Wynn Resorts, Limited (WYNN) Q2 2007 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Wynn Resorts Limited, Second Quarter Conference Call. Joining the call on behalf of the company today are Steve Wynn, Ron Kramer, Marc Schorr, John Strzemp, CFO of Wynn Resorts, Andrew Pascal, President of Wynn Las Vegas, David Sisk, CFO of Wynn Las Vegas and on the phone Ian Coughlan, President of Wynn Macau and Scott Peterson, CFO of Wynn Macau. All lines have been placed on mute to prevent any background noise. Following the speaker's remark there will be a question and answer session. (Operator Instructions) Now, I would like to turn the call over to Mr. Kramer, please go ahead sir.

Thank you Libo and good afternoon everyone. Before we begin, I need to remind you that today's conference call contains forward-looking statements that we are making under the Safe Harbor Provision of Federal Securities Laws. I would also like to caution you that the Company's actual results could differ materially from the anticipated results in these forward-looking statements. Please see today's press release under the caption forward-looking statements for the discussions of risks that may affect our results. In addition we might discuss adjusted property EBITDA, which is a non-GAAP measure. A reconciliation of those measures for the most comparable GAAP measure is included in the press release. We are broadcasting this conference call live on www.wynnresorts.com where you can also find the earnings release, which we circulated earlier today. We're going to keep our prepared remarks to a minimum. Let me start by saying that we're incredibly proud of the achievements this quarter. The second quarter of 2007 was a record quarter for both Wynn Las Vegas and Wynn Macau. We've generated over $1 million in EBITDA per day in each of our properties, which we believe exceeds all expectations and highlights the strength of the Wynn Brand. In Las Vegas we generated EBITDA of about $115.2 million, a 57.6% improvement over the second quarter of 2006, as every segment including gaming, hotel, food and beverage, retail and others outperformed last years results. In Macau, we continue to experience strong sequential growth. EBITDA in the second quarter was $92.7 million, 17% above the first quarter and 58% higher than the fourth quarter of last year. We believe that our product and service are the best in each of the markets where we operate and that our numbers reflect that. And with that we're going to open it up for your questions.

(Operator Instructions) Our first question comes from the line of Celeste Brown with Morgan Stanley. Celeste your line is open.

Hi guys good afternoon, can you hear me?

Yes.

Alright. The results that Wynn Vegas which I guess we all forget about sometimes because we're so focused on Macau, are just absolutely extra-ordinary, because in terms of volumes and the EBITDA produced. Is the $115 level something that's sustainable from hereon in, is that something we should think about is a run rate for that property particularly given this was a seasonally weak quarter?

Look as you know we never give guidance and we've always said that we worry about growing the top line of our business and that overtime that the brand Macau can create increasing levels of profitability. We had a high whole percentage in this quarter, which contributed to those results and we continue to believe that our ability to grow the business and to extend the value of the brand is ongoing.

In terms of your whole there is only couple of hundred, 20 or 30 basis points above your normal range. How much do you think the higher whole contributed to the bottom line for that property?

Approximate $7 million.

Yeah, approximately $7 million and just also want to point out to you that this is the third quarter where we have been able to achieve over a $100 million in EBITDA.

Thank you and how much was higher whole that Wynn Macau, how much did that contribute?

Approximately, $8 million to $9 million for the quarter.

Okay. Thank you so much.

Sure.

Your next question comes from the line of Steven Kent with Goldman Sachs. Steve your line is open.

Hi Steve.

Hey Ron, hey could you just talk a little bit about any impact at all from the visa restrictions. Certainly the numbers don’t seem to be showing it in Macau, even though [mass] market was roughly flat with the previous quarter, just not seeing any slowdown in it. At least a few months ago it sounds like you were more concerned about that. Could you just address that?

Well look, we continue to be concerned about it, it's too early to really say what the impact is going to be. What's clear is that we had very little impact in the current quarter. The real story I am looking at, what's going to happen is these restrictions take hold, as again increasing capacities come on in the end of August, and then later in the year. So, we still are looking at the outlook in the market, but clearly there has been no immediate impact from those restrictions.

And also, I noticed that you changed sort of the mix of the expansion a little bit in Macau. Is that based on anything you are seeing in the market or anticipating?

Well, I think the premise in, where we were last time, was that the expansion that we were going to look at, to add additional retail space, to reconfigure the mix of both VIP and Mass, we’ve clearly landed on what we believed to be the right formula going forward. We’ll open up an additional 20,000 square feet in the third quarter, and then the ability to master plan the entire project and now we will be able to say that we will land 380 tables and 1,200 slots by Chinese New Year. So we still are looking at the increase in capacity. We still see that there is things going on competitively in the market, but we have a very clear plan about how we plan to position ourselves, relative to our competition.

Okay Ron. Thank you.

Your next question comes from line of Joe Greff with Bear Sterns. Joe, your line is open.

Good afternoon, everyone, nice results. Ron, can you just help clarify or quantify the second phase in the third quarter, the additional table games and slot machines. Is that consistent with the press release from June?

Yeah. Just to put it in perspective, we think that we will be adding in the third quarter, seven VIP tables and approximately 25 main floor tables and an additional 220 slot machines.

Okay, that's helpful. And then with the Wynn Diamond Suites expansion, am I right in assuming that there is going to be additional gaming space beyond VIP there?

We're still in the design of the Diamond Suites, obviously, we spent a lot of time over the last quarter, getting to the point where we are now comfortable to put out those broad project budgets of $550 million to $600 million in a timeline of opening in early 2010.

Okay. And then one final question, I know you referenced Cotai in the press release, is there anything else you want to talk there in terms of timing, I think, I know the answer there though?

We still, obviously, we have committed to both Encore and to the further expansion of Wynn Macau, we have the 52 acres of land, we are moving forward and as our plans become more concrete, we'll be able to give you more detail. The one other comment I want to make related to Macau is just as well as the property has been doing in this quarter, remember that we are still carrying 500 dealers and all the expenses for that planned expansion. So that probably impacted us to the $2 million, $3 million to $4 million something expenses in the quarter.

Great, excellent. Thanks.

Your next question comes from the line of David Katz with CIBC World Markets. David your line is open.

Hi, good afternoon.

Hi.

Congrats on your quarter.

Thanks.

You're welcome. A couple of questions, firstly in Las Vegas, the margin expansion obviously is exceeded most expectations, anything you've done on the cost side there in terms of cost cutting to drive that kind of margin expansion or are we to understand that that was all kind of volume driven and then I have one follow-up?

Yeah, I think, as we've talked about previously it's always been about growing the top line and that this has never been about trying to target margins and trying to take costs out to make the business more profitable, that part of the investment in the brand is being able to deliver a level of customer service that clearly is resonated with the higher spending clientele and the results in the volumes is being quite substantial.

Right. And then just one question on Macau, the announcements here about the expansion and I guess, and just looking at the press release that came out in June relative to this one to follow-up, I guess, Joe's question what change, what have we learned if and some of your earlier comments with respect to the -- these are restrictions we have yet to sort of see impact or learn about what the impact will be. I thought there was some commentary back in June about competition coming on. What change and what have we learned since then that gives us this confidence?

Steve Wynn answering this question. We didn't actually learn anything, I may have inadvertently due to sloppy communication given a wrong impression in the last quarter about our delay. Some people thought that we have stopped, quite the contrary, we were scheduled to open the full stretch of the expansion on the 5th or 10th of September in the next few weeks. And when I was there the last season, I am one of my trips I decided that there wasn't enough balance and the final configuration of the Diamond Casino, and I thought that we needed more retail, some additional food and beverage capacity and some more meeting rooms stuff upstairs and some other things that we had learned would be more responsive to the type of trade that we've attracted there, which can pretty much be described as the top-end. And that meant that I had to hold opening the rest of the space until later in this season in order to make those adjustments. And I made that point that we were delaying the full opening from September forward and it's now going to be January, because I want to make those changes to balance the facility much in the way the current facility is balanced. And it meant a few less tables but more powerfully positioned tables and the creation of new VIP rooms. And some other things of that sort and more retail, some very fancy retailers. We had such a wonderful response with our very exclusive top-end retail, that more of the top-end retail people wanted to come in and that sort of niche that we have established. At the same time, I talked about the rather breathtaking amount of capacity that was about to hit the market. And when those two things were said at the same breath, I made it sound like we were backing off, when hardly, when exactly the opposite was the case. So, allow me to correct that impression. We are not backing off at all. As a matter of fact we are pressing ahead, and we've come a great deal of the way down the road to completing our thinking and our planning on Cotai as well. But as to Wynn Macau, the existing facility, we've finished the planning of the current casino and it is underway and will be finished in January. The only thing that won't be opened for Chinese New Year will be the space directly under the Diamond Suites villas and Diamond Suites suites. And there are over 400 of the villas and suites, there are no typical rooms in that building, they are all exclusive and luxurious. And there are two VIP casinos there, two very luxurious junket rooms that have about 14 or 15 tables each. There are two new restaurants and some more retail underneath that tower and that won't be ready for quite sometime while we do the deep foundation work in landfill. But all the rest of the expansion that we have already built will be opened and fully operational with the staff that we have been carrying since last winter by Chinese New Year. We will open it in January, we are right on schedule, and there are no more questions about that that we are answering. We are setting sale with that program against all competition in the market and we are feeling very good about it.

Thank you for that. And if I could just ask one more quick one. With respect to Macau and whole percentage, I would say one of the challenges we have in forecasting is getting our table whole percentage dialed in just right. What have we I guess learned in a short time that Macau is opened about table whole percentage and do we have the right normal range out there or should there be some adjustment to that normal?

Repeating your observation that you are having a hard time getting a handle on that, welcome to the club.

Yeah, 2.7 to 3 is what we continue to put out as our range and we continue to exceed our range.

Look.

I am not with it.

I would only add one think to this discussion of whole percentage. To the investment community that's joined our call and our competitors as well, something that's been known to all of us for quite sometime. The house advantage in a given mathematical sense on a hand of baccarat, or a passing dice is well understood. But what determines the growth revenue of a casino is the length of play. And casinos that appeal in a special way to customers, and make them sit for a longer period of time, enjoy a different range of response than those that do not. Similarly, and that's true of black jack or craps or roulette, it is also true that casinos that cater to high-end Baccarat players, who tend to have much longer playing periods and bigger bank roles, have a higher range of response in terms of casino potential revenue than those that do not. And that's why the Golden Nugget when we operated it, didn’t hold as much money as the Mirage or the Wynn Las Vegas, it would be different than a place like the Sahara. So when you talk about Macau you are on exactly the same position again. The General Casino was one thing, and the VIP rooms were another, they differ structurally in the way we pay the junket operators and the promotional allowances we dispense to customers and credit and all the rest and people in the General Casino play for a shorter period of time. And so whole percentage is a murky subject at best, and it has to be considered in the total context of the resort and the clientele the resort enjoys. And I think that as you evaluate all of us in this business that you are going to have to come your own conclusions about that and of course you can look at history. We don’t publish our whole percentages by the month. It's probably well passed the point of too much information for anybody to bother with. But you should certainly take note of the kinds of hotels that the various companies operate or the kinds of operations today a particular hotel represents. I am done with the answer,

Thank you very much.

Your next question comes from the line of Robin Farley with UBS. Robin your line is open.

Great, I have got three questions first one on Encore, it looks like the budget went up slightly since last time and you made a comment in the release about refining the final design, so I guess is that, should we interpret that as the potential for that budget to go up a little further? And then the other two are Macau questions, one is do you anticipate any changes to commission levels in the market after capacity in Cotai opens? And then, secondly in terms of your comments just a moment ago on whole percentage are there others in the market saying they are comfortable with VIP win levels instead of being 2.7% to 3%, are little higher or I guess at 3% and based on the commentary you just made about the kind of the more upscale the property, the more the propriety offers, more likely the whole percentages to be higher, I am curious why you wouldn't have a whole percentage? Why you would have a whole percentage I guess below what others are saying as a normal hold?

Robin its Steve I don't know what others are saying, but I responded to the other question by saying that, it’s a moving thing and we are new in the market, not as Sands has the most experience. We are relative new comers we are just getting ready to finish our first year and I am learning along with my colleagues about Macau and sharing that information with all of you as quickly as we are able to discern any pattern. And we have no secrets, the comments I just made about the whole percentage are based upon my experience here in Las Vegas for the past 40 years. As far as the budget of Encore, Encore is done the apartment on the 41st floor this week.

And the increase is mostly rounding as we have finalized design so this is not the $100 million increase this was a $21 million increase which took us 2.15 though we've rounded. So there is a very small increase that's included in the Encore budget.

Encore will be open next year, its 2039 suites. The whole thing is all suites just like diamond. We won't be building regular rooms much any more in this company. Did I miss and answer to your question Robin?

The other question was just in Macau if you anticipate any changes to commission level in the market.

I remember now Robin we don't know what to anticipate. The enterprise that's about to be launched in a few weeks is the massive groundbreaking enterprise by our neighbors, good neighbors to the south and they have an enormous amount of VIP space, over twice as much as our self at the moment. And we would not lead any change in the market. We would only be forced perhaps to follow it but I'd really think that question would be better addressed to other companies that are in the market, we don't have any plan whatsoever to change our programs that we have. Our junket operators the three of them are very happy with us and have expressed that they are very happy and claim that their clientele find the hotel to be the hotel of choice of all the hotels that are in Macau at the moment and hopefully they'll continue to feel that way. Even though they may patronize another or newer hotel they'll still find us as a nice place to be and so we are not planning any changes.

Okay great. Thank you.

Your next question comes from the line of Will Lerner with Deutsche Bank. Will your line is open.

Yeah thanks a lot you guys. Two questions, one Steve can you just make remark of what Okada is saying about Japan if you are willing to share that with us now that we've seen some changes with the LDP, then I have got a Macau follow up.

I don’t feel qualified in giving any leadership to this subject at the present time. Sorry.

Okay. Well the follow up is just on the structure of your VIP business. I guess we seem now and obviously some of this has to do with whole this offer to be seen margins improve sequentially in Macau can you just talked about if not absolute numbers just directional help here on the percentage of your VIP business that's direct versus junket? And I would suspect that that's a big benefit from margin perspective.

Matt you are -- John Strzemp is going to answer the question.

In Macau approximately 75% of our VIP business comes from junket operators, approximately 20% to 25% is run in-house programs.

In house okay.

Basically [75.2]

Okay, can the in-house stuff that you just think about as typically slightly lower margin than mass market margins, its still structurally little different.

Well I think that's again under the category with a little bit more information than we need to share with everybody at this moment on a conference call.

Okay. Right let me ask you one more then if I can, just on the when you talked about the golf course development in a while and obviously there is a tremendous amount of supply in the Vegas pipeline, you guys have talked about maybe punching a hole in the ground there in 2010 or so. Given the infrastructure needs of Vegas and given the amount of supplies or premium proposed supply anyway, coming in 2011 and 2012 and so forth. Did that change your view on timing and scope?

No. Listen, we got a $2 billion hotel under construction next door, that's over 2,000 suites. Now based upon the information that you see available to you about the one that we are sitting in today, and how it performs, imagine if we hold or improve these levels, you don't need too many other hotels. Now, if we were operating with a different kind of company, we might need five or six of these puppies, but at our level one or two is enough. The property holds its value. The golf course, we are talking about our real estate, only gets worth more each day. And we have had a very exciting development in our neighborhood with the arrival of Mr. [Schuba] and his colleagues from the Plaza Hotel from Israel. They are going to be spending billions of dollars across the street, right next to the folks of the Boyd Gaming who are spending billions of dollars on Echelon Place. The whole high-end neighborhood of Las Vegas is about to take place, slightly north of Spring Mountain Road in Treasure Island. And then Caddy Corner is Barney's and Palazzo, in the middle of this little cross wire is our property. I am feeling wonderfully encouraged by the improvement in the neighborhood, I mean, we were across the street in a Frontier Hotel and I built that when I was 25 years old with some other guys and it was a mean looking place by the time it got closed, nobody really went there anymore and Phil Rothman did a fabulous deal by selling it to Isaac Schuba. And Isaac has got plans that he shared with us verbally because he stays here to look down on his property. We picked up our occupancy from the Schuba Group. And they have plans that are really quite dramatic, not to mentioned Donald Trump's, Condo Hotel, which is opening in a few months. And the second however underway, but there is a 1000 rooms and 3000 rooms of Palazzo that are very fancy not to mention Barney's and all those stores and all those restaurants that the folks at the Sands are opening. We don't have any walk-in business, this quarter that you are looking at is, where Island here, and a nice Island perhaps, but we are in Island and we are about to become the cross section of the Fancy's neighborhood on the Las Vegas trip. To take Echelon and the Palazzo developments, as an entry, coupled with the Palazzo and Encore and the Sands' rooms -- but looks are even going as far as the Flamengo just stay with the adjacent property. The Fancy's new hotels in the history of Las Vegas were all here. And I think that's a very notable migration of the center of gravity of our town in terms of quality at least to the North. And we are mighty proud of our neighbors and what they are doing, we can't wait for Mr. Adellson's Group to commence their operations later this year, hopefully because that will make it another big jump in our retail walk-in traffic. I don't when Barney's is going to be open, its right on the corner adjacent to us our store is Barney's which is wonderful, we are very excited about all that and so of course we are going to keep studying in and take advantage, the first thing we'll do on the Golf Course is build directly across in the Las Vegas Convention Center on the corner of Paradise Road and Desert Inn, that will be the first shot that we fired and we are working on that idea and the concept of that now. I hope that answers your question.

That's great. Thanks Steve.

Your next question comes from the line of Larry Haverty with Gamco. Larry, your line is open.

Yeah, two questions related about Macau. The first is, do you expect ever the non-gaming revenues to move up below the low level that they are currently at? And then the companion question is that the slot win was pretty impressive in the quarter, does this mean that the locals are changing their behavior to slots and does that affect your thought processes?

Larry, Macau is an evolutionary market and when you look at the history in Las Vegas and you look at how the market has grown as you develop non-gaming assets, the gaming market improved. In Macau, you are starting with a run rate market that's already beyond Las Vegas. The infrastructure to the market is still the story about what's going to happen in the years to come, the road, the bridges, the rails, increased air transportation. So, the visitation to the market will only go up over the next few years, and as a result of that, the gaming revenue will grow, but the non-gaming revenue will grow to get to the mix of where Las Vegas is currently operating, looking at us it approximately 45%, gaming, 55%, non-gaming is going to happen in Macau over a much shorter period time.

I think I would like to add little something to that. It's in a different tag, think of Las Vegas versus Atlantic City for a moment. Atlantic City have a lot of day trippers, a lot of repeat visitations, multiple visits. If there are 35 million people out just and then the number it's probably a 1 million people 35 times. In Las Vegas of the 35 million people, it may be 17 million people twice a year. Okay, those are of course exaggerations. But my point is obvious, that when people go on vacation as they do here, then their shopping and they are taking longer trips and the non-casino options are very important to them. In Atlantic City which is now become something of mature market, we see a trend or a profile that's much closer to Macau and there is tremendous similarity between the two places actually. And the proximity, the big population areas, the fact that people can reach it easily for an evening or a day, their average stay is much shorter. So Las Vegas was out in the middle of desert. People had to come here and make a journey, they still do. And so they don't make the journey for a night, they make it for two or three. I think that Macau will change the profile. But to Larry if I understand your question, we get to the point where we have 50-50 mix like we do here. No, I don't think so not right away, but we will get our fabulous demonstration of how close the idea is if you have [build and they will come], we will see how close that may be as we watch the results of the wonderful new Venetian hotel when it opens, because here is the case where there is huge shopping center and all other things that we see in Las Vegas brought to an enormous level. The Sands folks did a good job of describing all of that, and if there is ever a chance we'll see it first at The Venetian because in our current facility we can never match the non gaming offerings that are being presented at The Venetian, but incidentally I am impressed with The Venetian’s approach and that is why I reconfigured the Diamond Casino to add more retail and other attractions, entertainment attractions all of which would unveiled in January. Because, I am trying to get that other number up, I don’t know what comes first though. You built, you have the facilities and you are using them, or is it something inherently structural about the nature of the visitation. You know we have got a very big airport here, and so there is a nice airport in Macau, the flights are being increased each season from Taipei and another places, but I would look for a fifty-fifty breakout in the near future. And as far as the slot machines go, same comment I made before. Slot revenue goes up when people stay at the machines longer. When people stay at the machines longer that’s what happens in our place, which is why the slot revenue is as high in both Las Vegas and Macau compared to the rest of the market per machine.

Okay, great, good job Steve.

And your final question comes from the line of Mathew Farkas with Paradigm Capital. Mathew your line is open.

Thanks so much, congratulations. I have one question that’s kind of a two part. Would you think that your sensational results in Las Vegas is the result of taking market share from some of your competitors in that town or is it more based on people from Asia, who may be hadn’t come to Las Vegas, but now that you know your name is establishing a brand in Macau, they are now coming to Vegas or in fact more often.

Both

Both?

Yes.

Okay, I guess that's that. Thank you.

And there are no further questions at this time. Gentlemen, do you have any closing comments?

No. Thank you all for joining us and we look forward to speaking to you again after our next quarter.

This concludes today's conference, you may now disconnect.