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Edited Transcript of RRR earnings conference call or presentation 7-Nov-18 9:30pm GMT

Q3 2018 Red Rock Resorts Inc Earnings Call

LAS VEGAS Nov 17, 2018 (Thomson StreetEvents) -- Edited Transcript of Red Rock Resorts Inc earnings conference call or presentation Wednesday, November 7, 2018 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel P. Foley

Red Rock Resorts, Inc. - VP of Finance and IR

* Frank J. Fertitta

Red Rock Resorts, Inc. - Chairman & CEO

* Joseph J. Hasson

Red Rock Resorts, Inc. - Executive VP & COO

* 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

* Chad C. Beynon

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

* Daniel Scott Adam

Nomura Securities Co. Ltd., Research Division - Research Analyst

* Omer Nathan Sander

JP Morgan Chase & Co, Research Division - Analyst

* 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 Third Quarter 2018 Conference Call. (Operator Instructions) Please note this conference is being recorded.

I would now like to turn the conference over to Daniel Foley, Vice President of Finance and Investor Relations. Please go ahead.

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Daniel P. Foley, Red Rock Resorts, Inc. - VP of Finance and IR [2]

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Thank you, Debbie. Good afternoon, and welcome to Red Rock Resorts Third Quarter 2018 Earnings Conference Call. Joining me on the call today from Red Rock Resorts are Frank Fertitta, Chairman and Chief Executive Officer; Rich Haskins, President; Steve Cootey, Executive Vice President, Chief Financial Officer and Treasurer; and Joe Hasson, 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 or implied due to a variety of factors. The risks and uncertainties related to these statements, the company's future operating results and financial conditions are detailed in our filings with the SEC.

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 the financial tables in our earnings press release and Form 8-K we filed this afternoon prior to the call. Also, please note that this call is being recorded.

I would now like to turn the call over to Stephen Cootey.

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

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Thank you, Dan, and good afternoon, everyone. Let's take a look at our third quarter results. For the quarter, consolidated net revenues increased 1.6% to $412.3 million. Adjusted EBITDA decreased 7.9% to $109.1 million, and margins decreased 270 basis points to 26.5%.

With respect to our Las Vegas operations, net revenues for the quarter increased 3.9% to $389.7 million as we saw some volume growth across every major gaming category. Notably, this marks our 21st consecutive quarter of same-store net revenue growth, which only serves to underscore the strength and resiliency of the Las Vegas locals market.

Adjusted EBITDA decreased 3.9% to $97.9 million, and margins decreased approximately 200 basis points to 25.1%, mainly driven by the ongoing construction disruption at Palace Station and the Palms. Excluding the impact of our 2 disrupted properties, performance of our Las Vegas operations was solid as net revenues increased nearly 3.3%, adjusted EBITDA increased 2.2%, and margins decreased slightly to 30.6%.

In addition to experiencing ongoing construction disruption at Palace Station and the Palms, the quarter was negatively impacted by a number of other nonrecurring factors, including -- onetime factors, including increased marketing and entertainment spend designed to drive greater trial and awareness regarding our exciting new offerings, including those at the Palace Station and the Palms, and increased CapEx and operating spend as we continue to enhance the guest experience across our portfolio. Due to this combination of factors, flow-through for these non-disrupted properties was just over 20% for the quarter. However, after adjusting for the nonrecurring factors we discussed, we would have seen flow-through in our historical 50% to 70% range for the quarter, and we expect to return to our historical flow-through range in Q4.

The intra-quarter trends are also worth noting. During July, we experienced less-than-expected volumes during the month, which led to lower top line performance and reduced flow-through. However, volumes recovered in both August and September, which led to top and bottom line performance that was more consistent with the trends we have experienced over the past quarters, during which time our growth rate has far outpaced the growth rate of the overall market.

As we begin the fourth quarter, the future outlook remains extremely bright as Las Vegas continues to be one of the fastest-growing economies in the nation. From a population standpoint, Nevada is the second fastest growing state in the nation, while Las Vegas is the third fastest growing major metropolitan statistical area in the United States. In fact, driver's license surrenders in August were up 6.2% from the prior year, the highest monthly total in nearly 12 years.

Looking at employment, Las Vegas continues to be one of the fastest growing employment markets in the United States, has now experienced 92 consecutive months of broad-based job growth. In addition, average weekly wages continue to accelerate and were up 3.9% in September. This, in combination with employment growth, drove total earnings up over 7.7% for the same period. At the same time, the unemployment rates fell to 4.7%.

The Las Vegas housing market also remains solid with more than 94% of homeowners now having positive equity in their homes, up from 22% in 2010. At the same time, Las Vegas remains one of the most affordable housing markets in the United States.

As for consumer spending, taxable sales are up 5.8% to date in 2018, with increased spending levels being seen across multiple discretionary categories. Moreover, Las Vegas has over $18 billion in new capital investment planned or underway, including major projects as the new Raiders stadium, Project NEON, the Convention Center expansion, and the new 10,000-seat Las Vegas Ballpark located directly across from Red Rock Resort and Casino, which is expected to be completed in March of next year.

Lastly, both businesses and residents in high tax states continue to be attracted to Las Vegas for its low taxes, affordability, great weather and other amenities, which will further fuel both population and employment growth.

These robust economic fundamentals, along with extremely favorable supply-demand dynamics, a stable regulatory environment and the lowest gaming tax rate in the nation, all serve to reinforce, I believe, that the Las Vegas locals market is the best gaming market in the United States. As with our irreplaceable Las Vegas platform and deep development pipeline, we remain uniquely positioned to continue to take advantage of this combination of positive factors.

Turning now to our technology initiatives. As we noted earlier, we are extremely excited to be rolling out the next innovative phase of our IGT slot system upgrade in Q4 into 2019. Since the initial rollout in Q3 of last year, the system has played a key role in accelerating gaming revenue growth as we have seen significant increases in key slot metrics, such as carded slot handle, slot win and spend per guest across all demographic segments, and we believe that this next wave of system enhancements, which include exciting new jackpot delivery capabilities, company-wide bonusing programs, linked progressive jackpot features and promotions featuring the highly popular Monopoly board game, will further accelerate that growth as we leverage it across our 20 properties in Las Vegas.

Now let's turn to our Palace Station and Palms redevelopment projects. Notably, both these projects are now nearing completion, with Palace Station expected to be fully online around the end of the year and almost all of the Palms project expected to be complete in Q2 of next year. We remain extremely bullish on both of these opportunities based on their ability to appeal to both residents and tourists alike and expect them to generate significant returns for the company upon their completion.

Regarding Palace Station, the redevelopment project remains on time and on budget. Once fully complete, the project, which only awaits the completion of a 9-screen luxury movieplex in December of this year, will have added 178,000 square feet of exciting new gaming entertainment space to the property, along with a refreshed exterior look that includes 2 new LED marquee signs, improved access and 300 additional parking spaces. With respect to the impact of construction disruption, we expect only minimal disruption at the property in the fourth quarter as the project wraps up in late December.

Regarding the Palms Phase 1 of our plan to completely redevelop and reposition, the property was completed in May to exceptional reviews. And Phase 2 of our plan is well underway. By the end of 2018, we expect to open the following additional amenities: the balance of our unfinished rooms and luxury suites in the Fantasy Tower; Vetri, a critically acclaimed Italian restaurant from James Beard Award-winning Chef Marc Vetri will be making his Las Vegas debut; Mabel's, a new twist on American barbecue from celebrity chef, Michael Symon, who will be also making his Las Vegas debut; an additional 15,000 net square feet of completely renovated premium meeting and convention space with premiere view of the Strip.

Toward the end of Q1 of 2019, we also expect the following venues to open up: Shark, a high-energy seafood restaurant with James Beard Award-winning celebrity chef, Bobby Flay; a spectacular 29,000-square-foot nightclub; a new world-class 73,000-square-foot pool club, which will redefine the day club experience in Las Vegas. Notably, the pool club will be open on a year-round basis; and an innovative new restaurant concept we have in partnership with Clique Hospitality Group, the leader in Las Vegas hospitality and night life; lastly, a new 20,000-square-foot wellness spa and salon with 16 treatment rooms and state-of-the-art facility -- fitness facilities will open in Q2 of '19.

The majority of Phase 3 of the redevelopment project is expected to be completed by the end of Q2 2019, which includes casino floor expansions featuring the additional 300 slot machines and 16 table games; a casino connector, seamlessly integrating the adjacent 599-room Palms Place Tower directly into the property's newly expanded casino floor; an indoor connected to the pre-existing self-parking garage with ingress directly into the new expanded casino floor; collaborations with world-class artists throughout the property; and state-of-the-art digital signage on the hotel tower exterior. Finally, world-renowned Chinese dim sum restaurant, Tim Ho Wan, from Hong Kong will be completed by the end of Q3.

Once fully complete, we are confident that this fully transformed property will prove to be an absolute game changer from a guest experience perspective and create one of the most exciting gaming and entertainment destinations in all of Las Vegas. Although the project remains on time due to increased construction cost, driven by higher labor and materials cost in Las Vegas market, we're increasing the overall project budget to approximately $690 million. Also, as previously discussed, we expect the construction disruption of the Palms to remain significant through the completion of Phase 2 in the redevelopment plan.

Turning to our Native American segment. We reported management fees for the quarter of $19.8 million, down 21.9% from prior year, primarily driven by the expiration in February 2018 of our management agreement with the Gun Lake Tribe. That negative impact was partially offset by an 18.4% increase in fees from the great management agreement as the property continues to perform at a very high level.

With respect to the North Fork project, we are progressing through the few remaining pieces of litigation related to the project. As we previously noted, the California Supreme Court has granted the tribe petition for review with respect to the key lower court decision involving the project but deferred taking any further action in that matter until it's ruled on a very similar case before involving the enterprise tribe, which we see the stable 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 $111 million, and total principal amount of debt outstanding at the end of the second -- the third quarter was $2.77 billion. At the end of the third quarter, net debt to EBITDA and interest coverage ratios were 5.1 and 4.4x, respectively. Capital spend in the third quarter was $150 million, which includes both Palace Station and Palms redevelopment. In 2018, we anticipate capital expenditures will be between $550 million and $575 million, inclusive of the Palace Station and Palms project. In addition, on November 1, 2018, the company announced that its Board of Directors had declared a cash dividend of $0.10 per share payable in the third quarter payable on December 31, to shareholders of record on December 14, 2018.

Operator, this concludes our prepared remarks for today. We are now ready to take questions from participants on the call.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Joe Greff with JPMorgan.

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Omer Nathan Sander, JP Morgan Chase & Co, Research Division - Analyst [2]

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It's actually Omer Sander on for Joe. Just I have a quick question. I don't think the directional trend of EBIT performance in the locals market produced surprise to anyone, but the magnitude of the delta probably is -- so help us get a better sense in your portfolio there. Let me ask you. It's Red Rock and it's generally grown in excess of what Boyd grows in locals market and they grew EBITDA there for 7%. Obviously, that's not the case here. So if we exclude Palace and Palms from the overall locals result, did it grow similarly in relation to them or in relation to your [rev] in the last couple of quarters?

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

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In terms of revenue? Are you talking of revenue or top -- you were pretty difficult to hear. But are you talking top line or bottom line?

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Omer Nathan Sander, JP Morgan Chase & Co, Research Division - Analyst [4]

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On EBITDA.

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

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The EBITDA. As I said, we didn't go to the extent that we did this quarter and that was due to several onetime factors, which I mentioned in the remarks. That includes maintenance and IT cost. We had some increased marketing spend as we were trying to track folks to new amenities at the various properties. And once we -- if you back out those factors, we are within historical range of 50% to 70% flow-through.

So not quite up to board level, but we're also growing the market -- we're growing the top line faster than the market.

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Omer Nathan Sander, JP Morgan Chase & Co, Research Division - Analyst [6]

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Got it. And how much -- sorry, how much of the drag from Palace and Palms in your 3Q is temporary and -- as we head into year-end and then in the next year? And also, we know Palms ramped up marketing in the 3Q and abated here. And how much is that will continue into the next year?

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

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Look, if you break down the onetime cost related to Palms and Palace in 3Q, it's probably about $2.5 million, $2.8 million, which is consistent with the guidance we were giving of third quarter disruption being in the low end of the $10 million to $15 million range annually.

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Operator [8]

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The next question comes from Stephen Grambling with Goldman Sachs.

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Stephen White Grambling, Goldman Sachs Group Inc., Research Division - Equity Analyst [9]

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I guess, first, a broad one. I mean, how would you generally characterize the health of the consumer on the Las Vegas Strip? And how are -- how important will that be in the ultimate success of Palms?

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Frank J. Fertitta, Red Rock Resorts, Inc. - Chairman & CEO [10]

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Look, at the end of the day -- this is Frank. At the end of the day, we've been very successful at running hybrid properties, both the Red Rock and Green Valley, which are very similar in size, scope and scale to what the Palms is going to be. The Palms will actually have more amenities and more horsepower, but at the end of the day, you have to remember even at the hybrid properties that we have, about -- somewhere between, depending on the properties, 60% to 80% of those revenues are coming from local customers, and we would expect the Palms to be no different. And so while we have a component of the property, 800 -- or 700, 800 hotel rooms that are tourist-oriented, which would be affected by trends that you see with room rates and all on the Strip, we still are going to have a significant locals component at the property that is really a different market. Steve or Joe, do you have anything more to add?

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Stephen White Grambling, Goldman Sachs Group Inc., Research Division - Equity Analyst [11]

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Yes, this is Stephen. So I guess one other unrelated follow-up, I guess given some of the consolidation of space and the rise of REITs within the backdrop, I guess how would you assess the value of retaining ownership of your real estate versus selling it?

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Stephen Cootey, Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer [12]

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I think the issue with selling your real estate -- this is just coming from just one person's opinion, as you're recording a ton of, what I would call, fixed cost and rent that ultimately you layer on top of our existing debt or interest cost -- and so you actually end up with a very little CapEx to actually create a customer experience that will drive repeat business, which is absolutely critical in the locals market.

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Frank J. Fertitta, Red Rock Resorts, Inc. - Chairman & CEO [13]

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Right. We always evaluate all options to maximize shareholder value, and we will continue to do that going forward.

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Stephen White Grambling, Goldman Sachs Group Inc., Research Division - Equity Analyst [14]

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And I guess the last quick follow-up. Has anything been changed in your mindset given the change in the competitive backdrop or even from a consolidation standpoint?

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Stephen Cootey, Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer [15]

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No. We've seen no change in the competitive landscape in the Vegas market.

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Operator [16]

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The next question comes from Harry Curtis with Nomura Instinet.

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Daniel Scott Adam, Nomura Securities Co. Ltd., Research Division - Research Analyst [17]

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This is Dan Adam on for Harry Curtis. First, on the increased marketing spend in the quarter, to what extent is that a onetime expense? Or will that continue for the foreseeable future?

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Stephen Cootey, Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer [18]

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No. I think I'm going to -- I mean, sorry go ahead, Frank.

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Frank J. Fertitta, Red Rock Resorts, Inc. - Chairman & CEO [19]

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So what you have is you have to realize when we've done some of these renovations and remodeling at both Palace Station and Palms, it's not like we open a property all at once. So we have amenities coming on in stages over time. We had a significant amount of the amenities come online at Palace Station last quarter, and as a result, we had some pretty significant onetime noise in terms of relaunching the Palace Station, giving trial over there in terms of both advertising, marketing and entertainment to re-expose the property. So there is a lot of onetime noise in Q3 especially with regards to Palace Station.

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Daniel Scott Adam, Nomura Securities Co. Ltd., Research Division - Research Analyst [20]

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Okay, great. And then the other question is you mentioned that you expected only minimal disruption impact from Palace Station in the fourth quarter. What was it in 3Q just in, again, order of magnitude?

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

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Well, what we did -- I would say it's still consistent with $2 million. I mean, what I said in the earlier question was we found -- we guided between $10 million to $15 million annually. We said it was going to be at the low end of that range.

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Frank J. Fertitta, Red Rock Resorts, Inc. - Chairman & CEO [22]

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Look, we were still going through the room remodel and didn't have the room remodel at Palace Station complete. We were in the middle of bringing new restaurant amenities online. There is some noise in the Q3 numbers relative to what it takes to open restaurants and get them stabilized future labor under control, get your cost under control, et cetera. But the good news at Palace Station is that we really like what we're seeing with the business trends. And all we have left really to bring online, which will be towards the end of the year, not too far away, is the movie theaters, which will create more visitation through the property. And then we're finalizing refurbishing of the high-limit area. That's really all that we have remaining out there at Palace Station. So we would expect in Q1 basically that the -- out of the gates and off to the races of Palace Station was essentially a brand new property.

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Daniel Scott Adam, Nomura Securities Co. Ltd., Research Division - Research Analyst [23]

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And is there any way you can break out what your expectation is for the increase in room rate post renovation there? So not only factoring in the disruption -- the negative disruption impact in the third quarter. If we look out, say, for the first quarter '19, can we see an additional lift in RevPAR?

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Joseph J. Hasson, Red Rock Resorts, Inc. - Executive VP & COO [24]

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This is Joe Hasson. We have already seen lift in RevPAR at Palace Station. It's difficult to forecast different handicap going forward. My expectation would be that we would perform at or above market in terms of finding the right guest at the right rates in a completely refurbished and updated product, such as what we put together at Palace.

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Operator [25]

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The next question comes from Chad Beynon with Macquarie.

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Chad C. Beynon, Macquarie Research - Head of US Consumer, SVP and Senior Analyst [26]

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First, on Palms Phase 2 and 3, so I guess just regarding the CapEx increase and the change of some of your business partners, anything worth sharing in terms of vision of the property, similar things that are worth talking in the investment community about? Or is that just kind of internal changes and everything in terms of the vision still on track with how you communicated it before?

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Frank J. Fertitta, Red Rock Resorts, Inc. - Chairman & CEO [27]

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I think the vision of the property is exactly the same, and I think anybody that goes through and walks through there is just things coming together. You can really see what it is. We've got a lot of positive feedback from everybody that visits the property. Towards the end of this quarter, we're going to have the new Vetri restaurant, with meeting space to come online as well to Michael Symon restaurant. And then literally by the end of Q1, we will have the nightclub, day club amenities at the property, which, we think, will basically redefine the market. And at the end of the day, while it's a mutual decision to move in a different direction in terms of managing those amenities, we think the decision is very positive for the Palms, and it's going to allow us to provide a more fully aligned and seamless guest experience across our venues, which, at the end of the day, we think, is going to be way better for us in terms of the bottom line results.

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Chad C. Beynon, Macquarie Research - Head of US Consumer, SVP and Senior Analyst [28]

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Great. And then separately, not to be too myopic on trying to have the monthly performance loss in Vegas, but there's a lot of attention around it. You guys have been doing this for decades. Anything that kind of stuck out in July when you saw some of that weakness? I know you said August and September volumes kind of rebounded, but just anything -- any more color on kind of what you saw? And I guess because it came back, probably nothing more to talk about, but that'd be helpful.

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Joseph J. Hasson, Red Rock Resorts, Inc. - Executive VP & COO [29]

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This is Joe Hasson again. July was not a friend of the industry in locals Las Vegas. And ultimately, what happened was August and September rebounded very nicely to levels that we were very pleased with. Absent July, I would have been -- just found it to be a terrific quarter.

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Chad C. Beynon, Macquarie Research - Head of US Consumer, SVP and Senior Analyst [30]

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And was it anything in terms of your promotions weren't sticking or some of your most loyal customers may be were just away on vacation, busy with other things? Just anything that you can kind of highlight.

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Joseph J. Hasson, Red Rock Resorts, Inc. - Executive VP & COO [31]

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I don't know if I can describe it much more fully than what I already mentioned. And again, sequentially, we found the quarter to be improving as it's moving forward.

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Operator [32]

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(Operator Instructions) The next question comes from Barry Jonas with SunTrust.

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Barry Jonathan Jonas, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [33]

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Just first off, in terms of the budget for the Palms, fair to say that this is locked in till the end of the project. And then I'm assuming you're still targeting kind of mid-teen returns, but maybe just talk about how we should think about the ramp to get there.

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Stephen Cootey, Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer [34]

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Yes, I think the -- we're pretty confident in the $690 million at this point. Substantially all of the contracts have been awarded, so probably 95% is so hard. So there's a lot of confidence in the $690 million number. And from a return perspective, we just pushed the budget up. That probably impacts return about 50 bps, but we're still confident in achieving a low double-digit return on the project.

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Barry Jonathan Jonas, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [35]

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Great. And just in terms of the ramp, it's sort of like a 2-year -- like what's a good way to think how you kind of get there?

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

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That's really unchanged from our current view.

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Barry Jonathan Jonas, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [37]

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Okay, great. Then just one more question from me. If you kind of exclude the properties under disruption, just curious if there are opportunities for maybe pulling more cost out or any margin expansion and if there are -- or maybe just talk about what buckets that would be, whether it's labor or marketing.

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Frank J. Fertitta, Red Rock Resorts, Inc. - Chairman & CEO [38]

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I think we absolutely believe that there's opportunity to take more cost out of the business going forward. Joe, you can talk a little bit about where you're seeing those opportunities.

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Joseph J. Hasson, Red Rock Resorts, Inc. - Executive VP & COO [39]

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Sure, sure. Thanks, Frank. Of course, reinvestment is always a high focus for us. It's a very expensive part of our business. We will always look to optimize it and to tailor it to get best results top line, bottom line. We'll also look carefully at the newly deployed and refreshed business components of amenities that we've installed. Opening a new restaurant, as you mentioned, Frank, is a process that allows us the opportunity to expose those restaurants to guests that are both new and old and then to tailor their operations as well from a labor perspective, from a cost of sales perspective, and ultimately crack them to profitable results.

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Operator [40]

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

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

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Well, thank you, everyone, for joining us on the call, and we look forward to talking to you in 90 days.

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Operator [42]

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