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Edited Transcript of RRR earnings conference call or presentation 6-Aug-19 8:30pm GMT

Q2 2019 Red Rock Resorts Inc Earnings Call

LAS VEGAS Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Red Rock Resorts Inc earnings conference call or presentation Tuesday, August 6, 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

* Chad C. Beynon

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

* Jared H. Shojaian

Wolfe Research, LLC - Director & Senior Analyst

* John G. DeCree

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

* Stephen White Grambling

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Steven Moyer Wieczynski

Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research and Gaming & Leisure Research Analyst

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Presentation

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Operator [1]

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Good afternoon, and welcome to the Red Rock Resorts Second Quarter 2019 Conference Call. (Operator Instructions) Please note this conference call 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, sir.

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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 Second Quarter 2019 Earnings Call.

Joining me on the call today from Red Rock Resorts are Frank Fertitta, Chairman and Chief Executive Officer; Rich Haskins, President; Bob Finch, Executive Vice President and Chief Operating Officer.

Our call today will include forward-looking statements under the Safe Harbor Provisions of 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 measures. For the definitions and complete reconciliations of these figures to GAAP, please refer to the financial tables on 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 second quarter results. On a consolidated basis, net revenues increased 16% to $482.9 million, adjusted EBITDA decreased 7.6% to $115.2 million and margins decreased 600 basis points to 23.9% for the quarter. Excluding the impact of approximately $11.3 million of one-time expenses related to the Palms grand opening weekend in April and the property's national branding and marketing campaign, adjusted EBITDA on a consolidated basis increased 1.5% to $126.5 million and margins decreased by 370 basis points to 26.2% for the quarter.

With respect to our Las Vegas operations, net revenues for the quarter increased 16.3% to $457.8 million, adjusted EBITDA decreased 9.7% to $101.7 million and margins decreased 640 basis points to 22.2%. Excluding the impact of Palms' one-time expenses described above, adjusted EBITDA for the Las Vegas operations was effectively flat at $113 million and margins decreased 390 basis points to 24.7% for the quarter.

This net revenue performance was driven by significant growth of the Palms and Palace Station across both gaming and non-gaming segments of their business. As a reminder, both of these completely transformed properties are still in the process of ramping up, and we continue to expect these investments to generate significant returns for the company over time.

Not to be overlooked, the overall performance for the remaining properties in our portfolio was solid with net revenues, adjusted EBITDA and margins all up in the quarter. And on a same-store basis, that is including Palace Station but not including Palms, this represents our highest second quarter net revenue and adjusted EBITDA performance since 2008.

Notably, the Las Vegas locals market has been the fastest-growing regional gaming market in the United States over the last 24 months on a same-store basis, and our locals market gaming revenues has grown at more than double that rate of the remainder of the market over that time.

Let's now take a look at some of the key economic indicators which confirm that the Las Vegas economy remains robust in support of a future growth. Population is at an all-time high and Las Vegas remains the second-fastest-growing MSA in the nation. Employment also remains at record levels, and we've now seen 97 consecutive months of broad-based employment growth.

Wage growth as measured by weekly earnings per employee is also strong with Las Vegas reporting a net increase of 3.1% for the trailing 12 months, ended June 2019. Moreover, total earnings, which takes into account both employment and wages, have increased approximately $2.5 billion over that time.

In addition, discretionary spending has accelerated as evidenced by a 7.4% increase in taxable sales during the trailing 12 months ended April 2019.

Housing also remains solid as median home sale prices were up 5.8% in June. And finally, there are now over $20 billion new capital investment projects planned in Las Vegas, $14 billion of which have already broken ground, 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 positive economic outlook, combined with very favorable supply/demand dynamics, a stable regulatory environment and the lowest gaming tax rate in the nation explain why we continue to view the Las Vegas locals market as the most attractive gaming market in United States. And with our best-in-class assets and locations, unparalleled distribution and scale and deep organic pipeline, we remain uniquely positioned to take advantage of the ongoing growth in this extremely vibrant market.

Turning next to our redevelopment of the Palms and Palace Station. As noted earlier, while these completely reimaged properties are in the process of ramping up, we're already seeing significant revenue growth at both properties as a result to our investments made there. In addition, the great -- guest feedback we've received, the data has been extremely positive and we remain very focused on building additional awareness and trial with respect to both of these properties.

We remain bullish on these opportunities based on their hybrid ability to appeal to both residents and tourists alike as the new venues and offerings of those properties are clearly appealing to both of these key customer segments.

With respect to the Palms redevelopment, our $690 million plan remains on time and on budget and is rapidly nearing completion. The final component of Phase 2, our world-class wellness spa and salon, opened to stellar reviews in late June. And the key and final components of Phase 3, Michelin-starred dim sum restaurant, Tim Ho Wan from Hong Kong and the addition of 16 new gaming tables in the west expansion area are expected to finish in mid-September.

Once fully completed, this one-of-a-kind reinvestment will touch nearly every aspect of the iconic property, and we are confident that the Palms will be one of the premier gaming and entertainment destinations in all of Las Vegas.

Taking a quick look now at our technology initiatives. The new IGT slot system continues to play a pivotal role with respect to gaming revenue growth and our related ability to [continually outperform] the market as we saw increases once again in key slot metrics such as carded slot win, time on device and spend per visit.

At the end of last year and as we previously discussed, we introduced our latest system enhancement in the form of personalized on-device marketing and messaging, which we continue to optimize and refine. We'll also be introducing a number of other system enhancements throughout the remainder of the year. We believe that these system enhancements will provide an even more engaging, rewarding and convenient experience for our guest that will in turn drive additional gaming revenue.

Turning to our Native American segment. We reported management fees for the second quarter of $22 million, an increase in 10.9% over the prior year, driven by outstanding performance at Graton Casino & Resort. With respect to the North Fork project, we continue to progress with a few remaining litigation related to the project. As previously noted, the California Supreme Court has granted the tribe's petition for review of the key lower court decision involving the project, but has deferred taking further action until it is ruled on a very similar case involving the Enterprise Tribe, which received a favorable ruling at the appellate court level.

We continue to anticipate 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 the end of the second quarter was $100.2 million and the principal total amount of debt outstanding at quarter end was $3 billion. At the end of the second quarter, the company's net debt to EBITDA and interest coverage ratios were 5.6x and 4x, respectively.

Capital spend in the second quarter was $111.6 million inclusive of the Palms redevelopment project. In addition, on July 1, 2019, we purchased a 20-acre parcel of land on which the Wild, Wild West is located for $57.3 million. We anticipate capital expenditures for the balance of the year will be between $80 million and $105 million, inclusive of the remaining cost related to the Palms redevelopment project. Following the completion of the Palms redevelopment in September, we reached a key inflection point as a company and expect to generate significant accelerating free cash flow beginning in the fourth quarter.

As we exit out of this development cycle, we will be intently focused on maximizing the financial performance of our existing properties and reducing our net leverage ratio to the target level of 4x or less through a combination of paying down debt and increasing EBITDA.

Lastly, on August 6, the company announced that its Board of Directors have declared a cash dividend of $0.10 per share payable for the third quarter of 2019. The dividend will be payable on September 27, 2019 to shareholders of record on September 13, 2019.

Operator, this concludes our prepared remarks for today. 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) And the first question comes from Joe Greff with JP Morgan.

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Unidentified Analyst, [2]

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(technical difficulty)

on for Jeff, thanks for taking the question. Regarding the Palms, how large of negative EBITDA did the Palms generate? Could these one-time expenses from the 2Q go away completely in the 3Q? And do you think you'd generate positive EBITDA in the 3Q and 4Q?

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

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Well, as you know, we don't really break out distinct properties, but your point about the $11.3 million one-time expenses, they go away completely.

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Unidentified Analyst, [4]

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Great. And at Palace, did you grow 2Q revenues and EBITDA year-over-year at faster paces than the 1Q?

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

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Yes, we did.

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Unidentified Analyst, [6]

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And then lastly, did you grow same-store locals, excluding Palms and Palace, faster than Boyd in the second quarter?

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

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Yes. I think what we said in the last call is that -- and we said and we alluded to in the comments that we continue to outperform the market.

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Operator [8]

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And 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 [9]

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Your room revenues were up 15% year-over-year, while your room EBITDA was actually up 23%. I'm guessing most of this is being driven by Palace and then also Palms. So understanding that Palms will take a little while to ramp on the mid-week business, could you elaborate a little bit just in terms of if you're happy with the weekend rates? Kind of how that's ramping at Palms? And if we should expect this to further ramp in the back half of the year?

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Stephen Cootey, Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer [10]

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I think we're only 4 months into this investment right now. So we're still in very early days. That said, and I think as you noted, I think from a hotel standpoint we're moving in the right direction. The team is intently focused on how do we actually increase ADR going forward. So we're still not quite there yet, but we're tracking in the right direction.

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Chad C. Beynon, Macquarie Research - Head of US Consumer, SVP and Senior Analyst [11]

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And then from a medium-term standpoint, when you think about -- I think last call you talked about leverage, and then once you get through a certain level that you would explore some more organic growth, potentially some M&A, maybe some other options with the balance sheet. Given that it looks like you are ramping pretty fast here, has your view in terms of external initiatives changed at all?

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

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No. I think we're going to reiterate what we said last call, that our primary focus right now is to make sure the Palms and Palace ramp up effectively. And then once we reach that inflection point, which we said we'd start seeing in the fourth quarter, we really are intent on reducing our leverage debt 4x or less. That said, if there's M&A opportunity that exist, we're always going to look at opportunities to maximize shareholder value.

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Operator [13]

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And 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 [14]

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So there's been lots of noises on some of the changes going on with the Palms in the press. Can you just discuss some of the optimization that is taking place? And maybe outline what the path is here to obtain the kind of target ROI on the property?

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

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That's a good question. You have to be a little bit more specific on the things you've mentioned and you see in the press.

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Stephen White Grambling, Goldman Sachs Group Inc., Research Division - Equity Analyst [16]

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So between some of the changes in management at the club to not having it open on Thursdays, I mean it just seems like there's a couple of things -- tweaks that are going on here and there.

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Stephen Cootey, Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer [17]

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Oh, I see. Yes. Going back to the investment, I mean the team takes a very long-term view of these assets. And so as I mentioned, we're 4 months into a long-term investment in this project. It is going to be constant reevaluation of staff. It's going to be constant reevaluation of opportunities as a way to increase our return as well as improve the customer experience.

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Stephen White Grambling, Goldman Sachs Group Inc., Research Division - Equity Analyst [18]

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Then maybe... Go ahead.

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

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I was saying all of these -- the intent here is to drive toward our low-digit return that we've said we're going to hit. Double-digit -- sorry, low double-digit, my apologies.

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Stephen White Grambling, Goldman Sachs Group Inc., Research Division - Equity Analyst [20]

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Great. And then I guess maybe changing gears a little bit here, but in light of the pullback in the stock, I guess has your prioritization of how you think about capital allocation changed? And you think that there's levers that you can pull to kind of take advantage of the recent correction more real-time?

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

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Well as you know, we -- the Board approved last quarter $150 million share repurchase. But that said, I keep going back to -- it's really about making sure the properties ramp properly, and our focus is really deleveraging the balance sheet.

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Operator [22]

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And the next question comes from Steven Wieczynski with Stifel.

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Steven Moyer Wieczynski, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research and Gaming & Leisure Research Analyst [23]

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So the $11.3 million expenses you called out, can -- from an accounting standpoint, can you just tell us where those kind of flew through your income statement?

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Stephen Cootey, Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer [24]

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Sure. About $3.7 million went through F&B and the remainder at the SG&A line -- the G&A line.

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Steven Moyer Wieczynski, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research and Gaming & Leisure Research Analyst [25]

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And then where -- I guess when we do look at that, I would assume that when we looked at the F&B, where do you think you can get those margins in the near term?

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

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I mean the short answer -- I mean you've seen from the balance sheet, once we exclude the one-time charges, which is definitely not where we want to be, the focus there is mainly -- we've opened up a bunch of new restaurants at the Palms and the Palace. I think there's opportunities on both sides. One doing -- we're not there from a revenue perspective at any of the boxes yet, even though they are all tracking well. And then from an expense structure, it's about grinding and optimizing the expense side of the business. So I don't think -- I don't see any issue returning to our historical or slightly below our historical margins on an F&B perspective.

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Steven Moyer Wieczynski, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research and Gaming & Leisure Research Analyst [27]

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Okay, got you. And the last question, I know it's still early with the Palms and all, but can you maybe help us think about the flow from a customer standpoint in terms of where these folks are coming from? And what I'm getting at here is, is it more kind of a locals customer? Is it more folks coming from the Strip? Or is it a combination of both?

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

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Maybe a combination of both. When you break down the card at play at the Palms, it's roughly 60% out-of-town, 40% local, which is really kind of in line with our investment pieces for hybrid property. In terms of locals, it's coming from all over the valley. We're actually see -- your next logical question, is there cannibalization at any of the existing properties? We're actually seeing the reverse. We are seeing the addition of the Palms systems actually increasing organic growth. We're seeing increased play and crossover, i.e. the second stop. And so we're pretty happy with -- from a local’s perspective. And out-of-town, we're taking them from the Strip properties.

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Steven Moyer Wieczynski, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research and Gaming & Leisure Research Analyst [29]

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And one more, if I could, sorry. Is the promotional environment pretty rational out there at this point?

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Stephen Cootey, Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer [30]

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It's incredibly rational. We remain within our historical range as we have the last -- since I've been here.

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Operator [31]

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And the next question comes from Barry Jonas with SunTrust.

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Barry Jonathan Jonas, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [32]

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Just following up on Steve's question. I think Boyd talked about some hide-in promotional -- hide-in promos in the market in Q2, which has since normalized. Is that something that you guys saw?

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Unidentified Company Representative, [33]

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No. We're right within our historical reinvestment range as we have been for as long as I can remember.

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Operator [34]

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And the next question comes from John DeCree with 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 [35]

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Most of my questions have been answered, but just 2 housekeeping items. Steve, I'm sorry if I missed earlier, the $11.3 million one-time expenses, did that include the national brand campaign as well?

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

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Yes, it did. Well, include a portion. There was some portion of it that we are able to push into pre-open. As you're aware, we kind of did a rolling opening. So you can see some of it is branding.

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John G. DeCree, Union Gaming Securities, LLC, Research Division - Director and Head of North America Equity & High Yield Research [37]

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Got it. Okay. And then just another housekeeping item. Maintenance CapEx, once the project at Palms is fully done with Tim Ho Wan opened, can you give us an outline of what that could look like for 2020 and going forward?

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Stephen Cootey, Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer [38]

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Yes. I think roughly maintenance CapEx, excluding any one-time refurbishment, is going to be approximately $100 million on an annual basis.

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Operator [39]

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And the next question comes from Jared Shojaian with Wolfe Research.

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Jared H. Shojaian, Wolfe Research, LLC - Director & Senior Analyst [40]

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So just on the Vegas revenue, the 16% growth in the quarter, how should we think about that into year-end? And by that, I mean do you expect the growth rate to accelerate from here as the property continues to ramp? Or do you think there were some one-time revenue benefits in the period just from, call it the grand reopening?

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

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I think I kind of -- you can break it up in a couple of pieces. I mean we've always stated that the core business, let's call it the non-Palace and Palms, is going to grow. We feel that we're going to consistently take share because of our asset quality -- high asset quality. So we should perform double the market or at the market or above as we have been the last 24 months. And from a Palace and Palms, we didn't see any one-time snap during the opening weekends. So we continually see this property -- the property will continue to ramp faster than the market.

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Jared H. Shojaian, Wolfe Research, LLC - Director & Senior Analyst [42]

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Got it. Okay. And can you share what you've seen so far in July and maybe early August in terms of how that relates to the growth you saw in the second quarter?

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Stephen Cootey, Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer [43]

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I'd love to in about 90 days.

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Jared H. Shojaian, Wolfe Research, LLC - Director & Senior Analyst [44]

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All right. I'll try another then. On the cost side, excluding the $11.3 million, should we assume that costs are going to need to ramp from here? Or do you feel like there's expenses that were in the quarter that you'd expect to sequentially get better as we progress into year-end and next year?

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Stephen Cootey, Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer [45]

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Yes. I think we've always said -- I think I referred to the last call with the Palms, because of its complexity of scope and size, is going to track like a new build. So we've always given that 18-month ramp. Like any new project, expenses open much higher than you would normally expect just a refurbishment. That's due to -- you're trying to increase customer awareness, you're trying to make sure that the customer service is actually at a top-notch. So as we start ramping, the first phase is capture, and then we're going to start -- you start optimizing the resort from an expense side. So there are expenses that will be reduced as time moves on.

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Operator [46]

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(Operator Instructions) All right. As there are no more questions at the present time, I'd like to return the floor to Stephen Cootey for any closing comments.

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Stephen Cootey, Red Rock Resorts, Inc. - Executive VP, CFO & Treasurer [47]

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Well, thank you very much for everyone for joining us, and we look forward to talking to you in about 90 days.

Thank you.

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Operator [48]

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

You may now disconnect your lines.