Wynn Resorts Ltd (WYNN) — Q3 2015 Earnings Call Transcript

Thank you, and good afternoon. Joining the call on behalf of the company today are Steve Wynn, Matt Maddox, Kim Sinatra and myself here in Las Vegas. Also on the phone are the operational management teams from both our Las Vegas and Macau properties. Before we get started, I just wanted to remind everyone that we will be making forward-looking statements under Safe Harbor Federal Securities law and those statements may or may not come true. And with that, I’ll turn the call over to Mr. Wynn.

I think the numbers speak for themselves; general comment covering both Las Vegas and Macau is this. We don’t see any major change or new development in Macau concerning our existing operations other than all of the comments we’ve made in the past about the confusion, the ambiguity about what we face in terms of tables in the upcoming months as we’re about 170 days before the opening of the Palace, which is the most significant event in the company’s near future. And based upon what’s happened to Galaxy and what we expect to happen at the Studio City, which is just today on how many tables they are going to have in the last two days, a few weeks before they open. The confusion and the rather mystical policies that are governing the assignment of equipment in these new hotels, which are tremendous diversifications away from pure gaming into all other forms of non-gaming, the confusion about the tables and the government’s position in this regard has made it very difficult to plan for employees and other aspects of the facility. I mentioned this early in the conversation because it’s become a major issue in Macau as to the impact of government policy on planning for employment, promotions, hiring and compensation. None of us are really clear on what our environment is going to be like going forward. And it makes planning and adjusting almost a mystical process. This is probably the major topic of conversation in executive conference rooms as people try and resolve their planning on human resources in the Macau market. Our construction of our hotel now is on schedule for March 25th opening. The results of the last quarter were consistent with what we’ve seen in previous quarters and that is almost approximately half of the VIP business is gone and maybe shrinking has caused us to review our credit policies and our attitudes towards junket operators, and some of them have gone out of business. I think others will indeed go out of business, which means you have to focus very intensely on the policies that you employ with regard to the credit that the junket people in terms of the chips that are advanced to them. Our mass business is sort of flat, and that explains the earnings in Macau. Now in Las Vegas, we are in this market, the principal beneficiary of international business, and we have been since we opened in 2005. If a segment of the international market is impacted for extraneous reasons or external reasons like a change in government policy or whatever in China, then we would be the principal victims or we would suffer the most, and that’s exactly what happened. Any change in our earnings in Las Vegas is strictly a reflection of a drop in Asian baccarat business. The rest of the segments in our Las Vegas business are pretty good. Room revenue and other related metrics are healthy. Our convention business is healthy; our food and beverage business is healthy. We’re very satisfied with Las Vegas. The problems in China are causing us to refocus our energies here in America even more intensely. We’re happy that we’re moving forward in Massachusetts, in spite of the friction created by the mayor and the administration in Boston, which for some reason is unwilling to accept the decision of the Casino Control Commission gracefully and keeps trying to use various tactics to claim that we are in Boston not Everett. It may sound laughable at this point and in a perverse way, it is comedy, but it did cause us delays. Happily, they’re mostly behind us now and we’re underway with remediation. We’re looking forward to groundbreaking in a few months. The Massachusetts project, which we think is a very exciting thing, will be on its way and hopefully open in 2018. I’ll leave the rest of any general remarks before we take questions to Matt or Ian or Gamal or Steve or Maurice or anyone on the call who would like to expand or alter what I’ve just said. Gamal, do you have anything to add? Ian? Either one?

Steve, you have articulated it very well. It’s still a guessing game when it comes to the number of tables and the number of employees, the quotas for the employees. There is a reluctance, if there is any good news which has been rumored, they’re just that, and there is a reluctance to actually come out and indicate to the companies that are working here that they are deliberately easing some of the restrictions they have been placing on us. We’re hoping for the best and we hope to be treated fairly. But as you said, the property is looking great and our opening date is March 25th and we’re very hopeful.

The question is will our property be overwhelming enough to kick that market into a different place? It’s hard to say. I have no idea how many tables we’re going to have. The notion that a person who spent $2.5 billion, I’m talking about Melco now, would not know how many tables they are going to have three weeks before they open is preposterous. It’s worthy of comment. How in the world do we underwrite the job security of the local workforce in Macau, keep the promise of promotions and better opportunities under these circumstances? I’m at a loss to answer that question. As we go forward in the planning of Wynn Palace, we are hopeful that we’ll be able to press the issue and get stronger and much clearer communication from the leadership of the local government.

I think we should open it up for questions.

Hi, this is actually Rebecca Stone from Steven Kent’s team on for Steve. I was wondering if you could talk a little bit more about Las Vegas. I did notice that food and beverage is doing well. You spoke, Steve, to some of these things doing better to maybe offset some of the lack of international businesses. Is this something that you would be looking to adjust further in Las Vegas to appeal to more of these types of customers? Thank you.

Yes, ma’am. We’ve done a whole bunch of things. We always adjust. I mean we’re professionals, and I would describe this as such. We run the business in uptimes and downtimes and we adjust to the situations. We’ve made a whole bunch of changes in the casino, both physically and procedurally. We’ve even adjusted the rules of the game. It has been 50 years since Las Vegas increased the price of gaming; we’re long overdue considering the cost of running games and payroll. We’ve adjusted our yield management approach. Maurice Wooden is here and he is very good at that in the whole American operation. We’ve made a host of adjustments. We were off one month by $100 million; at another time, we were down by $45 million. The truth is we can manage and control a lot of things. My long-term view of our operations in America and in China is still positive. It’s the short-term that’s troubling and it’s enough to complain about, but we are actively adjusting and successfully managing our business.

Earlier this month, it was reported in the local Macau media that the Director delays to Macau and mainland China that the central government is going to help support Macau’s economy. These comments followed similar statements from Macau’s Chief Executive last month. I think no real specifics were given. So my question to you, Steve, is this: How do you interpret these comments? What specific measures can or will be introduced based on your dealings with those sets of government officials or do you think these statements were more generic and/or meant to signal mainland Chinese tourists to consider going into Macau? And then I have a follow-up.

Who knows? These facilities are enormously diversified non-gaming buildings, but their survival and operational viability depend on the gaming equipment that was always part of the whole construct. Here in America, we would never have a Las Vegas of the diversity we’ve had if the city had told us how many tables we could spread. The table cap is the single most counterintuitive and irrational decision that ever was made. We are spending billions of dollars creating non-gaming facilities and then arbitrarily being told 'you should only have this many tables.' No jurisdiction ever imposed such logic on us. What it has done is turned our human resource planning inside out and upside down. You can tell from my tone, the extent of my frustration on this point; my frustration on behalf of our colleagues at Melco, who made commitments for 400 tables. Why on earth do they have to deal with half as many? It isn’t good for Macau; it’s not good for the citizens who are looking forward to promotions and benefits that accrue because of the viability of these resorts. If you wanted to undermine the viability of our industry, you wouldn’t impose table caps. This is a critical issue that I’ve voiced to the government, but the rationale behind this is still unclear. My hope is that the government will take real action to support this industry and the people that work in it.

And then I have a second question. When do you start to migrate employees from your current Macau operation to Cotai? How many employees do you see shifting in this quarter, how many in Q1, and how much of fixed OpEx shifting is there going from the Peninsula to Cotai? That’s all for me. Thank you.

We have approximately 2,000 people; that all depends on people that want to transfer from Wynn Macau to Wynn Palace. To be honest, we’ll be able to tell more once we know how many tables we’re going to have. As stated earlier, there is tremendous ambiguity, and there is no clarity regarding the number of tables and the timing for the first quarter so we can acclimate them to the new property. We don’t have an exact number; we have a range based on requests for transfer that would be significant for Wynn Palace, but we’ll know the exact numbers as soon as we know how many tables we’re getting.

I mentioned earlier that the people at Studio City found out a few weeks before opening about their tables. Macau boasts a five-star status and it was hard to train people to achieve that level of service. We cannot maintain service levels when we don’t have time to train our employees. Finding out how many tables you’re going to get three weeks before the opening is outrageous and ridiculous. In my 45 years of experience, we’ve never operated a business this way. We train people; that’s how we give them a future and job security, which contributes to their promotions, pride, and guest experience.

Based on current business trends, there is a significant opportunity to migrate people to Wynn Palace with highly qualified staff and we might not necessarily need to backfill those positions at Wynn Macau until business levels pick back up. For the immediate outlook, there is a significant opportunity to transfer staff, leading to payroll savings for Wynn Macau without falloff in service quality.

It's important to note that while we can transfer some employees, that does not cover the entire workforce. There are still tremendous amounts of additional hiring that need to occur for the enterprise to exist. That point should not be lost on anyone.

I have two questions. For starters, maybe Gamal or Ian if you guys could comment a little bit on what you’re seeing within the mass business today. Obviously, the slots are a bit weaker, but the mass tables seem to have held up fairly well from a drop perspective on a sequential basis. So my question is, are you guys starting to see any stability or do you feel any comfort in at least that portion of the Macau business? And then a bigger picture question maybe for Steve: as you think about some of the government’s conversation and some of the comments that have been made over time about diversifying the economy of Macau, do you get the sense that Macau has the potential to really transform itself away from being a predominantly gaming market, much in the way that Las Vegas did over a number of years?

I’ll take my part first. Absolutely, Macau has transformed itself, not how or can it, but it has been transformed by the projects that have been built in direct response to the leadership and the suggestions made by the local government. Everything from promotions to the creation of facilities has already taken place. But understand that the reason these extraordinary non-gaming attractions exist is because the casino is the cash register. That’s what drives Las Vegas. Most of the hotels we’ve built in the past have never had even half of the revenue from gaming; over half was non-gaming, but none of them could have been built or would exist today if we had been given a table cap. The people want to play, and if you want to undermine and scuttle the viability of that industry, you impose table caps. That’s the truth. We’re trying to communicate this to the leadership of Macau, but it’s a challenge. I am hopeful that we can bridge this gap before we see negative consequences.

Mass table revenue is flat compared to a year ago, sequentially speaking. There has been a considerable decline year-over-year in the very high end of mass games. Those players have dropped, similar to the Wynn VIP. We’ve managed to drive more business into mid-tier segments. We’ve taken back tables from junket operators, adding 23 tables in mass compared to the same time last year.

So, what you’re saying is some of the VIP players that trickled down to the high end mass, are you not seeing as much of them which leaves you officially in a different form than you would have historically?

Yes, correct. More mass tables are essential so that people can participate. You can’t support lower levels of gaming without the tables. Essentially, we were able to transfer tables, but in Cotai, with these big hotels and their substantial footage dedicated to non-casino areas, you need more tables to operate effectively and support the workforce. Otherwise, we end up cutting back on our workforce. I’ve never implemented layoffs in my 45 years of experience and do not want to face that possibility one bit.

Robin, are you there? We missed you.

Steve, you mentioned a little bit earlier in the call that you had done a bit of deep dive with your staff in Macau regarding the VIP business. One of the other headlines that circulated in September was around the Dore junket business that was operating out of Wynn Macau and other casinos as well. I was curious about the team's view on whether you saw those issues as isolated and fully resolved or if there could be any continued fallout from those issues going forward?

Good question. It didn’t have anything to do with us; it had to do with one of their people in their financing syndicate. The way these guys operate is they get people to invest almost like a mutual fund or a hedge fund and then they give these people a return each month on the financial support they get from these groups of lenders. Apparently, one of the employees interfacing with the lenders absconded with their money. It had nothing to do with us. We went to 100% cash with Dore and they had all the liquidity they needed in the cage. When we found out about it, we terminated any extension for any amount to Dore and they were able to cover it thanks to their liquidity. Whether someone else is going to engage in similar deep allocation or embezzlement is hard to predict. Criminals tend to be surreptitious until the truth emerges. However, I believe that all junket operators have tightened their internal controls as a result of the situation at Dore. Therefore, I don’t anticipate a reoccurrence of that nature. We are also very conservative in how we handle our relationships with junket operators because we don’t know their retained earnings, which can be murky. That’s about the most thorough answer I can provide.

It’s great. Thank you very much. My other question revolves around some of your observations on how the people and employees at your facilities are impacted by the current policies. We’ve heard from market participants that the Macau government may also consider restrictions around the blue card policy, which relates to immigrant labor allowed into the market. I was curious if that affects your view on staffing levels in Cotai or if those risks are isolated to table counts and your planning abilities?

At present, unemployment in Macau is almost zero. The government wanted us to build highly diversified non-gaming structures; we went and did it for over $10 billion. How can you run those facilities without employees? Closing floors, shutting down restaurants, or curtailing various activities would be ludicrous. Some local places may close, creating unemployment. We can absorb some of them in the industry, but the extent of our new operations requires more people. These massive facilities being unattended is unimaginable and would have dire consequences in several areas. First, job security for local citizens would be negatively impacted, leading to significant complaints. The second consequence is that the hospitality profile of the city could be severely compromised, taking years to recover. Establishing a good impression takes time, and once lost, it may never be rectified. It’s critical that Macau never loses its viability because doing so will compromise its long-term success.

Hi Steve, and thank you for being refreshingly frank here. I wanted to return to the meeting you had with your employees on the VIP topic. I'm seeking clarity on whether any conclusions were drawn regarding the intent of policy changes related to the junkets as it pertains to Beijing.

Well, that's a good question. From what we understand, reading the South China Morning Post and other available sources, President Xi discovered that the people of China felt that government officials were corrupt and feathering their own nests. He made a decision to act against that to protect the health of his party and country through a campaign against corruption. Considering the reported number of people charged with misconduct, President Xi did the right thing for the right reasons. Businessmen in China, whether they had something to hide or not, had to go into a defensive posture while unsure of future ramifications. This has led to a contraction of VIP consumer spending, including Macau. The junket operators faced problems that are part of a central government policy, a necessary adjustment against corruption. However, it poses challenges to our operations. Ultimately, the communication around transitioning to this new normal is lacking, and as a community, we need clarity to move forward.

Can I ask just a quick follow-up on your comments? You mentioned restrictions on credit cards, I’m guessing it’s on the UnionPay cards. Can you provide a sense of whether that has been implemented and how it might alter customer behavior if it hasn’t?

We weren’t in the UnionPay card business to the extent of other operators. So, it didn’t impact us significantly.

And Harry, you should just look at the mass revenues and see how they’re doing. I don’t think that enforcing the rules around UnionPay is as significant as has been reported in the media.

This is Mark Savino on for Thomas. Just a quick question back on Vegas; I wonder if you could provide more detail on what you’re actually seeing in the high-end baccarat business. Maybe you could parse visitation versus spend for visit trends among those high-end players? And really, do you have any sense of how close you might be to a bottom there? Thank you.

We’re continuing to see year-over-year reductions in high-end play on the international side. And again, as Steve mentioned, we’re adjusting our operations to recover what losses we can across all areas. We currently don’t have a clear sense of what that bottom might be. While we still see a consistent flow of international business, it is not like it was in 2014 or 2013.

And we’re mainly talking about the gaming side; it’s not just Asia. Latin America, with everything going on there in Brazil and other regions, has been impacted as well. Our high-end business was down by about half compared to the revenue side from last year.

As a local analyst, I can share your frustration with the operational uncertainty regarding people allocation as well. So, on the third quarter, am I correct in saying that direct VIP actually held lower, impacting margin? What’s the approximate EBITDA impact? And will this operational uncertainty about table allocation affect the decision-making regarding the development of Wynn Diamond?

I’ll take the first one; it's Matt. As noted, while mass was up, that EBITDA increase was offset by direct VIP being down, as well as our slots. So, those two factors offset the increase in table mass. The hold percentage was normal; direct VIP saw declines in volumes.

The government told us that we could continue to develop our planned concessions, as was phase two, which has always been. We designed a remarkable phase two. Until we understand Wynn Palace better, our ability to plan for the future financially is also compromised. My long-term confidence in Macau remains strong. I love being a part of that community. The short-term challenges demand adjustments, but my long-term outlook is optimistic. We all want to ensure stability and a better future for employees to maintain positive human resources.

If we look at the forthcoming new property in Cotai, and presume that it will be highly desirable in the market, can you talk about strategies to identify and engage with the new customer mix?

There is no mystery regarding those customers. They are primarily individuals from Taiwan, Hong Kong, and mainland China who desire to enjoy life for a day or two or three while on vacation. They want to be well-served, stay in beautiful hotels, dine in excellent restaurants, and experience entertainment and attractions that their home regions do not offer. They want the chance to play in exciting casinos while enjoying all the accompanying experiences. Our environments and service levels control that. As in Las Vegas, Boston, Macau, or Manila, the principles remain constant; nothing changes.

If I could reiterate the question in a more pointed manner, do you expect this market to become more aggressively competitive, and how do you factor that into your engagement strategies?

It’s already competitive; it has been for quite some time. Consider Las Vegas with its multitude of hotels, thousands of tables, and hundreds of thousands of rooms, offering numerous dining, convention, and entertainment options. It’s an intense fight for the audience. Discounts at tables, complimentary offerings, all part of maintaining competition. Different hotels and locations cater to different market segments. We operate at the highest levels of service, and while we sometimes lose market share to competitors, we are confident in our differentiated offering. Ultimately, visitors want the best, and we’ll continue to serve that demand.

Matt, Steve Cootey, Ian Coughlan, Mr. Aziz, Mr. Wooden, would you like to add anything? No? Okay. While this may not have been the most satisfying quarterly phone call we’ve ever had, it’s been the most candid and honest one we could provide for everyone. I hope it sheds light and provides real insights into anything that interferes with the long-term health of Macau or Las Vegas. Thank you all for your attention, and we’ll talk again in 90 days. Bye-bye.