Wynn Resorts Ltd (WYNN) — Q3 2017 Earnings Call Transcript

Thank you, operator. Good afternoon, everyone. On the call today with me in Las Vegas are Steve Wynn, Matt Maddox, and Maurice Wooden. Also on the line are other members of our management from Macau, Las Vegas, and Boston. I want to remind everyone on the call that we will be making forward-looking statements under Safe Harbor Federal Securities Laws and those statements may or may not come true. I will now turn the call over to Mr. Wynn.

Hello. The numbers speak for themselves. We are pleased that Las Vegas had its best third quarter since 2005, and we're particularly excited about the strong performance of our non-casino revenue. This success sets the stage for our golf course development, which we will discuss today. We're also satisfied with the progress in Macau. When we started building the Palace, we communicated our goals clearly. Matthew mentioned we aim to reach 1.3 billion to 1.4 billion with both locations. My target was to achieve 4 million a day, and we are getting closer, having reached 3.5 million. In October, we exceeded 4 million a day, benefiting from a holiday. Our market share has grown from 9% with the Wynn Encore to 16%. Our ability to capture market share is evident, which differentiates us from some competitors. However, challenges remain in the Cotai area where construction continues. We control the entire square, surrounding four roads on our 50 odd yard acres. The SJM is not expected to open until next year, while MGM has faced delays from a hurricane but should be operational in the coming months. The incomplete monorail station is also on our west side but is making progress toward completion by 2019. We're hopeful that the disruptions will lessen in the next quarter. The light rail project is also on our north side. All these factors have impacted traffic to the Palace. While it's been challenging in our first year, we’re performing well, and we anticipate even better outcomes as our neighbors complete their developments and we establish pedestrian connections. This encapsulates my perspective. Maurice will discuss Las Vegas, and Craig and Matt can provide additional details. As we reach a decision point after two years of designing the golf course, we have an incredible opportunity with our extensive water field from the Desert Inn Water Company and our close proximity to the Sands Expo Center and the Las Vegas Convention Bureau. Together, they offer nearly 6 million square feet of exhibit space, one of the largest in the world, adjacent to us. We will leverage this proximity in our development. I’ll take your questions now. Go ahead, Matt. Do we have a caller? Have we lost connection?

Good afternoon. There were excellent results in Vegas and a strong ramp at Palace. However, if we're going to be critical, it seems that Wynn Macau has lost some market share. Could you discuss the performance there a bit? Thank you.

If someone wants to nitpick, they're welcome to do so. Ian, would you like to comment on this one area?

Wynn Macau maintained market share. And if you look at the Peninsula in general, there has been a gravitational pull to Cotai, and that has been dropping off while it's been growing as a market. But Wynn Macau continues to do more than a fair market share downtown. It continues to be the market leader. It came off a very, very high comparison with quarter two. But if you look at quarter one, quarter three and four last year, it had good growth. There have been a lot of discussions about cannibalization of Wynn Macau, and there hasn't been. It's just getting compared to a very, very strong second quarter. If we look at October month-to-date, it's bounced right back. So we're very happy with Wynn Macau.

Steve, you brought up the golf course; can you elaborate on that a little bit? Thank you.

Two years of design development, a lot of choices. We finally settled the golf course for the sake of the golfers. Construction of the buildings begins the day after New Year's on January 3rd, I think it is on Tuesday this year. And we're moving trees and doing the grading of the property so that we can get started with the foundation on the 450,000 odd feet of exhibit space. When we get finished with the convention of the jewelry show in June, or the end of May, we will be demolishing the North Villas where the 1,500-room high rise is going to go, and the casino and the restaurants and the lagoon which is 1,600 feet long and 650 to 750 feet wide. It's surrounded by a boardwalk that's a mile long. And along this boardwalk on the north and the south side to the north, which is towards Desert Inn Road. Just for those of you who are familiar with this building, when you're in the Wynn Hotel and you look at the golf course, you're looking from west to east. The strip is the west, Desert Inn Road is north, Sands Road is south, and Paradise Road is the eastern boundary of our property. The lake goes from just past the Fairway Villas, 1,600 feet to the east and has an irregular shape. It has the first seven to nine acres shaped like an hourglass from 600 or 700 feet down to 250. There's a pavilion on the south where all the big convention building is for outdoor events that's over 30,000 feet with a roof and columns, although it's open to the outside air. That's an outside, in addition to the 450,000, that 30,000 feet is an outside pavilion because we have a lot of events that want to be outdoors. And opposing the pavilion is another little promontory that comes out that's a carousel, 103 feet in diameter, and the horses go and you go on this carousel by walking from the boardwalk out on a finger dock. You can step on to the carousel on a 20-foot wide finger and the carousel goes around and there are booths alternating with horses going up and down. There are two rows of those, and the center is a bar, and 330 degrees of this carousel are out in the water. This bar rotates with the music and is a classic carousel. It poses with this beautifully lit roof, the pavilion on the other side. And there are a number of other things that we call in "midway." We have decided to take the theme of carnival and turn it on its edge and make a series of attractions and interactive experiences that in some ways have their roots in what we all grew up with, but are far more. For example, the notion of bumper cars. Remember that from when you were a kid? Imagine a whole lineup of bumper cars like in a pit in Indianapolis. You get into the bumper car, but the entire skin is LED lights controlled by a system that is linked through contact with the car. We have this rally every 10 or 15 minutes. You go around in these cars, and if you touch another car, it triggers an enormous audio response and an electrical response. So all of these cars are flashing and exploding in color and making crash and explosive noises. Now you go around this oval, and if you win, you get a prize. But there are three Keystone Cups that have bumper cars dressed like police cars with flashing red lights and in costumes. If you get in the lead, they smash into you and cause tremendous crashes. To win the rally, you have to overcome our policemen and our traffic cops. Anyway, it's bedlam in audio-visual interaction. Now I give you that one example; there are a number of others. It's the notion of carnival, but also we've taken the word carnival and put an E on the end, as they do in Rio de Janeiro, and it's Carnivale. Every night at the far eastern end, there's a ramp that goes to a building of 40,000 odd feet that is our housing for our floats. We have taken the notion of Carnivale with the help of wonderful consultants and collaborators like Michael Curry, who did the puppets for Lion King. We have these floats that come out in an audio-visual parade every night right after dark. That parade is a musical and visual extravaganza, but it's not the Rose Bowl parade. It's a much edgier kind of thing with huge spiders, King Kong, and the Devil that are 25 or 30 feet tall and animated. People can pay to be part of that parade and get on the floats. There is a kind of a parade every night. There are zip lines, fireworks, and a host of other things that populate the boardwalk. That leaves 40 or 50 or 60 acres of undeveloped property at the far east and north towards the convention center for development in the future as we go forward with several applicants already in negotiation with us. Phase 1 of our convention center and our hotel and our casino and our restaurants and all that goes along with the full-scale destination hotel. This building on the north, where the North Villas are now, is a 47-story, 1,500-room hotel with a new room idea that I think will be very well-received. Everything looks over the lake and the boardwalk, and everything is interactive. I think probably sometime this spring I might have another conference and show everybody the final model of what we'll be building at that time. It's taken us months of delightful design development to get to the options that would be easy to monetize. We are happy with where we are, so we're ready to start building. We are in final stages of getting our building permit to get going. We should be in hard construction by April, March, or April, I would say. After we move these trees and the earth. The site in Las Vegas is the whole valley here; it slopes from west to east downhill 1 foot per 100. The strip is at 2,075; Paradise Road is at 2,045. You can't see a 1% drop, but it's 30 feet down across the length of our golf course. You could see it if you go to Bellagio, you come into the backdoor of Bellagio on grade, but if you go to the nightclub they call Hyde, you can look down on the water and see that the strip is lower. We had to pick a level that where we wouldn't have to bring in thousands of truckloads of dirt or take out thousands of truckloads of dirt, which would then add costs. The water level is at elevation 2,060; the boardwalk is at 2,062. Wynn, the hotel and Encore are at 2,086 because we have the back of the house below the casino. You'll be looking down on the boardwalk about 20 feet, and that allows us to have boardwalk buildings that are below the casino level and below the hotel level. That's probably enough information for now. Maybe it was more than you wanted.

No, sounds amazing. I'll let my peers ask more questions, I'm sure. Thank you.

Hey, thanks for all the details there. Maybe shifting back to Macau, one of your competitors mentioned some reinvestment is required as the market has matured. Are you seeing any change in the competitive behavior in Macau? And what's your perspective on additional growth opportunities in that market?

I spoke with Sheldon Adelson after seeing his announcement, and it was interesting to see his commitment to improvement. Sheldon and his team are focused on enhancing any aspects they find lacking. What's intriguing is that a major player like The Sands is willing to invest significantly, indicating their confidence in the market's future. I was pleased enough to discuss this with Sheldon, who provided further details. It highlights an important point: in our industry, similar to the theme park sector, if you're not growing, you're declining. Improving is essential in our capital-intensive business, but the good news is that these capital investments yield substantial rewards. For instance, we recently completed a renovation of the north end of our casino, where we invested $11 million and opened in August with new advanced screens, a restaurant named Charlie's, and a new bar. From our assessment, it appears we will increase our EBITDA by five million. While we can make a modest return on significant cash reserves, investing in our business allows for much higher returns, often in the range of 40% to 50%, or double-digit returns. We've also seen similar successful outcomes when we relocated poker to Encore and transformed Botero into Jardin, investing $5 million and generating an additional $1.5 million in EBITDA. Like The Sands, we consistently reinvest in our business to enhance guest experiences, making it a sound investment.

Very helpful, I'll jump back in the queue. Thanks so much.

Hello everybody. Two questions: one, can you talk about what trends, what kind of recovery levels that you're seeing in Las Vegas? We've heard comments obviously from LVS last night, and Caesars made some comments about Asian play earlier in the week. And then my second question for Craig, if you could just give us the adjusted EBITDA for the properties in Macau and Las Vegas, that'd be helpful? Thank you.

We don't have any; the hold adjustments are not really significant here.

10 to 15 in Macau.

Yeah. They're not significant.

At Wynn Macau, you can see the 3.37% VIP holdout adjustments between 10 million to 15 million.

And at Las Vegas?

We haven't encountered any major issues. We've been the main beneficiary of high-end international business for a long time, particularly with table games, hotels, and restaurants. This is a positive aspect of operating at a higher level. There are ups and downs in every market segment, but we've enjoyed international play since we began in 1989 with The Mirage. This has continued through various locations, including Bellagio, Wynn, and Encore, so it's not something new for us. We revised our business strategy three years ago in July 2014.

Yes. It was '14.

We lost $150 million in Wynn when the campaign of corruption came in Macau. We lost $150 million in Las Vegas, which was about $40 million, $30 million in those days of EBITDA. Maurice Wooden and I and the gang, we all sat down and we redid our business plan. No one had changed the price of gambling in 50 years in spite of the increase of cost of running the business. But we thought it was time to take another look at it. It involved changing the location of the equipment on the floor. Primary locations, we put higher-yielding equipment. Secondary locations, we put in lower-yielding destination things. We took the craps table from in front of the elevator and put it over on the side, we put higher yield games. We took 50% of our blackjack and went 6 to 5 on blackjack instead of 3 to 2. We went to double odds instead of a higher multiple of odds unless someone was playing in a high-limit game. We took away the casino block from the hotel; instead of the casino out in the block, they had to go back. The hotel had the block to sell for cash, and the casino had to ask for the rooms. We stopped giving discounts in craps and blackjack or any other exceptional promotional allowances. We changed the criteria from average bet and linked the play in all those traditional metrics that casino marketing people have run hotels for decades. We went to EBITDA per foot with a cold-blooded attitude that promotional allowances would only be issued on current play, not on what you did last trip or the trip before but what was your activity now. And we told our customers, look, if you want to say you will be treated like a prince, just give us your credit card. We treat everybody that way. But if you expect to get free room, free food or any of those things, we're just a business, and it's based upon if you gamble at a level that's acceptable, then of course we won't charge you for your dinner or hotel room. But if you don't, don’t expect us to give it away free. That’s a soft way of putting it, but I assure you that the applications hurt as hard as a diamond. We don't accommodate people that don't play, period. And therefore, our margin on table games, which historically has been below 20 in this city, is now 50. We had the same margin with table games virtually now as you do with slot machines and our rooms. Maybe we have a little less business, but we sent a lot of non-productive customers over to our neighbors. Because we love our customers, we send them over to our neighbor in a Rolls Royce.

And Joe, the first part of your question is like everybody, we saw increasing cancellations, etc., after the event. But we are pretty much back to normal booking trends here at Wynn for the end of this year through next year.

Actually, one of the groups that canceled was 200 rooms; they rebooked at a different date.

It would certainly, I'm sorry.

I just said, for example, we closed the Macau original 600 room tower for a period; you go ahead Ian.

So it had a much bigger impact in Downtown Macau just because of the nature of Downtown Macau being the older part of the city that was less prepared. Cotai features a lot of new properties which didn't have as much damage as Downtown. We had a lot of services that were cut off Downtown. Clearly, the focus was on taking care of residents and areas like the hospitals, etc., in terms of power supply and water supply. So, we were affected Downtown, more off the image of Macau was affected for a period of time, and that did affect bookings. We had tour groups that were essentially cut off from Macau for nearly two weeks, so we did see an impact. It's hard to quantify what it means in EBITDA terms, but there definitely was a lull probably for two to three weeks.

Hi, good afternoon. Ian, maybe we could stick with the same kind of line of questioning, but wanted to dig in a little bit more on the gaming operation side as you are key to ramp up Palace. Any kind of things that you could tell us about what you're doing either on the junket relationship side or how you're configuring the mix between premium mass and grinder base mass right now in terms of what you saw in terms of player behavior in the quarter and how you can really see the building ramping from here?

Well, taking mass first, the lift in mass will be in all segments of mass, and as a consequence of the growing market and all the initiatives I described earlier. On the junket side, it's kind of a situation where the players within the junkets are demanding to come to Wynn and we're seeing the benefit of that. Junket play roles as the property matures and gets older, and people become more comfortable with it. Interestingly, we had a lot of strong junket interest at Wynn Macau also, where we have a couple of new junkets that are interested in joining us, and we've got expansion of the existing junkets. So the junket world is very stable, the growth is measured, and we're getting the benefit of it being having two properties that cater to the higher end of the market.

Good afternoon everyone. Steve, after the tragic events in Las Vegas, you made some comments about issues like security. Have there been any changes or discussions within the industry or on the Strip regarding preparedness or security moving forward that we should be aware of?

The short answer is yes. I think there has been ongoing concern about security among all the operators in Las Vegas for quite a while. However, I am not an expert on how each company specifically reacts to threats. I can only speak to what we've done here because a competitor described Wynn as paranoid. Two years ago, during the period between Thanksgiving and Christmas, we had numerous consultations with various experts, including Greg Kelly from New York and members of SEAL Team. We did everything we could to address this issue and strengthen our defenses. Our goal was to create an environment that would deter someone from targeting our hotel, demonstrating that we were serious about security. This included enhancing every door, profiling guests, using dog sniffers, and implementing various measures that officially went into effect in early May 2016. Since then, we have invested approximately $6 million to $7 million annually beyond our regular security expenses for personnel, equipment, and other enhancements that we never anticipated would be necessary. I felt that we were vulnerable and wanted to convey a strong message that it would be difficult for anyone to go unnoticed in our building. It's important to note that we were acquainted with the individual responsible for the shooting at Mandalay; he had been a customer of ours since 2006. I spoke with staff in our high limit slot area, where he played video poker at significant stakes. He held a substantial credit line and had no outstanding debts in Las Vegas. While he won at Mandalay, he faced losses here over several years, and he didn't fit the profile of a problem gambler. My employees were shocked that someone they recognized could commit such a horrific act, resulting in the tragic loss of 58 lives. The gaming industry is currently assessing the impact of the events. We aim to differentiate between minor injuries sustained in the chaos and those who were directly harmed. We are collaborating as a group with other companies such as the Sands and MGM. However, we still don't have an explanation for the shooter’s actions; it seems more like he just snapped. Every executive in the hotels along The Strip, in Reno, and across the country is exploring ways to reduce the likelihood of this happening again. We implemented a training program for our employees over the past two years, including room service, housekeeping, and maintenance staff, teaching them to be observant and vigilant. They inspect rooms and profile guests. We monitor baggage but allow guests with pull-along luggage to pass without interference unless they raise suspicion, in which case we take action. Our security protocol is carefully organized on our end while remaining unobtrusive for guests. Should a potential perpetrator consider targeting this hotel, they might notice some of our security measures, and that’s fine with us; we don’t need to hide everything we do, but we also do not advertise our strategies.

Thank you for that. And if I can just ask one brief follow-up with respect to the development on the golf course and the detail; it sounds exciting as expected. When we think about what that project can do in and of itself in terms of revenue and profits, apart from what it does in driving business to the property against the existing property. Can you talk about the different elements of it that will be revenue and profit centers in and of themselves within it? Yeah, thank you.

The hotel I mentioned has 1,500 rooms and is more than just a tower addition; it serves as a complete destination hotel. It includes spas, suites, restaurants, gaming, entertainment, and showrooms. Additionally, it's located on the waterfront boardwalk, filled with attractions and activities such as zip lines and carnival parades, along with convention facilities. The 1,500 rooms come with their own convention space, complementing the 450,000 square foot building on the Sands side and the 30,000 square foot outdoor pavilion also on that side. The hotel on the north side stands alone as a destination hotel and operates as a profit center. The boardwalk and its attractions benefit all three buildings, while the surrounding real estate adjacent to the boardwalk increases in value significantly. Just imagine developing on the boardwalk, next to the beach, parades, water attractions, and lake surfing, all while being directly across the street from the Las Vegas Convention Bureau or the Sands Expo Center. The location is incredibly advantageous. Furthermore, there’s a new forum being planned nearby, and we've been in discussions with Madison Square Garden staff. Agreements have been reached to start construction, which is currently underway. Our complex is surrounded by major attractions. The Madison Square Garden venue will have 18,000 seats dedicated to theatrical performances, not just another sports arena. It’s envisioned similarly to the Forum in LA as a premier entertainment destination for Las Vegas, located directly across from us. We own both corners surrounding the Madison Square Garden project. This entire area is set to become highly interactive by 2020 and 2021, with plenty of developments expected. Additionally, there’s the football stadium and the advancement of the resort world construction on the site of the former Stardust Hotel. It’s likely that something will eventually happen with the frontier property across from us, which has been stagnant for years, but I believe it will be developed positively in the future. I'm optimistic about Las Vegas for the next 20 years. My company and Board of Directors are determined to enhance the non-casino tourism profile of our Wynn complex over the next five years. We will be consistently engaged in construction, with many projects expected to launch within the next 18 to 19 months. Activities will continue to unfold through 2021, and there's potential for new partnerships regarding our other boardwalk properties. Is that too much information for everyone today?

Hi guys. This is Rossi on for Robin. Just a couple of quick questions for me. On Macau, this is maybe more for Ian. What are you seeing on the promotional side for higher-end play in Cotai and Peninsula, and do you expect any changes to that dynamic in 2018 with new competition?

I think everybody has seen very steady measures, as Studio City, if you arrived in the Studio City, people didn't shift off their investment rights; it's been steady both Downtown in the Peninsula and in Cotai.

The political environment seems to be stable following the recent election. We believe there is increasing momentum for the IR legislation expected next year. Additionally, we understand that once the legislation is enacted, there will be a lengthy process to establish everything. We are keeping a close eye on this and investing time in building relationships. Over the next few years, we anticipate gaining a clearer understanding of the potential opportunities.

Thanks everybody. Talk to you in the next quarter. I appreciate your time.