永利渡假村 (WYNN) 2019 Q2 法說會逐字稿

Welcome to the Wynn Resorts Second Quarter 2019 Earnings Call.

(Operator Instructions) This call is being recorded.

If you have any objections, you may disconnect at this time.

I will now turn the line over to Craig Billings, President and Chief Financial Officer.

Sir, you may begin.

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, Ciarán 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 today.

As we look back at second quarter, I'd like to start with congratulating the 5,000 new team members that we have in Massachusetts for opening Encore Boston Harbor.

The property opened on June 23 to much fanfare, thousands and thousands of visitors coming in and the property has not disappointed.

The reviews have been terrific.

People really appreciate the quality and our service levels are beginning to ramp to Wynn standards.

We've seen some really positive impact in the casino on the table games 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, with our management team and with our product that we will continue to ramp that property and take share in the Northeast.

And 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%, and our VIP turnover in May and June were essentially flat with last year.

So really, what that tells us is you can't look at 1 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 segment.

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 property 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 3 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 in luxury in the Macau market.

It's clear that we need more rooms at Wynn Palace.

And at our Investor Day, we laid out our program for the Crystal Pavilion, which includes 1,300 new rooms, 650 rooms in Phase 1, plus the Crystal Pavilion itself, which is a nongaming 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 Marilyn and the team in Wynn Las Vegas for an extraordinary quarter in executing our strategy.

It was the first time in over 5 years where our REVPAR increased by more than 9.5%, but what I find much more interesting was our focus on the casino, which for the last 5 to 6 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 when the overall Las Vegas Strip was only up 7%.

Our baccarat revenues increased 5x faster than the market.

Clearly, we had some high hold.

But 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 and over 40,000 people responded this year, which is similar as to years past, which is, would you recommend Wynn Las Vegas to your friends and family?

This year, we outpaced the luxury hotel benchmark by over 15% and had 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 open in 6 months.

Thomas Keller, the renowned chef, will be opening his first fine dining restaurant in Las Vegas in 2020 here at Wynn Las Vegas.

Enrique Olvera, the top Mexican chef in North America, has 2 of the top 50 restaurants on the World's Best, will be opening his first restaurant in Las Vegas at Wynn Las Vegas in 2020.

And we'll be also 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, and 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 and we're going to ramp Encore Boston Harbor to be the top grossing casino in the Northeast.

We're very confident in our strategy and what that's going to do is 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 main floor core mass with combined property win in that core mass segment up 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 a $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 room 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 handle.

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.

The 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 cost 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 cost 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 at 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 dividend as well as opportunistic share repurchases.

With that, we will now open up the call to Q&A.

(Operator Instructions) Our first question comes from Carlo Santarelli with Deutsche Bank.

Craig, Matt, could you talk a little bit about kind of the impact that maybe the core mass growth relative to the other segments is having on margins.

If you just kind of look at Palace specifically, margins there were a little softer year-over-year and given the mix, you would somewhat anticipate that maybe the mix of revenue would be advantageous for margins, but we didn't see it in this quarter.

So maybe you could talk a little bit about kind of what's driving some of the margin pressure there.

Sure.

I'll start with that.

It's Matt.

So if you look at our operating expenses in the second quarter per day, they're roughly the same as the first quarter or the fourth quarter.

What we had in the second quarter is we had really low hold in the direct part of our business in VIP, which that mix definitely impacted margin.

And 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 it did impact the margin side.

So it's really premium mass coupled with low hold in direct.

Great.

Matt, that's certainly helpful.

And then look, I know this is very hard to answer, but bigger picture, clearly, with the -- not only the protest in Hong Kong, but obviously the rhetoric around trade war, et cetera.

We've seen kind of mixed results coming out of Macau, I would say, 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 guys in Macau would be even better suited to answer this, are you guys seeing anything that's materially different or behaviors that have changed given some of the aforementioned?

So I'll jump in then I'll have Ian answer.

Clearly, in July, as you saw from that DICJ report, there is some softness in VIP.

And when you have hundreds of flights canceled out of Hong Kong and some reluctance to travel, I do think that that's impacting the premium end of the 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 have existed for the last 9 months continue and clearly, 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.

And then, Ian, if I just could one 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 kind of the stability in role just more of the same and what we're looking at year-over-year just more has to do with comp stacks and luck factors as it pertains 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 a bad month.

Our next question comes from Joe Greff with JPMorgan.

Just with respect to the junket business in Macau, Matt or Ian or Craig.

Can you talk about sort of maybe the more recent if there is more recent volatility with sort of key junkets and how volatile that business is?

Obviously, you have a lot of news flow on key junkets and what they may be going through.

Can you talk about how diverse your junket business is?

And if one junket might be experiencing volume declines, how would that kind of impact the business in the aggregate?

And then just a follow-up to Carlos' question about the margins at Wynn Palace.

If we were to normalize for those hold impacts in, say, the 2Q and 1Q at Wynn Palace, what would be a normalized hold EBITDA margin in the 2Q and 1Q just to sort of better understand that dynamic?

And that's it for me.

Ian, why don't you take the first question?

And then, Craig, I'll let you handle the margin question.

So 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.

And on the margin point, Joe, the low hold in direct VIP high hold in junket phenomenon that we experienced in the quarter and then the mix shift that Matt referred to on the premium mass and core mass side probably caused us 150 to 200 basis points of margin.

Our next question comes from Felicia Hendrix with Barclays.

Ian, I'll start with you.

For those of us sitting in our desks in the U.S., this latest trade war intensification and RMB devaluation seems like it could have an incremental impact on demand.

You guys have kind of characterized what you're seeing as the continued choppiness.

But I'm just wondering, and I know it's super early because it just happened, but could we see another leg down?

And 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.

And I think it's too early to call the latest gyrations in the trade war.

I'm wondering if -- I can't remember, is Linda on the line?

I don't know what maybe she's hearing from some of the folks that she's been communicating with recently.

Yes, she's not on the line today, Felicia.

Yes.

Because it's obviously like the biggest concern that folks are having right now so, but it is early.

Also, through the -- since your Investor Day, one of the -- a lot 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%.

And 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.

Again, clearly, Wynn Palace needs more than 1,700 hotel rooms.

I think you can see from some of our competitors that have just 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 exist 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 out at Cotai, families travel with customers.

So 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.

So 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 was just for Craig, just a housekeeping.

I think it was at Palace where your bad debt slipped from a credit to an expense which affected EBITDA.

Just can you just talk about the expense in the quarter?

Is that just 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 macro trend.

And so it's normal course stuff.

So we went from $2.6 million credit in the prior year quarter to $2 million of expense in the current year quarter.

Our next question comes from Shaun Kelley with Bank of America.

Matt, just thinking about the kind of operating environment that were 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 sort of optimize Palace to take advantage of the market conditions as they are today?

And anything you guys are thinking about there from a kind of operating or expense perspective that would make sense to adjust?

Well, Shaun, we have been doing that.

So for our core mass to be up 22% that's not by accident.

We're running significantly more marketing events in concerts and programs.

We are really looking at continuing to drive that business.

And I believe we are taking a large share of the core mass relative to our unit base so with our roughly 300 games at each play.

So Wynn Macau will be perfectly positioned to continue to take additional share in core mass starting in 2020 as we finish that program.

And I just like to again remind everybody, the premium business is not going away.

We've all seen this over many, many years, in 2016, in 2012, when it artificially contracts for a very short period of time and people focus on core and then it expands quite rapidly.

So what we're not going to do is change who we are.

We are the premium operator and we will continue to be the premium operator.

But during this time, we are capturing, I think, more than our fair share of the core mass growth.

And then just at a high level, you guys have laid out sort of the 15% to 17% market share range.

I think in our math, you were 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.

Our next question comes from Thomas Allen with Morgan Stanley.

So 2 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.

People have been cautioning about that business.

So how should we think about the outlook for Vegas baccarat going forward?

So 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.

But we're pretty firm in our belief, great product, great service is going to overcome any competitive pressure there, but that's what's happening in food and beverage.

And then when it comes down to baccarat, it is what you see here in the choppiness is what you see in macro events.

And so 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 win.

It's been kind of -- it's been stable at around $300 million for 6 quarters now.

Do you think that's kind of the right run rate for the foreseeable future until kind of you see Crystal Palace on or see a big ramp-up in that premium play?

It's really very market dependent, Thomas.

So 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 not -- is quite hard, but I would expect us to see growth once the premium customer begins to come back to Macau.

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

It certainly has been for 6 quarters.

So we feel comfortable with our business model and the direction that we're going.

Our next question comes from Harry Curtis with Instinet.

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.

So we've targeted a 12-month ramp-up, Harry.

And what we're doing is, we're making sure that we're not going to get into a promotional war with our competitors.

We're quite nervous about Encore Boston Harbor.

So we're reacting to what our slot customers are telling us.

We're looking and understanding what promotions work, how points translate to comp dollars and what prizes, what gifts are working.

And we are really focused on -- it's guerrilla marketing out there.

And we're really focused on that.

And we have the right team to do it.

So Bob, do you want to jump in on that?

Sure.

One of the things we're primarily focused on is database building.

So right now, of course, we're trying to sign up as many new customers as possible.

We're doing quick evaluations and turns and making sure that we communicate with them.

Overall, when they see the property, great response, very positive.

But as you know, this does take time to get through the ramp process, but we are all over it, working on it.

Very good.

And 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 kind of commercially viable for you guys?

And are you looking at joint ventures?

How meaningful might joint ventures add to your cash flow over the years?

So the planning and permitting process does take quite a long time in Massachusetts and we're not in with any formal programs right now.

We are talking to various potential partners because I think joint ventures can really work on that 11 acres for additional hotels that might be not quite the Wynn standard and other entertainment offerings because this will be an entertainment destination in the Boston Metroplex.

And those 11 acres are going to be very valuable.

So 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 visitation to our casino.

When you talk about entertainment, I guess, is there any just 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 like to do the outdoor districts that have lots of various entertainment aspects but on a more boutique level.

So we're 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.

Our next question comes from Stephen Grambling with Goldman Sachs.

I guess 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 really started targeting them.

That's right.

What we've determined as -- 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 in really a very, very quick way.

But we had always said, let's give it at least 90 days before we start hitting our full database at Wynn Las Vegas, offering people offers there and directly marketing to our higher-end customer.

So the idea is that would be sometime in the fall.

Got it.

And then one other follow-up from the event back at Boston.

The $215 million in CapEx, I think, that you outlined as part of the $16 in free cash flow per share.

Can you just remind us what is and isn't included in that number?

That is the Las Vegas room remodel.

I believe that's what you're referring to in 2020.

And so that would be what your -- I guess is there any other kind of maintenance CapEx that we need to be thinking about or other ROI projects that we should be factoring in?

Well, I think we've outlined everything between the food and beverage program in Wynn Las Vegas, the trailing CapEx for the group space in Las Vegas, the maintenance CapEx needs that we have across the property, I think, are well modeled, including in your model and then the Crystal Pavilion in Macau.

That's really our pipeline.

Our next question comes from David Katz with Jefferies.

A bit more hypothetical.

If and when you decide to grow, are you thinking more about growth domestically or internationally?

We obviously are aware of Japan and what that opportunity is, but irrespective of that, do you have more of an inclination one way or the other?

No.

We're going to always focus on large-scale integrated resorts that can move the needle on a company of our size.

So 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, where it would be, it's hard to say how appealing that is.

But we're keeping a very close eye on that as well as lots of people are spending lots of time in Japan, including us.

And so anytime a market that can support a Wynn-style property would open, we would be interested.

But we're agnostic between domestic and international.

Our next question comes from Anil Daswani with Citibank.

I just wanted to focus a little bit on Wynn Palace and the Crystal Pavilion.

Matt, could you tell us how much integration is there going to be between these 2 properties?

And as a consequence, does that lead to any disruption at Wynn Palace going forward?

No, it shouldn't.

So Anil, 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.

But that thoroughfare is closed off to the public normally, and that will be the connection into the Crystal Pavilion.

So outside of construction traffic on the road, the overall property should feel very little impact on 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.

So in fact, 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.

And as my follow-up, could you maybe, Ian, tell us if there's been much of a disruption 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's had a material impact on business.

We're 40% of the way through remodeling in the Encore rooms and we're hoping to have everything finished by the end of the year.

I'll now turn it over to the host for final remarks.

Okay.

Well, thanks for joining today, everyone.

We'll talk to you next quarter.

Thank you.

This concludes today's conference.

Thank you for your participation.

You may disconnect your lines at this time.