Welcome to the Wynn Resorts First Quarter 2019 Earnings Call. 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.
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 Coughlin, Taran 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 good afternoon, everyone. Thank you for joining us. The quarter was pretty much in line with our expectations, and I think I'd just like to jump right in and talk about Macau. So in Macau, we generated $386,000,000 of property EBITDA. And as we've discussed in previous quarters, VIP was down and the premium area continues to be choppy.
However, what we saw was we saw real strength in our core mass. In fact, our core mass increased over 13% year over year. And what that shows is that our strategy is working. We've built 5 new restaurants at Wynn Palace over the last 24 months. Our visitation continues to increase.
And what's interesting, in March of this year, Wynn Palace achieved its highest normalized EBITDA on record. And 78% of that EBITDA was from the mass business and non gaming. If you look at Wynn Macau Downtown, we're continuing to perform in line exactly with our expectations as we're renovating that property. The Encore Tower, which are probably the nicest rooms in all of Macau, the average size of the room there is 900 Square Feet, is in a full renovation now, not just a soft goods renovation, but a full renovation, and that will be complete by the end of the year. We also looked at the success of our Encore Casino in Macau and those approximately 30 games are one of the most productive casino floor plans on the planet.
And we thought, what can we do to replicate that in half of our casino, our original casino, what we call the West. And so we began a project about 9 months ago that should wrap up at the end of this year that will take our original casino that's right now chopped up with various junket rooms and the energy has been suppressed and it will turn it into what I think will be the nicest premium mass destination in downtown. We have 7,000 new square feet of retail entering this area, 2 restaurants flanking the new casino and this should all be finished by the end of the year. So Wynn Macau's best days are ahead of it. 2020 should be a great year for Wynn Macau.
In Las Vegas, everything was pretty much in line except for Baccarat. And I think it's no surprise to the people on this call, Baccarat was down for us quite significantly just as it was for the market. So all of our competitors felt that baccarat was definitely soft in the Q1. What I've been impressed by is Marilyn coming in and her team understanding that baccarat is in a temporary decline have focused on the non baccarat casino business. And for the first time in a long time, our table drop excluding baccarat ra in the Q1 actually increased 10% over last year.
And I give a lot of credit to Marilyn and her team and the new marketing people that she has brought on to focus on areas where we have not focused as carefully in the past and I think it's an area of growth for us in the future. There's been a lot of discussion about new jurisdictions opening up in Asia and around the world and that maybe Baccarat's best days are behind it in Las Vegas or that Macau can continue to see some cannibalization. And what I would say to that is I totally disagree. We've experienced gaming expansion in the United States for decades, and we're experiencing it now in Asia. But what always happens is customers will go try out the new product.
They'll go to a place where they're getting free money and big discounts, but that never lasts. Customers with money and choice always go to the place that they enjoy the most. And you cannot replicate Las Vegas or Macau anywhere else on the planet. The number of hotel rooms, the entertainment options, the infrastructure, the service levels can't be replicated. And so our company and our growth profile are properly situated to bet on the future growth of the 2 best gaming jurisdictions in the world, Las Vegas and Macau.
And I am a very firm believer that our product is positioned perfectly in both of those markets. In Massachusetts, we received a decision from the MGC regarding their investigation last week. Importantly, there was no impact on the suitability of the company or its key employees to hold a gaming license in the state and we are ready to move forward with the opening of Encore Boston Harbor. However, we are still reviewing the decision as it relates to some of the secondary and tertiary conditions imposed by the commission. We do not believe, if we choose to appeal, that, that will impact our ability to open the project at the end of June.
So the regulatory process has consumed a great deal of resources at both the company and with the regulators. We are focused on opening this property within weeks and we feel very confident that it will be the nicest integrated resort on the East Coast. So before I turn it over to Craig, I'd just like to remind everybody about why I'm such a big believer in this company. We've been through a significant transition and there has been some turmoil over the last 15 months, but that is now behind us. And if you look at our future and you look at our company and our growth profile, I believe it's unparalleled in this business.
In Macau, we have 1300 rooms, 700 plus in Phase 1 plus the Crystal Pavilion that we've made significant progress on for Wynn Palace and that project is needed for Wynn Palace to continue to grow and we're really excited about it. We're about to open Encore Boston Harbor, which is a step change in our EBITDA in weeks. Here in Las Vegas, we have a new convention center opening, doubling the amount of convention square footage we have over the next 6 months, multiple new restaurants coming into the property and a fresh look at the way we think about our casino business. So our growth profile is quite strong, and I am big believer and we are all big believers that Macau and Las Vegas best days are ahead of it. With that, I'm going to turn it over to Craig to get into some of the details.
Thank you, Matt. I'll run through some additional points on the quarter. As noted in our release, our Macau operations delivered $386,500,000 of adjusted property EBITDA on $1,250,000,000 of operating revenues. As Matt noted, the quarter was characterized by continued choppiness in VIP and premium mass, offset by meaningful growth in main floor core mass with combined property win in that core mass segment up 13.1% year over year. March was particularly strong with Palace experiencing its best month ever in mass drop, mass win and EBITDA.
Our results in Macau were positively impacted by VIP hold, increasing EBITDA at Wynn Palace by approximately $25,000,000 from a normalized level. Bad debt expense in Macau was $1,800,000 in the quarter compared to $300,000 in the prior year. Our Las Vegas operations delivered $108,300,000 of adjusted property EBITDA in the quarter on net revenues of $401,000,000 with year over year growth in non baccarat table drop and slot volumes. As discussed in our Q4 2018 call, a large group shift from Q1 to Q2 this year negatively impacted RevPAR growth and food and beverage revenues in the quarter. We expect offsetting outperformance in RevPAR in the 2nd quarter.
Consistent with the broader Las Vegas market and our commentary on the Q4 call, baccarat volumes declined year over year and such declines were the primary driver of the year over year EBITDA decrease. Property held high, adding a little over $5,000,000 to EBITDA. Bad debt expense in Las Vegas was $3,600,000 dollars compared to $400,000 in the prior year quarter. Compared to the prior year quarter, EBITDA margin in Las Vegas was negatively impacted by the swing in bad debt and operating deleverage from Baccarat. We spent $48,800,000 in CapEx on the additional group space at Wynn Las Vegas, taking our spend to date to $181,500,000 In Boston, we incurred $233,400,000 in total project costs during the quarter, taking the total spend to date to $2,260,000,000 We ended the quarter with total debt of $9,200,000,000 and total cash and investments of $1,800,000,000 including approximately $900,000,000 at Wynn Macau.
During the first quarter, we returned approximately $81,000,000 to shareholders through our quarterly dividend payment. And today, we are pleased to announce a $0.25 or 33 percent increase to that recurring quarterly dividend. Our recurring dividend is now $1 per share, returning over $100,000,000 per quarter to our shareholders. Consistent with our sharp focus on capital allocation, we will continually evaluate periodic increases to our dividend as well as opportunistic share repurchases as valuation and broader capital allocation priorities warrant. With that, operator, we will now open up the call to Q and A.
Thank Our first question comes from Carlo Santarelli with Deutsche Bank. Your line is open.
Hey, guys. Thank you very much. Matt, Craig, if we can go back and kind of discuss Macau, as you guys talked about specifically at Palace, you really saw a nice boost in mass and obviously on a base mass, I should say. And obviously, some of the changes that you're making at Peninsula should certainly further that effort. If we think about the Macau market in a flattish environment for say 2019 and you guys think about your positioning obviously given the impact of your positioning in mass or sorry, in VIP and premium mass, you would expect some share loss there.
Do you believe with some of the growth you're seeing in mass and some of the pivoting that you could do that you would be able to offset some of the share losses from both a margin and EBITDA perspective over the course of the year?
Hey, Carlo, it's Matt. When we're looking, it's always hard to predict exactly what's going to happen in Macau, but we do believe with our product that we'll be able to stay within that market share range of at the lower end of it of 15% to 17%. As you know, our competition has been ramping up. MGM just opened the mansions, which is quite nice product. Morpheus is ramping up.
So Cotai is a really competitive place, but we feel like Wynn Palace is perfectly positioned to continue to maintain its share and Wynn Macau is really about 2020.
Understood. And then if I could, just one follow-up as it pertains to some of the tariff news that's out there, etcetera. Are you guys hearing anything, I guess, more specifically from some of your higher end players as to the impact, some of the ambiguity around that is having right
now? I think anytime there's uncertainty in the world, all of us feel a little bit nervous, whether it's you sitting in your office at Deutsche Bank, me in Las Vegas or someone in Shanghai. That's just a natural human reaction. I can't say that there is clear data pointing to slowdown and we are looking forward to moving forward.
Great. Thank you. And I'm nervous all the time. It's not just with the uncertain line. Thank you very much.
Our next question comes from Joe Greff with JPMorgan. Your line is open.
Good afternoon, everybody. I have two questions. One is on Las Vegas on the Baccarat segment. To what extent is the softer demand recently experienced a function of things that aren't related to the macro or say shifting geographies that you referred to Matt, but rather maybe other structural I mean, I think maybe most of us are probably some to some degree surprised about the Crown news. So my question isn't necessarily about Crown, but just about M and A in general.
What are the criteria and the goalposts that you have when evaluating M and A opportunities and what are the things that fit? What are the things that you look for financially and strategically? Sure. So,
I don't really think we're seeing any long term sustainable trends. I think we're experiencing exactly what you understand. And we definitely think the 2nd quarter is going to be a little better than the Q1 based on what we're seeing right now. So I don't want to be predicting baccarat volumes, but Las Vegas over the long term is a global destination for those it's all the global
headwinds. And I think that, it's all the global headwinds. And I think that hopefully that these players will be back if that's what the past has been.
On the M and A front, so Joe, as I laid out in my opening remarks, our growth pipeline is quite robust and the large capital spend is now behind us after a multi year capital development program as we're about to open Encore Boston Harbor and really become really start generating lots of free cash flow, which is one of the reasons that we raised our dividend by 33% this year. When it comes to M and A, we will always be looking for opportunities for assets that are Tier 1, 1st class assets with licenses that are protected in cities that are global destinations. So while we are not pursuing any acquisitions at this stage, we will, along with all of our competitors, I'm sure, be looking at opportunities that you can't replicate through development. We are a development company at heart. We're focused on new projects, but we will continually look for to enhance shareholder value without increasing our leverage profile and without hurting our free cash flow story.
That's helpful. Thank you.
Our next question comes from Felicia Hendrix with Barclays. Your line is open.
Hi, thanks a lot. Hey, Matt, just peeling back the layers a little bit more on the market share issue and you've said this a lot on your past calls, you want to stay in the 15% to 17% range. But if you could just help me with the math for a second, if we use the DICJ data, which I realize is still flawed, It looks like mass share in the quarter did decline sequentially. And I'm just trying to reconcile that with your commentary that you saw strength in the core. So is that basically just because you did lose more premium, but you're gaining core, but it just didn't offset it.
Is that all that you would read into that?
That's exactly right. So premium, we definitely lost some share in premium mass and the premium mass business around town was down. Core mass, which is we define it by geography and by average bet, core mass was up over 13%, but that was not enough for us to keep up our share in the market. I think our win was up roughly almost 3% sequentially and that was less than the market and that's because we are more reliant on the premium segment, But our strategy is working, and it shows that Wynn Palace and Wynn Macau can really compete in any market. And Alicia, you've been watching this for a long time.
People get really focused on core mass because that business is always there. Premium and VIP get compressed temporarily and then the growth happens. So I don't know how long that that area is going to be compressed, but what I do know is the demand is still there. And so we feel very comfortable that when that business begins to come back, we are going to be perfectly situated to capture it.
That's super helpful. And then when you were talking earlier answering Carlo's question and you said, look, we'll stay in the 15% to 17% range, but we're now perhaps at the lower end. Is that also kind of indicative of what you're seeing kind of in early May?
Hey, Felicia, it's Craig. Yes, I would say that the trends that occurred in Q1 market wide really have continued into Q2 through May. It's a very core mass driven growth market and we don't we skew towards the premium end. That's true in mass as well. So to the extent that there is outsized growth in core mass, we will benefit from that partially, but clearly not as much as the market because there are others in the market who directly cater to that segment.
Right. Okay, that's helpful. And Matt, just a clarification. At beginning of your comments, you alluded to gaming competition globally and some perhaps that you're experiencing Macau. And while that's not a new comment in general, I don't believe I've heard you say that on a call like this or I've heard Wayne in general talk about this.
So how would we interpret the comment relative to your performance in the quarter?
I don't think you should look into the performance in the quarter at all. I've just noticed some of our competitors and other people tend to be commenting a lot on these emerging markets, in particular in Asia, and that they could have an impact on the large global gaming jurisdictions. And I just don't believe that Macau and Las Vegas are going to be cannibalized by those small tertiary jurisdictions that are emerging. In the short term, they could. We're not seeing that right now.
But over the longer term, people always go back to the places that they enjoy the most. And so I wasn't addressing that relative to this quarter. I was just addressing it relative to what we're seeing in the market and what we believe will be the long term success of Macau in Las Vegas.
Okay. That's helpful. Thank you very much.
And next we have Shaun Kelley with Bank of America. Your line is open.
Hey, good afternoon, everyone. Maybe just to stick with Macau and the core trends there. Could you just discuss I think you talked about the share shift as it might relate to other markets. But Matt, I think you also called out just that some of the competition is moving around. Do you think we were in a fairly normalized environment as it would relate to that competition in Q1, meaning is there more to fear as we move forward?
Or do you think like, look, this is the right environment now and we're pretty comfortable with how your product is situated with what you're seeing in the market at this moment?
Yes, Sean. I definitely think we're in the normalized environment right now. There are no large scale gaming jurisdictions coming on in the next few years. Some junket operators may move business around, but that's always temporary and it will come back to the places where the customers want to go. Ian, do you have any thoughts on that?
We go through this after 12 years in Macau, we get these periods of sporadic volatility, VIP wanes for a variety of reasons and then it picks back up. People always gravitate to quality. We're always there to pick it up when it comes back. So we stayed in the junket game when other people backed out. We made hay while the sun shine.
Now there's pressures on commissions and incentives. We're going to remain through to what we've always done and people will come back. In the meantime, we grow premium mass and general mass.
Great. And then same theme, but moving back to the Peninsula, you obviously are undergoing a meaningful renovation there. Could you just walk us through the cadence of how you expect that to progress throughout the quarter throughout the balance of the year? Was there a meaningful disruption in Q1? And then how and is there a number or anything worth calling out there?
And then how should we think about that? If there was or was not, how should we think about that continuing throughout the balance of the year?
Sure. So I'll jump in and then I'll turn it over to Ian. I don't think that there's any number we should be calling out because what we had before the construction was a sleepy casino that wasn't generating a lot of business. So this is more of growth CapEx that we're putting to work. We definitely have rooms out of order in the Encore tower, which have been impactful on our business.
But I think it's hard to quantify right now and 2020 is really the year to judge Wynn Macau and its earning ability. Ian, what are your thoughts on that?
There hasn't been significant noise disruption that was all dealt with in the early stages. We have anywhere from 80 to 100 rooms out at any given time in Encore, and we're getting them back progressively. There is the hoarding wall effect when you wall up areas to do work. That does affect the energy of the space. It has affected retail a little bit as we brought in new brands.
But in general terms, there's not a number to put to it and it's not significant. And we're looking forward to getting it complete at the end of the year.
Our next question comes from Thomas Allen with Morgan Stanley. Your line is open.
Hey, good afternoon. So in your prepared remarks, you talked about how you're taking a fresh look at how you're thinking about the casino business in Vegas. Can you guys just talk and Marilyn maybe talk about some of the changes you've made since coming back? Thank you.
So the key has really been to take a look at our casino block and to grow that and to invite the folks who come to town who didn't use to stay with us to experience the hotel and our food and beverage offerings. And it's been well received. So we've seen very nice growth in the casino block as it relates to the past.
And then I think you removed the parking fees. Can just talk a little bit about that decision?
When you think about the parking fees, although if you came here and you'd spent $50 you had a validation, it was frankly an irritant to those folks who would drive into the parking garage. And frankly, most people who come here do spend more than $50 but why upset them and so we did that. It also helps us with our high end local customers. It's been so well received. We're very pleased that we've moved forward on it.
Helpful. And then just quickly on Boston, I mean, we're a month and a half out. How are things progressing in terms of getting the staffing in line and then infrastructure around the property? Thank you.
The construction is almost essentially complete. The building looks like it is in great shape. Staffing, we have 90% of the people either onboard or within offer. So we are in line to and on time to complete almost everything we need to have a great opening. I don't know if the opening date will be June 23rd or a week or 2 later because we are going to make sure that it's flawless.
And clearly, the regulatory complexity we have been through has been a challenge. And so we're now doubling back and the team we have on the ground there is terrific. We are ready to open. We may give ourselves another week, we may not, but the property looks great.
Looking forward to seeing it. Thanks.
Our next question comes from Harry Curtis with Instinet. Your line is open.
Hi and good afternoon. While we're on the topic of Boston, now is probably a good time to begin to set expectations for the ramp in Boston, particularly margins given that most Wynn properties when they open tend to run kind of rich in high service levels and labor. So if you could take the opportunity to set some expectations on that front?
Hey, Harry, it's Greg. Thanks for that. Yes, I think it's a fair assessment to say that not only do our properties tend to run very high service levels early on and account for some given level of attrition, But regional properties, as you know, tend to ramp much more slowly from a marketing perspective. So we haven't given any specific numbers or any specific margin expectations yet. But certainly, we would expect that property to ramp up over the course of 2019 and all the way through 2020.
Very good. And second question is just going back to the Crystal Pavilion. What details can you share about timing, cost and features that you are excited about?
So we are working on that now, Harry. We are going to have a reveal of the Crystal Pavilion in a pretty public way. I'm not sure if it will be through an Analyst Day or something else down the road. We are finalizing a lot of the different features, I think, that you are going to find them very interesting. It will be in the next couple of months that we will be laying out this program.
Okay. And then my last question, it's really going back to your commentary about some customers in Macau, just trying some of these smaller newer Asian casinos. To what degree do you think some of those customers are just gravitating there because the regulatory environment in Macau has just gotten a lot tighter?
I don't think that's the case at all. I think when new people will say that because they are marketing their properties in these jurisdictions. But the fact is oftentimes when places open, they offer bigger commissions, more liquidity, larger credit lines and that's typically very temporary.
Very good. Thank you.
Our next question is from Stephen Grambling with Goldman Sachs. Your line is open.
Thanks. Good afternoon. With the Boston property essentially complete in terms of the investment, can you just remind us how you think through CapEx, not only for that property, but more broadly? And as cash flow inflects, how you stack your priorities across debt versus redeploying cash back to shareholders versus growth investments? Sure, Stephen.
Well, subsequent to the opening of Boston, we will have some trailing CapEx, right, as we pay out the remaining construction costs. Those get accrued and then obviously paid throughout the remainder of 2019. And then we are working on the additional group and convention space out back in Las Vegas as well. That opens in early 2020. So really 2020 is the inflection point that you talk about.
It's rapidly approaching, as you note, and capital return is absolutely top of mind for us. The recurring dividend is really the stone of our capital return policy. And I think you saw we raised that 33% today, really as an indicator of our belief in our business and our belief in that cash flow inflection point. As we grow and generate additional free cash flow, we'll carefully prioritize that between immediately available growth opportunities, most notably the Crystal Pavilion, capital return and then the maintenance of some dry powder for future opportunities, whether Japan or otherwise. And then of course, with respect to share repurchases, we will always be opportunistic with share repurchases, but that's really valuation dependent on the stock.
Great. Thanks so much.
Next question comes from Anil Daswani with Citigroup. Your line is open.
Thanks for taking my question. The first question is with regards to this base mass business and the strength that we're seeing in the base mass business. How much is that eating into your room inventory at the different properties in terms of the comp ratio at both Palace and Macau is my first question. Ian, do you want to take that? I mean, we haven't lowered our threshold for ADT in order to get a comp room in Macau.
So I'm not sure what eating into means exactly. You still have to qualify in a certain way. Clearly, we're not having as many junket rooms. So our problem, Aneel, as you know, is we don't have enough rooms. And we need more rooms at Wynn Palace.
And that's really at the weekends, we're out of space. And so more mass customers are getting rooms just as a direct reflection of direct and VIP being down. Ian, do you have any thoughts?
No, that's correct. We've been able to gainfully shift rooms from the junket allocations as businesses wane over to our mass segment. And ADT is on the way up. Putting better customers in those rooms. So the comp level ratios are similar to what they've been in the past, around 80% for Wynn Palace and 94% for Wynn Macau.
And my final question is, could you give us any update, Matt, on the progress in Osaka and in Japan? I mean, are you guys still as committed to that as you have been in the past? We are. We will actually be making a trip there next week. And so we have a team on the ground.
We have a team here in the United States that's focused on Japan. We're building quietly our relationships with potential partners over there and we are focused on various jurisdictions in Japan. So we are looking at this over the long term and we will be continuing to monitor the situation and participate where we see fit. Thanks for taking my questions. Thanks, Anil.
And our last question comes from David Katz with Jefferies. Your line is open.
Hi. Afternoon, everyone. I wanted to just go back to the M and A boundaries a little bit. And I heard what you said about leverage levels and accretion, but can you help us think about any other sort of strategic aspects of attributes that may be compelling to you, whether that's in different segments of the market, right, whether more value driven customers might help you branch out, a little more meat on those bones would be really helpful.
Well, I hate to lay out our strategy for everybody, David, but I'll tell you what we're not going to do. We're not going to go into the value business. We are high end operators. We're quality operators and we will be looking at quality assets around the world. We are not regional gaming operators.
So that's not an area where we're going to be branching out in a significant way given there will likely be lots of regional gaming properties for sale. So we're focused on where the growth is happening globally. We believe that Asia will continue to grow faster than the West. And if there are opportunities in those areas where we believe it fits with our profile and it will be accretive and it will be able to capture long term growth for our company and our shareholders, we will take a look at it. But we do not have anything right now that we're focused on.
Got it. Okay. That's it for me. Thank you.
Sure. Thanks, David. Thanks, David.
I'd now like to turn it back over to our host for final closing thoughts.
Well, thank you everyone for joining us today and we look forward to talking to you next quarter. Thank you, operator. Thanks.
Thank you. That concludes today's conference. Thank you for participating. You may now disconnect.