Good afternoon, welcome to the Wynn Resorts second quarter 2012 earnings call. Joining the call on behalf of the company today are Steve Wynn, Marc Schorr, John Strzemp, Matt Maddox, Maurice Wooden, COO of Wynn Las Vegas, Scott Peterson, CFO of Wynn Las Vegas, and on the phone, Linda Chen, COO of Wynn Macau, and Robert Gansmo, CFO of Wynn Macau. After the speakers' remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. I would now like to turn the call over to Mr. Maddox. Please go ahead, sir.
Thank you, everyone, for joining us today. Before we get started, just to remind everybody that we will be making forward-looking statements under the safe harbor of federal securities law, those statements may or may not come true. With that, I'm going to turn it over to Steve for the introduction.
Hello, good afternoon, everybody. Appreciate Linda staying up so late in Macau. I think we have everybody here to answer questions. I'll make a couple of summary remarks. First, Las Vegas. Last year, I mentioned before, we enjoy a great deal of very high-limit baccarat business, that high play tends to be volatile. In the long run, not so much, in the short run, it can be. For example, last year, during the first six months of the year, winners, that is to say, people who won money from the casino, were outnumbered by the losers. The losers were outnumbered by the winners. That is to say, the amount of money we paid to people who beat us compared to the amount of money of folks who lost money to us was a positive for the company of $150-odd million.
This year, the people who won money in the casino were much more, the people who lost money in the casino were less, the delta was $38 million. That is to say there was a $112 million difference in six months in the win of the casino associated with high-limit baccarat. Last year, we held 37% or something like that. This year, it's 17%. Normalized is about 26% for that game. When you normalize everything, the trend in baccarat, Matt will remind me. In 2010, high-limit baccarat won how much, Matt? $111 million. $111 million, if you normalize the whole percentage- $125 million. Pardon me? In 2010, if you normalize- 2010 was $125 million. Normalized. Normalized. Actual is $111 million. What was normalized last year? $145 million. This year, normalize it. $174 million. $174 million. We actually had more business.
All of that is academic in a matter of speaking, it does shed some light on understanding the kind of shifts that can take place short-term in businesses that have this kind of high-end gambling. In terms of the rest of the business, it's about flat or slightly up in Las Vegas in terms of non-casino revenue. If you normalize everything, we would have had a better result than we did. Last year, we had a premium result because we had abnormally high hold percentages. Our business levels this year in Las Vegas are slightly better than last year, except for a hold percentage. In Macau, for the first six months, business was flat. We were slightly ahead. The market has gotten more competitive. Two new hotels opened up in the second quarter, operated by the Sands.
Those two hotels added more games to the marketplace. Generally speaking, business was flat for the market, the high-limit business and the VIP junket business and the total casino win. We suffered on the top line an adjustment of a couple points on revenue, but we didn't seem to have the problem on the bottom line. As a matter of fact, the basic challenge in Macau, we have our share of the business, is to preserve margin, the bottom line. That is, of course, difficult when we have been able to hold the percentage we pay the junket operators to 40% plus 3% or so for complementaries, and our competitors are about 5 points ahead of us in terms of what they give the junket operators. Ordinarily, that's not an unusual thing. That happens all the time in competitive markets.
A hotel like Wynn, or before Wynn, Bellagio, was always facing the challenges of other properties who tried to buy the business away from us by increasing promotional allowances and other customer discounts of one form or another, or player benefits. We believe that we give away about as much money in terms of promoting our business, in terms of sharing revenue with junket operators or discounts, complementaries and stuff like that. We believe we give away as much as we can, consistent with good, solid business thinking, because we're really concentrating on keeping the bottom line. It's the reason why on almost any metric of return on investment and stuff like that, we still are very happy with our position in China. That doesn't lessen the fact that the challenge is continuous.
The market is constantly moving and changing, both in terms of the amount of volume that comes into town. It's been a rock and roll, rollicking several years, and that growth rate has slowed down as the base has gotten bigger. Because Asia is feeling, to a much lesser extent, the kind of uncertainty and economic stress that the rest of the world, Europe and the U.S., are experiencing. I'm hoping that we can be agile enough to adjust to those changes. For example, we're improving our high-limit slot business in China physically in the current period. One of the other, if I can just extend these comments for another moment. When you're in a competitive market like Macau, hotel B or hotel C increases the incentive to the junket operators to get more business from them.
They can do so by increasing the percentage of participation. They can also increase it by extending extra credit to them, using credit as a marketing technique. Now, we know from 40-odd years of experience that is a very dangerous path. Using credit as a marketing tool is a big mistake in gaming and has proven to be so over the decades, which is not to say you shouldn't give the right kind of people the right kind of credit, but you can't just try and buy business by extending credit. That ends up poorly. We are very conservative about credit. I've said that on these kinds of phone calls before. We were so conservative that when the economies of Europe and the U.S. and China were being questioned, we were very tight in our reserves.
It turns out that in the past six months and before, we've been too tight. Our collections have improved, I'm happy to say, beyond our expectations. We've made that adjustment this month in order to correct it and be a little less conservative than we have been. I think you can see those adjustments. It really does represent real earnings that we had, but for the first half of the year, were suppressed because of our conservatism, and we've restored that upon the advice of our auditors and based upon our own experience, primarily. One last comment. If the competitors increase promotional allowances to slot players and to VIP players, what can you do about that? Can you just sit there and lump it, watch your market share be eroded? Market share being eroded doesn't bother me so much as the bottom line being eroded.
That's quite something else. There is a counterpoint to all of this. The structure in Asia is that junket operators have sub-junket operators, and some of these sub-junket operators who feed and support the main junket operator are aggressive and resourceful and energetic people in their own right. They have aspirations and ambitions of their own. We take advantage of those aspirations and ambitions by offering key primary agents the opportunity to be the primary junket operator because that, in effect, increases their percentage of participation because they're not being part of a larger group. They are now the head junket guy. That's the counterpoint, and we're using that strategy successfully, I think. As a matter of fact, we're introducing, and we've built some new space, and we're introducing some new junket operators as we speak that will be obvious in the quarters ahead.
That's basically my comments on the existing situation and counterpoint strategies to deal with such a competitive market whose growth rate has seemingly slowed. We are underway in Cotai with a very ambitious and far-reaching project that will have the same effect on the market there that Bellagio did, for example, and Wynn did here. I want to remind everybody that it's okay not to be first sometimes. If you recall, I use a little history as an example. When Bellagio opened, everybody thought that Mirage was the number that could be topped. We won $600 million, $500 million, $600 million with a casino alone at Bellagio, which set a new record. When we opened Wynn in 2005, for the first time in Nevada history, a casino won over $700 million, which was a Nevada historical mark.
Last year, in 2011, we broke our own record and did $774 million in casino revenue. If you build the right product and you have a concomitant parallel organizational professionalism, you can take the market up, and we're hoping that our Cotai property will do that. Naturally, we have to wait till it's finished, and everybody's hard at work doing that. Our land concession, and we can proceed. One other thing, if I can change the subject, I'll cover my observations today and then open this up so that you can question my colleagues. We wanted very much to be first in the marketplace with the financing of Cotai, because there are, after all, going to be a couple of new hotels built in the next few years on the Macau Cotai Strip.
Thanks to Mr. Maddox and company, we had a terrific response, and we've basically done $2.3 billion in a revolver, and we're hoping to close in 10 days. Generally, the expectation is that our revolver and our term loan will be $2.3 billion, and the interest rate will be under 2%. We're very happy about that and expect that to be finished in the next couple of weeks now that we have the commitments. Unless anybody at the table has any general comments to offer, I'm sure there'll be specific questions. Linda, do you have anything that you want to add at this time about the overview on China?
No, I think you summed it up very well, that it's more important to preserve the margin. Really, the two issues, credit and promotional allowances. You said it exactly right. It's not about the market share and top line only.
Maurice Wooden is here. Both Ian and Marilyn are on vacation, as customary this time of year. The super competent people like Linda, who's really the COO there, and Maurice Wooden is here today. Maurice, you have anything to add to the general description of things?
No, I think the specific questions when they come in.
Okay, let's start with the questions, everybody.
Once again, to remind everyone, if you would like to ask a question, please press star one on your telephone keypad. Our first question comes from the line of Joseph Greff, J.P. Morgan.
Hi, everybody. Hi, Steve.
Hi, Joe.
Big picture question for you on Macau, perhaps one that you can chime in on. On the recent Macau gaming revenue deceleration, obviously, we've seen a number of mainland China economic measures like GDP growth slow, and that's certainly a reason for the recent market-wide performance. I guess my question is this: To what extent is the recent performance driven by non-economic factors, say, political ones, such as wealthy VIP patrons maybe visiting Macau less and waiting for the government changeover later in the year? Is that a factor? How big of one? What are your players or junkets telling you in this regard?
Nothing in regard to that, Joe. Unless Linda has something to say, I don't think we felt that kind of Linda, am I wrong, or would you take that?
You're correct, yeah. I definitely don't think any of the slowdown is caused by any of the political or other issue. Like you say, outside economic issue, I think some of it's intentional. The junkets are being responsible by controlling credit, and so are we. Part of the slowdown is actually, I think, very healthy, controlled growth. I don't know if you can really expect 20% growth year-to-year to be reasonable. Really, Macau is growing at 7%-8%, which is comparable to the China GDP growth.
Okay. Has there been a mix shift between direct and junket in the VIP segment in the second quarter?
No, I don't think there's as much of a change between direct and junket. There is actually a growth in the mass market, if you will, mass compared to VIP, because we do have more mass facility to open in the second quarter.
Okay, great. Matt, I have a couple of quick modeling questions. How much of the cash balance is in Macau?
Of the $1.9 billion, around $500 million is its parent, and $500 million or $600 million in Macau, and the rest at Wynn Las Vegas from the bond deal.
Got you. Then how much CapEx in the second half of this year related to the Cotai development?
In the second half of this year?
Yeah.
Well, it looks like we'll probably spend somewhere in the neighborhood of $150 million.
On foundations.
on foundations over the next nine months or so.
A lot of land remediation, as we mentioned last time, Joe. As we dry that property out and start to sink foundations.
In the second quarter, we spent $58 million in Cotai, $50 million of which was land related. We spent about $140 million total on Cotai so far. $112 million of that has been related to the land, another $27 million on the land remediation, there's probably a $150 million to go over the next nine to 12 months.
Great. That's it for me. Thank you.
Your next question comes from the line of Shaun Kelley, Bank of America.
Hi, good afternoon. Matt, just to follow up on two more housekeeping questions for you. We were kind of calculating something like $30 million-$35 million of EBITDA impact from kind of a hold swing to normalize it in Vegas. Any chance we could get you to comment on that? Sometimes I know you like to or not like to.
Yeah, well, I will this quarter because we only held 9% in the second quarter in baccarat, which is almost 18 or 19 points lower than it should have been. If you normalize everything, including the adjustments, this quarter would've come in around $116 million because of the baccarat. Baccarat, as Steve pointed out-
In April-
was 26
In April, for the first time in 45 years, I saw Go minus for a month. Never saw that before. On the other hand, last year I saw a 37% hold. If I was a customer, I might have asked for an investigation. Those are the kind of swings that can take place. I guess April this year was an answer to April last year, or June or July last year.
Where all we did was win. Actually, that makes me uncomfortable because I really don't like the customers to bump into such terrible bad luck. After all, this business is about amusement, self-indulgence on a very special level. Basically, the people that come here and do these things, they are here because they like that more than they like the money. They like the game. It's their hobby, so to speak. It's an indulgence. Like some people buy bottles of wine for $20,000. These are people that like to gamble, and what's best for them is to have the normal ups and downs and normal swings. They don't expect to win, but they like to get lucky once in a while and have fun with the house's money.
The last few months, it's been extreme in that regard, last year it was extreme in the other regard, in the first six months of the year. I really don't like it when we win too much money from the players. We get way ahead of the statistics. It has a stultifying effect on the psychology of our customers.
No, I appreciate that. I guess the second housekeeping one I had was just on the credit provision or the benefit that you guys had. Did that fall all in Macau, Matt? Or where did that show up? Did it hit the P&L?
No, it was two-thirds Macau, one-third Las Vegas. After the first quarter, we did a full hindsight analysis of all of our collection history since opening, and determined that we were over-reserved and needed to change our estimate. The good news is our collection trends have been quite strong.
Okay. That is benefiting the property level EBITDA numbers that we're seeing in the quarter?
Yes.
Okay. The big strategic question I had was, Steve, you hit on this in your prepared remarks some. Just the promotional activity as the gaming revenue growth has really flattened out here. I guess the question is, has that gotten really any worse quarter-on-quarter? Have you seen both with the opening of Cotai Central and then probably more importantly, what you saw in May and June when we really started to see gaming revenues decelerate in the market, did you see real significant increases or changes in behavior by some of the other operators, whether they're on Cotai or just around the market? Just how would you characterize that environment?
The answer in a word is yes. We did. When they opened the Cotai Central, you can imagine that the folks that operate those places had to develop strategies that would justify revenue for all of their places. They got more aggressive than usual, and I'm not criticizing them by any means. You asked the question, are we seeing more aggressive activity? The answer is positively yes. Does it affect us? Sure. Do we have to react? You bet. The choices that we have, there are choices that we have, but I don't think one of them is simply to increase the discounts or to increase the incentive payments to junket operators.
When we look at that number in a common sense and straightforward way, we cannot justify, by an expectation of increased revenue, any increase in the discounts or the promotional allowances of participation given to the junket operators. If we could share more money with the junket operators intelligently, we would do that because they are, in fact, an important part of our business. We go out to the red line, so to speak. If our competitors see that line somewhere else, all the more power to them. We are paying attention to the numbers, and we don't agree that we can go higher, and so we don't. Linda Chen spends all of her waking hours worrying about such things, and if she has something to add to this, I think she should.
No, I think, Steve, you said it. The difference also is not just the VIP business, Steve. Actually, price war has extended into the mass and the slot market. I think we always focus on how much junket commission that's given out, but they're actually giving out a lot more incentives now in slots and mass market to also buy that business.
To me, in this room, Linda's voice is muffled. I'd like to ask the person to ask me the question, could you understand her okay?
We could understand. We also get a little static, but we could understand.
I'd like to repeat what Linda said because I knew what she was going to say because of the numbers that we study. The aggressiveness of our competitors has spilled over into the slot machines, and they are being very aggressive in slot promotional allowances to the players. They've also built very beautiful rooms that are attractive and cleverly designed. Everything gets stepped up. Competition has made everybody sharpen their knives. It's healthy in the long run, challenging in the short run. We understand this. We've only been in competitive markets all of my 45 years, and most everybody in this room has been with me a long time. We understand this. We don't overreact. We wait till we see something real, and then we deal with it. Which maybe makes us a little slower sometimes, but we're not sleepy. We're just careful.
Next question. Was that answer okay with you, Shaun?
That was great. Thank you for your time.
Your next question comes from the line of Carlo Santarelli, Deutsche Bank.
Thank you. Steve, when you look out at China right now and you think about the big picture macro, and you think about the growth in this market over the last few years, how do you kind of reconcile the way you want to handle your balance sheet going forward in light of the backdrop and kind of the great unknown that is China right now? Thanks.
Well, Carlo, you know we've kept very respectful ratios of debt to equity as we've launched properties. Even on day one in Las Vegas when we built Wynn, it was $1.7 billion in debt and $1 billion in equity. Hardly a highly leveraged business. We haven't followed a model that many of our competitors. I remember when Sheldon Adelson did his deal, he held onto high interest rate notes for a long time in order to play the market just right, and he did it beautifully. I, on the other hand, temperamentally, didn't want to live with that kind of pressure. We increased our equity at the very beginning of the company's history and maintained those equity debt relationships that were conservative by any measure.
We have done that in China as well, as you know. I think that horses run true to form most of the time, unless it's a very wet track, and we're going to do the same thing going forward. We'll be mindful of having a lot of room, a lot of cushion in our equity on our balance sheet to handle the vicissitudes of a changing market. We came through this whole last 2008, 2009 thing. We opened up Encore at exactly the wrong time, right smack in December of 2008, into the jaws of this economic turmoil. Although it was painful in terms of return on investment, we didn't have any crises or any real heartburn about it.
We just sort of sucked it up, went straight ahead, took very good care of our properties, took very good care of our employees, and had the kind of reserves financially it would take to protect such things. I think we should do the same thing going forward. This is a world in which no one can predict tomorrow. With long term, this next quarter, you have to be ready for all kinds of things to happen, because most likely they will. I think China, incidentally, is more stable than any place else. Europe and the U.S. are tricky. I think that China represents, at least to our family, a more stable environment, even if things are a little edgy than any place else. They seem to have cool leadership, and they are term thinkers, so we'll behave accordingly.
Great, Steve. That's helpful. Thank you. Just really quickly, if I could, on Macau, it seems even if you kind of back out, obviously, the promo and the debt, you guys seem to do a pretty good job managing cost in Macau. Is there anything maybe Linda could expand upon as to what you're doing there to manage some of the other OpEx?
Well, I think. Is Robert Gansmo on the call?
Yes.
I am indeed, Steve.
Robert, what do you think about that question?
Well, as everyone knows, the primary costs revolve around payroll. We, like all the operators, have had salary increases on an annual basis, and we also keep up with the market to remain competitive in our salary offerings. However, we also try to offset that to some extent with operational efficiencies, try to make sure our processes are as smooth as they can be, and try to minimize the number of FTEs. Consequently, I think we've done a pretty good job. We're running about $1.3 million, just under, between $1.3 million-$1.4 million per day, before we take into account commissions or bad debt or anything like that. I expect that to continue, but there will be continuous cost pressures, primarily driven through the pressures on payroll.
Great. Thanks, Robert. That's helpful.
Your next question comes from the line of Steven Kent, Goldman Sachs.
Hi. I was just wondering about the new program for the sub-junkets, whether that would cannibalize some of the existing business with the main junkets in the sense that are the terms to those sub-junkets the same as that you offer to the main junkets? Is there a difference there?
Steve, when I said that our counterpoint to pressure from the big junket operators to increase their percentage is offset by the fact that some of their agents wish to be promoted to main junket status. That is to say, they want to go off on their own, sort of like internet companies do. We understand that ambition, that Chinese ambition, that entrepreneurial spirit, and we can take advantage of that entrepreneurial spirit by offering a junket arrangement, a primary junket arrangement, to someone who may have been a key sub-junket operator or agent for somebody else. We do that when we find our main junket operators spreading themselves very thinly. What they do in Macau is the main junket people will be in almost every hotel, because they have to be. The customers want to be serviced wherever their yen for luck takes them.
Someone walks from SJM across the street to Wynn, if the junket operator doesn't have a room in both places, some other junket operator will pick up the customer. The junket operators are forced to have outposts in each hotel. Well, couple that with their natural yen to grow and to be part of every new property, they get spread around. Sometimes they shortchange one location in favor of another, or at least it appears that way to us, if it does. Then we say, "Well, you don't need the tables that we've given you. We're going to remove those tables and either put them into a more if they're unused, we'll put them back in a general casino where the margin's good.
We'll create another junket room and give it to someone who's up and coming, who's very aggressive." Very often, that may be someone who was a sub-junket operator for someone else. Now, instead of getting a piece of the pie that they used to get from the main junket operator, they get the pie itself. That, in effect, is an increase in their participation without it coming out of our hide. Steve, am I clarifying that?
Yeah. That's actually very helpful.
The cost is the same to us, regardless of sub or.
We just eliminate one of the middlemen. Now, we don't do that in an adversarial or menacing way. It's just a normal course of human ambition that Listen, they exploit competition among the hotels by saying, "I got a better deal at MGM than I did from you," or, "A better deal from Venetian than we got from you. Why can't you give us as good a participation? Why can't you give us 48% if they do?" We say, "We can't afford to give you 48%." "Well, I just got to take my customers because I give so much money back to the customers," says the junket operator. "I'm hamstrung, Mr. Wynn. I can't help myself." They say to Linda, "We got to go next door." Linda says, "Well, I'm sorry you've got to go.
We've had a good relationship, but if you're going to go next door, and you've got 18 or 24 tables, maybe you don't need these other six. We'll take them back." That's the price they pay by hijacking business from us to someone else. Hijacking is a pejorative term. That's the price they pay for spreading themselves around. Again, I say that's normal and admirable and understandable, and we have no hard feelings about it, but we can react to it. Our reaction is to say, "Okay, we'll take back the tables. You don't need 24, we'll give you 12." Well, all of a sudden, that's 12 tables available for allocation to a new junket operator who's very happy to accept 43 because he was only getting a percentage of the money that the other guy was getting. Now he's getting the 43.
he's happy as a clam, he gets his own room, or we put it back into the general casino where the margin is good, but maybe the volume isn't as high. That's a counterpoint to all this, and that's both sides. The junket operator as the salesperson, so to speak, and the casino as the home base. Those are the two sources or the two dynamics that both sides exploit. I'm sure it'll continue in good faith and with warm and fuzzy relationships all around.
Steve, if I could just shift to another question, which is, given the very compelling loan characteristics you just laid out, which are incredibly favorable, and also given the incredibly strong existing cash flow, the financing for Cotai now seems very secure, and you'll have excess cash. Can you tell us a little bit about how the board is thinking about special dividends, annual dividends, and share buybacks, and how they balance those three opportunities to return cash given the financing relationships, financing that you just locked in, which are so compelling?
I can't resolve that question in absolute terms. I can tell you that that is the order of business before the board when we get together. It comes up at this time. The board was naturally waiting to see how the financing would go. Matt has been very busy for the past few months. When my colleagues and I get together, that will be one of the things we do discuss, Steve. I can't speak for the board today because I'm not authorized to do so. You, I think, if you change seats with me, you could make an argument for several different approaches to our very favorable posture. We're going to measure all that and toss it around. We've got probably the fanciest board in gaming. Think about it. Al Shoemaker was chairman of First Boston.
Russell Goldsmith was chairman of City National Bank. Ray Irani is chairman of Occidental Petroleum. Governor Miller, as you know, was 10 years governor of Nevada and chairman of the National Governors Association. Man who directed fiscal policy for the state of Nevada successfully for 10 years, and also the guy who started the investigation of our former shareholder. Boon Wayson. Boon Wayson is on our board, was on the MGM board after the merger of Mirage and MGM. Boon ran Wynn, the Golden Nugget Atlantic City, when he was 28 years old, after being in charge of CAGR Credit. That's how experienced he is, and he's 60 now. There's an awful lot of experience on my board. For example, Allan Zeman runs an enterprise that spans all of China, Shenzhen, Hong Kong, Guangzhou. He's in four or five different provinces, not to mention running Ocean Park.
We've got a lot of perspective on the board. John Moran from Dyson-Kissner-Moran, the original leveraged buyout company. We got a lot of experience, and this conversation is really juicy. Not to mention Elaine and Linda and Marc. Everybody gets into this very intensely. What about the board in China? The Chinese board. Bruce Rockowitz is the President of Li & Fung, the largest sourcing company in the world with offices in 275 cities, and one of Barron's magazine's 30 best CEOs in the world. Nick Smith was head of Hongkong Land, the Jardine Matheson subsidiary of the great English trading company that's so much a part of the history of Hong Kong. Jeffrey Lam was a legislator. We've got a lot of firepower on the board.
This is going to be a subject, now that we know about the financing, this is going to be a very interesting subject. We're going to take into account the economy in China, the economy in Las Vegas. Much depends upon the upcoming election in America. No news to anybody. We're going to measure everything.
Your next question comes from the line of Felicia Hendrix, Barclays Capital.
Hi, good afternoon. Steve, I was wondering if we could talk about Wynn Cotai for a moment. Can you just walk us through the permitting that you still need there? When do you expect to get your construction permit, and what has to happen prior to that, if that? Thanks.
Oh, you mean the permitting process. It goes in stages as you build in China. First is the foundation permit, which is currently under consideration. As we polish up the presentation, I guess, went in already. That'll be forthcoming. We'll be driving pilings and digging and excavating with augers, the great caissons of the high rise this fall. Once we get out of the ground, that'll take probably the better part of a year, this from now, then it goes very fast because it's just another poured- in- place building. It's pretty quick. The building permits are issued in stages as you submit final working drawings, specific construction documents that have very detailed stuff on them. That's scheduled, along with the rest of our construction schedule, to go along in stages and phases that match the moment. It results in about a 46-month schedule.
I can't tell you the date that you get a permit for one part of the project or another, but I can tell you this, that once you get to where we have been in the spring, then everything after that is pretty automatic. It's a technical schedule. I'm sorry that I can't answer the question month by month, but the reason I can't answer it is because it's not important at this level of the company. It's handled. We've been through it before. It proceeds in a very orderly, predictable way.
Okay, great. That's helpful. As you think about the continued potential for Wynn Macau, just wondering if you could share with us some of the plans you might have to continue to drive incremental revenues there. I know you're always tweaking things, do you have any specific plans to reconfigure public spaces, tweak the mix of your gaming floor?
Good question. I'll give you an example of how delicious it gets over there. We have 52,000 feet of retail that's going to push $1 billion in sales before we're done this year, $900 odd million. Our profit on that may be $170 million or $180 million. For a shopping center with 52,000 feet, think of what I just said. That the rental income is that high and the profit margin on the rental income is 70%. Have you been to the property, ma'am?
Yes.
Well, you know the Esplanade Cafe is right there in the lobby by the elevators.
Yep.
As a 24-hour restaurant, it's a little bigger than we need. Half of it is the buffet and the windows and the tables along the pool. The front half is a square that's 2,000 feet. The entrance is in the middle, between the front half and the back half. We decided that we didn't need the front half, that we could handle the business with the back half. I went to a couple of our famous retailers, and for the moment, I'm not going to mention a name, but I said to them, two of them in particular, we had a little tennis match going. I said, "Look, we think that the 2,000 feet is going to do $40 million." I want 15% or $6 million for the space. Would you take it or leave it? There was some dickering and some jockeying and offers and counteroffers.
At the end of the day, one of the two major international retailers paid us $6 million fixed for 2,000 feet, $1.5 million a quarter, $500,000 a month, fixed rent, guaranteed for 2,000 feet. Those are the kind of options that you get. That's being done this summer and fall, and they'll be open, I hope, by Christmas or something like that, maybe a little later. We built a new junket room that's going to be open for Christmas. Another retail space, a small one for jewelry at the entrance to the casino.
Graff.
Oh, yeah. We opened up late in the last quarter. We moved Tiffany across the hall to where Fendi used to be because they were underperforming. Tiffany paid to move themselves, Louis Vuitton, that was doing $100 million in 28 square feet or more, has now got another 2,000 sqaure feet since April 1st, where Tiffany used to be, and their store has become almost twice as big, and the sales are booming at Louis Vuitton in spite of the economy in China. That will show up in the next few quarters as incremental income to us. Graff, the jeweler, opened up last week or two weeks ago.
Host area.
Our host area was by the Wynn Club. I saw Laurence Graff last week in Europe, and he was thrilled with his story. He told me, I saw him at lunch, he said, "I've never seen anything like it, and we've only been open a week." We tweak the space, and the game that's really adorable is the one with the retail. That is nothing but fun. In Cotai, we're going to have 120,000 feet, not 52. I think we're going to get up to about 58,000 feet this year in retail. We're going to increase by 10%. Sales are really rocking there, and so is our rent because in all of our new leases, we get 15%, which is terrific for us. Those are the kind of tweaks, and we take tables away from junket operators and give them to new junket operators.
We take tables, add them to slots, or take them away from general casino and vice versa to try and maximize our income. It's the kind of thing that the team over there does on a monthly basis.
That's really helpful. I appreciate that. Just a final question on the gaming side at Wynn Macau. On the direct VIP side of your business, I know you commented earlier about the junket side, but on the direct VIP side of the business, are you seeing any change in creditworthiness or liquidity from your direct customers at all?
Linda?
I don't see any change in terms of creditworthiness, but the collection, I have to say, it's a bit slower than before. That could also be caused by the, obviously, slowed down economy. The other part is we are more cautious. We're definitely more conservative on issuing credit on the direct program side.
There's no credit if you don't collect. You've got to pay the 39% tax anyway.
That's right.
Make you conservative. If you've got your head screwed on right, and you've got to pay a 39% tax, you better make sure you know what you're doing credit, because it's very painful if someone jumps the fence.
Okay. Thank you so much.
Sure.
Your next question comes from the line of Robin Farley, UBS.
Thanks. I have a question on the provision for doubtful accounts and then one on table mix. On the provision for doubtful accounts, I know the credit is $17 million, but can you give a sense of what the full delta would be? In other words, that's normally an expense, so the full amount would be more than just the $17 million? If you hadn't gone back and revisited your reserve levels.
Sure. I understand the question. The charge under the old methodology would have been $14 million, the delta is $31 million, and that's split two-thirds Macau and one-third in Las Vegas. The $14 million is really not a number that you should focus on, though, because what you found in the first quarter in Macau, we had an $8 million incremental charge that reversed itself right away in April. We were fully reserved in Macau at 150 days, and we found that that was just overly conservative. That got extended out to about a year, which is what caused the change. While Linda said collections have slowed a little bit, compared to the way we were reserving, collections are still very, very good.
To put it another way, Robin, we always thought that in China, that after 150 days, if we didn't get the money, it might be gone. It turns out it shows up anyway. Much more of it shows up than we thought later. They slowed down, but they didn't get bad.
That's right.
In Las Vegas, we used to say, after a year, we're going to be 100% reserved if someone doesn't pay us in 12 months. Now we see money showing up so that we've extended that by several months.
To 18 months.
To 18.
What triggered you to revisit your reserve policies and reserve levels this quarter versus given that you've gotten more cautious about extending credit?
Every quarter, we talk about how conservative we are, our auditors and ourselves, after the first quarter charge of $8 million in Macau, which reversed itself after a week Determined that we need to do a full hindsight analysis of everything we've collected relative to everything that we've issued. When that analysis came back, we had the information in our hand that made us change our reserve policy.
Robin, one of the things that made us be so tight-fisted was that all during these last two years, there have been rapid expansions of junket and new hotel rooms and new junket rooms in the market. At the same time, as the new hotels open, I'm talking about Galaxy, the Sands various operations, the expansions of their operations at the Four Seasons, the introduction a few years ago of City of Dreams. Everybody got very, very aggressive. They were using credit as a tool. We said, "Oops, this could be very bad." The amount of outstanding credit in the marketplace ballooned. Ballooned. We looked at that more than we did at our own books Linda said, "Steve" I'm there once a month, she said, "Steve, I'm a little concerned about this." We were playing the other guy's hand, really.
The amount of money that these other guys are giving out is so big. These are our junket operators as well as theirs. They're the same guys that go from hotel to hotel, the junket operators. The amount of outstanding paper that some of the big junket operators have is staggering. I remember Marc Schorr looked at the books of one of the companies one day, who shared the numbers with him, and how much did he have outstanding in those days?
$250 million.
Yeah. One guy had a quarter of a billion U.S. outstanding. Well, that sort of gave us the willies. So we started tightening up, not based so much on our own experience, but on an expectation that this could turn sour. Well, it didn't. This hindsight analysis that Matt Maddox just mentioned has revealed that our worst fears were not realized, and therefore, we could resort to a more relaxed approach. When I say more relaxed, less conservative than the extremes that we had gone to defensively in the past.
Robin, just as a quick example, at the end of 2011, on a gross basis, our bad debt reserve was 42% of our accounts receivable. At the end of June, after this adjustment, our bad debt reserve was 44% of our accounts receivable. So even after we made this adjustment, our reserve is still higher relative to our receivables than it was at the end of 2011.
I wonder how that compares to our neighbors. Do you have any idea?
That's helpful, those reserve percentages. Thanks. The other question I had was just looking at your mix of VIP and mass tables in Macau, because some of the wording in the release seems to suggest that some of the decline in mass table drop was due to fewer mass tables. I guess I'm just curious what your thoughts are about shifting some back to mass.
Yes. Robin, that was a very clever observation. You have perceived something that we share with you, we are going to do exactly what you said.
Oh, great. That was easy. Thank you. That's all my questions.
Your next question comes from the line of John Oh, CLSA.
Hi, I have a few questions. I'll start with the comment that Linda made earlier about some of the weakness or some pockets of weakness we've seen in the collection. Are there any distinct, or I would say anecdotes, Linda, that you could share with us if it's coming from a certain segment of your direct VIP play on the very high end or the mid or on the low end, or any specific geographies in China where you are seeing a bit more difficulties in collection?
She didn't say that.
Okay. Yeah, I didn't exactly. I was just going to say, I didn't say that. Actually, I said collection is a bit slower, the reason that we can reverse some of our reserves, we're still collecting. The first, obviously, I guess, trick in collection is giving good credit. When we are conservative in giving credit, we know that it's credit that's worthy that we give out that eventually we'll collect. The reason sometimes the collection becomes slower, there are many reasons. One is obviously the business, slowdown in economy. Second is because many casino, more junkets are competing for the business. When you have one player who's playing maybe instead of one or two casinos, they're playing five or six casinos, then it takes a bit longer for them to turn around their receivables. At the end of the day, they're not doubtful.
They're not bad credit. We're still collecting them, even though instead of taking one month, it might take us two months.
To put it another way, the reason they're a little slower is because they can be. What's our defense?
Sure.
As long as they pay us, it's pretty hard to turn them down. The guy says, "Well, I didn't pay you in 30 days. I paid you in 60. I paid you in 75. I paid you. I'm back again. I want to play." You say, "Well, you used to pay us in 45 days. You took twice as long this time." "I'm sorry, but I've never not paid. Can I have my credit or can't I?" That's how it comes down. When you take a look at his history, you say, "Okay, go. Please try and pay quicker." He says, "I will." Then he doesn't. If you want to be in our business, you want an anecdotal information, you want to stand in our shoes, that's what happens, just like I told you.
Okay, thank you. Just to follow up, just to try and understand the advanced commissions that you provide to the junket operators on your property. Matt, could you share with us some color as to what's the average number of months outstanding right now, and perhaps any trends that you've seen? Is that number increasing given the competition of new supply?
Sure. We settle by the fifth day on the following of every month.
Yeah. You asked a question about how many months.
Yeah.
None. Unlike our competitors, we're out at the end of the month, by five days later. We have held that line to our It's caused some stress. What we do is we advance the guys during the month. Usually, we used to give them as much as we owed them. We settle with them in terms of what they receive at the end of the month, at the first week of the following month. They settle with the credit at the same time. Well, we started a few years ago saying, "Okay, halfway through the month, we'll give you what your expectation is for the rest of the month." That sort of thing. We're zeroing out.
That's right. You don't get 30 days from that mid-month advance. At the end of every month, it's closed out anyway.
Yeah, it's 15-day credit on the 15th of the month.
We don't have a rolling program.
Yeah, we don't use a rolling program. I'm really glad you asked that question. That's one of the main deltas between us and the other guys. That is still a conservative bias at Wynn Macau. Our exposure is limited.
We have reached the allocated time for questions and answers. I'd now like to turn the conference back over to management for closing remarks.
Anybody in the room have anything they'd like to add to what they've heard today or expand? I invite everybody to speak up. Scott, Maurice, Robert Gansmo, or Linda, Mark, Matt. Well then, thank you everybody. We'll talk to you again next time. Bye.
Thank you for your participation on today's call. You may now disconnect.