Welcome to the Wynn Resorts Second Quarter 2019 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, 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 Collin, Kieran Carruthers, Frederic Luisutto 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 the Q2, 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 is not disappointed. The reviews have been terrific. People really appreciate the quality and our service levels are beginning to ramp to win standards.
We've seen some really positive impact on the casino on the table game 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 properties 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 Q3. Moving on to Macau, we generated $343,000,000 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 Q1. 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 June were up over 7% and our VIP turnover in May 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 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 1300 new rooms, 6.50 rooms in Phase 1, plus the Crystal Pavilion itself, which is a non gaming development that has a new theater concept, 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 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 found 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 5 times 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. And 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 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 the capital improvements that we launched 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 Alvera, 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 supper 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 $343,000,000 of adjusted property EBITDA on $1,180,000,000 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 $8,000,000 from a normalized level. Bad debt expense at Wynn Macau was comparable year over year, while at Wynn Palace, a swing from a 2 point $6,000,000 credit in last year's quarter to a $2,000,000 expense in this year's quarter cost us nearly $5,000,000 in year over year comparable EBITDA.
During the quarter, we spent $23,500,000 on the West Casino refurbishment and Encore Room Refresh, taking our spend to date to approximately 40 $2,000,000 Our Las Vegas operations delivered $137,400,000 of adjusted property EBITDA in the quarter on operating revenue of 4 $64,100,000 with year over year growth in both baccarat and non baccarat table drop as well as Slidetable. On the hotel side, RevPAR increased 9.5 On the hotel side, RevPAR increased 9.5% year over year to $300 driving $127,600,000 of hotel revenue, which is a property record. The property held high adding approximately $12,000,000 to EBITDA. Bad debt expense in Las Vegas was $2,400,000 compared to $1,700,000 in the prior year quarter. We spent $58,000,000 in project costs on the additional group space of Wynn Las Vegas, taking our spend to date to $246,600,000 In Boston, we incurred $187,600,000 in total project cost during the quarter, taking our total spend to date to $2,450,000,000 The remaining CapEx and construction retention of approximately $150,000,000 will be paid over the coming quarters.
We ended the quarter with total debt of $9,150,000,000 and total cash and investments $1,510,000,000 including approximately $804,300,000 at Wynn Macau. During the Q2, we returned over $100,000,000 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
Our first question comes from Carlo Santarelli with Deutsche Bank. Your line is open.
Good afternoon. 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 Q2 per day, they're roughly the same as the Q1 or the Q4. What we had in the 2nd 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 indirect.
Great. Thanks, 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, etcetera. 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 and then I'll have Ian answer. Clearly in July as you saw from the 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 into 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.
Then, Eavan, 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 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.
Okay, great. That's helpful. Thank you, guys.
Our next question comes from Joe Greff with JPMorgan. Your line is open.
Good afternoon, everybody. 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 1 junket might be experiencing volume declines, how that kind of impacts the business in the aggregate?
And then just a follow-up to Carlo's question about the margins at Wynn Palace. If we were to normalize for those hold impacts in say the 2Q and 1Q 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. Thanks.
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 and 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 cost us 150 basis points to 200 basis points of margin.
Thank you.
Our next question comes from Felicia Hendrix with Barclays. Your line is open.
Hi, thanks a lot. Ian, I'll start with you. For those of us sitting at our desks in the U. S, this latest trade war intensification and the 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 is 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 supreme 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.
No, she's not on the line today, Alicia.
Okay. Yes, because that'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 1700 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. We 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 multi generational 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 10,000,000 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 the housekeeping. I think it was at Palace where your bad debt flipped 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 core stuff. So we went from $2,600,000 in the credit in the prior year quarter to $2,000,000 of expense in the current year quarter.
Okay, great. Thanks so much.
Our next question comes from Shaun Kelley with Bank of America. Your line is open.
Hey, good afternoon, everyone. Matt, just thinking about the kind of operating environment that we're in a little bit more broadly and the growth 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, Sean, we have been doing that. So for our core mass to be up 22%, that's not by accident. We are running significantly more marketing events and 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 place. 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'd just like to again remind everybody, the premium business is not going away. We've all seen this over many, many years in 2016 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.
Thanks for that. And then just at a high level, you guys have laid out sort of the 15% to 17% market share range. I think on 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.
Great. Thank you very much.
Our next question comes from Thomas Allen with Morgan Stanley. Your line is open.
Hey, so two questions on Vegas. First, broadly the property did really well in the quarter, but food and beverage revenue was down. Was there anything nuance 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.
Helpful. And then just on Palace, on the mass table win, it's been kind of it's been stable at around $300,000,000 for 6 quarters now. Do you think that's kind of the right run rate for the foreseeable future until kind of we 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 we once the premium customer begins to come back to Macau.
And you think this level of cash 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. Okay. Thank you.
Our next question comes from Harry Curtis with Instinet. Your line is open.
Hey, Good afternoon, everyone. I had a and 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 who are 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 guerilla 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 could really work on that 11 acres for additional hotels that might be not quite the wind 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 I'm 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 were 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.
Very good. Much appreciated. Thank you.
Thanks, Harry.
Our next question comes from Stephen Grambling with Goldman Sachs. Your line is open.
Hey, good afternoon. Thanks for taking the question. I guess one follow-up on Boston. What would you need to see to start thinking about becoming more aggressive with targeting VIP players at the property? We want to make sure that our service
levels are at the wind standard. We want to make sure that our service levels are at the wind 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 customers. 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 $215,000,000 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 you're 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 in the Crystal Pavilion in Macau. That's really our pipeline.
Fair enough. Thanks so much. I'll jump back in the queue.
Sure. Our next question comes from David Katz with Jefferies. Your line is open.
Hi, afternoon. Thanks for all of the detailed information you've covered quite a bit. A bit more hypothetical, if you decided 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 could support a wind style property would open, we would be interested. But it's we're agnostic between domestic and international.
Perfect. Thank you and nice quarter.
Our next question comes from Anil Daswani with Citibank. Your line is open.
Thanks for taking my question. I just wanted to focus a little bit on Wynn Palace and the Crystal Pavilions. Matt, could you tell us how much integration is there going to be between these two properties? And as a consequence, does that lead to any disruption at Wynn Palace going forward?
No, it shouldn't. So Aneel, we have 7 acres of land adjacent to Wynn Palace and we'd 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 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 roads, 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.
Thank you. 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 the Encore rooms and we're hoping to have everything finished by the end of the year.
Thanks for taking my questions guys.
Thanks, Neil.
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.