Wynn Resorts Ltd (WYNN) — Q1 2018 Earnings Call Transcript

Thank you, Operator, and good afternoon everyone. On the call today with me in Las Vegas are Matt Maddox, Kim Sinatra, and Maurice Wooden. Also on the line are Ian Coughlan, Linda Chen, and Bob DeSalvio. I want to remind you that we may make 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 Matt Maddox.

Good afternoon and thank you for joining us today. It’s definitely been an eventful three months since we last reported quarterly earnings. So I’d like to start the call by reminding everyone of who we are. We are the leading operator of luxury five-star integrated resorts catering to the most discerning customers in the world. We are the designers and developers of buildings and amenities that are global, international tourist destinations. We are 25,000 professionals, dealers, architects, florists, housekeepers, performers, chefs, designers, and thousands of others. They deliver our brand promise to over 20 million customers globally every single year. Together, we are Wynn. Over the past three months, those 25,000 people have done what they do best — being in the moment with our customers, paying attention to every detail, and delivering the best experience available in the markets where we operate. And the scorecard is in, record results. Their efforts show immediately right now in what you see. Meanwhile, executive management has not only been focused on maintaining and enhancing the operations of the business and stabilizing the culture but also in reducing the noise surrounding our business. As CEO, I’m not interested in looking in the rearview mirror to guarantee a wreck on the way; I’m only focused on the future. In order to focus on the future, we had to make meaningful progress over the last 60 days so that on each and every one of these calls, we talk about our business, our people, and our growth. Just to remind you of a few things that we’ve done over the last 60 days. Steve Wynn is no longer a shareholder in this business. In fact, two-thirds of his stock, or 8 million shares, were personally placed with two long-term institutional stockholders, and we are proud to have their support. Galaxy Entertainment, a company that we greatly admire, purchased more than $920 million of Wynn stock, just under 5% of Wynn Resorts Limited, and we look forward to working with them in the future. We increased our quarterly dividend by 50% and we’re no longer mired in litigation after six years of litigation with Universal Entertainment, with billions of dollars at risk. We were able to solve that by repurchasing the redeemed shares effectively. There are 24.5 million shares at $78 a share. We didn’t finance it at 2%, we financed it at 6%. That was the deal we made. It was a great deal for our shareholders and for our company, it was a great deal for Universal, and it’s no longer a financial overhang and a significant drag on management time and a distraction, and we wish Universal well in the future. We also resolved legal claims with Wynn. Six years of work; we have no payment by the company. In addition, I’m particularly proud of our board. They began a serious search to refresh and expand our board of directors 60 days ago. They started with over 50 candidates and are using an executive search firm, plus their networks and connections. I personally interviewed over 10 different candidates, and I’m really proud of the nominating committee and our board of directors for the three people that they chose: three new female board members that are going to bring significant skill and experience to our board and to our company as it relates to corporate governance, strategic communication, hospitality, and technology. What’s exciting about these new board members, on top of the great asset that they are going to bring to the boardroom, is that our company is now in the top 40 of the S&P 500 in terms of female representation on public company boards. We’ve also continued to implement significant initiatives internally to bolster our company’s culture and to make sure that it remains strong and continues to grow. I am committed to leading our company and this industry in diversity and gender equality. What’s great about our company is our base is already so strong. For every job opening at Wynn Las Vegas, we get 110 applications, and that is actually increasing right now. Our turnover rate is less than half of the industry standard because this is the best place to work, and we are going to continue to invest in our people. They are not an expense; they are the assets of the company and we are really excited about the future. As I mentioned in our March preannouncement, we are intensely focused on capital allocation to enhance shareholder value. That includes all future development opportunities in Las Vegas, in Macau, and in a region that I’m very excited about, Japan, where we are going to be spending more time and resources in the future. Let me give you a concrete example of this approach. Over the last 30 days, we reviewed our $360 million convention facility to ensure that what we were building was exactly right. We were able to identify $35 million of savings by simply consolidating some back-of-house space while only reducing the usable square footage by less than 5%. The changes actually enhance the customer experience, do not impact the timing, which is scheduled to open in March of 2020, and enhance the EBITDA potential of the project. That type of discipline and focus is something that we are going to bring to everything we do in this company. In addition, I have begun closely working with our global design and development team, which has over 150 employees and is the best in our industry, because I want to take a fresh look at the lagoon project – the lagoon component of our project on the golf course in Las Vegas. I’ve challenged the team; I don’t want to focus on the mass-market theme park, which is really where we were going before, trying to attract more of the mass market into the lagoon. I want to really focus on the luxury customer and what it is that our hotel guests want. The lagoon is going to be an amenity for our hotel guests because we are going to reinvent daytime activity for guests in Las Vegas and continue to make Wynn Las Vegas the best place to stay on the Las Vegas Strip. Lastly, in Las Vegas, we are carefully considering our approach to the development of the lagoon. We are really fortunate to have a large assembly of prime Las Vegas land, and the importance of appropriately sequencing that development cannot be overstated. We look forward to providing more details on these developments in the very near future. Moving to Macau, I have reprioritized and accelerated investment opportunities in Macau. In 2018, we will begin a $100 million investment program at the Peninsula in Downtown Wynn Macau. This will include reinvigorating our regional casino; we are building two new restaurants there, taking out a lot of the exterior junket space that’s not productive, and making it a vibrant atmosphere. We think the returns to our shareholders will be quite impressive when we are finished with that. We are also going to remodel our Encore rooms; some of the most popular rooms in all of Macau are going to begin that remodel this year. Moving to Wynn Palace, we opened Red 8 in February to great success. The team is currently working on two new restaurant concepts that we plan on starting construction on this year to continue to add to the non-gaming amenities at Wynn Palace. In addition, we are conceptualizing what we should be doing with the 11 acres of additional land at Wynn Palace. We are working through what will be best for our company, for our shareholders, and also to achieve the government’s vision of increasing non-gaming amenities in Macau. Turning quickly to some of the quarter results, we saw strength across the portfolio. At Wynn Palace, we continue to aggressively take share in the mass market. It wasn’t only in the premium mass. In fact, our premium mass was up over twice what it was at this time last year, but demand for mass market was up over 70% from last year. Our mass gaming revenues, including slots, were almost 48% of our gross gaming revenue compared to just 39% in the fourth quarter of 2017. Our VIP volumes remained strong, up 39%, so everything’s working there. Wynn Macau continued to maintain its share during the quarter. VIP volumes were up 29% over the year, and mass was up over 20%. I really want to commend Ian, Linda, and Frederick, and the 13,000 Macau-based colleagues for delivering so strongly over the past several quarters and their intense focus on the future. In Las Vegas, the property experienced a record first-quarter EBITDA. Overall room revenues for the first quarter were a quarterly record for Wynn Las Vegas. What’s important is we’ve seen no degradation of business. In fact, we are seeing stronger bookings for 2018 and into 2019 compared to the same time last year. What we are feeling and seeing in Las Vegas is continued strength. I’m as excited as ever about the future prospects of this company. We have the best assets in the industry, and we will continue to execute on our service and product-led strategy in all of our markets over the coming years. Before we turn it over to Q&A, I’d like for Craig Billings to take everyone through some of the specifics in the press release.

Thank you, Matt. I’ll quickly run through some additional points on the quarter. I’d like to start by reminding everyone that like our peers, we adopted new revenue recognition accounting guidance in the quarter that impacts the current and historical periods’ revenue and expense classifications but does not impact our EBITDA. While there are a number of reporting changes stemming from the adoption of this guidance, there are two key changes I would like to note. First is the elimination of promotional allowances in determining net revenues, with comps now directly reducing the revenues of the departments using those comps. The second is the full deduction of 100% of junket commissions from gaming revenues in Macau. We’ll spend some time with the analyst community after this call to help further break down these changes and to distill an apples-to-apples view of EBITDA margins and certain other key metrics impacted by this guidance. As Matt mentioned, Macau was particularly strong this quarter, delivering $421.7 million of EBITDA on $1.3 billion in net revenues. Continued ramping of Palace and improved mass revenues drove operating leverage leading to a record EBITDA margin of Palace, something we are particularly proud of. These results were not materially impacted by hold, with the direct program holding higher than junkets. Bad debt in Macau was $300,000 in the quarter compared to a $4.6 million credit in the prior year. Las Vegas delivered $142.6 million of EBITDA in the quarter on net revenues of $431.5 million driven by strength across the property. Table games hold percentage was on the high end of our expected range in both current and prior year periods, driving a little over $10 million of incremental EBITDA in Q1 2018. Bad debt in Las Vegas was $400,000, comparable to the prior year quarter. In Boston, we incurred $241.7 million in total project cost during the quarter, taking the total spend to date to $1.38 billion. We remain on time and consistent with the last published budget. We ended the quarter with total debt of $9.36 billion and total cash and investments of $2.2 billion, including $1.6 billion at Wynn Macau. Those debt and cash balances reflect the payment of the $2.4 billion Universal note and settlement. However, it’s important to note that several financing transactions were in motion on March 31. Our $800 million bridge facility used to partially pay the Universal note and settlement was outstanding at quarter-end. Also at March 31, the sale of $927.5 million of stock to Galaxy Entertainment had been arranged but had not yet closed. When that equity transaction closed on April 3, $800 million of the proceeds were used to repay the previously mentioned bridge loan. With that, we will now move to Q&A.

Hi, good afternoon everyone. Matt, thanks for the run-through on sort of the overdue strategy. I think it’s really helpful for everybody. Maybe one area you could talk about since there has been a lot of press speculation on it would be Massachusetts, specifically, I mean clearly got an update on where you stand with the budget, but there has been a lot swirling around others too; could you just give us any of your latest thinking about potential outcomes and strategy as it relates to the project specifically?

Sure. When we entered that market, it was actually five years ago. We were excited about the prospect of that market, our location, and the ability to generate some growth for the company. Five years later, up until today, we still like the Greater Boston area market. We think it is a really good opportunity. However, we are a $30 billion company, and if there was ever any risk due to heightened rhetoric, that there could be any contagion from Massachusetts into our $30 billion company in Las Vegas and Macau, we will have to take a hard look at what is best to protect our shareholders and our value. Still again, we love the market. We are going to continue to actively cooperate with the regulators there and move forward. But at the same time, we will always be protecting our shareholders and our employees.

And Matt, there’s been some discussion on timelines pointing towards, you know, maybe not an open-ended investigation but something that can maybe wrap up a little sooner, possibly as early as the summer. Is that consistent with what your understanding is, or could you give people an update on just what your thoughts are on maybe having a more concrete outcome?

I think that our understanding is consistent with yours that it’s in the summer. I wouldn’t want to speculate, early or mid, but we are actively cooperating with regulators, and it feels like the process is moving forward quite smoothly.

Great. I’ll open it up for everyone else. Thank you for taking my questions.

Yes, hi, and thanks for taking my question. Matt, you referenced in your remarks earlier the taking out of the promissory note, the 2% note with the 6%. I’m assuming that 6% refers to the cost of equity with Galaxy, and if so, what was the decision behind going with an equity investment there?

So those two things are totally separate. What we agreed to with Universal was that from the time that note was outstanding, the $1.936 billion, instead of it being at a 2% interest rate, it would be at a 6% interest rate. When you recalculate it over the five-year period, that's why the number was $2.4 billion instead of $1.9 billion. So the extra $400 million was incremental interest expense.

Right, sorry, that’s correct. I remember that. Now but just in terms of the Galaxy and the decision to use equity in that transaction as opposed to potentially a lower after-tax cost of debt, could you talk a little bit about the thought process there?

Sure, so what I’m focused on is having long-term strategic partners as owners of this company. The two investors that bought 8 million shares from Steve Wynn fit into that category, and so does Galaxy. I’ve been a long admirer of Galaxy and what he’s done, and they are long-term investors. Having long-term, stable capital in equity, I think, is a very good move for this company and for all the shareholders. Also, Carlo, I’m not a big fan of lots of parent company debt, which is where that $1.9 billion existed. It was the only debt at the parent, so advertising the parent, getting rid of the $2 billion of debt at the parent, really enhances our flexibility to do more in the future.

Great. Thanks, Matt. And then, Craig, if you don’t mind, I thought you mentioned that the Las Vegas hold impact was a $10 million benefit. If I missed that, I apologize, but did you quantify the lower-than-theoretical VIP hold in Macau?

What I mentioned is that it really didn’t have a material impact in Macau because we held high in direct and low in junkets. So really the only impact was in Las Vegas.

Thank you very much.

Hi, thank you, and good afternoon. Matt, I really appreciate your overview and the review of the company’s accomplishments over the quarter. I thought that was very helpful. But just to step back big picture, you know, since this is the first time you are addressing the investment community in this – I was just wondering if you could walk us through your vision, both in the near term and longer term, and if you could frame your response in regard to, you know, government, organic growth, CapEx, and capital return, that would be helpful. I mean, obviously, your prepared remarks touched upon it a bit, but just looking forward, how do you see the company evolving over time?

Sure, so the company’s current asset base is the best in the business, I believe. Our growth profile is quite strong. What we are doing is we are reprioritizing where we want to spend our capital based on where we think we can get more immediate growth. So I have re-prioritized spending money in Macau, looking at those projects and what’s going to attract new customers and keep our customers at those properties longer. In Las Vegas, our previous project actually had a budget of over $3 billion, which was not sustainable, so we are taking a hard look at what is sustainable here and what’s going to keep attracting our customers. We are moving forward with the lagoon. I’m a big believer in the future of Las Vegas, and we will be coming back to the investment community later this year with where our next development opportunity will be. Will it be on the lagoon? Will it be on the Las Vegas Strip? That is what we are studying now, and we will spend a lot of time on. In terms of future development, we are going to be spending more time, and we’re really enhancing our team to focus on the Japan opportunity. It’s something that I think is ripe for additional investment, and we are really focused on it. We think we have a great story there; we’re already talking to potential consortium partners. We are focusing on locations. I have dedicated a couple of people there that are full-time, who are developers and understand how to work with the governments in terms of what it is that they want to accomplish. So the vision is we are going to keep developing. We are going to be at the top of the market. We are going to use our 150 people in our design and development team to execute properties at the highest standards that are going to drive shareholder returns.

Right. And I assume that the dividends increase is the beginning of a long-term view on the return of capital to shareholders?

It is. We will consistently review investing in the ground, paying down debt, buying back stock, and increasing dividends. Those are things that Craig and his teams are going to be reviewing on an ongoing basis, and what is going to drive more value. The 50% increase in the dividend is something that was easily sustainable by our business, and our board and management team will continuously be reviewing that.

And that’s helpful. Thank you. And then just switching gears to Ian, and I think you said Linda was on the call as well. I know the question of concession renewals in Macau came up last quarter. I thought Steve actually gave it pretty thorough and helpful perspective on that, but investors continue to ask and be concerned about these upcoming events. So I was just wondering if either one of you or both of you could share your thoughts on what you think the requirements for renewal could be. Most investors think there might be some kind of payment required; some have even brought up the chances of having to bring in partners. So, I know there are different scenarios right now we could discuss, and it's unknown, but given that you're both kind of there in the heart of it, I just thought I’d pick your brains on this thing?

Ian, why don't you go ahead and take that?

Sure. Thank you, Matt. We are completely committed to the future of Macau. We continue to re-invest in the properties. Our relationship with governments as an industry has always been very collegiate and very engaged. We, as an industry, have created great success for Macau. We’ve been good citizens. We take great care of our employees. We brought a lot of stability to the economy here, and we have every indication that the process will take place at some stage this year, and we have a future in Macau as an industry with all the current players. We are waiting to be given specific details. There has been a lot of discussion about the need for the marketplace to have more of a non-gaming focus to provide some balance with casino revenues. We’re very committed to that, as Matt addressed in his opening remarks. Like our other concession partners in town, we continue to focus on the future of Macau, reinvestment, and development for the future.

Okay. Thank you.

Hey, everyone. I have a couple of quick questions. First, regarding Wynn Palace, how significant were the mass-market share gains you mentioned earlier in the call? Were they largely related to the second half of the first quarter due to the MGM Cotai construction project becoming an operational property? Also, could you discuss any positive implications for walk-in traffic from MGM Cotai?

I'll take that first and then turn it over to Ian. But I think what we're seeing is an increase in the quality of our customers. We haven't seen a big uptick in foot traffic coming into the buildings, but if you look at what it takes now for Wynn Palace, from an average daily theoretical basis to get a room comp, that is going up quite significantly, which is really a telltale sign of the quality of the customers. We’re seeing premium mass customers that are staying at MGM, walking over to Wynn Palace to enjoy our facilities, and that's obviously an outsized benefit on the revenue line. Ian or Linda, do you want to add to that?

Just sticking with our customers, we continue to ramp up. We've seen a significant gain in what we call our Chairman's Club and our Diamond Club areas. Premium mass customers are beating the way to Wynn Palace. We are using our rooms much more effectively, and if you look at Q4 2017, 53% of the inventory of the 1,700 keys went to casino customers. In Q1 of this year, 73% of the rooms went to casino customers. We clearly have even more room to grow there. Our EBITDA per room for the first quarter per room in table is up 47%, and occupancy is up 23%. We’re getting better quality customers in the room. We have the finest room product in the marketplace, so people are getting more familiar with the property. The more holidays that happen, the more visitors that are in town, the properties gaining traction, there’s still lots of upside. The impact of MGM; they will go through the same ramp-up steps that we have to go through. There are no miracles when you open a property. We have seen increased visitation, as Matt referenced. A small nugget of that is our gondola traffic is up 18% since MGM opened, and visitation into the property is up 7% to 8%. There are more people on the street. The light rail was cleaned up significantly. We are waiting for the cross bridge to open between ourselves and City of Dreams. But in general, the neighborhood is tightening up. We've got an additional tower opening later in the summer, and the Palace will open in Q1 2019, so there's lots of upside for Wynn Macau, very focused on premium mass customers; lots of room to take them in.

I think specifically how we've been able to accomplish all the growth in the mass and premium mass is, first, we definitely grew our database through the new aggressive sales strategies and their current existing sales efforts, and their strong relationships. Secondly, as mentioned before, we're using our rooms effectively so every customer that stays in the room is absolutely contributing more than what we used to have when we opened. Thirdly, we’ve increased the frequency of both guests coming back to our property by doing more events, whether it's concerts or casino marketing events or even food and beverage events. We've leveraged a lot of our facilities to expand our customer base. Lastly, we’ve been targeting our casino promotions aggressively to address each market. The Cotai and downtown markets have different clientele and we’re effectively addressing their specific needs to increase those shows to our customers, all while hiring new sales personnel for Cotai.

Great. And then, Matt, I have a follow-up on some of your older comments on Galaxy's investment in Wynn Resort. You talked about the strategic benefits of having a long-term holder, and the consequence of having a better capital structure. I think all of the calls totally get. Could you help us understand in what other ways the Galaxy investment in Wynn Resort is strategic?

Because both operators, Wynn and Galaxy, are focused on quality and on experience, I think that as international jurisdictions open up, we could potentially work together to jointly examine those. We certainly haven't made any agreements to do that, but our operating styles and philosophies are very similar, and it's something that could potentially be valuable to both companies in the future.

Thank you very much.

Hi, good afternoon.

Hi, Harry.

Hi, Matt. First question in Vegas, could you give a sense of how the household teams are camping in the Fontainebleau projects in your opinion? Are they at a 100%?

I would hate to speculate for them. It doesn't look like a 100% from a guy that drives by every day to go to work, but I really think you would have to ask them. There are some cranes out, there are some people there, so it's not empty, and I'm actually not sure all about Fontainebleau. But it doesn't feel like it ramped up to a 100%.

Well, I guess the reason I ask is that there are some concerns about capacity growth in 2019 or 2020, but from what we're hearing, there seems to be considerable media discussion about these projects really ramping up, and that's not the sense that I'm getting. I'm wondering if collectively in your room you would agree that they are not really running it at full capacity?

We would definitely agree that additional capacity in 2019 and 2020 would be a long shot. These projects feel to me like they are much further awaiting that.

Okay. And then turning to Macau, I thought one of the interesting things in the quarter was that Wynn Macau is proposing to repurchase about 10% of its shares. Who are they purchasing it from? And is it possible that they purchase it from the parent company? Is there perhaps a long-term strategy to reduce your ownership in Wynn Macau?

Harry, it's Craig. That's really a routine repurchase authorization that we and all other Hong Kong listed companies seek every few years. It's much more procedural and is not reflective of any intent.

I see. Okay. Well then, let me ask one other question of maybe Ian. Ian, what's your view on infrastructure timing? There have been some disagreements about the timing and the impact of the Hong Kong-Macau bridge, as well as when the light rail system will really be operational. I wonder if you could give us your view on those?

The general sense in Macau is that it will open for traffic at some stage in the summer. The infrastructure and civil engineering is all completed. People have been doing some test driving over the bridge. The key issue is the support services, getting everything coordinated — simple things like rescue between the three different parties, getting customs and excise organized, getting immigration organized, and dealing with how the traffic enters into the different points of entry. That’s being worked through with three different authorities, and it’s a magnificent structure. I don’t think we’ll see a huge impact from it initially, but it will certainly ease the burden on ferry terminal activity, which right now is chaotic, particularly on the Hong Kong side. We look forward to that teaming up significantly. The travel time from central Hong Kong to Macau will improve once we get through all the border situations. I think the ferry itself will still be considered very convenient for people. In time, it will bring extra visitors to Macau. The biggest gain from an integrated resort perspective would be the closeness of Chek Lap Kok, Hong Kong's airport, and our ability to get our higher-end customers from that airport to the city and to our resorts. So we're looking forward to that.

And light rail?

The light rail is scheduled for 2019. They have been testing the rolling stock, and structurally it’s getting very close to completion. The drag on the light rail was the depot, which had some contractual disputes, but the government has done an excellent job in getting that far back up again very quickly, and I think that they’re looking to do it with extra speed. We hope to have it open next year; clearly, it’s a huge opportunity for Wynn Palace in particular with the station right outside our property and it traveling on two sides of the property. Again, this will be a great thing for the neighborhood.

Okay. Perfect. Thanks a lot.

Good afternoon. Thanks. I just have a few follow-ups. I guess first on Japan, given some of the rules have seemingly solidified a bit. Can you talk to your latest thought and how big even the opportunity that market could be? How do you think about capital allocation there? And what are your rolling this is to lever up a little bit versus partner with someone such as Galaxy, as I think you mentioned earlier?

Sure. We’re big believers in the Japanese market. Everything that Japan stands for in terms of tourism, which is the best hospitality in the world, some of the finest food in the world, architecture that is hands down some of the best in the world, all of those things, we think, really fit with what we do, which is the luxury experience in integrated resorts. More and more people from all over the world, in particular Asia, are traveling to Japan every year. We would be very interested in looking at large-scale opportunities there. We will be working with consortium companies, but it’s one of those moments that in our industry you do not want to miss. We’re clearly always watching to make sure that the rules and regulations are conducive to a good operating environment, but it’s one that we're very focused on.

And I guess a follow-up question for you Matt. In your prepared remarks, you mentioned stabilizing the culture. Can you clarify that, and as we look to the future, what changes do you want to see and how do you think about creating your own legacy throughout the organization?

Sure. There's just been an onslaught of negativity from the media. What that does is destabilizes people because they read that there are things for sale or there are problems. I’ve actually been hosting town halls for all employees — about 15 of them — and I think I’ve seen almost 15,000 employees so far talking about the future of the company and how bright it is, and how we're not for sale and what it is they were doing and how we're focusing on who we are and we're going to keep reinvesting in our people. We immediately implemented some initiatives that had been a long time coming, like leadership development programs for line-level staff that want to make it to supervisor and supervisor to manager. We've rolled that out in a big way because we want to continue to provide opportunities for our people to grow. What we're doing is just reminding everybody that we are Wynn, we're very strong, and the future is better than the past, no matter what the media likes to say.

That's helpful color. One last if I can sneak it in for Craig. On the Vegas strength, can you provide any additional color on what drove not only the quarter but as we look further out — whether it's five, I guess in the quarter, the types of games or customer base. For example, is it primarily baccarat, or international customers versus leisure or convention spillover?

Actually, I'd like Maurice Wooden, our Property President, to grab that.

I mean, yes, to continue on from first quarter strength to the rest of the year, we have a very healthy convention base throughout the rest of this year, and if you look at 2019, we're significantly outpacing 2019 numbers already. As far as the business goes on the casino side, we continue to see great strength on the international front, especially in our Far East and European markets. We're very stable in our domestic markets, and last year we had a record slot performance with respect to our slot numbers on the casino floor. We're facing a very similar performance to last year's. Overall, our business trend looks very healthy this year forward and into 2019.

All super helpful. Best of luck this year.

One other thing I'd like to point out in Las Vegas, if you look at our non-gaming numbers, it doesn't look like that the other piece outside of the hotel is up very much. There's a reason: our retail revenues were down almost 20%, but that's because of a change in strategy. We've been moving out of operating unprofitable retail stores and moving into experts in retail and leasing that out. While our revenues in retail were down almost 20%, our operating income in that department was up almost 10% for the quarter. Those are moves that we continue to make internally.

Helpful. Thank you.

Hi. Congratulations on the quarter. I wanted to ask about Macau specifically, and just not the capital allocation strategy. There was a press report. I'm not asking you to confirm or deny it, but it did suggest a share repurchase effort. If you could talk through your capital allocation priorities specifically in Macau, because you did indicate in your prepared remarks about some spending on the Peninsula, could you talk through that? That would be helpful. Thank you.

Hey, David, it's Craig. I'll start and then pass it to Matt. The share repurchase authorization that we're seeking is purely procedural and is done by most all Hong Kong companies; it is not reflective in any way of intent. If you look at our peers and their filings, you can see very similar proposals.

The capital allocation strategy in Macau is to continue to focus on investment and non-gaming amenities that will drive additional customers to Macau, accelerating the design of those investments because we feel like there’s great opportunity there. We will continue to revisit our dividend policy there relative to our free cash flow.

Right. And just one more, given the strength in Las Vegas and your outlook in Las Vegas and the opportunities that you have there, some of which are underway and others that are land across the street, how are you thinking about your domestic presence, specifically in Nevada, relative to the other opportunities that are out there? How would you sort of qualitatively rank that?

We are big believers in Las Vegas internally. I think the future of Las Vegas is very bright. What we build will be consistent with the Wynn brand and with luxury, and with the customers that we have been focused on for the last 15 years. We are moving forward with the lagoon and are reevaluating what our next development opportunity should be, but we are moving forward with ideas for a new development opportunity, whether it’s on the lagoon or across the street, because over the next number of years we are believers in Las Vegas. What we’ve done in Macau is just accelerate a lot of the ideas that we've been working on and begin to try to move that forward in a more expedited basis. We're always looking at international development. If something comes up like Japan or pick another place that has great rules and regulations and is a large opportunity and has potentially better returns than the company, we’ll have to look at that. But for now we’re monitoring all three and aggressively pursuing all three.

Right. And if I can just ask one housekeeping question, Craig, are we going to get at some point sort of 2Q and 3Q, 4Q pro formas under the new format? Is that something that may appear in the Q or in an 8-K?

David, we'll talk to you after this call about that. We're going to walk you through the changes and give you a sense for what it primarily does to EBITDA margins, where it has a modest 100 to 200 basis point impact in Macau.

Understood. I'll look forward to the walk, and thank you for taking my questions.

Sure.

Great. Most of my questions have been asked already. Maybe just to clarify because in your opening remarks you talked about March 2020 still being the date, so would the only thing going forward right now as planned in Vegas be the convention center? And then you're kind of stepping back from active construction on the lagoon to kind of reevaluate the scope, timing, and budget? Am I correct in thinking that this could end up falling behind some of the projects with the former Ellen Palace? Is that the right way to think about what's sort of actively going forward versus just kind of actively being considered?

No, that’s not the right way to think about it. The convention center is underway. We got $35 million out of that budget and enhanced the customer experience. The lagoon is underway too; that’s going to be targeted as an amenity for our 4,700 rooms here at Wynn Las Vegas that will reinvent daytime activity in Las Vegas — I don’t say that lightly. We're going to have watercraft, great water sports, beachfront, and we’ll have some restaurants and bars. It’s going to be a really fun place to be for our customers. The next multibillion-dollar development of new hotel rooms, new restaurants, the full integrated resort is what we’re examining right now. Before that was on the lagoon and being programmed as phase 1B. That’s what we are re-examining to decide if we want to focus there or focus across the street for the next resort.

Okay, great. Now that's helpful. And then for the lagoon, is the budget and timeframe for that the same as when it was last discussed a few months ago?

It is.

Okay. All right. Great. Thank you.

Sure.

Hi. So, on the Macau accelerated investments, how are you thinking about the return on investment on those dollars spent? And then will there be any for modeling purposes? Will there be any renovation impacts for the short term? Thanks.

We're not going to quantify what the returns on those will be because it's really about adding to the overall integrated resort and keeping our customers longer. Clearly, we think the returns are going to be strong. In terms of renovation, I know the teams are working carefully with the Encore room tower remodel because it's one of the most popular room products in all of Macau to ensure that we're not jeopardizing business. That tower runs at over 95% occupancy, so taking rooms out to remodel is a delicate dance, and we're working through that now to try to make sure we minimize the impact on the business.

It's also a soft refurbishment, so we can manage that very effectively. We did it with the Wynn Tower. We don't foresee it hurting occupancy too much.

Very helpful. I have a follow-up question about Macau. How do you plan to continue enhancing the customer mix at Palace? What potential opportunities do you see? Can you provide additional metrics regarding the higher quality customers you've mentioned? Any further details would be appreciated. Thank you.

Sure. Linda and Ian, why don't you talk about the comp mix in the hotel?

Well, as I addressed earlier, we've listed the number of rooms at Wynn Palace that are casino-related, some 53% in the first quarter last year to 73% in the first quarter of this year. We continue to have space in the property to bring more high-end customers in, casino high-end customers. So, that's our opportunity. As the property gets more familiar with players, we have a lot more repeat business. New customers are being introduced; all the marketing efforts we're making are bearing fruit. We just continue the things that we're doing. We believe that we're still on lift-off and ramping up.

Also, the quality of our room product is really the top in the market. We’re able to progressively move our customers up to even the next level of room and suite products that they haven’t experienced before. We have the penthouse and the villas, and those are actually new experiences for a lot of the premium mass customers. We’ve been able to progressively increase their spend based on the facilities they get to experience.

It may be a good opportunity for Ciaran to talk about the strength of mass at Wynn Macau as well. One of the key focuses is just to not cannibalize Wynn Macau.

At Wynn Macau, we continue to see growth in the mass business despite the challenges posed by Cotai product segments. We have been utilizing our rooms and casino at a very high rate, with around 94% or 95% occupancy. Our optimization strategy has been effective in attracting better quality customers, converting those who previously did not stay with us into hotel guests. We are careful not to undermine our business and avoid unnecessary transfers to Wynn Palace. Many customers who used to frequent Cotai have now chosen to enjoy the Wynn experience at both properties. Our primary focus is on maximizing the quality of our customers in the rooms.

Also, where we experienced the most growth at Wynn Macau is we've been able to leverage the facility at Wynn Palace to reactivate a lot of our inactive customers that we lost from Wynn Macau to the Cotai market. Once our Wynn Palace property was available, we reintroduced our company and brand to those customers. Now they have come across both properties, so Wynn Macau has experienced a lot of, if you will, reactivated customers that haven’t visited in the past couple of years.

Okay. Thanks.

If I could just one quick follow-up. So, I guess, Ian, you said 73% comp, but Ciaran highlighted that at the Peninsula it's 94% to 95%. I mean, is that the long-term opportunity?

That is the long-term opportunity. If every room at Wynn Palace goes to a casino customer with a high yield, that's where we want to be.

But the Cotai mix is different than Peninsula. We’re not going to start setting targets for the Cotai room mix to be the same as the Peninsula. That, as you know, Tom, is just the wrong thing to do. We’ll continue to increase our room mix in an appropriate way so that we’re maximizing the bottom line.

Good. Thank you all.

Next question.

Hi, guys. Thanks for taking my call. A couple of things: first of all, could you give us an update on any timelines for the 11 acres of additional land that you guys have over Wynn Palace? Is there any timeline that you could suggest or CapEx that you could suggest for what you plan to do with that?

No, it’s too early. We’re in the beginnings of the conceptualization phase. We're actually bringing in some of the leading global designers and people in the animatronic world that we’ve worked with in the past. They were responsible for the Lake of Dreams here in Las Vegas and Prosperity of Tree in Macau. We’re starting to conceptualize some really interesting non-gaming amenities, but we’re at the beginning of that and it will be a number of quarters before we’re able to articulate it.

Okay. And the second thing, Matt, could you give us some more granularity on Japan? Are you looking at Osaka? Are you looking at Yokohama? What type of CapEx are you guys thinking? You'd be willing to commit? I know a couple of others have already commented that they're prepared to invest up to a trillion yen. Is it a similar commitment that Wynn's prepared to make to that Japanese market?

We never lead with the number without knowing the location, all the rules in play, what the consortium looks like, and what the expected returns are. Clearly, anybody can throw out a trillion yen and back into an ROI that makes sense. But until we know those things, we're not going to be putting out budgets based on thin air. What we’re doing is working carefully with the cities and the Tokyo Bay region and Osaka, explaining our qualifications, what it is that we do, and working on partnerships to move forward in either one of those markets.

Thanks, Matt.

Sure.