining, and I look forward to talking to you in 90 days. Bye-bye.

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Operator [61]

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