Good day, ladies and gentlemen, and welcome to the Red Rock Resorts' Second Quarter 2017 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this call is being recorded. And I would now like to introduce your host for today's conference, Mr. Daniel Foley. Please begin.

Thank you, David. Good afternoon, and welcome to Red Rock Resorts' Second Quarter 2017 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 of Operations. Our call today will include forward-looking statements under the safe harbor provisions of the United States federal securities laws. Developments and results may differ from those projected. The risks and uncertainties related to these statements are detailed in our filings with the SEC. During this call, we will also discuss non-GAAP financial 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, which were 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 Steve Cootey.

Thank you, Dan, and good afternoon, everyone. The strength of the Las Vegas economy remained evident in the second quarter as we experienced top line growth across both gaming and non-gaming areas of our business. For the quarter, consolidated net revenues, including the Palms, increased 14.8% to $403.5 million, while adjusted EBITDA increased 1.8% to $119.5 million. In Las Vegas, net revenues, including the Palms, increased 15.1% to $371.5 million, and adjusted EBITDA increased 0.1% to $104.7 million. Looking at our performance on a same-store basis, excluding the Palms, we registered our highest second quarter consolidated net revenues and our highest second quarter Las Vegas net revenues since 2008. Margins for the quarter were 29.6% on a consolidated basis and 28.2% for Las Vegas operations. As discussed on our last call, margins continue to be impacted by significant construction disruption at both the Palms and Palace Station as well as the ongoing impact of enhancements related to our food and beverage offerings, and additional investments made in our team members. To further quantify this impact, the company had approximately $7.4 million of cost in the quarter related to the impact of the enhancement of our food and beverage offerings and the investment in our team members. Of that amount, approximately $3.9 million was specific to the second quarter, while $3.5 million will anniversary during the fourth quarter. This is in addition to the previously discussed $10 million to $15 million annual EBITDA disruption we're experiencing due to construction disruption at Palace Station. That said, we've instituted a number of company-wide revenue and efficiency initiatives, which when taken together with the anniversarying of the aforementioned cost, should result in margin improvement and increased flow through heading into 2018. Despite the impact of the factors outlined above, the overall core fundamentals of…

Absolutely. [Operator Instructions] Our first question comes from Joe Greff with JPMorgan. Your line is now open.

Good afternoon everybody. There's a lot of information, Steve. Thank you. Just with respect to the two major projects, Palace and the Palms, can you remind us what the all-in investment at Palace will be, inclusive of the $76 million you just referenced today?

The $191 million for the Palace, and then the Palms, we disclosed 100 -- sorry?

And when you think of -- I'll go to the Palms in a second. And when you think of the return associated with this, I mean, is this a little bit more defensive and more maintenance CapEx? Or maybe the easiest way to do is maybe you can share sort of your range of return expectation. How much of this is offensive versus defensive?

I think it's a little bit of both, but I'll point out, our expected returns, Joe, in any capital expenditures is mid to low teens return.

We're very bullish on Palace Station location. That's where we started, it's right in the middle of town. We see all of these new things happening in Las Vegas, with the expansion of the convention center, NFL football coming to Las Vegas. And we've used Palace Station Casino and Hotel to build the rest of the properties there. There are no significant investments since 1991. And we believe by going back in and putting a state-of-the-art buffet on the first floor, new restaurants, movie theaters, which have been very successful for us with all the other locations, that there's offense in this plan at Palace Station, where we think we're going to have a lot more reasons to attract people to go to the location.

Great. And do you think the renovation disruption is going to be greater than that $15 million number that you talked about given incremental investment?

We think that as we start moving through the casino floor, it could trend to the higher end of that $15 million.

Okay. And then with respect to the Palms, I mean, same thing, I mean, what will be your all-in investment between the purchase price, what you've been doing before the announcements or the communication of this $146 million? And can you then remind us what the prior peak EBITDA was, and how do you get there to the return you think you can get to with this all-in investment relative to what it generated at the prior peak?

Well, the completed investment that we've announced to date, including the $350 million purchase price, is about $450 million. Again, the way we look at this property, Joe, is very simple. I think we originally announced that we expected to do about $35 million in EBITDA. And when we really start to dig into the property, we saw its true potential and decided to accelerate the capital -- accelerate our capital spend in the project to really realize…

Maximize the full potential of the location. I mean, it's a great location. It's a property that has had no tender loving care in a long, long time. And we look at that location and the bones of the property, and we just decided that we were better off taking the short-term pain in order to maximize the full potential of the cash flow of this location. And when people see what we're going to have here, it's going to be a must-see property in the Las Vegas market, no question about it.

Got it. And Frank, do you see the Palms, after your investment and your repositioning, that it's more of a local? Or is it more of a strip? Or is it kind of the hybrid it used to be?

It's going to be a hybrid, the same as it used to be. I mean, you guys have to remember, when we started the Palace Station that was originally a hybrid property. Palace Station started as a local casino with no hotel rooms. We saw the demand of people staying on the strip wanting to experience what locals experience at Palace Station. We built the tower back in 1991, and from there hybrid properties evolved around the strip, whether it be the Rio, whether it be the Palms, whether it be the [technical difficulty]. And so we're really comfortable being in this space. I mean, we had a lot of doubters, I think, when we built Queen Valley Ranch, which is a hybrid property off the strip, the same thing with Red Rock. And this is what we do. We're going to take everything that we've learned over the last 30-plus years, and you guys are going to see it at the Palms.

Great. And my final question, I think you've talked about having an investor event sometime later in the year. Can you talk about your thoughts there? It probably would be helpful for investors, Frank, to kind of hear some of these longer-term projects and the anticipated returns in specifically what you're doing. But that's all from me. Thank you.

And, Joe, that's a great question. And what we're thinking about doing is timing the Investor Day around the completion of Phase 1. That way, you can come down to the Palms and see and touch what we've built, and then see the vision that Frank has for the property.

Thank you.

Thank you. And our next question comes from Carlo Santarelli with Deutsche Bank. Your line is now open.

Hi, everybody. Good afternoon. Steve, when you think about kind of the Palace Station and the Palms, obviously, both projects now are going to stretch into 2018. And I think when you looked at the business this year, clearly, Palms was in ramp phase and Palace Station. Yet, you talked about the $10 million to $15 million headwind. It does sound though like the incremental $146 million and $76 million investments hitting some of the more profit centers or some of the busier profit centers of the property, will be a little bit intrusive into 2018. When you think about kind of 2018 and the Las Vegas locals kind of organic or, call it, same-store growth of the other assets, are the headwinds created by these two renovations into '18 going to make it difficult to grow the overall footprint next year?

No. In fact, I think we've kind of demonstrated that we can grow with the market. We experienced 2.7% same-store sales growth this quarter, and I don't think the construction disruption at the Palms or Palace Station would have any -- would not cause any issue with the rest of the properties.

Okay, understood. And then just if I could, when you -- you noted gaming revenues, plus 2.8%; non-gaming revenues, plus 2.5%. Those were same-store, I assume. And if so, is the 2.8% a net casino revenue number?

Yes.

Okay, great. Thank you.

Thank you. And our next question comes from Shaun Kelley with Bank of America. Your line is now open.

Hi, good afternoon guys. So maybe just to stick with the -- to make sure we've got the disruption kind of pattern underwritten correctly. So Steve, when we think about the $15 million or the $10 million to $15 million, that's the impact for calendar 2017. Will we still be able to get -- maybe to ask Carlo's question a little differently, are we still going to be able to get a piece of that back next year even with the incremental disruption at Palace? Or no, because you're going to be touching other things at the property, really, that's going to be a '19 ramp?

No, I think we're going to stick within the high end of the $15 million. Because remember, the next phase of the casino renovation really hits the heart of the casino.

Okay. So basically, we won't see that -- any real recovery of that business until we move out into the following year?

So when we added the new casino space and the bingo room and all that, we had great customer reactions to the new look and feel of Palace Station. So we've made the decisions to go through and renovate the whole section of the casino to match the new. And so the disruption that you're going to have is in the main table games area and the main slot areas running through into 2018.

Yes. And then with the main areas really being 4Q and 1Q.

Okay.

But when you're done, you're going to have a brand-new facility from head to toe. And I can tell you guys, when you look at Las Vegas, there is a lot of properties that are long in the tooth in terms of how they're maintained and taken care of. Between Palace Station and the Palms, being right in the heart of Las Vegas, they're going to be renovated from head to toe and completely well positioned to take advantage of the growing Las Vegas market.

Okay, that's great. And then if we think about the Palm side, the -- is the property -- like sort of before we get into the $146 million kind of renovation plan, is the property otherwise kind of ramping in line with your expectations to sort of hit the $35 million target? Was everything sort of set there before we start to see the impacts on the floor?

I think it was. I think if you go back to the previous question, I think it was ramping, hit that $35 million. But I think as we did their due diligence we made a conscious decision to pivot and reinvest into the property so we can realize its full potential given the strength in the Las Vegas market, and the position that the Palms has…

We didn't talk about the percentage of the slot floor that is disruptive right at the moment inside the operating the casino floor.

Because right now, -- I mean, right now, Shaun, I mean, I encourage you to come down and walk through. You got about four restaurants -- four of the major restaurants on the podium are closed, and you get about 30% of the slot for it down. And that's only going to -- that disruption is only going to continue as you continue the renovation of the casino floor.

Understood. Last question from me would just be some thoughts around the 2Q. You called out a couple of costs, but one in particular was, I think, $3.9 million, that you said was specific to 2Q as it relates to personnel. Is that a different way of just saying, it's a one-timer for 2Q, won't repeat next year, and shouldn't be something we need to carry forward for the rest of the year, is that what that is?

That's correct, Shaun. Because what I'm trying to give you guys, and I know you know the math, is that when you look at our core EBITDA margin -- I want to build -- show that the core business is very strong. And when you take the $3.9 million, the $3 million plus the station disruption, you're actually getting back -- the core business is running at historical margins. That's really the point, so yes.

Got it. Okay, great. Thank you.

Thank you. And our next question comes from Stephen Grambling with Goldman Sachs. Your line is now open.

Thanks. So this is maybe a bit of a softball question, but Steve, I think this is the first time you've been leading the call. So as you look at -- back at your perception of Red Rock prior to starting at the company, what's maybe surprised you most in the first couple of months? And what do you think are the areas at this point that are maybe most misunderstood by investors?

Yes, there's a couple of differences. I don't have to worry about 2022 anymore, I guess, that's one point. No, but actually, I think from a philosophical standpoint, the company is very similar to my prior management, with Frank and Lorenzo and Steve, are more similar than I think people know. I mean, they believe in if you take care of the customer and you take care of the team members and the business somewhat takes care of itself, which is what I'm seeing here. So I think my perception as being the best-positioned company to capture the locals market is its consistence from all the diligence prior to coming on board. I'm not sure if that's what you're looking for.

Well -- and there is the question about anything that you think is misunderstood by investors given your own perception?

I'm not sure -- I mean, I'm not sure -- yes, I'm not really sure what you're trying to get at there. I mean, I think it's a pretty easy story to understand. If you create -- if you get the right people and you get the right assets and you execute correctly you're going to generate business locally. I think this company is incredibly positioned to capture the strength in the Las Vegas market. And I think that's well understood with investors. I think right now, where you're experiencing some one-time or short-time margin disruption, which is I think causing some confusion. But that said, that's why I tried to lay out the math for you to say, hey, the core business is incredibly strong. And the two properties, Palace Station and Palms, we're positioning for -- we've decided to reinvest and position for future growth.

That's helpful and clear. Thanks so much.

Thank you. Our next question comes from Steven Wieczynski with Stifel. Your line is now open.

Hi, good afternoon, guys. So Steve, you talked about the $146 million for the Palms, that'll be done by 2Q '18. I think you said that was casino, food and beverage, and a couple of other things maybe I missed. But you said that next potential phase would be done by 2018. Did I hear you right there? And maybe if I did, what would that potentially target around the property?

We think it's really the hotel and the nightlife complex.

Okay. And then I would assume that the cost there would probably be less than the $146 million.

We're still working through -- yes, we're still working through the designs. And we're not really ready to announce the cost yet.

Okay, got you. And then just going to the locals market, obviously, things look pretty good there. But could you help us think about, if you look at your typical, your Boarding Pass, typical customer. What have you seen in terms of trends coming out of your rewards program, not only in terms of maybe new sign-ups, but your typical player, are they coming more? Are they spending more? Is it a combination of both?

Steve, let me jump in and address that. This is Joe Hasson. And what we're seeing is something that has trended out for at least a couple of months, if not enough, call it a couple of quarters, and that is strength at the high end of the database, strength in the middle of the database, strength in the unrated portion of our business, and just a bit of weakness at the very low end of the database. And we've heard similar comments from around the marketplace, talking to our colleagues, and listening to other earnings calls. But sign-ups, a very good story for us. We continue to grow in ways that are pleasing to us.

And promotional environment, fair?

Promotional environment has been very consistent for us. Not much of a change other than we have the upside potential of the new capabilities that Steve mentioned earlier, just a few minutes ago.

And to add to that, reinvestment rate is flat year-over-year.

Okay, great. Thanks guys. Appreciate it.

[Operator Instructions] Our next question comes from Adam Trivison with Gabelli & Company. Your line is now open.

Hi, and thanks for taking my question. I guess related to the slot systems upgrade and the technology upgrades, are there any costs for those built-in to the second quarter related to implementation or -- it seems like you mentioned additional marketing expense?

Yes. There was probably about $300,000 to $500,000, which we view as kind of learnings. As through trial and error, we're just learning to use the system. I think we've kind of got that behind us now.

Okay. And on the personnel upgrades there, the F&B product upgrades or investments, how do you guys think about the return on those, I guess, as we're set to annualize some of those stepped-up costs in the next quarter?

I think it's -- the way we look at this is we enhanced -- when you enhance food product and you enhance customer service around that, the food offerings, you're allowed to realize price increases across like venues, so we're taking advantage of that.

Okay, that's great. Thank you very much.

And I'm showing no further questions in queue. I would now like to turn the call back over to Steve for any closing remarks.

Well, thank you everyone for joining, and we look forward to talking to you in three months. Bye-bye.