Daniel Foley - Vice President of Finance and Investor Relations Steve Cootey - Executive Vice President, Chief Financial Officer and Treasurer Frank Fertitta - Chairman and Chief Executive Officer Joe Hasson - Executive Vice President and Chief Operating Officer.

Stephen Grambling - Goldman Sachs Dan Adam - Nomura Instinet Chad Beynon - Macquarie Barry Jonas - SunTrust.

Good afternoon, and welcome to Red Rock Resorts Third Quarter 2018 Conference Call. All participants will be in listen-only mode. 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..

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 condition 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 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. 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 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 local’s 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 two disrupted properties, performance of our Las Vegas operations are 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 non-recurring factors included – one-time 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-disruptive properties was just over 20% for the quarter. However, after adjusting for the non-recurring factors we discussed we would have seen flow-through land in our historical 50% to 70% range for the quarter and we expect to return to our historical flow-through range in Q4.

The inter 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 no 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, last week's remains one of the most affordable housing markets in the United States.

As for consumer spending, taxable sales were up 5.8% to date in 2018 with the increased spending levels being seen across multiple discretionary categories.

Moreover, Las Vegas has over 18 billion in new capital investment 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 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 the 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, only serve to reinforce I believe, that the Vegas local’s 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 upgrades in Q4 into 2019.

Since the initial roll-out 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 guests across all demographic segments.

And we believe that this next wave of system enhancements, which include exciting new jackpot delivery capabilities, companywide bonusing programs, link 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 will have added 178,000 square feet of exciting new gaming entertainment space to the property, along with a refreshed exterior look that includes two 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 the late December.

Regarding the Palms Phase 1 of our plan to completely really develop and reposition the property was completed in May to exceptional reviews and Phase 2 of our plan is well underway.

Now 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 Mark Vetri will be making his Las Vegas debut, enables 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 to the Strip. Towards the end of Q1 of 2019, we also expect the following venues to open up.

Shark, a high-energy secret restaurant with James Beard award-winning celebrity chef Bobby Flay, a spectacular 29,000 square foot night club, a new world-class 73,000 square foot pool club, which will redefine a day club experience in Las Vegas. Notably, the pool club will be open on a year-round basis.

And an innovative new restaurant concept developed with partnership with Clique Hospitality Group, leader in Las Vegas hospitality and nightlife. Lastly, a new 20,000 square foot wellness spa and salon with 16 treatment rooms and state-of-the-art fitness facilities will open in Q2 of 2019.

The majority of Phase 3 of the redevelopment project is expected to be completed by the end of Q2 2019, which includes casino floor expansion 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 and 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, the 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 would create one of the most exciting gaming and entertainment destinations in all of Las Vegas.

Whether our project remains on time due to increased construction costs driven by higher labor and material costs in Las Vegas market, we are increasing the overall project budget to approximately 690 million.

Also, as previously discussed, we expect the construction disruption at the palms to remain significant through the completion of Phase II of 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 exploration 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 versus the [indiscernible] taking any further action in that matter until it is ruled in a very similar case before it involving the enterprise tribe, which received a favorable 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 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 4.4 times, respectively. Capital spend in the third quarter was 150 million, which include 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..

[Operator Instructions] The first question comes from Joe Greff of JPMorgan. Please go ahead..

Hi guys. It is actually [indiscernible] on for Joe. Just, I have a quick question. I don't think the directional trend of EBITDA performance in the local's market in the 3Q is a surprise to anyone, but the magnitude of the Delta probably is [indiscernible], just got a better sense of your portfolio to ask.

Let me ask you this, Red Rock has generally grown in excess of what Boyd grows in local's market and they grew EBTDA grew there of 7%, obviously that’s not the case here, so as we exclude Palace and Palms from the overall local’s result, did you grow similarly in relation to them or in relation to Europe in the last couple of quarters?.

In terms of revenue – you're talking revenue or top – you are pretty difficult to hear, but are you talking with topline or bottom line?.

On EBITDA..

The EBITDA, as I said, we didn’t grow to the extent that Boyd did this quarter and that was due to several one-time factors, which I mentioned in our remarks, but that includes maybe some IT costs, we had some increased marketing spend as we’re trying to attract 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 Boyd level, but we’re also growing the market, yes, we are growing the top line faster than the market..

Got it. Thank you.

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

Look, if you break down the one-time cost related to Palms and Palace in 3Q, it’s probably about $2.5 million to $ 2.8 million, which is consistent with the guidance we were given. Third quarter disruption will be on the low-end of our $10 million to $15 million range annually..

Thank you..

The next question comes from Stephen Grambling with Goldman Sachs. Please go ahead..

Hi, thanks. I guess, first a broad one.

I mean, I guess how would you generally characterize the health of the consumer on the Las Vegas strip and how important will that be in the ultimate success of Palms?.

This is Frank. At the end of the day, we’ve been very successful of running hybrid properties, both at 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 property is 60% to 80% of those revenues are coming from local customers and we would expect the Palms you know different.

And so, while we have a component of the property 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 local’s component at the property that is really a different market.

Steve or Joe, do have anything you want to add?.

Yes. This is Steve. So, I guess one other unrelated follow-up.

I guess given some of the consolidation space in the rise of reach within the backdrop, I guess, how would you assess the value of retaining ownership of your real estate versus selling it?.

I think the issue with selling your real estate, and this is just coming from just one person's opinion, as you are reporting 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 very little CapEx to actually create a customer experience that will drive repeat business, which is absolutely critical in a local's market..

Right.

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

And I guess the last quick follow-up, has anything then changed in your mindset get in the change in the competitive backdrop or even from a consolidation standpoint?.

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

Great. Thanks so much. I’ll jump back in the queue..

The next question comes from Harry Curtis with Nomura Instinet. Please go ahead..

Hi everyone. This is Dan Adam on for Harry Curtis. Thanks for taking my question.

First on the increased marketing spend in the quarter, to what extent is that a one-time expense or will that continue for the foreseeable future?.

Well I think – I’m sorry, go ahead Joe..

Well what you have is, you have to realize, when we have done some of these renovations and remodeling at both Palace Station and the Palms, it’s not like where you open a property all at once. So, we’ve had 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 one-time noise in terms of relaunching the Palace Station getting trial over there in terms of both advertising, marketing, and entertainment to re-expose the property.

So, there is a lot of one-time noise in Q3, especially with regards to Palace Station..

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 to get an order of magnitude?.

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

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, get your 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, well this would be towards the end of the year, not too far away as the movie theatres, 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 to be out of the gates and off to the races of Palace Station, essentially brand-new property..

And is there any way you could 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 2019, can we see an additional lift in RevPAR? Thanks..

This is Joe Hasson. We have already seen lift in RevPAR Palace Station. It is 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 guests at the right rates in a completely refurbished and updated product such as what we’ve put together at Palace..

Great. Thanks guys..

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

Hi, good afternoon. Thanks for taking my questions.

First, on Palms Phase II and III, so I guess just regarding to the CapEx increase and the change of some of your business partners, anything worth sharing in terms of division of the property? Some of the 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 is still on track with how you’ve communicated it before? Thanks..

I think the vision of the property is exactly the same. And I think anybody that goes through or walks through there as these things come together you can really see what it is. We’ve gotten 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, new meeting space come online, as well as the Michael Symon restaurant and then literally by the end of Q1 we will have nightclub day club amenities at the property, which we think will basically redefine the market.

And at the end of the day, while it was a mutual decision to moving in a different direction in terms of managing those immunities.

We think the decision is very positive for the Palms and it is going to allow us to provide more fully aligned and seamless guest experience across our venues, which at the end of the day we think it’s going to be way better for us in terms of the bottom-line results..

Great. Thank you. And then separately not to be too myopic on, can I have the month lead performance was in Vegas, but there was 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, anymore color on kind of what you saw and I guess because it came back probably nothing more to talk about, but that would be helpful? Thanks..

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 loss]..

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?.

I don't know that I can describe it much more fully than what I already mentioned, and again sequentially we’ve found the quarter to be improving as it moved forward..

Okay. Helpful. Thanks very much guys..

[Operator Instructions] The next question comes from Barry Jonas with SunTrust. Please go ahead..

Hi guys. Just, first-off in terms of the budget for the Palms, fair to say that this is locked in until 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?.

I think we're pretty confident in 690 million at this point, substantially all of the contracts have been awarded. So, probably 95%, let’s call it hard. So, there’s a lot of components in the $690 million number. And from a return perspective, we just pushed the budget up.

That probably impacts return about 50 bips, but we're still confident in achieving a low double-digit return on the project..

Great.

And then just in terms of the ramp is this – it is sort of like a two-year like what is a good way to think how you kind of get there?.

It’s really unchanged from our current view..

Okay, great. And just one more question from me, if you kind of exclude the properties under disruption, just curious if there are opportunities or maybe pulling any more cost out of any margin expansion and if there are maybe just talk to – what buckets that would be, whether it is labor or marketing? Thanks..

I think we absolutely believe that there is opportunity to take more cost out of the business going forward.

Joe, you can talk a little bit about where do you see those opportunities?.

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 also look carefully at the newly deployed and refreshed business components and amenities that we’ve installed.

Opening new restaurants 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 press [ph] them to profitable results..

Great. Thank you so much..

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

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

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