Wynn Resorts, Limited
Q3 2018 Earnings Call Transcript

Published: 8 Nov 2018

[Operator:]

Welcome to the Wynn Resorts Third Quarter 2018 Earnings Call. All participants are on listen-only until the question-and-answer session of today's conference. 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, Chief Financial Officer. Sir you may begin.

[Craig S. Billings:]

Thank you, operator, and good afternoon everyone. On the call today with me in Las Vegas are Matt Maddox; and Maurice Wooden. Also in the line are Ian Coughlan, Ciaran Carruthers, Frederic Luvisutto and Bob DeSalvio. I want to remind you that we may make forward-looking statements under Safe Harbor federal securities laws and those statements may or may not come true. I will now turn the call over to Matt Maddox.

[Matthew O. Maddox:]

Thanks, Craig, and welcome everyone. Before we get started today talking about the quarter, I want to take a few minutes and just lay out why we are very excited about the future of Wynn Resorts in the next two to three years. First, I'd like to start in Boston. We were there recently. I was there recently. And we have 200 people on staff right now and we're about to hire 4,000 more and open a $2.6 billion integrated resort in the heart of the Boston metroplex in less than eight months. And some of the major issues that we're dealing with as a management team are how are we going to control the crowd and how are we going to control the traffic to make sure that the five-star experience that people expect from Encore Boston Harbor will be delivered. It's a property that's about to open. It will provide step function growth in EBITDA. We're really excited about it and we hope all of you will be able to join us in eight months for the opening of that property. Moving to Macau, first, I'd like to congratulate the government of Macau for how the typhoon was handled this summer. Not only were they very well prepared, but in the aftermath and the cleanup, it was flawless. We as a company, our 13,000 employees and I know the entire community greatly appreciate it. And when we take a look back at what Macau has wanted to accomplish, since 2002, when it brought in the new operators, Wynn was brought in as the innovator, as a progressive company. It's not going to compete with replitecture (02

[Craig S. Billings:]

Thank you, Matt. As noted in our release, our Macau operations delivered $409.1 million of adjusted property EBITDA on $1.3 billion of operating revenues on the back of growth in VIP and mass with mass table win a particular highlight increasing 36% year-over-year. In fact, over 70% of our departmental EBITDA in the quarter was generated in mass, slots and non-gaming. We continue to diversify our business in Macau. While Macau's operations for the quarter were impacted by September's typhoon-related closure, the estimated EBITDA impact to the closure was offset by approximately $11 million of EBITDA in the quarter from the receipt of business interruption insurance proceeds related to 2017's Typhoon Hato. Our results in Macau were also positively impacted by VIP hold as Matt mentioned primarily at Wynn Palace increasing EBITDA from our Macau operations by approximately $20 million from a normalized level. Bad debt in Macau was $2.8 million in the quarter compared to a $600,000 credit in the prior year. Our Las Vegas operations delivered $95.3 million of adjusted property EBITDA in the quarter on net revenues of $398.9 million. Las Vegas held low during the quarter, negatively impacting EBITDA by almost $10 million. As the quarter develops, the property was increasingly impacted by market-wide declines in table revenues, which also negatively impacted ADR, RevPAR, and hotel revenues with a loss of higher ADR casino nights in the room base as Matt mentioned. In addition, weather events also negatively impacted our nightclubs driving year-over-year declines in food and beverage revenues. In Boston, we incurred $193.3 million in total project cost during the quarter, taking the total spend to-date to $1.83 billion. The property really looks great and we remain on track to open in June of 2019. We ended the quarter with total debt of $8.9 billion and total cash and investments of $1.9 billion, including $1.4 billion at Wynn Macau. Subsequent to quarter end, Wynn Resorts Limited issued $500 million of term debt with the net proceeds to be used for general corporate purposes, CapEx and potential share repurchase. Consistent with our announcement earlier in the year, our quarterly dividend is $0.75 per share returning over $81.5 million to the shareholders for the quarter. In light of the revised CapEx planning that Matt talked about, we anticipate generating meaningful cash flow after the opening of Encore Boston Harbor. We look forward to continuing to prudently reinvest in our business, while returning excess capital to shareholders. With that, we will now move to Q&A.

[Operator:]

Thank you. We'll now begin the question-and-answer session. Our first question comes from Joe Greff with JPMorgan. Your line is open.

[Joseph R. Greff:]

Good afternoon everybody. Matt, just with respect to your comments about what you're seeing in Macau here since Golden Week, I mean we could probably surmise some of these comments. But what are you hearing from some of your players and what are you hearing from some of the junket operators as the drivers? And maybe this is sort of a quixotic question, but are some of the reasons for this murkiness or choppiness, do you think they're temporary? Or do you think they are somewhat permanent?

[Matthew O. Maddox:]

Sure, Joe. So what I'd start with is, this does not feel like 2014. There's not a large credit bubble looming. As an example, we're generating roughly $120 billion of turnover annually between our two properties, which is the same that we were generating back in 2013 with one property. But the advances that we're making to our junket operators are less than half today that they were then. So in talking to the junket operators, I was there recently, and none of them feel like this is the 2014 credit bubble that's going to pop. It really feels more macro. So what I would say to that is the demand for our product and for Macau in China is insatiable. We are very big believers in the long term in Macau. And if there's a pullback for three months, six months, nine months, not sure what it is, We've been through these. But we note that the underlying demand for this business is very strong. So again, I think pullback is definitely temporary. The growth of Macau is up and to the right. And we're well positioned to take advantage of that over the next five years.

[Joseph R. Greff:]

Okay, great. And then just to maybe understand in this environment the operating expense structure. Obviously when we look at your historical results, we can see what's variable expenses, between gaming, taxes, and say junket commission. With that other sort of third bucket of OpEx, the non-gaming tax, the non-gaming commission, how much flex is there if revenues are flat or trending downwardly?

[Matthew O. Maddox:]

Joe, I wouldn't assume that many operators could be going on an expense diet, given the current structure of labor, which is going to be continually increasing and the commissions and taxes.

[Joseph R. Greff:]

Great, that's helpful. Thank you.

[Operator:]

Our next question comes from Carlo Santarelli with Deutsche Bank. Your line is open.

[Carlo Santarelli:]

Hey, guys. Good afternoon. Matt, when you think about the fourth quarter, and obviously with the results that you had in the third quarter and some of the commentary that you made in the post-Golden Week. Golden Week generally tends to be a period where the wings of it, the short – the period before and after could be a little bit softer. When you're referencing the $3.3 million to $3.7 million of property level, and I'm assuming that was the property level EBITDAR per day, is a good range for the fourth quarter. Is that just more or less extrapolating what you're seeing kind of month-to-date with the tail post-Golden Week kind of run out through the end of the year? Or is there something else that's kind of influencing how you're kind of getting to that range?

[Matthew O. Maddox:]

Yeah, sure, Carlo. So just to be clear, the $3.3 million to $3.7 million is for the full fourth quarter, including Golden Week. And as we said, as I said earlier, Golden Week was quite strong. But what we're experiencing midweek and weekend, midweek has been soft and weekends have been sporadic. So I don't want to get into forecasting what 2019 is going to look like. I think that's a market call. We feel very comfortable with our position. But that's what we're anticipating for the fourth quarter.

[Carlo Santarelli:]

Okay. And, I guess, just to follow-up on that then, is some of the – is the sporadic nature that you mentioned, is that kind of across the board? Are you seeing that from VIP right through to your lower levels of mass? Or is that just more of a VIP and maybe bleeding into premium mass?

[Matthew O. Maddox:]

It's VIP and premium business. The grind business actually continues to grow. So we are seeing our main floor business doing well. And the premium business, it will grow. And that is where you always want to invest in this industry. But we're seeing a little bit of a contraction right now.

[Carlo Santarelli:]

Understood. And then just if I could, one follow-up. As you talked about the two towers on the wings of Wynn Palace. Could you kind of give us a ballpark estimate for how you're thinking about what CapEx would look like for the entirety of what you're doing there over the next several years acknowledging this is going to be a multi-year process?

[Matthew O. Maddox:]

It's really too early. We'll be providing more detailed CapEx estimates in 2019. But the one certainty is Wynn Palace needs more hotel rooms. On the weekends we can't accommodate all the customers that we need and we need to find a way to get to 3000 hotel rooms and create what will be the tourist destination in Macau with our Crystal Pavilion.

[Carlo Santarelli:]

Understood. Thanks Matt.

[Operator:]

Our next question comes from Felicia Hendrix with Barclays. Your line is open.

[Felicia Hendrix:]

Hi, thanks a lot. Matt and Ian too, I know – in this kind of environment, I know you're not going to get promotional to stimulate demand because that's never been how you guys operate, but is there a concern that the market will as everyone starts to fight or compete for lower volumes of demand?

[Matthew O. Maddox:]

Ian, I'll let you take that one.

[Ian Michael Coughlan:]

Sure. In general, the competitors have been very measured about periods of downturns, either liquidity driven, policy driven. So we don't get that kneejerk reaction we used to see six or seven years ago. Certainly there's been a lot of stimulation in the junket market. You had seven new junket rooms open and more on the horizon over the next 12 months particularly in Cotai and that does tend to drive bigger profit share for the junkets. It makes it hypercompetitive. It's not a game we play. We look at the long term, but nothing on the mass side at this moment and other than some of the new junket rooms that have opened that have increased their commissions, we haven't seen anything to be too concerned about.

[Felicia Hendrix:]

And Ian, as you're trying to kind of spread a bit of a lower base among the two properties, can you just talk about how that strategy might look in a bit of a slower period?

[Ian Michael Coughlan:]

We'll just continue to operate the way we've always operated. We'll try quality and leverage having the best product and service in the marketplace. We've been in the rodeo for 12 years. We go through these sporadic periods of volatility. And then we see extreme bursts of growth. So that's been Macau for 12 years. We're not going to over steer one direction or the other. It's hard to look the whole way through 2019. I think what's being overlooked here is a good Golden Week has colored the two weeks post Typhoon Mangkhut when business fell off considerably. And that was a bellwether for the fourth quarter in my opinion. And so we're seeing a lot of softness during the week and some reasonable weekends we've had four weeks post-Golden Week now to look at the business and it is soft.

[Felicia Hendrix:]

Okay. Thank you. And by the way thanks everyone for all this transparency, I think it's very helpful. Craig, just switching gears, you guys – you recently closed on a new $500 million term loan and the language in that 8-K lists repurchases of common stock as one of the uses of net proceeds from the capital raise.

[Craig S. Billings:]

It does.

[Felicia Hendrix:]

Yeah. And so in your prior call you indicated that dividends would be the preferred way to return cash, but you also said that in the case the stock got extremely cheap, you would hoover it up. So, given everything that's going on, given what's happened with your stock since the last quarter and probably what's going to happen now, I'm just wondering if you're pulling your vacuum out.

[Craig S. Billings:]

Sure. Yes it does. We did say that. We have been pretty explicit about our capital return policies we do. We have a stated preference for dividend and I did say that if the stock got extremely cheap we would buy it. When outlandish market narratives or extreme market dislocation caused the stock to be really where we don't think it should be, then we'll back it with our own purchases.

[Felicia Hendrix:]

Okay. And just to make sure I'm right, you still have $1 billion on your authorization?

[Craig S. Billings:]

We do have $1 billion authorization, right.

[Felicia Hendrix:]

Okay. Okay, great. Okay, thank you.

[Operator:]

And next we'll go to Shaun Kelley with Bank of America.

[Shaun C. Kelley:]

Hey, good afternoon, everyone. Matt you've already I think I alluded to this in some of your prepared remarks and also in the answer to Joe's question a little bit, but could you just kind of characterize the customer behavior in terms of just breaking it down a little bit by spend per visit and number of visits? It seems like this is largely just a kind of a contraction of confidence by the consumer but could you just help us think about the consumer behavior a little bit more since you've seen this soft patch?

[Craig S. Billings:]

Yeah. I think you nailed it. The contraction of confidence is the way to look at it. When we look at our daily visitation to Wynn Palace, for example, it's roughly 20,000 people a day right now in line with where it's been in the past. So we're not seeing a large fall off in visitation or the place feels really busy. It's really in the premium segment where there's been a slight contraction in confidence. And as everyone that's been following this space for more than 10 years know, it's temporary, but it takes a little time to get that confidence back.

[Shaun C. Kelley:]

And then I think you mentioned this as well, but just to clarify, I think you said, you sort of expect your market share to remain consistent. Is that – was that the correct interpretation there, so this is really much more of a macro concern than what you're kind of seeing or a market overall concern than anything specific to your customers?

[Craig S. Billings:]

Yes. I mean, we've been fairly consistent between 15% and 17% market share. As you witnessed in the second quarter we were a little lower because one of our competitors downtown opened a new junket room and flooded it with liquidity, and we lost some customers and it was very temporary. That could happen in a quarter in 2019 when some of our competitors are opening new junket rooms. But over a 12-month period we do not anticipate that we will lose any market share.

[Shaun C. Kelley:]

Great. Thank you very much.

[Operator:]

Our next question comes from Harry Curtis with Instinet Nomura. Your line is open.

[Harry C. Curtis:]

Hello, everyone. Matt, you made some comments about land on the Strip and how that was a preferential spot to develop. Can you give us a sense of what your timing is on that anytime soon?

[Matthew O. Maddox:]

No. I think I said in my opening statement that we're just beginning the design development of that, Harry. And it takes two years to really properly think through what is going to be the next great thing for Las Vegas. We're just launching that process. And we'll be doing it through 2019 and 2020 to really determine what's going to be the next great thing for this market.

[Harry C. Curtis:]

The reason I ask is because you also comment that you're on the cusp, once you open Boston, of generating some significant free cash flow. And it would seem to me, and I don't know where the stock is going to be in six months or 12 months or 18 months. But what sort of returns on invested capital are you going to need to see investing in the Strip versus your stock?

[Matthew O. Maddox:]

Sure. Harry, I understand the question. Again, we're investing in Wynn Las Vegas right now. We have new restaurants opening, a new convention center opening, the golf course will be reopening. And you're right on the free cash flow point. Once Boston opens in eight months, large scale capital deployment will not be occurring until a couple of years later, just because of the construction cycle. So we're in the full design and development mode for what we want to build in Macau. And we're at the beginning of that process here in Las Vegas.

[Harry C. Curtis:]

Thank you. And then switching to Macau. It looked to me like you gained share in volume in the third quarter on the VIP side. But you lost it in mass, which was the – I mean it was the inverse of what I would have expected. Can you give us a sense of why that happened? And is that continuing as we look into the fourth quarter?

[Matthew O. Maddox:]

Harry, our overall market share, including slots, was over 17%. 17.4%. So in looking at the various segments, we were not losing share.

[Harry C. Curtis:]

Well, okay. The reason that it's important to me anyway is because if you're – at least during the third quarter you gained share in VIP with a lower margin, but you lost share in mass, that might that have an impact on our EBITDA margins going forward?

[Craig S. Billings:]

No, Harry. Like we said in the prepared remarks, our mass business is doing quite well. Matt referenced the state of the premium consumer, post Golden Week, not only in his prepared remarks, but in all of the Q&A. We anticipate holding margin in the near term as really the increase in the proportion of mass offsets any operating deleverage that may come from lower volumes on the premium side.

[Harry C. Curtis:]

All right. Well, let me follow-up in a little while with you guys. Thanks.

[Operator:]

And next, we'll go to Stephen Grambling with Goldman Sachs. Your line is open.

[Stephen Grambling:]

Hey, thanks. I guess first off on Las Vegas. I guess what's the customer overlap in your Las Vegas Baccarat business with Macau? Is there any change in behavior from those that do overlap?

[Matthew O. Maddox:]

As I mentioned in my opening statement, that what we've seen in the past is when there's a slowdown in the premium market globally, or in Asia in particular, Macau and you're seeing it somewhat in Singapore, that the Baccarat market in Las Vegas also experiences somewhat of a slowdown.

[Stephen Grambling:]

And then I guess as you look out for Vegas into 2019, I mean any initial reads on how you're thinking about how the year is shaping up based on what you're seeing? Thanks.

[Craig S. Billings:]

Sure. No problem. So on the group side, we're fine when we look out to 2019. Matt alluded to the softness in Q3 on the Baccarat side. And we're watching that day-by-day. As he just said, it's a global question. And so could that impact Q4 and then into 2019? Certainly, it could. So a little too early to talk about anything beyond that.

[Matthew O. Maddox:]

Yeah. Our group business is at 80% booked right now, revenue is at about 85% booked for next year. So group feels fine.

[Stephen Grambling:]

Great. Thanks. I'll jump back in the queue.

[Operator:]

Our last question comes from Cameron McKnight with Credit Suisse. Your line is open. Cameron McKnight - Credit Suisse Securities (USA) LLC Good afternoon. Thanks very much.

[Matthew O. Maddox:]

Hi, Cameron. Cameron McKnight - Credit Suisse Securities (USA) LLC So, Matt, in terms of the development of the 38 acres on the Strip, I mean given the difficulty that the Strip saw in the third quarter, do you think that the Strip can absorb additional hard supply here?

[Matthew O. Maddox:]

So, Cameron we don't plan our business which grows in five-year increments with these properties based on one quarter. So what we're doing is we're starting the design development of the 38 acres which will take 24 months to get through what it is that we think is going to grow this market. So we're going to be staring at 2021 in terms of here's a new project that we're really excited about and should we move forward. The best days for Las Vegas are ahead of it. We have the Raiders coming here. We have a massive expansion of our convention facility. There's no other place on the planet where you can have 150,000 hotel rooms within three miles to host what will be the biggest events on the planet. So we are long-term believers in Las Vegas, and we're going to work over the next two years to determine what it's going to take to move the needle. Cameron McKnight - Credit Suisse Securities (USA) LLC Perfect. Thanks. And then a follow-up if I could. In terms of the $3.3 million to $3.7 million of EBITDA per day in the fourth quarter, could you give us a sense of, is that roughly the level that business is tracked at post-Golden Week? And can you give us a sense of the drop off that you're seeing from Golden Week to post-Golden Week?

[Craig S. Billings:]

Hey, Cameron, it's Craig. As Matt mentioned earlier that's inclusive of Golden Week, and as we indicated we had a pretty strong Golden Week. So Golden Week does increase that number. We're not going to provide anything beyond the $3.3 million to $3.7 million. Cameron McKnight - Credit Suisse Securities (USA) LLC Okay. Understood. Thanks very much.

[Craig S. Billings:]

Thank you.

[Operator:]

Thank you. And I'll turn it back over to our hosts for final remarks.

[Matthew O. Maddox:]

Thank you for joining us today. And have a great day.

[Craig S. Billings:]

Thanks. Bye.

[Operator:]

Thank you. That concludes today's conference. Thank you for participating. You may now disconnect.