Wynn Resorts Ltd (WYNN) — Q3 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 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. Good afternoon, everyone, and thank you for joining us today. Before I get into the quarter, I'd like to thank the cast, crew, and producers of Awakening, our new show in Las Vegas, which successfully opened on Monday. The show is yet another example of our willingness to innovate and push the envelope to drive the straightforward. I'm incredibly proud of the team behind the show. I'll kick off in Las Vegas, where the team turned in a third quarter record with $196 million of EBITDA or approximately $207 million adjusted for lower-than-normal holds. We saw broad-based strength across casino, hotel, food and beverage, and retail, all well above third quarter 2021 levels despite the difficult year-over-year comps. The comparison to third quarter 2019 is even more impressive with our EBITDA more than doubling on a 36% increase in revenue. Our investment in people, facilities, and programming, along with our team's deep sense of ownership, continues to elevate us in Las Vegas above our peers. This quarter once again highlights the benefit of that deliberate investment strategy. Looking ahead, I am encouraged that the strength we have experienced over the past several quarters has continued into the fourth quarter. In fact, our EBITDA during October was an all-time monthly record for the property. Similarly, our forward-looking indicators also remain quite strong despite well-known macro concerns, as room bookings are pacing at or above pre-COVID levels on substantially higher ADRs. Near term, we expect the normal seasonal pattern to hold during the remainder of Q4, with some of the usual softness surrounding Thanksgiving, followed by a strong close to the year in the latter half of December. Turning to Boston, like Vegas, Encore had a strong quarter, generating $61 million of EBITDA. We saw strength across the casino with record gross gaming revenue and on the non-gaming side with record hotel revenue driven by strength in both ADR and occupancy. These trends have continued into Q4, with EBITDA per day in October consistent with the third quarter levels. Looking ahead, we remain excited about sports betting in the Commonwealth, which is expected to kick off early next year. Our retail sportsbook there will soon be a significant opportunity for customer acquisition. We also continue to finalize our plans for our upcoming development project across the street from the property that will add incremental parking, food and beverage, and entertainment amenities. In Macau, the market continues to be challenging with market-wide GGR in the third quarter only reaching approximately 8% of the third quarter of 2019 levels, and our results have reflected that. 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. As a result, despite the nearly two-week closure of casinos in the market in July, our overall EBITDA loss in the third quarter was $66 million, which was a meaningful improvement from a loss of $90 million in the second quarter, even after adjusting for a $7 million bad debt credit that benefited the results in the third quarter. More recently, we did see some encouraging pockets of demand during the October holiday period, particularly in our direct VIP business, where turnover was actually slightly above the comparable 2019 holiday period; and in our retail business, where tenant sales reached 74% of 2019 levels. This once again highlights the strong demand for Macau's unique tourism offering during periods when the market is accessible. The authority in Macau continued to advance the concession process according to the pre-established timeline. We were pleased to submit our concession tender application in September, and the government is currently reviewing the proposals with decisions expected to be made by year-end. Long term, we remain excited about the prospects from Macau with so much pent-up demand for travel and tourism in Asia. At Wynn Interactive, our overall EBITDA burn rate declined to $18 million in Q3 from $21 million in the second quarter of 2022 on the back of strong cost controls and improved marketing efficiency. We are looking forward to the potential for a significant catalyst for Wynn there in Massachusetts. Lastly, we're advancing quickly on our planning for Wynn Marjan, our integrated resort in the UAE. We're in the late stages of programming for the resort. Given the pristine beach setting and the somewhat natural aspect of a man-made island, we have an incredible canvas with which to work and design something truly unique. I expect we will share renderings, programming, and plans more publicly in early 2023. I also expect we will be driving piles for the foundation of the property by the middle of next year. We look forward to sharing more details with you about this exciting project in due course. With that, I'll turn it back to Julie to run through some additional details on the quarter.

Thank you, Craig. At Wynn Las Vegas, we generated a third quarter record of $195.8 million in adjusted property EBITDA on $544.4 million of operating revenue during the quarter. Lower-than-normal hold negatively impacted EBITDA by around $12 million in Q3. Our hotel occupancy was 88.8% in the quarter, up 580 basis points year-over-year and up 90 basis points versus Q3 2019. 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 $426 during Q3 2022, up 8.7% versus Q3 2021 and 39% above Q3 2019 levels. Our other non-gaming businesses saw broad-based strength across food and beverage and retail, which were up nicely year-over-year and also well above pre-pandemic levels. In the casino, our Q3 2022 slot handle increased 31.6% year-over-year and was 72.2% above Q3 2019 levels. Similarly, our table drop was up 12.5% year-over-year and was 32.4% above Q3 2019 levels despite still suppressed international play during the quarter 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 an adjusted property EBITDA margin of 36% in the quarter. On a hold-normalized basis, our EBITDA margin was up approximately 1,300 basis points compared to Q3 2019. OpEx, excluding gaming tax per day was $3.6 million in Q3 2022, up 10% compared to Q3 2019 levels, but well below the 36% increase in revenue 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 $61.1 million in Q3 2022 with an EBITDA margin of 28.9%. We saw broad-based strength across casino and non-gaming during the quarter. In the casino, we generated $184 million of GGR, a property record with strength in both tables and slots. Our non-gaming revenue grew 33% year-over-year, with particular strength in the hotel, driven by 97% occupancy and a $398 ADR. We stayed very disciplined on the cost side with OpEx, excluding gaming tax per day of approximately $1.1 million in Q3 2022. This was a decrease of over 10% compared to $1.3 million per day in Q4 2019 and broadly in line with Q2 2022. As we've discussed on prior calls, the year-over-year EBITDA and OpEx comps were impacted by a combination of contractual labor agreements, which added around $45,000 per day to our OpEx base beginning late in Q2 2022, along with a one-time benefit of $3 million in Q3 of last year. We're 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 $65.6 million in the quarter on $115.6 million of operating revenue as the COVID situation in the region has continued to suppress visitation. As Craig noted, while the business has remained challenging, we experienced some encouraging pockets of demand during the October Golden Week holiday period, particularly in our direct VIP and retail businesses. Our OpEx, excluding gaming tax, was approximately $1.6 million per day in Q3, a sequential decrease compared to $1.9 million per day in Q2 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, our EBITDA burn rate improved to $17.7 million in Q3 2022 from $21 million in Q2 2022, primarily driven by improved marketing efficiency and disciplined OpEx control. Moving on to the balance sheet. Our liquidity position remains very strong with global cash and revolver availability of approximately $2.8 billion as of September 30. This was comprised of $997 million of total cash and available liquidity in Macau and $1.8 billion in the U.S. These numbers exclude the undrawn $500 million intercompany revolving credit facility that resorts entered into with Wynn Macau. Our previously announced sale leaseback transaction for the real estate of Encore Boston Harbor remains on track to close before the end of the year. Pro forma for the transaction, we have approximately $4.4 billion of consolidated global cash and liquidity. Importantly, the combination of very strong performance in Las Vegas and Boston, with the properties generating trailing 12-month EBITDA of over $1 billion, together with our robust liquidity, creates a very healthy pro forma leverage profile in the U.S. Finally, our CapEx in the quarter was $87 million, primarily related to the Awakening theater at Wynn Las Vegas and normal course maintenance. With that, we will now open up the call to Q&A.

I wanted to discuss what you both mentioned regarding the increase in Macau. How significant do you think this change is, especially considering it primarily involves direct VIPs and a smaller number of players who can have a major impact? Also, since the Visa policies were adjusted, have you noticed any changes? Regarding your comments on non-gaming, is there anything happening that might be accelerating the return of customers?

Hi, Carlo. Sure, I'll start, and then I'll ask Ian to comment. I think on the latter portion of your question, with Hong Kong being accessible, I think you've seen pretty reasonable retail sales in Macau, given it's more accessible than Hong Kong. And I think that's just a natural outcome of accessibility. With respect to your former question, I mean, it's like squeezing air in a balloon, right? The demand has to go somewhere. So we weren't surprised to see an uptick in direct VIP growth in light of the market having no junkets. So I don't think either one of them was surprising to us. We've seen it before. We've over the course of the past year, when there have been pockets of demand. Ian, would you add anything to that?

I would like to clarify that e-Visas have not started to show significant activity yet, as they reopened on November 1. Therefore, they did not impact October's performance. The activity we observed in our VIP and premium areas is somewhat related to the return of former junket players. Additionally, we experienced a Chinese New Year. We believe that our strong position in the market, along with the facilities and services we provide, will make us appealing to these players, and we expect their return in the future.

Great. And while you're there, is it possible that we will hear something? I know you guys certainly said by year-end as it pertains to the granting of the concessions. Is it possible that between here and there, seven, eight weeks away, that we will hear some contingent licenses being handed out?

Sorry, anything is possible, Carlo, but the pre-established timeline has been year-end.

Great. And then, Craig, I know you mentioned some development in the UAE and that there will be some groundbreaking activities next year, with more details expected in the first quarter of 2013. Could you share some insights on the progress you've made and any additional information you can provide on that front?

Yes, sure. I think I mentioned on a previous call that the more time we spend over there, and I was just over there recently, the more we believe in the non-gaming elements of that market. It's a tremendous non-gaming leisure and luxury market. As I mentioned in my prepared remarks, we're in the pretty late stages now of programming. So essentially determining what we're going to build, not how it's going to look per se. And given that it's a man-made island without any existing development, it's an incredibly flexible location on which to plan. For example, if you want to move a beach, you move a beach. So it's a really exciting project. And we've sought to maximize the relationship of the facility to its surroundings, particularly in the non-gaming amenities like food and beverage, wellness, and really take advantage of such a unique location. Meanwhile, the casino component, where at least for some period of time, we will be operating on our own, which makes it quite exciting, is shaping up to be somewhat larger than Wynn Las Vegas, but with numerous pockets of energy and compression. Striking that balance is important. When you think about a market like that where you, for some time, will be the only operator, you certainly don't want to underbuild the casino, but you want to maintain that sense of energy. So I think the property is going to be a stunner, and we look forward to sharing more in early 2023.

I was hoping you can talk about Las Vegas, Craig, in a way that's going to be a little bit different than how you and your strip peers talked about trends up until recently, specifically about programming. Can you discuss maybe in this way, that would be helpful as we try to ascertain the sustainability of currently strong trends? Can you talk about how many programming events you have for the first half of next year versus the first half of this year if visibility stretches out for the full year of next year? And can you compare that to the full year of '22? Is there a general rule of thumb relating to incremental revenues of an average programming event?

Sure. Look, I think Las Vegas has done programming for years in some form or fashion. As we emerged from COVID, we were, in many cases, a better location in terms of accessibility, openness, and match than some of our adjacent markets, particularly California. I think the trend towards programming and the willingness of a higher value customer to pop over to Las Vegas for a particular event increased meaningfully. And by the way, at the same time, you obviously had a number of sports teams that had emerged in Las Vegas, notably the Raiders, who drive a tremendous amount of visitation. So I think in general, the town has become quite good at really looking at every weekend or every two weeks as an opportunity to program something. The journey for us, I think, is slightly different, right? We don't think of programming as purely transactional. Who are we going to plug into a particular theater on a particular day? For us, it's more holistic. How can we leverage all of the assets that we have in this building, including the golf course, which we've used to great success with the match with the recent Concours d'Elegance car show that we drummed up and originated here? And so how do we use the property as a stage? We think about that all the time now. And so I don't have a heuristic for you, where I can quote to you x number of events per year because really we're focused on it every single week. But it's certainly more than just revenue to the property, right? It makes you the CNBC in spot. And that's important because marketing is no longer about billboards. It's about television commercials. It's about content. And so we've been incredibly good at creating content. It doesn't hurt that during the pandemic, we continued to invest in this property and invest in our people. And so we're firing on every cylinder here, and I think it shows in the numbers, and programming is a piece of it.

Great. And then, Craig, my second question relates to a topic that you might be limited in fully answering. We also have Tilman filing a 13G filing last week. So my questions are: one, have you had any conversations with them? Obviously, you talk with investors and respective shareholders all the time. Two, what has he communicated to the reason for his sizable stake in Wynn, and can you share that?

Well, I guess what I can say is kudos to him because he's done quite well since he appears to have started acquiring in the second quarter when the stock was excessively cheap. It's actually right around when we were buying back some stock as well that we reported in our second-quarter Q. Based on what we've seen watching our share register as we do constantly, sometime in Q2, we began seeing accumulations really by certain banks that have traditionally been associated with derivative transactions like total return swaps, things like that. We watch those banks establish positions in our stock, and we were well aware of them. All in all, I think it's just a great recognition of the value in our equity, but there's not much more to say beyond that.

Craig, I wanted to dive deeper into Las Vegas. We discussed the top-line perspective and the outlook. Could we also address labor and operating expense trends? Despite the quarter's results, operating expenses did increase slightly. Can you help us navigate the balance of factors as some of the non-gaming aspects continue to recover, and the contributions from group-related events, banquets, and shows increase? How should we consider these elements moving into next year, especially as we begin to compare with a strong margin and average daily rate performance from 2022? It would be helpful to understand the differing impacts on revenue versus margins as we plan for the upcoming year.

Yes, sure. I'll turn that one over to Brian.

Sure. Thanks, Shaun. Our team has really been incredibly disciplined over this last year and even before that coming out of the pandemic with respect to OpEx. We've driven real strong revenues. The EBIT and EBITDA margin, as you can see, has been quite strong and in comparison to Q3 '19, amazing performance. So I think this has all been done by really balancing the revenue, our cost base, and most importantly, our brand and really being conscious of that. There's an impact from the seasonality of where we're at. Our hold, obviously, was a little down this last quarter, and labor is being very well controlled by the team. I think that we can continue to see margin expansion versus '19 at almost any given revenue level. The team has been really balanced on focusing on revenue, the cost base, and our brand, and we've seen great growth. As far as ADR, we've seen very little resistance, as you're filing, I'm sure you are. We've leveraged as much as we pushed as hard as we can, and kudos to our revenue team and sales team, they're absolutely crushing it. We are seeing incredible records on our side for ADRs. And that's not just on the transient side. We're seeing that in group across every segment.

And I would just add to that. As you know, Shaun, we don't target margin in any particular quarter, right? We target prudent management of our resources in order to deliver an experience that is consistent with the brand. We learned a lot during COVID, a lot. We are more nimble than we have ever been with respect to OpEx. And so we're running the business with fewer people. We're delivering on the brand promise as well as or better than we have historically, and that's how we manage the business.

Great. And for my follow-up, maybe for Ian. Just obviously, the e-Visa channel did open, I believe, on November 1. Has there been any notable change or anything you could just say about traffic levels because that's obviously a material area that has been shut down for a very long period of time at this point? And if not, are there some counterbalancing forces we need to be aware of? I know there have been a decent number of lockdowns and COVID outbreaks that also could have some impact here. So just what are you seeing on the ground?

Ian, do you want to take that?

Shaun, we are very impressed with the government's response to the recent outbreak in Macau. During the outbreak in the summer, we experienced a six-week closure and recovery period for the casinos. This time, the government has managed to resolve the situation in just two weeks. We are starting to see an increase in occupancy this coming weekend. We are emerging from our recent outbreak, and I believe the e-Visas will begin to come in over the next couple of weeks and then increase significantly in the following months.

This is Cassandra on behalf of David. Can we talk about digital wagering? I think some operators talked about October being close to breakeven or even EBITDA positive. Can you provide any update or incremental clarity on when you think the business may profit?

In the long term, we focus on the business strategically, especially in iCasino where we've seen significant success and our brand holds value. As mentioned previously, we do not intend to expend huge amounts of money unnecessarily, and we have managed to avoid that. Our Q3 results demonstrate that we maintained a consistent total handle compared to Q3 2022 and Q3 2021, despite significantly reducing our marketing spend and burn. Our initial customer groups continue to generate revenue, and we are being careful with user acquisition and promotions. With Massachusetts on the horizon, I anticipate a slight increase in user acquisitions, but nothing drastic, as we already have a substantial database there. It appears we will have retail sports betting without mobile options for some time. Our immediate goals are to launch in Massachusetts, reach breakeven, and then expand as the market develops, particularly in iGaming, where our brand can attract valuable digital customers to Wynn Las Vegas and Encore Boston Harbor. While we are not officially calling the EBITDA breakeven point yet, our numbers indicate we are nearing that milestone.

Great. And for the follow-up, have there been any updated thoughts on the excess land you have in Las Vegas? What are some strategies that could activate the value there?

We are focused on the design and development we are doing, and we need to concentrate our efforts. Right now, our main priority is the UAE, which we believe presents a significant return opportunity for us. Therefore, this is our primary focus in design and development at the moment.

In Las Vegas, you've mentioned some programming benefits. Looking ahead, how should we approach this? Considering the return of group and convention business in 2023, can we confidently attribute the full five points credit to you starting next year, or will it be implemented gradually?

We don't really discuss forward guidance, so I can’t convert it into basis points. However, you're correct that the group in convention business earlier this year was somewhat limited or focused in specific areas. Over the last month to month and a half, we've noticed a more complete recovery in the business. This certainly provides a boost to occupancy, but at this moment, we don't quantify it.

Can you kind of remind us what your interest level is in the potential New York side at this point?

Yes, we are focused on major urban areas, significant developments, and key assets. We are certainly interested in locations like New York. However, the specifics matter a lot, such as the upfront licensing fee, the tax rate, and the detailed regulations. So yes, we are interested in New York, as has been reported.

But you wouldn't necessarily give any more detail in terms of potential location or timing expectation?

I think it's been reported that we are working with Related, which is Hudson Yards.

Thank you, operator. We'll take one last question.

Your margin performance this quarter was impressive, particularly with the 10% increase in OpEx per day compared to 2019. I'm interested in examining that figure on a compound annual growth rate basis to assess how well you can sustain that growth rate. Additionally, I'm wondering if the increasing inflation will affect your ability to manage this moving forward.

I'll take this one, Julie. First, consider our experience during COVID and how we've moved forward. As we came out of COVID, we had to become more disciplined in managing costs. We've always provided the best guest experience in the industry, but the challenge was to maintain that quality with a lower number of full-time equivalents (FTEs). We've continued this approach, and we're still down in FTEs compared to 2019, even in this quarter and in the last quarter when we achieved nearly $240 million in EBITDA. Our operating expenses per day are now largely variable and directly tied to revenue. Regarding inflation, it affects our business in two ways. The price of a hotel room can change every minute, which is a significant advantage for us. We are confident in our ability to manage labor costs. We also have a part of our operations, shared by many major players, that impacts labor costs. However, we’re not overly concerned about labor expenses. Most of the positions in our establishment rely on tips, and those employees are eager to work here. We are pleased with our margins. We don't focus on achieving a specific margin each quarter; instead, we manage our FTEs carefully while maximizing revenue and fulfilling our brand promise.

Excellent. And then just as a quick follow-up. When you talk to your internal sales folks who are on the phone every day with the planners at large corporate clients, do you get the sense that there's any unevenness across different corporate sectors, i.e., tech, where people are looking at '23 gatherings and potentially hitting the pause button just given the macro?

Brian, do you want to take that?

Sure. Thanks, Craig. Brandt, I think something that's really telling from an industry standpoint is to really just look at the large city-wise. CES back in 2020 did over 170,000; in '22, it did 44,000. So certainly, there is a strong international component to that business as well as in the tech industry. But if you look at SEMA that just happened this last month, a couple of weeks ago, they had over 130,000. So we're having the most solid year we've ever had. We are going to have our best year ever in group in both room nights and revenue, and we're pacing ahead of that 2023. That's despite January and February having a real soft January and February with Omicron. So I think we're well positioned. There are certain industries that are performing better than others, and we're seeing that both at Wynn and across the city, I would assume.

We've been more than able to fade any minor fallout that we've seen from tech, mortgage, etc. We've had a couple of cancellations, but it's nothing out of the norm. In fact, it's below what we would normally see. So I think we're quite comfortable with where we're pacing. We're pacing ahead of where we should be, and we are very encouraged by what we're seeing for 2023.

With that, we will now close the call. Thank you, operator, and thank you, everyone, for your interest, and we look forward to talking to you again next quarter.