Wynn Resorts Ltd (WYNN) — Q1 2022 Earnings Call Transcript

Thank you, Operator, and good afternoon, everyone. On the call with me today are Craig Billings and Brian Gullbrants in Las Vegas. Also on the line are Ian Coughlan, Linda Chen, Ciaran Carruthers, Frederic Luvisutto, and Jenny Holaday. 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 Craig Billings.

Thanks, Julie, and good afternoon, everyone. Thanks for joining us today. I would like to start by welcoming our new CFO, Julie, who you just heard from, to the company and to her first earnings call with us. For those who don’t know Julie yet, I think you'll enjoy getting to know her. Welcome. Before we get to the specifics of the quarter, I want to take a moment to thank our outstanding team of 27,000 colleagues globally for their unrelenting focus on delivering the industry's best design, development, and service. That dedication was again recently recognized by Forbes Travel Guide with 24 Five-Star Awards, the most of any independent hotel company in the world. Turning now to the quarter and starting in Las Vegas. The team at Wynn Las Vegas had another great quarter despite the impact of Omicron in January. The property generated $159 million of EBITDA with broad based strength across casino, hotel, food and beverage, and retail, all well above pre-COVID levels. You may recall from the fourth quarter call that we expected the quarter to improve month-over-month and expected occupancy to reach the mid-80s in March. In fact, we actually hit 91% hotel occupancy in March which contributed to an all-time record EBITDA result during the month. Encouragingly, March strength has continued into Q2 and our forward bookings also show no signs of a slowdown with our booking pace at pre-COVID levels on substantially higher ADRs. Now everyone on the call knows that Las Vegas as a market has experienced a rapid rebound over the past years. We certainly have been a beneficiary of that. We're also benefiting from our own efforts in the past several years. Even during difficult times, we invested in our people, in our products. We opened Delilah, we completed a refresh of the lounges adjacent to the Lake of Dreams. We opened Casa Playa and we remodeled the Wind Tower rooms. We look at every inch of this market leading property and ask ourselves how can we make it better? How can we make it return more? It's a dedication to our craft that makes me incredibly proud and it's what drives enduring results. Turning to Boston, Encore had a strong quarter across the casino resulting in $55 million of EBITDA in Q1, again despite the impact of Omicron in January. As we also discussed on the Q4 call, we expected the quarter to improve progressively month-over-month and that's exactly what we experienced with EBITDA in March approximately 60% higher than January. That positive momentum has continued into Q2 with April EBITDA topping an already strong March. It's been a great deal of time during Q1 refining the plans for upcoming development projects across the street from the property. Design and planning for that project is on schedule. We're excited for our next phase of growth in Boston. In Macau, the market continued to experience subdued visitation during the first quarter, particularly in the back half of the quarter. And this has continued into Q2 with market wide GGR in April only reaching 11% of April 2019 levels. Our year-to-date results have reflected that enroll, drop, and hotel occupancy. Encouragingly during periods where the market is accessible, we see demand return very rapidly with hotel occupancy in the 65% to 75% range during portions of the recent May holiday. Longer term, we remain excited about the prospects for Macau with so much latent demand in the region. The market is evolving and we are prepared to adapt and grow our businesses as we embrace those changes. The concession process continues to move forward according to the pre-established timeline with the amended gaming law currently progressing through the legislative assembly. We continue to be pleased with the process and with the content of the amended law. At Wynn Interactive, we increased net gaming revenue by 23% sequentially despite materially lower user acquisition spend. The strategy we implemented late last year to manage the business with a long-term shareholder friendly view is working with our overall EBITDA burn rate declining to $31.5 million in Q1, better than the $40 million range we discussed on our last call. With the Massachusetts Senate passing a Sports Betting Bill several weeks ago and now in reconciliation with the house, we're looking forward to the potential for a significant catalyst for Wynn Bet in the Commonwealth. Lastly, we have moved quickly into design on our project in the UAE, and I grow more excited about the opportunity with each iteration of that design. The Island, which is really a blank canvas for us, presents amazing opportunities to do what we do best. From offshore large-scale water and light spectacles akin to the Lake of Dreams in Las Vegas, to a room product that takes advantage of the unique aspects of a beach side setting, I'm confident we are going to deliver something special to a market that is accustomed to paying a premium for luxury experiences. With that, I will now turn it over to Julie to run through some additional details from the quarter.

Thank you, Craig. First of all, it's a privilege to be here, and I'm delighted to be working with Craig again as well as with his talented team. Turning back to the business. At Wynn Las Vegas, we generated $159.4 million of adjusted property EBITDA, on $441.2 million of operating revenue during the quarter. Overall, our hotel occupancy was 77% in the quarter, with 62% occupancy in January, improving to 91% in March. Importantly, we've stayed true to our luxury brand and continue to compete on quality of product and service experience with our overall ADR reaching $432 during Q1 2022, 28% above Q1 2019 levels. Our other non-gaming businesses saw broad based strength across food and beverage and retail, which were also well above pre-pandemic levels. In the casino, our Q1 2022 slot handle was 49% of Q1 2019 levels, and our table drops were 36% of our Q1 2019 levels, despite still suppressed international play due to COVID-related travel challenges. The team in Vegas has done a great job of controlling costs, without negatively impacting the guest experience, delivering adjusted property EBITDA margin of 36.1% in the quarter. This was up 1,100 basis points compared to Q1 2019 on a hold-adjusted basis. Operating expenses excluding gaming tax per day was $3 million in Q1 2022, approximately $160,000 per day below Q1 2019 levels due to lower headcount and broad-based cost efficiencies in areas that do not impact the guest experience. We remain committed to maintaining a cost structure that appropriately balances margins and our exacting service standards. In Boston, we generated adjusted property EBITDA of $55.2 million in Q1 2022 with an EBITDA margin of 29%, driven by strength across the casino in both slots and tables. Consistent with our regional peers, Omicron along with bad weather, temporarily disrupted our performance at Encore Boston Harbor in January. But as Craig noted earlier, we exited the quarter generating EBITDA in March that was 60% above January. We've remained very disciplined on the cost side with operating expenses excluding gaming tax per day of approximately $1 million in Q1 2022. This was a decrease of over 20% compared to $1.3 million per day in Q4 2019, and flat relative to Q4 2021. Looking ahead, as we noted last quarter, we expect operating expenses to increase modestly due to higher payroll related to contractual labor agreements coming into effect in Q2, which will add around $45,000 per day to our operating expense space. We are well-positioned to drive strong operating leverage as we continue to grow the top line over time. Our Macau operations delivered an EBITDA loss of $5.5 million in the quarter on $298.4 million of operating revenue, as the COVID situation in the region has continued to suppress demand. While business in Q1 was challenging, we remain disciplined on costs and CapEx, a prudent approach which positions us to drive strong operating leverage as the business recovers over time. Our operating expenses excluding gaming tax were approximately $2.1 million per day in Q1, a decrease compared to $2.2 million in Q4 2021, excluding non-recurring items. Turning to Wynn Interactive. In Q1, the business generated approximately $727 million in total turnover. Top-line growth combined with decreases in marketing spend and other operating expenses drove an improvement in our EBITDA burn rate to $31.5 million in Q1 2022 from $79.4 million in Q4 2021. Turning to the balance sheet, our liquidity position remains very strong with global cash and revolver availability of $3.4 billion as of March 31. This was comprised of $1.5 billion of total cash and available liquidity in Macau, and $1.9 billion in the U.S. Pro forma for the sale leaseback transaction we announced in February, we have approximately $5 billion of consolidated global cash and liquidity. Finally, our capital expenditures in the quarter were $96 million, primarily related to the Wynn Las Vegas room remodel and the theater renovation. With that, we will now open up the call to Q&A.

Hey, guys. Good afternoon, and thank you for the remarks. Craig, Julie, whoever wants to kind of handle, I was wondering if you could talk a little bit about how, from an ADR comparison perspective relative to kind of the first quarter of '19 period? The cash versus comp mix has changed?

Sure. Brian, do you want to take that one?

Yes, the Omicron wave had a significant impact on our first quarter, especially in January. We have also seen a higher group mix, which had previously affected rates somewhat. However, our March ADR has rebounded strongly and is now above 2019 levels. There hasn’t been much of a macro impact. Compared to 2019, we continue to see substantial rate growth, and in terms of volumes, we are on track with 2019 figures.

And the cash versus comp mix, it's not really a material driver, Carlos, of the change that you're seeing in ADR. The quality of growth in cash ADRs has been very, very substantial. And in fact, as Brian mentioned, the slight ADR dip that we had in the quarter versus Q4 '21, some of that actually has to do with group business coming back, which as we talked about before, comes back at rates that were contracted some time ago.

Right. Craig, to the point I was actually kind of moving towards or driving at, just in terms of kind of the customer that you're seeing and kind of cash comp mix speaks to it. But is it still like kind of as it was, which is kind of the same customer from 2019 spending more? Or are you starting to see kind of different channels, different customers that are coming in and kind of contributing to the mix? And maybe those customers weren't previously in your loyalty program and not necessarily previous casino guests?

Yes, it's a good question. I guess what I would say is this. Besides the obvious shift in international mix because of COVID, what we've seen is very strong domestic casino growth. We've seen that for a few different reasons. One is market wide growth, as I alluded to in my prepared remarks. The other is we spent much of 2019 reconstituting both our database strategy and our loyalty program and relaunching that loyalty program. So if you look at the Vegas statistics, we've taken share in casinos since 2019. And that is certainly showing up in room mix and quality room mix. And then the last thing I would say is that the cash, leisure and transient customer is also very, very strong relative to '19. But that's not really a mix shift point.

Understood. Thank you, guys.

Thanks, Carlos.

Good afternoon, everybody. Hello, Julie. I have a similar question to Carlos on room rates in Las Vegas. Can you talk about the group mix in the 1Q and the anticipated group mix for the balance of the year? And kind of where I'm going with this, Craig is, as groups become presumably a bigger proportion of the total for the rest of 2022, does that have an impact on how you can yield on an overall blended rate basis for the portfolio, given some of the group that might be coming back from years prior at contractually lower than market rates right now? In the last three quarters, are you at $400 ADR or above? Is that sustainable if you have a higher proportion of group mix?

I'll start and then ask Brian to share his thoughts as well. It certainly provides us with the ability to yield. It's also worth mentioning that a significant portion of our group business currently has a shorter booking window than it has historically, which allows us to price much closer to today's average daily rates than to historical rates. Brian, would you like to discuss the pacing for Q1?

Sure. We've really continued to improve pacing. In fact, right now, we're actually pacing above '19 levels on the group side. We had a little bit of a low with Q1 in booking pace because of the short-term impact of Omicron. But it has come roaring back. And now we have, I think, substantial pricing opportunities as we move forward in the other segments due to the strong base. In fact, one of the strongest bases we've ever seen.

Great. And then my final question is, can you talk about CapEx for the rest of the year in the U.S., and overall, including Macau?

Sure. Hi there. I will take that. It's Julie here. So as I mentioned in my prepared remarks, we spent $96 million in the quarter, which was primarily in Las Vegas on the room remodel and the renovation of the theater. We've got about $50 million to $60 million left on the room remodel, and that should complete in June. We've got around $55 million to $65 million to come on the theater renovation, and that should open in the fall. We're really excited about the show, and we expect it to be a great revenue driver in the fourth quarter. In addition, in terms of maintenance CapEx, we're looking at around $75 million to $85 million annually in Vegas and $25 million to $35 million annually in Boston. And that's really the maintenance CapEx. In terms of Macau, I mentioned in my prepared remarks, our prudent approach in Macau to OpEx and CapEx, given the operating environment there. And so what that means from a maintenance CapEx perspective is we're looking at approximately $10 million per quarter across both properties. We'd see that returning back to normal levels as the market comes back there.

Thank you.

Thanks, Joe.

Good afternoon, everyone. And, Julie, welcome to the call. My question would just be about margins, if we could start there. Thinking about the domestic properties, obviously, it seems like at both Las Vegas and Boston, you saw material sequential improvement. Can you just help us think about margin leverage you were able to see your drive as the quarter progressed? I mean maybe not specific numbers, but just directionally, did those exit rates were those on par with or materially better than what kind of the quarter as a whole did? Just to give us a sense of kind of how to think about the balance of the year or at least the second quarter.

Shaun, thank you very much. I'll address that. In Las Vegas, we are operating the business efficiently, and you can expect permanent cost savings compared to 2019 across various revenue levels. The specific margins will depend on top-line revenue and its composition. As I mentioned, our costs are well managed, and our SPAs have decreased significantly relative to revenue. We are well-positioned to continue generating strong operating leverage in Las Vegas, and we have experienced considerable margin improvement since before COVID. We are confident in our ability to maintain that operating leverage. In Boston, the margin reflects the business's earnings potential at current revenue levels. January was affected by Omicron, so we finished the quarter stronger than we started. However, I noted earlier that we are encountering some additional labor costs that will impact margins. Overall, we are pleased with the margins in Boston, which reflect the current cost structure, including payroll increases at these revenue levels.

Great. As a follow-up, could you share the latest insights or parameters regarding the progress of Wynn Interactive as we move through the year? What are the thoughts on losses? I know they came in significantly lower than we expected for the quarter, showing a considerable sequential improvement. Any guidance or parameters on this as the year continues would be appreciated.

Sure. So we've been pleased with the business over the course of the quarter. We really do believe in the industry longer term. Sports is where the majority of the addressable market is today, Shaun. And it's also where a lot of the irrational behavior is taking place, though. I will say that our rationality seems to be ebbing as valuations have come down. So I think that's good for everybody. We've always viewed Massachusetts as an important boot strapping event for Wynn Bet. And if you look at some of our competitors and their market share in states where they have a physical presence, it's clear that bricks and mortar is an advantage. So with a bill in reconciliation between the House and the Senate in Mass now, we're preparing to be there day one, and that will be an important event for the business. With Massachusetts looming, it's difficult for me to give you a sense of what the burn rate over the remainder of the year will be. But I would say in the absence of Massachusetts, the burn will be at or below the quarter that we just experienced.

Thank you very much.

Got it.

Hi. This is Cassandra. I'm asking on behalf of David. Thank you for taking my question. If we could expand on the Wynn Interactive question a little bit more with irrationality ebbing as you described. Where do you think this business could ultimately be? Is there any long-term kind of market share target or EBITDA target?

Yes. Thank you for the question. So this is really a business of building player cohorts, right? Every day, you're out acquiring customers. And you build those player cohorts. Those player cohorts age out over time, and they deliver EBITDA to you. So what we're focused on is continuing to build our player base and age that player base out and ultimately drive operating leverage out of the business and build the business. The next step for us in light of real uncertainty in the market with respect to user acquisition behavior is to get to the EBITDA breakeven point. And then longer term, there are really two primary catalysts for us. The first is Massachusetts, which, as I mentioned, is hopefully pending with a bill that we anticipate will be signed by the governor if it emerges from the reconciliation process. And then, of course, any additional online gaming states where we feel like we have a distinct advantage based on brand. So it's really too early to talk about market share targets or EBITDA targets. I think the focus for us is recognizing the ultimate potential total addressable market, our position in that market, and reaching that total addressable market in a prudent way that is ultimately shareholder friendly. So stay tuned.

Got it. Thank you. And if I may have a quick follow-up. Encore Boston Harbor, I know you've laid out a roadmap three years ago, and it's probably outdated. But how is that property trending now versus kind of your expectations? And how should we think about return to the additional CapEx spend there?

Well, look, we opened that property and it opened initially very soft. And we went to work very, very quickly as we generally do to turn that property around. And with both Brian and Jenny's extremely good work, we've been very successful. So we're run rating in the mid-200s at this point. And we feel like that's quite an accomplishment in light of the environment certainly that we went through during COVID. The next stage for growth in that business is really two things: database growth, which we have a lot of opportunity to do; and then the development that we'll do across the street, which will add a whole bunch of additional parking where we are parking constrained on weekends. And we would look at something like a 15% to 20% return on that CapEx.

Got it. Thank you very much.

Thank you. On the UAE development, there have been a bunch of articles out the past few weeks kind of asking if maybe there'll be more competition around the market. What are you hearing on the ground there?

I can't really comment on what the other Emirates may decide regarding legalization; that's up to them. However, I want to highlight that we not only compete but excel in the highly competitive market of Las Vegas. Our analysis of that opportunity considers the potential for competition, but I can't indicate that we are aware of any at this time. It's not my role to predict the actions of the other Emirates.

Okay. Helpful. Thanks. And then just as we think out through the rest of the year, can you just help us think about any like calendar shifts or seasonality we should be thinking about, especially around Boston, right? Because we never really had a full year pre-COVID of what Boston would look like. I think we all presume that summer should be the busiest period. But just anything around seasonality and kind of timing shifts we should think about as we think through the rest of the year? Thanks.

Yes, sure. Actually, winter, if you look particularly at Q4, winter in Boston proved to be pretty substantial for us, right, because everyone is inside as opposed to out given the environment in winter in Boston. So we're still feeling out seasonality, to be honest, even in the midst of 2021. We were still a little bit touch and go with COVID. But certainly, we had a very, very strong winter there. And seasonality in Vegas is as you would expect. You know this market extremely well.

Great. Thanks. I don't know if you have said officially whether you would be interested in a New York property, in a New York casino license?

Thanks, Robin. Yes, we are interested in any gateway city that is conducive to the scale and quality of development that Wynn Resorts does. So we are interested in New York, and we are active there, but not in a position yet to talk about anything in particular.

Okay. If I could ask a follow-up on your comments on Vegas. And how should we think about kind of steady-state margin in Vegas? And I guess you opened a conference center, a convention center there during the pandemic. So when we think about margin relative to pre-COVID, I guess, what would you suggest for kind of steady state, including that conference center now?

Julie previously mentioned this in a quantitative way. Qualitatively, I can say we are consistently managing our full-time employee count to meet both our internal standards and our customers' quality expectations. Up to now, we have been quite successful in this regard. Last year, we announced some permanent cost savings that we are staying committed to. As the business rebounds significantly, we are generating a substantial amount of operating leverage, but this also brings additional variable costs. We typically do not provide guidance on margins or future projections. However, I can affirm that a portion of the cost savings realized over the past few years is definitely permanent. Besides that, you can expect variations based on variable costs, which are closely linked to our revenue levels.

Okay. And if I could ask one last clarification. On the group, you said it's pacing ahead of 2019 levels. When you look at what you have in 2023, I don't know if there was kind of some lost ground during Omicron is what we've heard from others. Do you have more group cumulatively on the books for '23 than you did versus '19? Or is there still some kind of ground to be caught up?

We are currently on track to exceed our expectations for 2023. We feel very confident in our position. Considering the current global situation, everything appears to be looking quite positive.

Okay, great. Thank you.

Sure.

Operator, we will take one last question. Thanks.

Hi. Thanks for taking the question. Maybe turning to Macau, I guess I'm curious, as you look at that market, what are some of the growth opportunities to consider there from an investment standpoint if the concession process goes through smoothly? And what are you thinking about for the VIP rooms, in particular? Thanks.

Thanks, Stephen. I'll start, and then I'll ask Ian to comment as well. I mentioned on the last call that Macau is currently the most intriguing part of our portfolio. While the equity markets may not be recognizing that, it’s not uncommon. We have begun a journey to become a very effective and aggressive mass marketer with the opening of Palace, and we are performing well in that area. In 2019, over 80% of our EBITDA in Macau came from sources other than VIP. We feel well-prepared to compete with the market as it reopens, which will likely focus more on mass-market customers, and we aim to offer the best product and service available. What I find particularly interesting is that throughout COVID, we have seen new customers come to Macau with different motivations than we have historically observed, such as shopping and leisure. This change is partly due to the accessibility issues with Hong Kong. This draws our attention to the potential future development of Macau from a non-gaming perspective. We do not expect it to resemble a Las Vegas style non-gaming market, as the dynamics are quite different. However, our ability to adapt and transform our business in response to market changes, or even to lead those changes, which we have done historically in Las Vegas, is something I find both intriguing and a promising investment opportunity. Ian, do you have anything to add?

Hi. Thanks, Craig. Hi, Stephen. We have two undeveloped land parcels at Wynn Palace totaling 11 acres. We also have another 1.5 acres in the existing property. So we have three opportunities to build very meaningful product offers for the future. We're in the process right now of determining what exactly will benefit Macau for the long-term. We are awaiting the tender documentation to see what the government feels about what's required for the future, and we will blend our own needs with that. But there's great opportunity for us to expand our business considerably in Macau. We also, with our two existing properties being 15 years old and 5 years old, they're impeccably maintained. We've constantly reinvested in them. So we are ready when Macau bounces back and it will bounce back. It's just a matter of when we will be ready for that. And the long-term future of Macau, as Craig has pointed out, is exceptional.

Stephen, you also inquired about the junket space. We view this differently for each of our two properties. At the downtown location, we expect that gaming will be the primary motivation for customers over the long term. We have prime real estate in the form of former junket space that we believe will be highly competitive in the mass market. The situation at Palace is different since we may have the chance to implement some unique ideas there and engage in longer-term, more innovative planning. We are not making that investment at this moment, but we do have the real estate available to pursue that when the right time comes.

Maybe as one quick follow-up, if I may. Just there's been a lot of back and forth in the press about the lawsuits associated with VIP and who's responsible for what in the event of certain customer losses. I'm wondering if you could just shed some light on that. Any risk that we should be thinking through that may be outstanding or not? Thank you.

Yes, sure. This is one of those topics. We have them every couple of calls, where the sell-side tends to really under-appreciate nuance and instead paints with a very, very broad brush. The reality is that we haven't accrued for any material exposure, and each individual claim comes down to a really detailed analysis around clear proof of a deposit in your particular property, the statute of limitations on a claim, and a number of other very, very nuanced legal points, we don't expect material exposure at this time.

Perfect. Thanks so much.

Got it.

Okay. Well, with that, we will now close the call. Thank you, everyone, and we look forward to talking to you again next quarter.

Thanks, everybody.