Wynn Resorts Ltd (WYNN) — Q2 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, Frederic Luvisutto, and Jennie Holiday. 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. Good afternoon, everyone. Thanks for joining us today. Before getting into the quarter, I'd really like to thank our 27,000 team members globally. The year 2020 so far has been very different in Macau than it has been in North America. Our folks in Macau have endured what I know is a difficult period of isolation and volatility while our teams in Las Vegas and Boston have responded admirably to meaningfully elevated business volumes. To those operating in both circumstances, thank you. I appreciate you. Starting in Las Vegas. The team at Wynn Las Vegas turned in another all-time record quarter with $227 million of EBITDA and broad-based strength across casino, hotel, food and beverage, and retail, all well above 2Q 2019 levels. In fact, our EBITDA this quarter was over 40% above the pre-COVID Las Vegas Strip EBITDA record also delivered by Wynn Las Vegas in 2014. A few other all-time quarterly records to call out: record EBITDA margin, record slot handle and win, record non-baccarat table win, record hotel revenue, and record revenue from restaurants and bars. Meanwhile, our customer satisfaction scores in the first half of 2022 were up 3% over the first half of 2019. Our performance in Las Vegas speaks for itself. Looking ahead, while we are keenly aware of the macro environment and the uncertainty facing the economy, we've been encouraged that the strength we have experienced over the past several quarters has continued into Q3. In fact, our forward bookings continue to pace at pre-COVID levels on substantially higher ADRs. July was very strong for us with occupancy of 91%. We expect the usual seasonal slowdown in August with occupancy declining in the mid- to high 80s before accelerating back to the low 90s in September as groups return in large numbers. While we haven't seen any noticeable signs of weakness in our current operations or in our outlook, we are watching this closely. Our experience during the pandemic has made us nimbler than ever, and we are confident that we can adapt quickly to changes in the economic landscape, should they arise. Turning to Boston. Encore also had a great quarter, generating $64 million of EBITDA, a second quarter record for the property. We saw strength across the casino with record gross gaming revenue, and on the non-gaming side, we generated record hotel revenue with particular strength in cash ADR and occupancy. The positive momentum has continued into Q3. And again, similar to Las Vegas, we have yet to see signs of a slowdown. We were happy to see the Massachusetts legislation pass the sports betting bill and having already constructed a sportsbook at Encore Boston Harbor in 2021, we expect that retail sports betting will soon be a significant opportunity for property-wide customer acquisition in Boston. We also continue to finalize our plans for our upcoming development projects across the street from the property that will add incremental parking, food and beverage, and entertainment amenities. Design and planning for that project is on schedule, and we are excited for our next phase of growth in Boston. In Macau, the market continues to be very difficult with market-wide GGR in July, only reaching approximately 2% of July '19 levels. Our results have reflected that in roll, drop, hotel occupancy, and EBITDA. Overall, our EBITDA loss in Q2 was $90 million, which was negatively impacted by around $8 million from low VIP holds. So on a normalized basis, our EBITDA loss was $900,000 per day in 2Q. And despite the nearly 2-week market-wide casino closure in July, our EBITDA loss has been comparable at approximately $1 million per day quarter-to-date in Q3. Our team has done a fantastic job controlling costs in a very challenging operating environment through a combination of decreases in payroll and fixed OpEx. Several weeks ago, we announced some important leadership changes in Macau with Linda Chen moving into the role of President early next year; Frederic Luvisutto moving into the role of COO for the entire Macau business; and Craig Fullab, assuming the role of CFO and CIO for the business. I know many of you know and as I do respect him immensely, so I'm pleased that he will remain at the company in an advisory role through 2023. I have immense confidence in Linda, Frederic, and Craig and know that they are the right team for the future. The authorities in Macau continue to advance the concession process according to the pre-established timeline. We're currently working through our response to the concession tender RFP. Longer term, we remain excited about the prospects for Macau with so much pent-up demand for travel and tourism in Asia. Our market-leading assets and strong liquidity position us well to thrive as visitation returns to the market over time. At Wynn Interactive, 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 $21 million in Q2 from $32 million in Q1, despite a 3% quarter-over-quarter decline in total turnover due to the seasonally weak second quarter sports calendar. We are looking forward to the potential for a significant catalyst for Wynn Bet in Massachusetts both in digital and retail sports betting. Lastly, the design and programming project in the UAE are really coming along, and I grow more excited about the opportunity every day. The project, parking along a beautiful white sand beach, will contain a 200,000 square foot casino, an extensive food and beverage portfolio, and numerous forms of entertainment and spectacle. The more time I spend on this project, the more I'm convinced in our ability to build robust gaming and non-gaming businesses. With that, I'll now turn it over to Julie to run through some additional details on the quarter.

Thank you, Craig. At Wynn Las Vegas, we generated an all-time quarterly record of $226.7 million of adjusted property EBITDA on $561.1 million of operating revenue during the quarter. Higher than normal hold positively impacted EBITDA by around $6 million in Q2. Our hotel occupancy was 90.5% for the quarter, up 40 basis points versus Q2 2019. Importantly, we stayed true to our luxury brand and continue to compete on quality of product and service experience with our overall ADR reaching $460 during Q2 2022, 38% above Q2 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 Q2 2022 slot handle was 63% above Q2 2019 levels, and our table drop was 28% above Q2 2019 levels, despite still suppressed international plays during the quarter due to COVID-related travel challenges. The team in Las Vegas has done a great job of controlling costs without negatively impacting the guest experience, delivering adjusted property EBITDA margin of 40.4% in the quarter. On a hold-normalized basis, our EBITDA margin was up over 1,200 basis points compared to Q2 2019. OpEx, excluding gaming tax per day, was $3.5 million in Q2 2022, in line with Q2 2019 levels despite a 21% increase in revenue due to lower headcount and broad-based cost efficiencies in areas that do not impact experience. We remain committed to maintaining our cost structure that appropriately balances the market on our service standards. In Boston, we generated adjusted property EBITDA of $63.7 million through 2022, with an EBITDA margin of 13.3%. We saw broad-based strength across casino and non-gaming. In the casino, we generated $181 million of GGR, a property record with strength across both tables and slots. Our non-gaming revenue grew 78% year-over-year with particular strength in the hotel, driven by 94.1% occupancy and a $309 ADR. As Craig noted earlier, Q2 strength continued into Q3 as consumer spending on the unique experience remains strong. We stay value disciplined on the cost side with OpEx, excluding gaming tax per day of approximately $1.1 million in Q2 2022. This was a decrease of approximately 13% compared to $1.3 million per day in Q4 2019 and up modestly relative to Q1 2022 on higher revenue and higher payroll. As we've previously foreshadowed, contractual loan group reman added around $45,000 per day for our OpEx base beginning late in the quarter. 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 of $90.3 million in the quarter on $117.2 million of operating revenue as the COVID situation in the region has continued. As Craig noted, lower-than-normal VIP holds negatively impacted our EBITDA by around $8 million in the quarter. Businesses remained challenging into Q3 as local COVID outbreaks in Macau led to the shutdown of integrated resorts for nearly two weeks during July. Despite the closure, our quarter-to-date EBITDA burn was approximately $1 million per day, in line with Q2. Our OpEx, excluding gaming tax, was approximately $1.9 million per day in Q2, a sequential decrease compared to $2.1 million in Q1 2022. The team has done a great job remaining disciplined on costs in a difficult operating environment. Longer term, we're well positioned to drive strong operating leverage as the business recovers over time. Turning to Wynn Interactive. In Q2, the business generated approximately $704 million in total turnover, a decline of 3% sequentially versus Q1 due to a seasonally weaker sports calendar. Decreases in marketing expenses and other OpEx drove an improvement in our EBITDA burn rate of $21 million in Q2 2022 from $31.5 million in Q1 2022. Moving on to the balance sheet. Our liquidity position remains very strong with global cash and revolver availability of approximately $3.1 billion as of June 30. This is comprised of $1.3 billion of total cash and available in Macau and $1.7 billion in the U.S. These numbers exclude the $500 million intercompany revolving credit facility, Wynn Resort and Wynn with Wynn Macau, which further bolsters our already strong liquidity position in Macau and highlights the continued confidence we have in the long-term prospects for that business. Our previously announced sale-leaseback transactions at Encore Boston Harbor remain on track for a Q4 close. Pro forma for the transaction, we have approximately $4.7 billion of consolidated global cash and liquidity. Importantly, the combination of very strong performance in Las Vegas and Boston with the property generating trailing 12-month EBITDA of just over $1 billion together with our robust liquidity creates a very healthy pro forma domestic leverage profile. Finally, our CapEx in the quarter was $90 million, primarily related to the Wynn Las Vegas room remodel and the set renovation. With that, we'll now open up the call to Q&A.

Obviously, the booking pace on group remains pretty solid in Las Vegas. And clearly, there's a lot of pent-up demand for that. With the experience of now taking on bookings and hosting groups in the new facility. As you guys look out to 2023, what do you believe to be kind of the tailwind from an occupied room night perspective or an occupancy perspective, as well as perhaps what impact that might have on kind of the margin profile of the property with the presumably added occupancy?

Yes, it's definitely true that groups continue to be strong. And I'll ask Brian to talk about pacing in just a second. As we've talked about on prior calls, we did have some legacy group rooms as I think everyone at the market would from contracts booked in prior years that were at lower ADRs. We've been obviously signing new contracts at higher ADRs, which as they roll in will offset that. From an occupied room night perspective, I mean, we're running very healthy occupancy today. So I don't think it would change overall occupancy, but obviously, it does mix. Brian, do you want to talk about pacing a little bit?

Sure. Our sales team here at Wynn Las Vegas continues to just do an outstanding job, building a really strong base of business for our future. The second half of '22 that we're into now is ahead of pace, and for '23, we see quite strong. Just to give you a bit of a sense of how we're doing: the cumulative group bookings in the first half of '22 were 40% above the first half of '19. So the team just continues to build that solid base from which I think we can effectively yield-manage our rooms better next year and as we move into the future.

And then just as you think about that group room night as it pertains to 2023, and acknowledging other than the first quarter, which was a little lighter from an occupancy perspective, but 90% in this quarter. Who does that customer next year? Are you still getting a healthy or at least a tangible amount of rooms through OTAs and third-party channels right now? Or who is kind of being replaced? I assume it's likely not the casino customer.

Well, it's a great question, Carlo. We've already scaled back our allocation to some of the lower profitability channels. That's obviously the first thing you do anytime you're yield-managing. And it's a little bit of a rich man's problem now as we think forward because we have a very healthy casino business, as you saw in the numbers, and we have a very healthy group. So we're attuned to how we optimize that mix, and we'll be doing that over the course of the next couple of quarters. So stay tuned on '23, but we recognize that, rather than calling it an issue, it's actually an opportunity. We recognize the opportunity, and we will take advantage of it.

I have two questions. One is another similar question on groups in Las Vegas. When you look at next year, Craig, what are you targeting in terms of percentage of room nights related to the group segment? And then how much of that is on the books now? And how much of the strategy is in the period for the period going forward on group given the seemingly upward movement in ADR?

Brian, do you want to take that?

Sure. I think as we look at it right now, we're pacing to a normal percentage of around roughly 30%. We continue to excel. As far as where we are for next year, we're slightly ahead of where we should be. So we're very confident that we'll hit the number we need to, and it continues to contribute to our bottom line in base.

And those new bookings, particularly for new customers in the out years, are at a substantially higher ADR.

One thing that maybe surprised us looking at your earnings release tonight, Craig, was the buyback activity. Can you talk about that and how much of your capital allocation going forward is going to be buyback activity, assuming share price levels at or around these levels?

Joe, you know us, you've been following us for years, and you know that we're not programmatic about buybacks. We repurchased the stock when we think it's ridiculously cheap. And during Q2, that was certainly the case, particularly from May through the end of the quarter. So we're always balancing liquidity needs, capital deployment for growth, and returning capital to shareholders. The wildcard, let's be honest, the wildcard is Macau. So as we get better visibility on Macau over time, then we can have more confidence in each particular form of capital deployment and know that we can do them concurrently.

I just wanted to sort of ask about the trends in Las Vegas a little bit more. The color on just the trajectory of what you're seeing on the casino floor relative to the hotel. Could you just maybe help us think about as we get into some of the tougher, I think, comps on the growth that we've seen in casino, what are some of your expectations around trends or what may be driving that growth? I know market share gains, maybe on the slot side has been a theme, but maybe pros and cons on casino growth? And then, like I said, we've already talked about hotels, so just more on the GGR line?

Sure. I'll start, and then Brian will jump in. So this started really back in 2019. So you've heard us talk before about our reconstitution of our database strategy. We've made a bunch of changes in hosting. We launched Wynn Rewards. So really going into the reemergence of COVID, we had reoriented our casino strategy, and I think it shows. At the same time, we've been very relentlessly reinvesting in the property in Las Vegas despite COVID, in the rooms, in the food and beverage, and amenities, and it shows, and customers notice it. And so yes, we are taking share, and I'm incredibly proud of the team for doing that. Brian, do you want to give a little bit of incremental color qualitatively on July?

Yes. When you look at what we've done in July, we actually what the host team and the marketing team and the casino segments have focused on really expanding into markets that we haven't been in before, reaching further into domestic segments that we are seeing great returns on. And year-over-year, both drop and handle are significantly up. I couldn't be happier with the team right now, and they continue to just push with special events and driving weekends. It's just a great balance right now, and we're going to continue to do more of it.

And Shaun, we acknowledge that trees don't grow to the sky, right? I mean you're seeing this in all your Las Vegas names. But as I said in my prepared remarks, we watch the data daily, right? We don't have to look in Las Vegas. We don't have to look after 10 properties. We look after one. And we know everything that's going on in this building. And as I mentioned in my prepared remarks, we don't see, so that's where we are.

Really encouraging. And then my follow-up would be not so much about slowdown, but just about maybe traditional seasonality a little bit here, right? Historically, I think the properties tend to do a little bit better in the first half than second, especially in the third quarter. Can you help us just think about how those patterns may shape up for the balance of the year? Because we are hearing a little bit more from the broader lodging industry about a return to more normal seasonal behavior. Just any comments we could think about just to make sure we're in the right place for seasonal purposes?

Sure. You're right. August is usually pretty weak in Las Vegas. I think that's probably true or I shouldn't say pretty weak, relatively weak, particularly given the quarter that we've just experienced. So August is usually a pretty slow month. Groups come back in September, and you start to see an increase in occupancy. I talked about the occupancy shifts that we would expect over the course of Q3 in my prepared remarks, and we stand by that. So business is good. In fact, it's really good. But you always see seasonality in the quarter. You can go back and look at historical Q2 to Q3 movement from an EBITDA perspective in percentage terms. And I think you will see seasonality.

I was hoping for some insight around Interactive. Given that Massachusetts is moving forward, we do observe that there was a little bit of movement and the loss in the quarter. What are your updated thoughts there? Would the burn go up a bit, given that Massachusetts becomes an opportunity on home turf will take it all?

Sure. No problem. So beginning, I think, with our Q3 call. Since last year, we talked a little bit about what we were seeing in the market and some of the irrationality that we were seeing in the market. I can say that that has markedly declined, and that's encouraging. So to see other players in the market behaving reasonably well is great. For us, Massachusetts, I've said this before, Massachusetts was always an important good strapping event for Wynn Bet and Wynn Interactive as is any movement in our gaming, which we obviously don't see at the moment, but I'm certainly will over the longer term. So our goal is really to make sure that we are consistently running the business as best we can from a lifetime value to cost per acquisition perspective. So increased retention, increased CPA, and increase handle per customer. That's the way we run the business. That has resulted in a declining burn over time, which has sequentially gone by, as we told you it would. That burn could go up modestly with the launch of Massachusetts because we will do some user acquisition. I don't think we'll ever be back in the position that we were in at the launch of last NFL season. We've learned a lot in terms of which marketing channels work and which don't. But the business is really executing in that portion of our business, and we're watching the market very, very closely. We'll be in Massachusetts day one.

And if I can just follow up, does the promotional landscape that you noted, enable you to consider going back to other states where you don't have a land-based presence or regrowing the business? Or should we really just be thinking about Massachusetts for the moment?

Well, we are continuing to launch in additional states, and we're continuing to set the foundation in place to grow that business over time as the TAM grows and as our business grows. But Massachusetts, obviously for obvious reasons, we have the land-based presence there. You've seen market share from fellow market participants in places where they have brick-and-mortar presence, and it obviously warrants prioritizing Massachusetts.

I just wanted to follow up on Las Vegas. Obviously, margins were really strong in the quarter. I think your gaming mix at this point is back to 2019 levels. So now that mix is basically normalized. Is there any reason to think that you wouldn't be able to sustain margins in that high 30% range going forward?

We have been able to generate operating leverage consistently over the past three quarters, and I am extremely proud of our team's efforts. If you examine our rates and our performance in food and beverage, you can see that we have driven operating leverage in every area. What you are witnessing is not the result of aggressively cutting jobs or compromising customer experience, but rather effective pricing strategies. Consequently, our performance will align with our pricing. I am hesitant to commit to a specific margin or to forecast our ability to maintain a 40% margin, which is very strong, because we will not sacrifice staffing or customer experience, even in a modest recession. Our focus is on our brand's long-term sustainability rather than short-term gains. While I can't guarantee a precise margin, I can assure you that our team is managing staffing appropriately. We are approximately 10% below pre-COVID staffing levels, yet our customer satisfaction scores have improved, and we are pricing our products based on their quality.

And then just pivoting to Interactive. Obviously, you guys have become a lot more rational. The markets become more rational in terms of pricing and promotion and marketing. As we think about where we go from here as we go into football season in the back end of the year, how should we think about your burn rate relative to that 2Q number?

We have consistently stated that we will reduce our burn rate each quarter. Massachusetts could potentially affect this, but I don't expect a significant change. In the broader context, it is not a major factor. Therefore, I wouldn't invest too much effort into forecasting it, as the general trend should be downward, aside from a few quarters where we may engage in user acquisition in Massachusetts as the market opens.

So in Las Vegas, I was hoping you could just talk about international inbound visitation? And maybe walk us around the globe, where you think you have the most sort of mix during normal times? We obviously have our assumptions. But if you could just walk us around the globe and talk about where you think you're going to see upside near term, medium term, long term? And how much of upside we could sort of see here?

I'll start, and then I'll pass it to Brian. Keep in mind there are many potential international visitors who have been unable to travel. We've had considerable success internationally despite this, which serves as a positive factor for us. Brian, would you like to discuss the mix and opportunities?

We've definitely noticed an increase in our international clientele, from both gaming and non-gaming sectors. Canada and Mexico have been the first to show growth, and we're gaining significant momentum in the U.K. as well. I recently had a meeting with the LVCVA, and the travel from London has reached 106% of the levels seen in 2019 before COVID. This indicates that the U.K. market is recovering well. Looking ahead, our biggest opportunity is clearly in China, where current activity is very limited, as many of you are aware. While we're seeing some recovery from other Asian markets, it's not to the extent we would prefer. Nonetheless, I remain optimistic about future prospects, as we have considerable potential for growth ahead.

And just if I could follow up on Macau. Maybe you could just give us an update on your thoughts around the retendering process, any sort of surprises or anything that you'd want to let us know about in an update?

I'll start, and then I'll ask Ian to provide his thoughts as well. Not really. I mean we understand and appreciate what Macau is trying to achieve. Diversifying the market, both in terms of the geographic origin of visitors and their motivations to visit is not a process that happens overnight. In Vegas, it took many years, and it was a concerted effort by both government and business. We were instrumental in leading that change here in Vegas, and we will, of course, continue to play our part in Macau's journey to do the same. Ian, anything you would add, in particular, on the tender requirements?

I think the rules that were issued and the timeline, we're very clear. We have sought some minor factions and we're in a six-week process of crystallizing our responses, which will get submitted by all six operators on September 14. And then we go into a period of negotiation. And I think the government's intent is clearly before the end of the year to announce the successful operator.

Okay. Operator, we'll take one last question.

Two things just to clarify that you've talked about a little bit already. One was just for group for '23, what's your booked position or kind of room nights booked compared to 2019 at the moment for '23? It sounds like there was a lot of acceleration in the first half. I'm just wondering where that kind of you booked for '23.

We are performing better than in 2019 and 2021, and we expect to continue our upward trajectory. We don't anticipate needing to increase our numbers significantly for this year as we aim for our highest quantity of group rooms to date, thanks to the convention center expansion we completed a couple of years ago. We are starting to capitalize on that capacity, which also enables us to improve our rates as the year progresses. Overall, the situation is encouraging and definitely better than in 2019 and 2021.

And then the other question is just on the Vegas margins. And I know you talked about maintaining, I guess, experience on all of that. How much of the margin increase do you think is sustainable? Because I guess you said in the past on previous calls that you don't have as many open positions maybe as some other Vegas properties. But is there anything about the margin that you think is not sustainable? Or how would you sort of guide us to expect that?

Sure. We learned to run the business differently before COVID. We've talked about this before. And we completely reevaluated how we do that. And so we are running, I mentioned earlier on about 10% less FTEs than pre-COVID. And we're doing it in an absolute range of the market, and our customer satisfaction scores are going up. So that's a real testament to the team. So I would consider that at this point permanent. The operating leverage that we were able to obtain out of the business units; look, as you well know, room prices fluctuate with supply and demand. So you can have positive operating leverage and deleveraging operating leverage in rooms in a week's notice. On the food and beverage side, I suspect some of it's sticky. I mean, inflation is what it is, and we've been able to drive a decent amount of operating leverage out of the food and beverage portion of the business. So it's a little bit of a mixed bag. But Robin, I guess what I would say is the FTE count is what it is.

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

Thanks, everybody.