Daniel Foley - VP, Finance & IR Stephen Cootey - CFO, EVP & Treasurer Joseph Hasson - EVP & COO.

Joseph Greff - JP Morgan Carlo Santarelli - Deutsche Bank Shaun Kelley - Bank of America Chad Beynon - Macquarie Stephen Grambling - Goldman Sachs.

Good afternoon, and welcome to Red Rock Resorts Second Quarter 2018 Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event 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..

Thank you, Andrea. Good afternoon, and welcome to Red Rock Resorts' Second 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, 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 [indiscernible] to GAAP, please refer to the financial tables in our press release and Form 8-K, which 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..

Thank you, Dan, and good afternoon, everyone. As you can see from our earnings release, the second quarter was another outstanding one for Red Rock Resort. For the quarter consolidated net revenues increased 1.5% to $416.2 million adjusted EBITDA increased 3.9% to $124.6 million and margins increased approximately 70 basis points to 29.9%.

With respect to our Las Vegas operation, net revenues for the quarter increased 4.1% to $393.7 million adjusted EBITDA increased 7.1% to $112.6 million and margins increased 80 basis points to 28.6% all this by the impact of substantial ongoing construction disruption at both Palace Station and the Palms.

This marks our highest same-store second quarter net revenue and adjusted EBITDA since 2008.

Excluding the impact of the two disrupted properties and performance of our Las Vegas operations was even more impressive as net revenues increased nearly 7% adjusted EBITDA increased nearly 14%, margins expanded by over 200 basis points over 33% and flow through was solid within our targeted 50% to 70% range.

This stellar top-line and bottom-line performance was once again driven by solid growth across every major gaming category together with a constant focus on revenue and cost initiatives.

Notably, we have now seen gaming revenues increase by an average of 6.5% and our non-disrupted Las Vegas properties over the last four quarters far outpacing the growth rate of the overall market and not to be outdone are non-gaming amenities also saw solid growth during the quarter.

The second quarter results are powerful illustration of the strength of our irreplaceable Las Vegas platform as our best-in-class assets and locations and unparalleled distribution scale consistently allow us to outperform the market particularly in an up economy such as the one we are experiencing now.

With respect to the future outlook, Las Vegas remains one of the fastest growing economies in the nation as review of key economic indicators confirms. From a population standpoint, Nevada is the second fastest growing state in the nation and Las Vegas is the fastest growing major metropolitan statistical area in United States.

The number of residents is at an all-time high with approximately one-third of those new arrivals being retirees which represented key gaming demographic for us. Moreover Las Vegas is forecasted at nearly 200,000 new residents an increase of nearly 10% by 2022. Looking at employment, the number of jobs is at an all-time high.

Having recently eclipsed the 1 million job mark. We have now seen 88 consecutive months of broad-based job growth and Las Vegas continues to lead the nation in private sector job creation. Also, the unemployment rate is now down to 4.7% the lowest since May of 2007.

On a related note, wage growth was up 3.8% in the trailing 12 month which we have seen in the form of additional discretionary spending by our guests. With respect to housing, medium existing home prices were up 13.1% in June and are now up 160% from the love.

Importantly over the 92% of homeowners now have positive equity in their homes up from 22% in 2010. Even with these games however Las Vegas continues to be one of the most affordable housing markets in United States.

Taxable sales have increased 5.2% so far in 2018 with strong spending seen across multiple discretionary categories which is indicative of a healthy consumer. And it also becomes clear from the data that the Las Vegas consumers become more comfortable allocating a greater share of their discretionary budget towards gaming.

In addition, $18 billion of new capital investments is planned or underway including such major projects as the new Raider Stadium, Project Neon, the Convention Center expansion and the new 10,000 seat Las Vegas ball park located directly across from Red Rock Resort and Casino.

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 also further fuel both population and employment growth. For all these reasons, we are very excited about the future economic outlook for Las Vegas.

These strong economic fundamentals along with extremely favorable supply demand dynamic a stable regulatory environment and the lowest gaming tax rate in the nation only serve to reinforce our thesis of Las Vegas local market is the best gaming market in United States.

And we believe Red Rock Resorts with market leading distribution and scale and deep development pipeline remains uniquely positioned to take advantage of this combination of positive factors.

Turning now to our technology and innovation initiatives, as begin to lap the first year of our initial role of our new IGT slot system upgrade is apparent the system as predicted has played a key role in accelerating gaming revenue growth.

This first mover technology provides a premium a unique and entertainment experience including real-time marketing and balancing capabilities all of which resonates very well with our guests.

As a result, we have seen significant increases in key slot metrics such as card and slot win, time on device, spend per visit across all demographic segment since the initial roll-out one year ago.

But we are extremely pleased with the positive impact we've seen so far as the anniversary of the system rollout, we believe we are still in the early innings with respect to maximizing the full potential of this system.

In that regard, we look forward to introducing additional system enhancements beginning in the fourth quarter and continuing throughout 2019 that would provide an even more engaging rewarding and convene experience for our guests including new companywide bonusing engines, channel enhancements, reward programs as well as personalized on-device marketing initiatives which we believe will further drive increases in time on device and spend per visit.

Moreover, we expect to make meaningful strategic investments in the near term in other areas of our business, such as data analytics hotel and human resource technology that we believe we will pay dividends long into the future. Now let's turn to our Palace Station and Palms redevelopment projects.

We remain very bullish on both of these opportunities based on their ability to appeal to both residents and tourists alike and expected to generate significant returns to the company upon the completion.

At Palace Station recently completed highlights include a fully renovated and expanded gaming floor which provides a seamless contemporary look throughout the property and now offers approximately 1800 slot and video poker machines and 43 table games an increase of nearly 300 machines from the prior floor counts.

A new 14,000 square foot state of the art feast buffet which is now conveniently located on the ground level adjacent to the expanded gaming floor.

A new resort style pool area featuring a raised bar dining area, event lawn, private cabanas and day beds and San Francisco Boathouse Asian Eatery making it the biggest debut offering an eclectic mix of Japanese and East Asian cuisine. The guest response to these latest amenities and upgrades has been very positive.

Upcoming enhancements to the Palace property which are expected to be complete around the end of the third quarter include 575 updated hotel rooms and suites.

Chef Ralph Perrazzo's New York based bBd restaurant will be making its initial foray into Las Vegas with its award-winning burgers and innovative approach to the neighborhood burger bar concept.

A fully renovated poker room, a fully renovated race and sports book and in December Regal Entertainment will be bringing its premium cine-bar concept to the Vegas market for the first time which will include a boutique nine screen movieplex featuring all luxury with Kleiner seating and food and beverage offerings delivered right to your seat.

Once fully completed the redevelopment will add 178,000 square feet of exciting new gaming and entertainment space to Palace Station along with a refreshed exterior look that includes two new LED marquee sign, improved access with 300 additional parking spaces.

What we've seen construction disruption at the property begin to taper-off, we still expect to come at the low-end of our previously stated $10 million to $15 million range, disruption range for the year.

With respect to The Palms the final elements, the phase one of our plan to completely redevelop and reposition the property open in late May to exceptional reviews and phase two of our redevelopment is well underway. As a reminder, highlights that second phase will include 528 additional covered parking spaces which will come online in late August.

282 fully redesigned and renovated hotel rooms and luxury suites in the Fantasy Tower as well as construction of 60 new hotel rooms that was previously in an unfinished tower space. The vast majority of which we expect to have in service by the end of October.

Towards the end of the year, we plan to open the following Vetri, a critically acclaimed Italian restaurant from another James Beard award-winning chef Marc Vetri who will be making his Las Vegas debut, a new twist on American barbecue from celebrity chef Michael Symon who will also be making his Las Vegas debut and additional 15,000 net square feet of completely renovated premium meeting and convention space with premier views of the strip.

And around the end of the first quarter in 2019, we expect a high energy seafood restaurant with James beard award-winning celebrity chef Bobby Flay. A spectacular 29,000 square foot night club developed in partnership with TAO Group.

A new world class 73,000 square foot pool club also developed in partnership with the TAO Group which will redefine a day club experience in Las Vegas. Notably the pool will be open on a year-round basis. At the same time, we will unveil an innovative restaurant concept developed in partnership with the TAO Group.

Lastly, a new 20,000 square foot wellness spa salon with 16 treatment rooms and state-of-the-art facilities will open during the second quarter of 2019. With respect to phase 3 of the redevelopment, we now anticipate completing that phase by the end of the third quarter 2019 which is now ahead of schedule.

We are excited to announce today that we have entered into an agreement to bring world renowned Chinese dim sum restaurant Tim Ho Wan from Hong Kong to The Palms as part of the third phase. This to be the first Las Vegas location for this famed Michelin Star restaurant.

Other key elements Phase three will include a casino floor expansion featuring the addition of approximately 300 slot machines and 16 table games.

The casino connector seamlessly integrating the adjacent 599 rooms Palms Place tower directly into the property's new expanded casino floor an indoor connector to the pre-existing self-park garage with ingress directly into the newly expanded casino floor.

Collaborations with world class artists throughout the property and state of the art digital signage in the hotel tower exterior.

Once fully complete, we are confident that this redevelopment will create one of the most exciting and vibrant gaming and entertainment destinations in town and we look forward to returning The Palms to its iconic status as a place to see and be seen in Las Vegas.

As previously discussed, we expect construction disruption at The Palm Springs significant to the completion of phase two of the redevelopment plan.

Turning to our Native American segment, we reported management fees for the quarter of $19.8 million down $12.8 from the 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 a 21.5 increase in fees from the great management agreement as that property continues to perform at a very high level. Also with respect to the North Fork project, we continue our progress in working through a few pieces of litigation that remain regarding the project.

We took important step forward when we recently won a federal court decision in California continuing our string of positive results in the federal courts. I will now cover a few balance sheet and capital items.

The company's cash and cash equivalents at the quarter end were $108 million and total principal amount of debt outstanding at the end of the second quarter was $2.67 billion. At the end of the second quarter, net debt to EBITDA and interest coverage ratios were 5.1 and 4.6 respectively.

Capital spend in the second quarter was $120 million which includes both Palace Station and Palms redevelopment. In 2018, we anticipate capital expenditures will be between $575 million and $625 million inclusive of Palace Station and Palms projects.

In addition, on July 31, 2018 the company announced that its board of directors had declared a cash dividend of $0.10 per share payable for the second quarter to be payable on September 28, 2018 to shareholders of record on September 14, 2018.

Finally, we wanted to make you all aware we'd be moving our planned Investor Day from October to March of next year in order to allow us to fully showcase the extent of redevelopment that has taken place between now and then at both Palace Station and at The Palms.

Operator this concludes the prepared remarks today and we are now ready to take questions from participants on the call..

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Joe Greff of JPMorgan. Please go ahead..

Good afternoon everybody..

Hi Joe..

Steve, in the second quarter I know you are not going to give us as much as detail you can visualize.

But when you look at the contribution in the second quarter from both Palace and Palm relative to their contribution or impact in the 1Q was the revenue and EBITDA in the 2Q meaningfully better than the 1Q?.

We generally don't comment on property by property. Yes, I could say that from a Palace perspective you're seeing some meaningful contribution on the EBITDA side more so than Q1..

Okay. And then well we're going to leave this topic. Unless you want to talk about it in a qualitative way or a quantitative way.

Maybe you can talk about the early results in the performance in phase one The Palm tree development project, I just want to talk about it in terms or presentation or occupancy or I know it's been early and opened up in mid-late May but because I'm curious some early commentary there..

No, sure. No problem. As I mentioned in the comments, the Palms. The elements of The Palms that have opened up in May have had received rave reviews. It's now turned in, I think I believe it's now turned the corner as they have before.

People never wanted to go down Flamingo, past Bellagio and now people actually want to come and eat and hang out at The Palms. If you look at our gaming revenue, our food and beverage revenue all have trended up since our May 17 opening. Again, while this is still early those are very positive trends.

I think if there was one thing that we're behind on is hotel and catering but that's not surprising because we've had over 200 rooms our of pockets we're redeveloping. So that's almost 18,000 room nights. So, the property does continue to be very disruptive but we're very happy with the progress..

Okay great. And then a final question and that to Palace Station.

Would you expect that the renovation disruption in the 3Q is less than whatever you experienced in 2Q or how are you seeing that impact your balance sheet?.

I think the disruption in the casino will be waning in Q3. In fact, I think this week we get the racing sports book in the poker room, turned over those have been disrupted but they're nearing completion and should be turned over this week. Primarily, the disruption in Q3 is going to be the hotel and suite renovation that we have going on there.

So, we have quite a few rooms out of service at Palace Station right now. But we definitely see the light at the end of the tunnel. It definitely feels like it's getting traction week-to-week and it's had great results are feedback since we've opened the new feast buffet and the new section of the casino down there. So, working on very good right now..

Great. Thanks guys. Congrats of the good results..

Thanks Joe..

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

Hi everybody. Good afternoon. Thanks for taking my question. Steve, thanks for the color on kind of the same-store performance. I was just wondering within obviously the 200-basis points margin expansion and obviously you mentioned that the flow through within the 50% to 70% range.

Could you talk a little bit about what you're seeing with respect to the competitive environment in terms of marketing and promotional dollars in the Las Vegas locals market maybe relative to this time last year?.

Carlo, thanks for the question. I mean the promotional environment in Las Vegas continues to feel extremely rational..

Great.

And how much would you say in terms of the – it's going to be kind of tough I would imagine to answer, but just in terms of what you're seeing from the IGT systems upgrade how much would you kind of attribute to the overall market strength and the more team promotional market to the 6% plus gaming revenue growth that you guys have seen here over the past year and how much of it would you say amounts to some of the technology changes that you guys have made in general?.

I think it's a combination of a lot of different factors. I think if you look historically at the company's performance since we went public in 1993 other than downturn and 2008 through 2011 we've always outperformed the market.

And I think if you look recently at our performance over the last year or so, we've nearly grown at double the rate of the market to get back our company out of the market, which we think is pretty strong and there's several factors.

One is best location in market, best assets in the market and I think the innovative technology that we've rolled out with the IGT system has been really good for us over the last year. We're very excited about what we have in the pipeline to roll out late this year and through the remainder of 2019.

But I think it's a combination of all those factors together..

Great. Thank you very much guys..

Our next question comes from Shaun Kelley of Bank of America. Please go ahead..

Hi. Good afternoon everyone. Steve, just to kind of go back to the ramp up of Palms.

I know it's hard when you're not giving property specific numbers, but just from a sort of expectation perspective I mean can we expect like some -- at least on a year-on-year basis that there is a modest improvement from what we were seeing kind of last year at this time as we start to move through the third and fourth quarter or what's the rate baseline or cadence given seasonality just to think about for the balance of the year there?.

Well, it's not so much a seasonality question. When the property is undergoing some significant disruptions, as I mentioned in the comments and some of the commentary here one of the biggest drags on really activating that property is getting the hotel room suites online..

So, right now I mean we are missing pretty much the entire Fantasy Tower and suites which is undergoing renovation, which will start to come online floor by floor at the end of the third quarter and throughout the fourth quarter. By the end of the fourth quarter, we should have all the renovated rooms and suites online.

And that will be a big-big plus for us. And then towards the end of this year, late in the year we should get two brand new restaurants one from Michael Symon, one from Marc Vetri those will help having more amenities in the facility.

And then as we come around through the spring of 2019, we will have all the assets including 500 more parking garage spots and additional amenities. The only thing will be missing is the phase three casino expansion with the new Tim Ho Wan restaurant from Hong Kong. But the majority of it will be done within the spring of 19.

I can tell you though, if you just go over the property and walk around the pool, theatre has been completely renovated. All new sound system, all new LED electronics for the show to go on in there. We had [indiscernible] last Saturday night, the place was packed, it felt very good.

And so, from the assets that are currently online we're feeling very good week-to-week. But we still know we have a lot of disruption to work through, but the reviews that we're getting from is that people want to be at the property and we're excited about that..

That's great. And just maybe to add a little bit more, I mean I was looking at the website earlier and some of the renovation that's done it doesn't look like you are super actively marketing them yet.

So, when do you kind of make the big marketing push or splash to try and really ramp this thing as it relates to kind of destination or is that not until at least middle of next year.

Do you hope to have it at least by summertime or how do you think about it?.

Fine. So, look it's way easier to open a casino resort all at once right and when you go through a renovation like this where things are opening in a phase, it becomes a little bit more difficult to communicate. But we have rolled out an all new image campaign with AKQA both locally, digitally, socially.

That campaign has had a lot of positive feedback on repositioning The Palms as a place that people want to be seen in Las Vegas and we have also started to activate our database marketing here locally to get trial through the facility.

But as you can imagine, I mean we still are disrupted with parking right now as the parking garage is under expansion. We're lacking the pool, day club, the night club, the spa and multiple restaurants. And so, it will be a ramped effort say during the third, fourth, and a big push as we near the end of the first quarter..

Great. Thank you very much..

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

Hi. Good afternoon. Congrats on the nice quarter.

Can you guys talk about what you're seeing within your card and slot segments any additional data within the boarding pass program that you can communicate in terms of different tiers? And then also related to the 4Q technology investment could you just ballpark roughly what we're talking about in terms of CapEx is this de minimus amount or is it something that needs to be noted within our model at this time? Thanks..

Can you repeat the last part of your question?.

Sure. Just with respect to the I think you noted some investment in data analytics and some enhancements that you were planning to roll out in the fourth quarter, I didn't know if that was a big CapEx number if that was already kind of included in terms of in the guidance that you laid out..

Let me take the segment portion of that. This is Joe Hasson speaking. What we saw in the second quarter was solid growth in every segment across which we measure. Now that includes top end, middle of the pack so to speak and the retail end of our business.

There's also growth in the destination portion of our business coming from regional and national market. So, a very comfortable and an uptrend that really drove the kind of results that Steve spoke to a few minutes ago.

When it comes to ongoing enhancements to the platforms and the slot systems that we have in the pipeline, we see that again we're in the early innings and that is fuel in some of our growth and we see it as a view to the future as how do we continue to resonate with both local guests and also destination traveler's.

Our ability to use data analytics and to create attractive marketing campaigns and campaigns that I would also call sticky once the guest is engaged with us longer time on device a more rewarding experience, a more personalized experience. All of that is contributing to what we see currently, as well as how we see the future..

I'll now take the other, the second CapEx question. So, the initiatives that we're talking about data analytics HRA system that should add, I know that's probably going to be about $1 million to $2 million plus or minus..

Okay. Thank you. My follow-up is related to the repeal of PASPA, so obviously you guys are currently in a market that has had sports gaming for a while and you guys do a really good job. With that is there an opportunity to maybe partner with another operator in another market or kind of tap in to what could be growth in United States.

Just given your knowledge and your history and your experience in sports betting. Thanks..

We've definitely seen a flurry of activity and announcements over the last couple of days. And I agree with you, I think there is an opportunity for us to take advantage of this and we're still evaluating those opportunities to take our expertise outside of Nevada..

Okay. Thank you very much..

And our next question comes from Stephen Grambling of Goldman Sachs. Please go ahead..

Okay. Thanks. I guess a follow-up to Shaun's question on The Palms ramp.

I guess how do you generally think about initial pricing on the room's post renovation and specifically how you maybe benchmark that property versus others and what kind of uplift you might expect kind of pre to post if that's too specific how would you just characterize the ramp here and magnitude for that property versus maybe Palace Station?.

Certainly, as we look at Palms it's a premier product and as we renovate rooms we see an upwards ramp in terms of the kind of dollars that we can look for from the concerning consumer to simply pay for great quality and a terrific experience as the rest of the assets will have. So, nothing but an up ramp going forward..

And we believe that once we have the whole amenity package that we'll bring online at The Plams then we'll be able to significantly ramp the pricing of rooms, because people going to want to be there for a lot of reasons other than -- they're going to be fabulous rooms. I think some of the nicest suites in the entire city.

But once we have the pool, the day club, the night club, the spa the other restaurants and amenities I think we're going to have a lot more pricing leverage..

And just, as you know there is only 770 of these. So, we'll be able to yield the rooms properly..

And I guess one follow-up on that.

Have you already effectively booked rooms and rates, I guess booked the meeting space in kind of advance or is that still an ongoing discussion?.

Certainly, underway in terms of future bookings. With lots more to come. I think Steve you mentioned that there is more finished square footage coming in the form of future developments and redevelopment. Our process to sell that is underway now, so that we can get out in front of that curve and take good advantage of terrific assets..

And I guess last one looks like FNB turned the corner to growth this quarter.

And maybe I missed this, but how would same-store non-casino revenue have grown this quarter and if you can just elaborate on maybe the puts and takes I think are from here?.

Are you saying same-store – I mean basically if you exclude the non-disruptive I mean all factors, I mean I think you're referring to is hotel because if you look at their press release that's the one that looks like it's down.

You have to factor in the 439 rooms or almost 39,000 room lights we took out of The Palms in the palace and other 18,000 rooms that we took out of The Palms. So, if we actually take those out our hotel revenue is up approximately 5% on an undisruptive basis.

And the same could be said on food beverage which is up high single-digits on a non-disruptive basis. So, that really kind of leaves the non-gaming amenities..

That's great. Thanks so much..

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

Well, thank you everyone for joining and we all look forward to talking in about 90 days. Take care..

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