Wynn Resorts Ltd (WYNN) — Q4 2018 Earnings Call Transcript

Thank you, operator, and good afternoon everyone. With me today in Las Vegas are Matt Maddox; Marilyn Spiegel; and Ian Coughlan. Also on the line are Ciaran Carruthers, Frederic Luvisutto 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.

Thanks, Craig, and thank you, everyone for joining us today on this conference call. Before we dive right into the fourth quarter numbers, I’d like to make a few opening remarks. 2018 was a year of transition for our company and that transition is now over. We have a fully reconstituted board with Phil Satre as the Chair, working very well with management. In North America, we've hired a number of key people. We have a new Chief Marketing Officer that started about two months ago. We've hired a new Head of Human Resources for all of North America. And within the last 30 days, we've hired Marilyn Spiegel, who is sitting beside me today as the new President of Wynn Las Vegas. I'd like to welcome Marilyn back because she worked with us for three years in this role almost 10 years ago, and I'm really excited to work with her. Now that we have our board in place, our team in place in North America, and we're continuing to grow our team in Boston and what I believe to be the best team in Macau, running Wynn Macau and Wynn Palace, we're ready to execute our strategy. Our strategy is growth. I believe that we have the best and most robust growth pipeline in our industry. As an example, five months from now, we're going to be opening the very first large-scale integrated resort in a Tier 1 city, Encore Boston Harbor. The Boston metroplex welcomes 20 million tourists a year, with two million of those being international, and we have a $2.6 billion property that we're going to be opening right in the heart of the Boston metroplex, and we'll be the only large-scale resort there. We're really excited about that opportunity. It provides a notable increase in EBITDA for our company, and that's in five months. Looking here in Las Vegas, it is now a marketer's market. The overall growth rate here on the Strip is pretty much in line with the economy. We know that we have to take share. Right now in Las Vegas, we have a 400,000 square-foot convention facility, state-of-the-art, under construction. It's going to open in 13 months. We know that it's going to add four to six points of additional occupancy at a strong rate to our property in 2020, and everybody on this call knows when you get additional occupancy with a strong rate, that's straight flow through. We've also redesigned, with Tom Bosio, our golf course, and it will open around the same time. This golf course makes money on its own, but we've underestimated the impact that it has on our domestic casino business, allowing our host and our team to run special events that will continue to enhance our casino play. We have three new restaurant concepts underway here in Las Vegas that we're going to roll out in 2019 because our customers expect us to continue to innovate, and that's what we're doing. I feel very good about the long-term position of our property and the ways that we're investing here in Las Vegas. Turning to Macau, if you look at our downtown property, Wynn Macau, which has always been an outlier in terms of its performance relative to its size, we realized in early 2018 that Wynn Macau was doing well, but it was making a disproportionate share of its revenue from second-tier junket operators. That's not a place where we wanted to invest for the long term. We've been there, and we know how it ends; it's too volatile. So we began redesigning Wynn Macau, the entire original casino, and also remodeling some of the nicest suites, the Encore Tower Suites. We started that construction in July. In the fourth quarter of this year, we'll be re-launching an entirely new premium mass casino experience that’s open to the water, with three new restaurants, 10,000 square feet of additional retail, and a new hotel tower that’s not just a soft refurbishment of the Encore tower; it's completely redone like a new property. We'll be effectively launching a new property at the end of this year for Wynn Macau, focused squarely on the business that we believe in for the long term, and that’s the Premium Mass segment. Moving to Wynn Palace, it continues to position itself as the premier property in Cotai. Ian and Linda and the team have been opening a new food and beverage outlet almost every quarter in the past four quarters, and he has another one coming up in the next six weeks. What we see at Wynn Palace is that as it continues to get into its rhythm, it's the destination where premium players like to stay and play. Now we know we don't have enough hotel rooms, just 1,700 hotel rooms. So we are actively designing what I think will be the top tourist destination in Macau with the Crystal Pavilion, something I've spoken about on these calls along with a phase one hotel tower of 670 rooms and a phase two hotel tower that’s roughly the same size. Our growth pipeline is quite impressive. If we just take a look at where we are right now and where we will be in the next 12, 24, and 36 months. Turning to the fourth quarter results, in Macau we generated $394 million of EBITDA. It was above our range that we provided in the third quarter. I'd like to point out that we've spent the vast majority of October and November inside the range we provided earlier. The inherent volatility of Macau makes predicting market revenues tricky, given everything that's going on with global headwinds, and potentially slowing global growth is something all companies around the world are discussing, not just us. This volatility complicates predictions. As an example, Wyn Palace’s revenues were slightly down in October and November compared to the fourth quarter of 2014. But in December, they increased by 50%. On the VIP side, that was mainly a result of hold, but mass side play was up 40% in mass play in December. Clearly, that's not a number we would extrapolate, nor is it something we would label as a trend, but it shows the inherent volatility in Macau. There are peaks and valleys. However, the way we positioned our properties allows us to capture premium customers when they come to town. Looking at Las Vegas, we made approximately $105 million of EBITDA this quarter. In the third quarter, we had a setback in our baccarat volumes and lost some market share, but we recovered. We enacted some changes in our marketing strategy and our business approach. We recovered in the fourth quarter, and I feel good about Las Vegas considering everything that we have going on here that I mentioned earlier with the convention center, the golf course, the restaurants, under Marilyn's stewardship driving this property each day. The best days for Las Vegas are yet to come.

Thanks, Matt. As noted in our release, our Macau operations delivered $394.1 million of adjusted property EBITDA on $1.294 billion of operating revenues. After experiencing a normalized average of $3.6 million a day from October 8, the day after Golden Week, through November 30, results improved in December due to increased VIP turnover in Wynn Macau and higher mass win at Wynn Palace. Overall, for the quarter, combined property mass table win was a standout, increasing almost 14% year-over-year. In terms of Q3, over 70% of our departmental EBITDA in the quarter was generated from mass tables, slots, and non-gaming. Our results in Macau were positively impacted by VIP holds, increasing EBITDA from our Macau operations by almost $15 million from a normalized level. Bad debt expense in Macau was $3 million in the quarter compared to a $1 million credit in the prior year quarter. Our Las Vegas operations delivered $105.2 million of adjusted property EBITDA in the quarter on net revenues of $393.6 million, driven by growth in table drops, slot volumes, and RevPAR. Table volumes were strong, but hold was low, negatively impacting EBITDA by about $5 million. RevPAR in the quarter was also strong, bolstered by a healthy group calendar and more high ADR casino room nights. RevPAR was additionally aided by relatively easy comparisons given the tragic events of October 2017. Bad debt expense in Las Vegas was $1 million compared to a $1.1 million credit in the prior year quarter. Compared to the prior year quarter, EBITDA margin in Las Vegas was negatively impacted by low hold and the year-over-year swing in bad debt. We spent $52.4 million in CapEx on the additional group space at Wynn Las Vegas, taking our total spend to date to $124.3 million. In Boston, we incurred $197.3 million in total project costs during the quarter, taking the total spend to date to $2 billion. The property remains on track to open in June of 2019, as Matt mentioned. We ended the quarter with total debt of $9.4 billion and total cash and investments of $2.2 billion, including $1.2 billion in Wynn Macau. In December, we completed the amendment and extension of our Macau credit facility, both reducing amortization payments and extending the maturity of the facility. During the quarter, we returned approximately $237 million to shareholders through the payment of our recurring quarterly dividend and the repurchase of $156.7 million of stock. We repurchased just under 1.5 million shares at an average price of just under $106 per share, and our quarterly dividend for the final quarter of 2018 is $0.75 per share, returning over $80 million to shareholders. Consistent with our sharp focus on capital returns, we will consider adjustments to our dividend in due course. With that, we'll now move to Q&A.

Great, thank you. Hey, Matt, you talked a little bit about the volatility within the fourth quarter that you experienced and the $3.3 million to $3.7 million per day range in Macau that you'd referenced on the third quarter call. In light of the quarter and the overall challenges within the Mainland China macro backdrop, along with some of the company-specific constituents not necessarily providing rosy outlook for their China-based business, how does all of this aggregate for you guys in your outlook around the market moving forward?

We remain cautiously watching the situation, but I think as all companies globally are doing, growth is uncertain, and where the trade wars end up is also uncertain. We continue to experience peaks and valleys in Macau, but as you can see from this quarter, being at the premium end of the market means we can control what we can control. We can't control the certainties of the market. I feel really good about where Wynn Palace and Wynn Macau are positioned in the market, but we are still waiting to see, like the rest of the world, what the market and how the growth will play out globally.

Great, thank you. And then Craig, maybe this one's best for you if I could follow-up. Obviously, you talked a bit about the buyback and clearly seeing equity levels as attractive. Could you just talk a little about the guardrails going forward in terms of what you're able to do from the buyback perspective, given some of the ownership thresholds, etc., as well as how you're thinking about capital returns in the future between dividends and buybacks?

Sure. Thanks, Carlo. We reached an important inflection point with the opening of Boston from a free cash flow perspective. We're excited about that. It gives us a lot of opportunity to think about how we might return capital to shareholders. We've historically stated that we preferred dividends and the recurring valuation impact we get from those. But as you saw in the quarter, we're not afraid to return capital to shareholders through other means. It depends on how the stock trades and how it’s valued across the coming quarters.

That’s very helpful. Thank you both.

Good afternoon, guys. Congratulations on the results. Two questions that pertain to Macau. First, with respect to Matt when you talked about Wynn Macau and the redesign, and reinvestment at that property and some of the stuff coming online in fourth quarter. Do you think the disruption you may be experiencing now accelerates from here? And then maybe Ian can also chime in here in terms of the business that might be affected at Wynn Macau that can't be accommodated; are you able to more easily shift that to Wynn Palace? And then I have a follow-up?

I'll start that, Joe, then I'll turn it over to Ian. I think that in the fourth quarter you could feel some disruption at Wynn Macau, and I think those volume levels may well remain in this range until we can re-launch the property at the end of the year. Ian, if you want to follow up?

As we look at the construction program, it's essentially over 12 months. We've gone through three months of it already. We manage with a great team at Wynn Macau to contain the impact and business damage, but there’s clearly disruption, and it will increase over the next six months. Areas will be inaccessible. There will be some reduction in certain table play. It affects the customer base, but we are hopeful that we can minimize the impact.

And just as you see, the first two quarters of 2018 were quite strong for Wynn Macau, bolstered by mid-tier junkets which have declined significantly.

Great. And then also Matt, can you just talk about sort of the length of collections from junkets and direct players? I know your bad debt expense went up marginally, but can you just talk about what you're seeing on that front? That's all for me.

Sure. We discuss this a lot to try to find trends. I was in Macau two weeks ago and met with the head of Suncity, Alvin, particularly to talk about collections, which currently are not an issue. Liquidity doesn't appear to be a problem; it's really more about caution. This is not the scenario we saw in 2014 and 2015. We're not having any of our junket operations come to us and ask for additional advances, which is usually a clear red flag of a credit bubble.

So the caution is coming from the player, not from the junket?

Yes, from both. Everyone has learned a valuable lesson, particularly the really large players that had a multibillion-dollar business. Again, the mid-tier junkets are the ones that have declined, but the three major junket operators still appear healthy.

There’s also much tighter regulation of the junket market, and both the DIC and DICJ and the governments have done an excellent job in bringing professional management levels to the junkets. The exposure we had years ago has diminished.

Thank you for the comments.

Hi, good afternoon. Thanks. Ian, we'll keep you on the hot seat here just on share in Macau. I know you fluctuate between 15% and 17%, and that's right where you are at the lower end. You may be seeing some of that just because of what's going on at Wynn Macau, but it's down sequentially and year-over-year. So, wondering if some of that is attributable to Wynn Macau, or if you could just walk us through that and help us understand where it's coming from? Is it Wynn Palace or The Peninsula VIP mass?

I think the share drop you're looking at is very Wynn Macau focused, linked to what we referred to on the previous call about eight new junket rooms in the city and a shrinkage in mid-tier junkets generally, which has affected Wynn Macau. Wynn Palace continues to perform well on a share basis, and Mass Market in both properties is doing well. It's really just junkets VIP at Wynn Macau.

Great. And then have you seen any change across the board in commission levels at your properties?

No.

Okay. And then just switching gears to Las Vegas, Marilyn, it's nice to hear your voice again. Welcome back.

Thank you.

I was wondering if you could address this two-parter. One is the RevPAR in the fourth quarter, which was up 13%, I think, and higher than anyone expected. I know there was an easy comp, but I was just wondering if there was anything extraordinary in the quarter that might have driven that result, because there seems to be a narrative that high-end operators like yourselves could be having difficulty raising rates from where they are now. Secondly, I was also hoping you could address your fresh perspective on the property and what ideas you might have about Wynn Las Vegas?

Absolutely. I was delighted to see the fourth quarter RevPAR. The convention business was strong and contributed significantly to those numbers. For the first quarter and the rest of our year here, things appear solid, but we had an outstanding fourth quarter. Coming back to the property, as you know, I was here and then I had previously competed against this property. There is no better set of assets and no stronger growth team or management team in all of gaming. I am delighted to lead this team. I see operational opportunities across all our assets. Specifically in the casino, we can drive more from our gaming floor.

Great. And then to touch upon the question I had on rates and the narrative out there suggesting that there may be concern about how high the levels are?

Yes. Hey Felicia, it's Craig. I'll take that. We've heard that as well. We continue to feel comfortable overall with 2019 rates across the different categories. There may be shifts between quarters. For example, we have a large group moving from Q1 to Q2, which could lead to fluctuations in RevPAR between those two quarters. Overall, we feel fine about 2019. The Q4 results, as Marilyn mentioned, were underpinned by very strong group attendance and were positively impacted by high casino room nights, which are typically comp rooms. I wouldn't extrapolate the numbers that we turned in for Q4, but we're optimistic.

Great. Thank you so much.

Great. Thanks. Just two fairly short ones. The first on Macau to follow-up. To build on the market share dynamic, Matt outlined an extensive program for Wynn Macau and The Peninsula. Do you think that is enough to drive market share growth, or is this just to defend your current position, given the shifts in mid-tier junkets?

Look, I think we're going to defend our position on The Peninsula as the premium property. Knowing that the mid-tier junket business is not reliable, we're gravitating away from that business model. Over the long-term, the premium mass model will be the focus. Wynn Macau excels in that area, and I believe our Encore casino likely features the highest grossing mass tables in all of Macau or Cotai. Our goal is to replicate that experience without relying on mid-tier junket operators. We are repositioning that property for the future.

As you do that, would it be fair to think that while revenue market share might be one thing on the VIP side, this could have a significant impact on EBITDA and profitability through the mix? Is that part of your strategy?

Clearly, the premium mass business is more profitable than mid-tier junket business. We generally don't focus on monthly gaming market share, given the fluctuations between VIP slots and mass play. We focus on our positioning in the Greater Bay region with over 60 million people and a GDP over $3 trillion, and a new bridge connecting Macau to one of the busiest airports in the world. Our strategy is centered on attracting premium customers who decide where they want to go and stay, and that's our focus with Wynn Macau.

Great, thank you. And just on Boston, everything there appears steady as she goes. Is there anything that could derail the opening from your perspective, or is all systems go as you move into the higher-end phases and training?

We are indeed internally targeting an opening date of June 23rd. We've seen recent developments around regulatory issues, and there are no limits on our licenses or current employees under review. I commend the Massachusetts regulators for their extensive and thorough work. We're looking forward to presenting our case. Operator, do we have any more questions?

A few questions on Macau. First, just on the bridge and the smoking ban. How do you think those are affecting the market and your shares specifically?

On the bridge, it's only been open a few months, but there's already a distinct benefit for premium mass and VIP players. I recently flew from Wynn Palace to the airport in just over an hour, which is remarkable. It’s a huge boon for those who want to utilize Hong Kong Airport, which has 3.5 times the number of daily flights from PRC than Macau Airport. This significantly boosts international travel overall. Long-term, we feel this infrastructure is beneficial for the city over the coming years. On the smoking ban, it's still early days, but we’re pleased because it levels the playing field. We've previously been at a disadvantage with some grandfathered areas allowing smoking, but now everyone operates under the same rules. We believe it gives us a big advantage in Cotai. It’s too early to determine its effects on speed of play, but we’re happy to have it in place.

Very helpful. And one follow-up, Ian. Wynn noted that your slot revenue was really strong at both properties this past quarter and it's a huge part of your revenue. Anything specific driving that?

Our slot business, being at the premium end of the market, is influenced significantly by big players, and their movement is unpredictable; for instance, Wynn Palace generated 50% more in revenue in December, largely due to the unexpected arrival of big players. Similar patterns are seen in slots. So it’s tied to volume.

Hello and good afternoon. Matt or Craig, versus the third quarter, what's your current outlook on forward EBITDA per day? Have you modified it?

We really don’t want to predict what we're going to be doing in the first quarter, especially because, as I said regarding Macau, it’s inherently volatile with peaks and valleys. Chinese New Year is approaching and will be a real test for the first quarter. We have lulls in January before Chinese New Year, but we anticipate it to be strong. We need to gauge the atmosphere right before and right after.

No, that's it.

Following up on your comment about being a growth company, which is accurate until the opening of Boston, but once Boston opens, the growth pipeline seems to decline. Can you share longer-term strategic plans?

I completely disagree that the growth pipeline runs out. We have $0.5 billion in capital to be deployed in Las Vegas, set to open in 2020, and that will significantly impact the property and leverage its operations. In Wynn Macau, we will have another re-launch at the end of this year, focusing on premium mass, with the Crystal Pavilion and new hotel rooms at Wynn Palace. These are major projects that will affirm Wynn Palace as a primary destination in the Greater Bay region. Simply put, we’re stair-stepping our developments: opening a $2.6 billion property in June, implementing a $500 million expansion in Las Vegas, and executing a $200 million expansion in Wynn Macau by the end of this year, which leads right into our plans for Wynn Palace. We're also active in new markets – while we won't count chickens before they hatch, we're well-positioned in Japan. We are focused on creating an innovative and exceptional project there, which is still a few years out. We'll continue to pursue these high-level opportunities.

Fair enough. I was trying to convey that after the final bills are settled in Boston, free cash flow generation will see a significant shift to multiples higher than in the past. Would you agree?

You're precisely right. Once the bills are settled in Boston, our free cash flow generation will increase substantially. The larger projects I mentioned will take significant time for capital deployment. So you are right; by 2021 and into 2022, our free cash flow profile will change significantly. Craig, do you want to add anything?

No, I agree. As we've discussed, we intend to allocate a proportionate amount of that free cash flow to shareholders.

Okay. Also, Phil Satre joining the board is a significant positive given his industry experience and respect. What will his role be?

I talk to Phil probably three or four times a week; he is a great resource. I have an excellent relationship with him. I don’t think he's interested in joining the earnings calls at Wall Street. He's been on several boards, including as Chairman of the Nordstrom Board before stepping down. His main focus is on being the Chairman of our Board.

He is a wise man, obviously.

He indeed is. Thanks.

Thanks. Just a couple of quick follow-ups. First on Las Vegas. I know you don't provide explicit guidance, but as we look at 2019, can you give a sense of the trends among the international versus domestic leisure customer base or even the convention customers amidst the greater market volatility?

Great question. In 2019, we mentioned to sell-side analysts after our Q3 call some insights to guide Las Vegas performance. In the first quarter of 2018, we set a record for the property, so comparisons for Q1 2019 will be tough. Consider referencing Q1 2017 for a better indication of performance as we're currently in a different cost environment due to recent Department of Labor regulations. We need to keep an eye on baccarat volumes, as they are globally influenced. The uncertainty in the Chinese macro-economy affects Las Vegas as well; likewise, we need to see how Chinese New Year unfolds to understand what it could mean for the year.

As stated in my opening remarks, Las Vegas is a marketer's market. We are prioritizing how we can enhance our share of casino revenue, particularly from domestic consumers, and grow our baccarat business because it is pivotal in our global profile. We will have three regions that high-end consumers will want to visit: Boston, Las Vegas, and Macau. We are continually working on creating a Wynn experience that attracts high-end customers away from our competitors.

That's helpful. Regarding Macau, there have been many inquiries about the impact of renovations. Could you share how many nights will be out of service during this process?

On the 1,004 keys, we’ll reach a peak of 100 rooms in Encore out of order over a period of four to five months.

Hi, good morning guys. Ian, another one for you, could you please give us an idea of what the comp ratios look like at both Wynn Macau and Wynn Palace? How close are we to reaching your targets for Wynn Palace in the long term?

Downtown Macau has been stable with about 95% of the rooms allocated to active casino customers. At Wynn Palace, we’ve improved from 47% 18 months ago to 81% in the fourth quarter. I previously mentioned that we could reach 100%, but our strategy involves enhancing the quality of the customer. We're executing this by booking customers in advance. Macau is challenging for walk-in customers, thus booking ahead takes priority. As a result, we see positive outcomes reflected in Palace numbers.

As a follow-up, I see you're renovating to create a new premium mass experience on The Peninsula. Do you expect to take market share from your competitors as this process unfolds?

This year involves renovation, and we see that this will help us capture a stronger market share in the future. Noting that the Wynn Club side of the Wynn Tower contains all of our suites, we aim to establish a premium mass area with new F&B additions along with new entrances from the boardwalk leading between Lisboa and MGM. We firmly believe our strategy will allow us to capture a higher share of premium mass business downtown during market recoveries.

Cotai continues to take share from The Peninsula, but The Peninsula is still a very large market. We are committed to capturing market share in The Peninsula, as it is significant; some competitors have premium mass smoking rooms. However, with the new level playing field, we are dedicated to The Peninsula just as much as we are to Wynn Palace.

Great, thanks. A lot of the major issues have already been discussed. I wonder if you could update us – in the last call, you mentioned the timing for a new Las Vegas resort under construction by next year. Can you please provide an update on the budget and timing for that?

Unfortunately, I can't. As I said in the last call, these projects typically take about five years, with a couple of years required for design and development. We are still in the early stages and trying to identify what could come next, considering that additional rooms, casinos, and retail space may not suffice.

At this point, it’s a conversation rather than something solid.

So, no groundbreaking scheduled for 2020? Okay, that's helpful. Thank you. In previous scenarios, premium mass levels have been tied to VIP business because groups travel alongside VIP players. How are you seeing that now? You've mentioned significant mass business in December, but generally what are premium mass trends relative to flat VIP drop?

You're correct. The premium mass segment was previously nourished by junket and VIP players. Over the last two years, premium mass has fortified itself by converting mid-tier mass players into premium players. Therefore, this is less of a concern. You can see this with the shrinking junket industry; premium mass continues to grow.

Okay, great. Thank you.

Operator, was that the last question?

Okay. Thank you everyone for joining today. We look forward to speaking with you soon.