Wynn Resorts Ltd (WYNN) — Q1 2019 Earnings Call Transcript

Thank you, operator, and good afternoon everyone. With me today in Las Vegas are Matt Maddox and Marilyn Spiegel. Also on the line are Ian Coughlan, 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 good afternoon everyone. Thank you for joining us. The quarter was pretty much in line with our expectations. And I think I'd just like to jump right in and talk about Macau. So in Macau, we generated $386 million of property EBITDA. And as we've discussed in previous quarters, VIP was down and the premium area continues to be choppy. However, what we saw was we saw real strength in our core mass. In fact, our core mass increased over 13% year-over-year, and what that shows is that our strategy is working. We built five new restaurants at Wynn Palace over the last 24 months. Our visitation continues to increase. And what's interesting in March of this year, Wynn Palace achieved its highest normalized EBITDA on record. And 78% of that EBITDA was from the mass business and non-gaming. If you look at Wynn Macau, Downtown, we're continuing to perform in line exactly with our expectations as we're renovating that property. The Encore Tower, which has probably the nicest rooms in all of Macau, the average size of the room there is 900 square feet, is in a full renovation now. Not just soft goods renovation, but a full renovation. And that will be complete by the end of the year. We also looked at the success of our Encore casino in Macau, and those approximately 30 games are one of the most productive casino floor plans on the planet. And we thought what can we do to replicate that in half of our casino, our original casino what we call the West. So we began a project about nine months ago that should wrap up at the end of this year, that will transform our original casino, which is currently divided with various junket rooms, and where the energy has been suppressed. It will turn into what I think will be the nicest premium mass destination in downtown, with 7,000 new square feet of retail entering this area, two restaurants flanking the new casino and this should all be finished by the end of the year. So Wynn Macau's best days are ahead of it. 2020 should be a great year for Wynn Macau. In Las Vegas, everything was pretty much in line except for Baccarat. And I think it's no surprise to the people on this call that Baccarat was down for us quite significantly just as it was for the market, so all of our competitors felt that Baccarat was definitely soft in the first quarter. What I've been impressed by is Marilyn coming in, and her team understanding that Baccarat is in a temporary decline and focused on the non-Baccarat casino business. And for the first time in a long time, our table drop, excluding Baccarat in the first quarter, actually increased 10% over the last year. And I give a lot of credit to Marilyn and her team and the new marketing people that she has brought on to focus on areas where we have not focused as carefully in the past, and I think it's an area of growth for us in the future. There's been a lot of discussion about new jurisdictions opening up in Asia and around the world. It may be that Baccarat's best days are behind it in Las Vegas, or that Macau can continue to see some cannibalization. And what I would say to that is I totally disagree. We've experienced gaming expansion in the United States for decades, and we're experiencing it now in Asia. But what always happens is customers will try out the new product. They'll go to a place where they are getting free money and big discounts, but that never lasts. Customers with money and choice always go to the place that they enjoy the most. And you cannot replicate Las Vegas or Macau anywhere else on the planet; the number of hotel rooms; the entertainment options; the infrastructure; the service levels, it can’t be replicated. And so, our company and our growth profile are properly situated to bet on the future growth of the two best gaming jurisdictions in the world, Las Vegas and Macau. And I am a very firm believer that our product is positioned perfectly in both of those markets. In Massachusetts, we received a decision from the MGC regarding their investigation last week. Importantly, there was no impact on the suitability of the company, or its key employees to hold a gaming license in the state. And we are ready to move forward with the opening of Encore Boston Harbor. However, we are still reviewing the decision as it relates to some of the secondary and tertiary conditions imposed by the commission. We do not believe that if we choose to appeal it will impact our ability to open the project at the end of June. Although the regulatory processes consume a great deal of resources at both the company and with the regulators, we are focused on opening this property within weeks. And we feel very confident that it will be the nicest integrated resort on the East Coast. So before I turn it over to Craig, I'd just like to remind everybody about why I am such a big believer in this company. We've been through a significant transition, and there has been some turmoil over the last 15 months but that is now behind us. If you look at our future and you look at our company and our growth profile, I believe it's unparalleled in this business. In Macau, we have 1,300 rooms, 700 plus in phase 1 plus the Crystal Pavilion that we've made significant progress on for Wynn Palace and that project is needed for Wynn Palace to continue to grow and we're really excited about it. We're about to open Encore Boston Harbor, which will be a step change in our EBITDA in just weeks. Here in Las Vegas, we have a new convention center opening, doubling the amount of convention square footage we have over the next six months, multiple new restaurants coming into the property and a fresh look at how we think about our casino business. Our growth profile is quite strong and I am a big believer that we are all big believers that Macau and Las Vegas best days are ahead of it. With that, I'm going to turn it over to Craig to get into some of the details.

Thank you, Matt. I'll run through some additional points on the quarter. As noted in our release, our Macau operations delivered $386.5 million of adjusted property EBITDA on $1.25 billion of operating revenues. As Matt noted, the quarter was characterized by continued choppiness in VIP and premium mass, offset by meaningful growth in main floor core mass with combined property win in that core mass segment up 13.1% year-over-year. March was particularly strong with Palace experiencing its best month ever in mass drop, mass win, and EBITDA. Our results in Macau were positively impacted by VIP hold, increasing EBITDA at Wynn Palace by approximately $25 million from a normalized level. Bad debt expense in Macau was $1.8 million in the quarter compared to $300,000 in the prior year. Our Las Vegas operations delivered $108.3 million of adjusted property EBITDA in the quarter on net revenues of $401 million with year-over-year growth in non-Baccarat table drop and spot volumes. As discussed on our fourth quarter 2018 call, a large group shift from Q1 to Q2 this year negatively impacted RevPAR growth and food and beverage revenues in the quarter. We expect offsetting outperformance in RevPAR in the second quarter. Consistent with the broader Las Vegas market and our commentary on the fourth quarter call, Baccarat volumes declined year-over-year and such declines were the primary driver of the year-over-year EBITDA increase. The property held high, adding a little over $5 million to EBITDA. Bad debt expense in Las Vegas was $3.6 million compared to $400,000 in the prior year quarter. Compared to the prior year quarter, EBITDA margin in Las Vegas was negatively impacted by the swing in bad debt and operating deleverage from Baccarat. We spent $48.8 million in CapEx on the additional group space at Wynn Las Vegas, taking our spend to date to $181.5 million. In Boston, we incurred $233.4 million in total project costs during the quarter, taking the total spend to date to $2.26 billion. We ended the quarter with total debt of $9.2 billion, and total cash and investments of $1.8 billion, including approximately $900 million at Wynn Macau. During the first quarter, we returned approximately $81 million to shareholders through our quarterly dividend payment. And today, we're pleased to announce a $0.25 or 33% increase in that recurring quarterly dividend. Our recurring dividend is now one dollar per share, returning over $100 million per quarter to our shareholders. Consistent with our sharp focus on capital allocation, we will continually evaluate periodic increases to our dividend, as well as opportunistic share repurchases as valuation and broader capital allocation priorities warrant. With that, operator, we will now open up the call to Q&A.

Matt or Craig, if we can go back and discuss Macau, as you guys talked about, specifically at Palace. You really saw a nice boost in base mass. And obviously, some of the changes that you are making at Peninsula should certainly further that effort. If we think about the Macau market in a flattish environment for 2019, do you believe with some of the growth you are seeing in mass and some of the pivoting that you could offset some of the share losses from both a margin and EBITDA perspective over the course of the year?

When we're looking, it's always hard to predict exactly what's going to happen in Macau. But we do believe with our product that we will be able to stay within that market share range of -- it's a lower end of it, of 15% to 17%. As you know, our competition has been ramping up. MGM just opened The Mansion, which is quite a nice product, and Morpheus is ramping up. So Cotai is a really competitive place. But we feel like Wynn Palace is perfectly positioned to continue to maintain its share, and Wynn Macau is really about 2020.

And then if I could just one follow-up as it pertains to some of the tariffs news that's out there, are you guys hearing anything from some of your higher end players that the ambiguity around that is having an impact right now?

I think anytime there is uncertainty in the world, all of us feel a little bit nervous, whether it's you sitting in your office at Deutsche Bank, or me in Las Vegas, or someone in Shanghai. That's just a natural human reaction. I can't say that there is clear data pointing to a slowdown, and we're looking forward to moving forward.

I have two questions. One is on Las Vegas on the Baccarat segment. To what extent is the softer demand recently experienced a function of things that aren't related to the macro, or say shifting geographies that you referred to Matt, but rather maybe other structural things, whether it's capital outflows or others? And then my second question relates to M&A. I mean, I think maybe most of us are probably surprised about the Crown news. So my question isn’t necessarily about Crown, but just about M&A in general. What are the criteria and the goalposts that you have when evaluating M&A opportunities?

So on the Baccarat side, in Las Vegas, and I'll also let Marilyn jump in here. But I don’t really think we are seeing any long-term sustainable trends. I think we are experiencing exactly what you understand. We definitely think the second quarter is going to be a little better than the first quarter based on what we're seeing right now. So, I don’t want to be predicting Baccarat volumes. But Las Vegas over the long term is a global destination for those customers from around Asia, and I feel very comfortable with that. Marilyn, what do you think?

There's really no structural change here that would impact these players. So it's all the global headwinds. And I think that hopefully, these players will be back as has been the case in the past.

On the M&A front, as I laid out in my opening remarks, our growth pipeline is quite robust. The large capital spend is now behind us after a multiyear capital development program. As we're about to open Encore Boston Harbor, we will really start generating lots of free cash flow, which is one of the reasons that we raised our dividend by 33% this year. When it comes to M&A, we will always be looking for opportunities for assets that are tier 1 first-class assets with licenses that are protected in cities that are global destinations. So while we are not pursuing any acquisitions at this stage, we will, along with all of our competitors, be looking at opportunities that you can't replicate through development. We are a development company at heart. We're focused on new projects. But we will continually look to enhance shareholder value without increasing our leverage profile and without hurting our free cash flow story.

Matt, just coming back the layers a little bit more on the market share issue. You’ve said this a lot on your past calls that you want to stay in the 15% to 17% range. But if you could just help me with the math for a second. If we use the DCIJ data, which I realize is still flawed, it looks like mass share in the quarter did decline sequentially. And I'm just trying to reconcile that with your commentary that you saw strength in the core. So is that basically just because you did lose more premium, but you're gaining core and it just didn't offset it? Is that all that you would read into that?

That's exactly right. So premium, we definitely lost some share in premium mass and the premium mass business around town was down. Core mass, which is defined by geography and average bet, is up over 13%, but that was not enough for us to keep up our share in the market. I think Wynn was up roughly 3% sequentially, and that was less than the market. That's because we're more reliant on the premium segment. But our strategy is working, and it shows that Wynn Palace and Wynn Macau can really compete in any markets. And Felicia, you've been watching this for a long time. People get really focused on core mass because that business is always there. Premium and VIP get compressed temporarily, and then the growth happens. So I don't know how long that area is going to be compressed, but what I do know is the demand is still there. And so we feel very comfortable that when that business begins to come back, we're going to be perfectly situated to capture it.

And then when you were talking earlier answering Carlo's question, you said we'll stay in the 15% to 17% range, we're now perhaps at the lower end. Is that also indicative of what you're seeing in early May?

I would say that the trends that occurred in Q1 market-wide really have continued into Q2 through May. It's a very core mass serving growth market. And we skew towards the premium end, that's truly math as well. To the extent that there is outsized growth in core mass, we will benefit from that, but not as much as the market, because there are others in the market who directly cater to that segment.

And Matt, just a clarification, at the beginning of your comments, you alluded to gaming competition globally and some perhaps that you are experiencing in Macau. How should we interpret the comment relative to your performance in the quarter?

Well, I don’t think you should look into the performance in the quarter at all. I've just noticed some of our competitors and others commenting a lot on these emerging markets, particularly in Asia, and that they could have an impact on the large global gaming jurisdictions. I just don't believe that Macau and Las Vegas are going to be cannibalized by those smaller tertiary jurisdictions that are emerging. In the short-term, they could. We're not seeing that right now. But over the longer term, people always go back to the places that they enjoy the most. And so I wasn’t addressing that relative to this quarter; I was just addressing it relative to what we're seeing in the market and what we believe will be the long-term success of Macau and Las Vegas.

Maybe just to stick with Macau and the core trends there. Could you just -- I think you could talk about the share shift as it might relate to other markets. But Matt, I think you also called out just that some of the competition is moving around. Do you think we were in a fairly normalized environment as it relates to that competition in Q1? Is there more this year as we move forward? Or do you think this is the right environment now and we're pretty comfortable with how your product is situated with what you're seeing in the market at this moment?

Shaun, I definitely think we're in a normalized environment right now. There are no large-scale gaming jurisdictions coming online in the next few years. Some junket operators may move business around, but that's always temporary and it will come back to the places where the customers want to go. Ian, do you have any thoughts on that?

After 12 years in Macau, we go through these periods of sporadic volatility, VIP Wynn's, for various reasons. And then it ticks back up. People always gravitate to quality. We're always there to pick it up when it comes back. So we stayed in the junket game when other people backed out. We made hay while the sun shone. Now, there's pressure on commissions and incentives. We're going to remain true to what we've always done, and people will come back. In the meantime, we grow premium mass and general mass.

And then same scene, but moving back to the Peninsula, you obviously are undergoing a meaningful renovation there. Could you just walk us through the cadence of how you expect that to progress throughout the year? Was there a meaningful disruption in Q1? And how should we think about that continuing throughout the balance of the year?

I don't think there's any number we should be calling out because what we had before the construction was a sleepy casino that actually wasn’t generating a lot of business. So, this is more of growth CapEx that we're putting to work. We definitely have rooms out of order in the Encore Tower, which have been impactful on our business. But, I think it's hard to quantify right now. And 2020 is really the year to judge Wynn Macau and its earning ability. Ian, what are your thoughts on this?

There hasn't been significant noise disruption that was all dealt with in the early stages. We have anywhere from 80 to 100 rooms out at any given time in Encore, and we're getting them back progressively. There is the hoarding wall effect when you wall up areas to do work, and that does affect the energy of the space. It has affected retail a little bit as we brought in new brands. But in general terms, there's not a number to put to it and it's not significant. We're looking forward to getting it complete by the end of the year.

Hey, good afternoon. So, in your prepared remarks, you talked about how you're taking a fresh look at how you're thinking about the casino business in Vegas. Can you guys just talk, and Marilyn maybe talk about some of the changes you made since coming back? Thank you.

The key has really been to take a look at our casino block and to grow it and to invite the folks who come to town, who didn't use to stay with us, to experience the hotel and our food and beverage offerings, and it's been well received. So, we've seen very nice growth in the casino block as it relates to the past.

And then, I think you removed the parking fees. Can you just talk a little bit about that decision?

When you think about the parking fees, although if you came here and you spent $50, you had a validation, it was frankly an irritant to those folks who would drive into the parking garage. Most people who come here do spend more than $50, but why upset them? So, we did that. It also helps us with our high-end local customers. It's been so well received, we're very pleased that we've moved forward on it.

Helpful. And then, just quickly on Boston, I mean, we're a month and a half out, how are things progressing in terms of getting the staffing in line and the infrastructure around the property? Thank you.

The construction is almost essentially complete. The building looks like it is in great shape. Staffing, we have 90% of the people either onboard or within offer. So, we are in line to -- and on time to complete almost everything we need to have a great opening. I don't know if the opening date will be June 23rd or a week or two later because we're going to make sure that it's flawless. The regulatory complexity we've been through has been a challenge. And so, we are now doubling back. The team we have on the ground there is terrific. We are ready to open. We may give ourselves another week; we may not, but the property looks great.

Hi and good afternoon. While we're on the topic of Boston, now's probably a good time to begin to set expectations for the ramp in Boston, particularly margins, given that most Wynn properties when they open tend to run rich in high service levels and labor. Can you set some expectations on that front?

Yes. It's fair to say that not only do our properties tend to run very high service levels early on and account for some level of attrition, but regional properties, as you know, tend to ramp much more slowly from a marketing perspective. We haven’t given any specific numbers or margin expectations yet. But certainly, we would expect that property to ramp up over the course of 2019 and all the way through 2020.

Very good. And second question is, just going back to the Crystal Pavilion, what details can you share about timing, cost, and features that you are excited about?

We're working on that now, Harry. We are going to have a reveal of the Crystal Pavilion in a pretty public way. I'm not sure if it will be through an Analyst Day or something else down the road. We’re finalizing many of the different features, and I think you are going to find them very interesting. It will be in the next couple of months that we’ll be laying out this program.

Okay. And then, my last question, just really going back to your commentary about some customers in Macau trying some of these smaller, newer agent casinos. To what degree do you think some of those customers are just gravitating there because the regulatory environment in Macau has just tightened?

I don’t think that's the case at all. And I think when new -- people will say that because they are marketing their properties in these jurisdictions. But the fact is, often times in places that open, they offer bigger commissions, more liquidity, and larger credit lines, and that's typically very temporary.

With the Boston property essentially complete, can you just remind us how you think through CapEx, not only for that property, but more broadly? And as cash flow inflects, how you stack your properties across debt versus redeploying cash back to shareholders versus growth investments?

Sure, Stephen. Well, subsequent to the opening of Boston, we will have some trailing CapEx as we pay up the remaining construction costs, those get accrued, and then obviously paid throughout the remainder of 2019. We are working on additional group and convention space out back in Las Vegas as well, that opens in early 2020. Really, 2020 is the inflection point that you talk about. It’s rapidly approaching, as you note, and capital return is absolutely top of mind for us. The recurring dividend is the cornerstone of our capital return policy. I think you saw we raised that by 33% today as an indicator of our belief in our business and our belief in that cash flow inflection point. As we grow and generate additional free cash flow, we’ll carefully prioritize that between immediately available growth opportunities, most notably the Crystal Pavilion, capital return, and maintaining some dry powder for future opportunities, whether Japan or otherwise. Share repurchases will always be opportunistic based on valuation.

Thanks for taking my question. The first question is with regards to this base mass business and the strength that we're seeing in it. How much is that eating into your room inventory at the different properties in terms of the comp ratio at both Palace and Macau?

Ian, do you want to take that? I mean, we haven't lowered our threshold for ADT in order to get a comped room in Macau. So, I'm not sure what eating into means exactly; you still have to qualify in a certain way. Clearly, we're not having as many junket rooms. Our problem, Anil, is we don't have enough rooms, and we need more rooms at Wynn Palace. At the weekends, we’re out of space. More mass customers are getting rooms just as a direct reflection of direct and VIP being down.

That's correct. We've been able to shift rooms from the junket allocations; this business is weighing over to our mass segment. ADTs are on the way up, we're putting better customers in those rooms. The comp level ratios are similar to what they've been in the past, around 80% for Wynn Palace and 94% for Wynn Macau.

And my final question is, could you give us any update, Matt, on the progress in Osaka and in Japan? Are you still as committed to that as you have been in the past?

We are. We will actually be making a trip there next week. We have a team on the ground. We have a team here in the United States that's focused on Japan. We're building quietly our relationships with potential partners over there. We’re focused on various jurisdictions in Japan. We're looking at this over the long term. We will continue to monitor the situation and participate where we see fit.

I wanted to just go back to the M&A boundaries a little bit. I heard what you said about leverage levels and accretion. But can you help us think about other strategic aspects of attributes that may be compelling? Whether that's in different segments of the market where value-driven customers might help you branch out? A little more detail on that would be really helpful.

I hate to lay out our strategy for everybody, David. But I'll tell you what we're not going to do. We're not going to go into the value business. We are high-end operators, quality operators, and we will be looking at quality assets around the world. We're not regional gaming operators. That's not an area where we're going to be branching out in a significant way, given there will likely be lots of regional gaming properties for sale. So, we're focused on where the growth is happening globally. We believe that Asia will continue to grow faster than the West. If there are opportunities in those areas where we believe it fits with our profile and it will be accretive and capture long-term growth for our Company and our shareholders, we will take a look at it. But we do not have anything right now that we're focused on.

Thank you everyone for joining us today. We look forward to talking to you next quarter. Thank you, operator.