Wynn Resorts Ltd (WYNN) — Q2 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 thank you all for joining our call. As we look back at second quarter, I'd like to start by congratulating the 5,000 new team members that we have in Massachusetts for opening Encore Boston Harbor. The property opened on June 3rd to much fanfare, thousands of tourists coming in and the property has not disappointed. The reviews have been terrific. People really appreciate the quality. Our service levels are beginning to ramp to Wynn standards. We've seen some really positive impact in the casino on the table game side. In Boston right now, table games are performing well. Our hotel is beginning to ramp and we are working on various offers and promotions to really understand the highly competitive slot market in the Northeast, and believe that with our property's location, management team, and product, we will continue to ramp that property and take share in the Northeast. We look forward to sharing more results as we have more days under our belt after our third quarter. Moving on to Macau, we generated $343 million of EBITDA this quarter. Macau is currently a really core mass market-driven market right now. Our core mass was up over 22% compared to last year. That compares to core mass up 13% in the first quarter. We're continuing to see some choppiness in the premium market and in the VIP market. As an example, April EBITDA on a combined basis was down 21% over last year. Yet, May and June were up over 7%. Our VIP turnover in May and June was essentially flat with last year. So really what that tells us is you can't look at one month as a trend. As an example, the July numbers were recently put out by the DICJ, and it was pretty clear that there was some softness in the VIP segments. We do not look at that as a trend. We look at it as a data point and fully believe in our premium market focus as we continue to take share in the core mass. Looking at the properties specifically, at Wynn Macau, we saw mass revenues grow over 10% and that validates our strategy as we repositioned Wynn Macau last year to turn it from a largely VIP junket house by reconfiguring the West Casino, remodeling the Encore Hotel Tower, building three new restaurants and an additional 8,000 square feet of retail, all of which will be completed by the end of this year, positioning Wynn Macau as a market share taker on the Peninsula for 2020. Looking at Wynn Palace, mass revenues were up approximately 6%, which was led by core mass up in double digits, offset by softness on the premium mass side. Wynn Palace continues to be the leader in quality and luxury in the Macau market. It's clear that we need more rooms at Wynn Palace. At our Investor Day, we laid out our program for the Crystal Pavilion, which includes 1,300 new rooms, 650 rooms in Phase I, plus the Crystal Pavilion itself, which is a non-gaming development that has a new theater concept, a collaboration with a museum that's going to have one of the largest collections of Chinese art on the planet, as well as 14 new food and beverage outlets. The Crystal Pavilion, coupled with the rooms, will make Wynn Palace the must-see destination in Macau. Moving to Wynn Las Vegas, I have to congratulate Maryland and the team at Wynn Las Vegas for an extraordinary quarter and executing our strategy. It was the first time in over five years where our RevPAR increased by more than 9.5%. What I found much more interesting was our focus on the casino, which for the last five to six years had largely been ignored. As an example, our domestic table games business was up 12% this quarter when the overall Las Vegas strip was down 6%. Our slot revenues were up 12% this quarter, while the overall Las Vegas strip was only up 7%. Our Baccarat revenues increased five times faster than the market. Clearly, we had some high hopes. Even on a drop basis, our Baccarat drop was up 16% this quarter, while the market was only up 11%. So it's quite an extraordinary result, which was a strategic change in focusing on the casino and driving additional visits and more play. Another thing that I was really proud of the team is our net promoter score at Wynn Las Vegas was the highest in the company's history. A net promoter score is a simple question that we ask all of our hotel guests. Over 40,000 people responded this year, which is similar to last year. The question is, would you recommend Wynn Las Vegas to your friends and family? This year, we outpaced the luxury hotel benchmark by over 15% and have the highest score in 2019 in our company's history. So through the cultural shift that's occurred in Las Vegas, I think that that single fact coupled with the numbers says a lot about this management team and what we've been able to achieve. You take the strong operational prowess and combine that with all of the capital improvements that we launched last year, a 400,000 square foot convention center that's going to be open in six months. Thomas Keller, the renowned chef will open his first fine dining restaurant in Las Vegas in 2020, here at Wynn Las Vegas. Enrique Olvera, the top Mexican chef in North America who has two of the top 50 restaurants on the world's best list will be opening his first restaurant in Las Vegas at Wynn Las Vegas in 2020. We will also be opening a new separate club called Delilah that I think will be the next evolution of nightlife in Las Vegas. So you combine all of these new projects with what our operations team has been able to deliver. I believe that Wynn Las Vegas will continue to be market share takers here in Las Vegas. Our vision is clear. We're going to continue to take market share in Las Vegas. We're going to own the premium market in Macau. We're going to ramp Encore Boston Harbor to be the top-grossing Casino in the Northeast. We're very confident in our strategy. This will produce significant free cash flow for our company and for our investors. With that, I'm going to turn it over to Craig to get into more of the numbers.

Thanks, Matt. As noted in our release, our Macau operations delivered $343 million of adjusted property EBITDA on $1.18 billion of operating revenues. As Matt noted, the quarter was characterized by strength in the main floor core mass segment with combined property win in that core mass segment of 22% year-over-year. Our results in Macau were positively impacted by VIP hold, increasing EBITDA at Wynn Macau by approximately $8 million from a normalized level. Bad debt expense at Wynn Macau was comparable year-over-year, while at Wynn Palace, a swing from a $2.6 million credit in last year's quarter to $2 million expense in this year's quarter cost us nearly $5 million in year-over-year comparable EBITDA. During the quarter, we spent $23.5 million on the West Casino refurbishment and Encore refresh, taking our spend to date to approximately $42 million. Our Las Vegas operations delivered $137.4 million of adjusted property EBITDA in the quarter on operating revenue of $464.1 million with year-over-year growth in both Baccarat and non-Baccarat table drop as well as slot table. On the hotel side, RevPAR increased 9.5% year-over-year to $300, driving $127.6 million of hotel revenue, which is a property record. Property held high, adding approximately $12 million to EBITDA. Bad debt expense in Las Vegas was $2.4 million compared to $1.7 million in the prior year quarter. We expect $58 million in project costs on the additional group space at Wynn Las Vegas, taking our spend to date to $246.6 million. In Boston, we incurred $187.6 million in total project costs during the quarter, taking our total spend to date to $2.45 billion. The remaining CapEx and construction retention of approximately $150 million will be paid over the coming quarters. We ended the quarter with total debt of $9.15 billion and total cash and investments of $1.51 billion including approximately $804.3 million of Wynn Macau. During the second quarter, we returned over $100 million to shareholders through our quarterly dividend payment. We will continue to look closely at capital allocation alternatives, including periodic increases to our dividends, as well as opportunistic share repurchases. With that, we will now open up the call for Q&A.

Good afternoon. Craig, Matt, could you talk a little bit about the impact that maybe the core mass growth relative to the other segments is having on margins? If you just look at Palace specifically, margins there were a little softer year-over-year. Given the mix, you would somewhat anticipate that the mix of revenue would be advantageous for margins, but we didn't see it in this quarter. Could you talk a little bit about what's driving some of the margin pressure there?

Sure. I'll start with that, it's Matt. If you look at our operating expenses in the second quarter per day, they are roughly the same as the first quarter or the fourth quarter. What we had in the second quarter was really low hold in the direct part of our business and VIP, which definitely impacted margin. On the premium side of the business, while core mass was up significantly with the premium mass being down, that did impact the operating leverage and the margin side. So it's really premium mass coupled with low hold in the direct.

Great. Thanks Matt, that's certainly helpful. Bigger picture, clearly, with not only the protests in Hong Kong but obviously the rhetoric around the trade war, we've been seeing mixed results coming out of Macau over the last several months. Obviously, one data point here or there, as you mentioned, for July doesn't really make a trend necessarily. But from the ground, and maybe some of the guides in Macau would be better suited to answer this, are you seeing anything that's materially different or behaviors that have changed given some of the aforementioned?

So, I'll jump in and then I'll have Ian answer. Clearly, in July as you saw from the ICJ report, there is some softness in VIP. When you have hundreds of flight cancellations out of Hong Kong and some reluctance to travel, I do think that is impacting the premium business. However, that to me feels very temporary and has really nothing to do with our business, and everything to do with what's going on in the region. Ian, do you have any further thoughts on that?

No, the same headwinds that existed for the last nine months continue. What's happening in Hong Kong, albeit it's more recent, is certainly going to impact business in the short term as you've described. There's been disruption to people movement between Hong Kong and Macau and that looks like it's going to continue for the next few weeks at least.

If I could just follow up. Obviously, VIP on a sequential basis across both of the assets was relatively stable in aggregate. Do you feel like that business has changed, or is the stability just more of the same, and what we're looking at year-over-year has more to do with comp stacks and luck factors as they pertain to revenue?

VIP continues to be very choppy for the same reasons as the last 12 to 18 months. I wouldn't suggest that there's stability there. We have some good months and then we have bad months.

Good afternoon, everybody. Just with respect to the junket business in Macau, Matt, Ian, or Craig, can you talk about sort of the more recent volatility with key junkets and how that business is obviously having a lot of use flow on key junkets and what they might be going through? Can you talk about how the ratio of junket business is, and if one junket might be experiencing volume declines, how that's impacting the business in the aggregate? And then just a follow up to Carlo's question about the margins at Wynn Palace, if we were to normalize for those hold impacts in the second quarter and first quarter at Wynn Palace, what would be a normalized hold EBITDA margin in the second quarter and first quarter just to better understand that dynamic? And that's it for me. Thanks.

Ian, why don't you take the first question? And then, Craig, I'll let you handle the margin question.

We have business with the same junkets that we've had over the last 18 months. They go through periods of choppiness. One junket is up, one is down. But there's nothing material about a specific junket that we do business with at this point.

On the margin point, Joe, the low hold indirect VIP and high-holding junket phenomenon that we experienced in the quarter and the mix shift that Matt referred to on the premium mass and core mass side probably cost us 150 basis points to 200 basis points of margin.

Hi, thanks a lot. Ian, I'll start with you. For those of us sitting at our desks in the U.S., this latest trade war escalation and RMB devaluation seem like they could have an incremental impact on demand. You guys have characterized what you're seeing as the continued choppiness. But I'm just wondering is -- and I know it's super early because it just happened but could we see another downturn? The second part of that question is, is there a point where the macro affects the mass and obviously, it's already affected the premium mass, but I'm really asking about the lower tiers of mass.

Based on visitor arrivals, which continue to grow, I don't think core mass is going to be affected. I think it's too early to call the latest gyrations in the trade war.

I'm wondering if -- I can't remember if Linda is on the line, I don't know what maybe she's hearing from some of the folks that she's been communicating with recently.

No, she's not on the line today.

Okay, yes. Because that's obviously like the biggest concern that folks are having right now, but it is early. Also, since your Investor Day, one of the questions that we've gotten on the Crystal Pavilion project was how you were thinking about the targeted return of 15% to 20%. I was just hoping that you could talk about what was driving that view and why we should be comfortable with that outlook?

Sure. So I'll start with that. Clearly, Wynn Palace needs more than 1,700 hotel rooms. You can see from some of our competitors that have ramped up their new, quite nice hotel product, what that has done to their bottom line. Our hotel is full. And on the weekends, we're turning away customers that we do not want to be turning away, and we know that they will spend more time and more money with us if they're staying with us. That coupled with the multigenerational travel that exists in Asia, much different than really anywhere else in the world, the Crystal Pavilion is going to attract lots of customers, but also, as we see at Cotai, families travel with customers. We think that the Crystal Pavilion Entertainment -- the Crystal Pavilion project will be attractive to a much broader audience and we've estimated that we expect over 10 million visits to that on an annual basis. The premium mass will be in the hotel and we think that we'll get significant incremental visitation from the core mass with the project.

Great, that's really helpful. My final question is just for Craig, just housekeeping. I think it was at Palace where your bad debt slips from a credit to an expense, which affected EBITDA. Can you just talk about the expense in the quarter? Is that just more normal course, caution, reason to think anything from that number?

No. We have a pretty rigorous process of aging our receivables, that's formulaic. It's not reflective of any particular micro trend. So it's normal course stuff. We went from a $2.6 million credit in the prior year quarter to a $2 million expense in the current year.

Matt, just can you give us the operating environment that we're in a little bit more broadly, and the growth that you're seeing in the core mass business. Is there anything you can do that's outside of obviously a meaningful room expansion to remix the property or optimize Palace to take advantage of the market conditions as they are today? Anything you guys are thinking about there from an operating or expense perspective that would make sense to adjust?

Well, Shaun, we have been doing that. For our core mass to be up 22%, that's not by accident. We're running significantly more marketing events, concerts, and programs. We are really looking at continuing to drive that business. I believe we are taking a large share of the core mass relative to our unit base, so with our roughly 300 games of each play. Wynn Macau will be perfectly positioned to continue to take additional share in core mass starting in 2020 as we finish that program. I'd like to remind everyone, the premium business is not going away. We have seen this over many years in 2016 and 2012, when it contacts artificially for a very short period of time and people focus on core, and then it expands quite rapidly. We are the premium operator and we will continue to be the premium operator. But during this time, we are capturing more than our fair share of the core mass growth.

Thanks for that. At a high level, you guys have laid out a 15% to 17% market share range. I think on our mass, you are still in that range just at the very low end of that. Is that still something you're broadly comfortable with, obviously, quarterly volatility or hold notwithstanding?

Yes, that's our range that we're still focused on for the year.

So two questions on Vegas. First, broadly the property did really well in the quarter, but food and beverage revenue was down. Was there anything nuanced about that? And then second, Vegas Baccarat was really strong in the quarter for you -- people are being cautious about that business. How should we think about the outlook for Vegas Baccarat going forward? Thanks.

In food and beverage, I mean, clearly, we have a new competitor in the marketplace in nightclubs, and it's a very promotional market right now. We're pretty firm in our belief that great product and great service is going to overcome any competitive pressure there. That's what's happening in food and beverage. When it comes down to Baccarat, the choppiness you see is what you see in macro events. We're not sure what any quarter is going to do for Baccarat, but we were delighted with this quarter.

And then just on Palace, on the mass table wins. It's been stable at around $300 million for six quarters now. Do you think that's the right run rate for the foreseeable future until you see the Crystal Pavilion open, or see a big ramp up in that premium play?

It's really very market dependent, Thomas. I believe as premium comes back, which it will, we're going to be a net beneficiary of that. Timing when that comes back is quite hard, but I would expect to see growth once the premium customer begins to come back to Macau.

Do you think this level is defendable given the strong core mass business?

It certainly has been for six quarters. We feel comfortable with our business model and the direction that we're going.

I had -- I apologize I've been bouncing between calls. I hope this wasn't asked. But in Boston, can you talk about your strategy in building your slot business? And in your experience, how long does that typically take to get to a satisfactory level?

Sure. I'll start and then I'll turn it over to Bob DeSalvio. We've targeted a 12-month ramp-up, Harry. We're making sure that we're not going to get into a promotional war with our competitors who are quite nervous about Encore Boston Harbor. We're reacting to what our slot customers are telling us. We're looking at understanding what promotions work, how players translate comp dollars and what gifts are working. We are really focused on guerrilla marketing. We have the right team to do it. Bob, do you want to jump in on that?

Sure. One of the things we're primarily focused on is database building. We're trying to sign up as many new customers as possible. We're doing quick evaluations to make sure that we communicate with them. Overall, when they see the property, the response is very positive. This does take time to get through the ramp process, but we are all over it and working on it.

My follow-up question is related to the acreage around Boston. You've been somewhat active buying up some key acreage. How long does it take for that to become commercially viable for you guys? Are you looking at joint ventures? How meaningful might joint ventures add to your cash flow over the years?

The planning and permitting process does take quite a long time in Massachusetts. We're not in any formal programs right now. We are talking to various potential partners because joint ventures can really work on that 11 acres for additional hotels that might not quite be the Wynn standard and other entertainment offerings since we want this to be an entertainment destination in the Boston Metroplex. We're taking our time to make sure that we have the exact right program, and understanding what it is that we need to drive more visitations to our casino.

When you talk about entertainment, is there any kind of 30,000-foot framework that you can put around that? How do you define entertainment?

We've been approached by people that would like to think about putting an arena there for various events. We've been approached by people that would like to do outdoor districts that have various entertainment aspects, but on a more boutique level. We are evaluating various proposals. We're not in a rush but we do think that that's going to really add to the area and to the revenues of Encore Boston Harbor over the long term.

Just one follow-up on Boston. What would you need to see to start thinking about becoming more aggressive at targeting VIP players at the property? I think you had said that you were going to wait a little bit before you start turning them?

That's right. We want to make sure that our service levels are at the Wynn standard, and that's not easy. The team is doing an amazing job, getting there extremely quickly. We will give at least 90 days before we start hitting our full database at Wynn Las Vegas to offer people offers there and directly marketing to our higher-end customers. So the idea of that would be sometime in the fall.

And then one other follow-up from the event back at Boston. The $250 million in CapEx, I think that you outlined is part of the $16 free cash flow per share. Can you just remind us what is and isn't included in that number?

We've outlined everything between the food and beverage program in Wynn Las Vegas, the ongoing CapEx for the group space in Las Vegas, the maintenance CapEx needs we have across properties, I think are well modeled including in your model and the Crystal Pavilion in Macau. That's really our pipeline.

Thanks for all of the detailed information. You've covered quite a bit. A bit more hypothetical, if and when you decide to grow, are you thinking more about growth domestically or internationally? We are obviously aware of Japan and what that opportunity is, but irrespective of that, do you have more of an inclination one way or the other?

We're going to always focus on large-scale integrated resorts that can move the needle for a company of our size. There are some large domestic markets that are talking about a third license, for example, in New York, but without really understanding how that would work and where it would be, it's hard to say how appealing that is, but we're keeping a very close eye on that. Lots of people are spending lots of time in Japan including us. Any time a market that could support a Wynn style property would open, we would be interested but we're agnostic between domestic and international.

Thanks for taking my question. I just wanted to focus a little bit on Wynn Palace and the Crystal Pavilion. Matt, could you tell us how much integration there is going to be between these two properties, and as a consequence, does that lead to any disruption at Wynn Palace going forward?

No, it shouldn't. We have 7 acres of land adjacent to Wynn Palace, and we had actually built a retail corridor that was going to connect to Phase 2 that we never opened. Currently, it's housing Art Macau. If you were to go over there and look at all of the art installations that we ran for Art Macau, that thoroughfare is closed off to the public normally, and that will be the connection into the Crystal Pavilion. Outside of construction traffic on the roads, the overall property should feel very little impact from the new construction. Ian, do you have any thoughts on that?

No, I think we knew we were going to develop both those plots of land. A lot of the back of house integration of those properties is already planned for. The facility of Wynn Palace as it exists has made provisions for a lot of back of house support.

Thank you. As my follow-up, can you tell us if there has been much of an impact in Wynn Macau from your remodeling that's obviously going to be completed at the end of this year?

Nothing significant. It's certainly visually disruptive, but I wouldn't say it has had a material impact on business. We are 40% of the way through remodeling the Encore rooms and we're hoping to have everything finished by the end of the year.

Okay. Well, thanks for joining today, everyone. We'll talk to you next quarter.