I find Steve Wynn's quarterly conference calls to be among some of the most honest, straightforward and illuminating data points freely available in the market. Wynn is the best of the best at what he does, and he's even better at clearly expressing himself. Without further ado, let's take a stroll through the transcript of the most recent call and see what sorts of interesting tidbits we find: (note: I have no positions in WYNN)
Steve Wynn didn't bother with an opening statement or a review of the quarterly results, simply explaining:
"The numbers I think speak for themselves. Really very little to add to that, except that the first quarter numbers that we released today do not include any contribution from Wynn Encore in Macau, and which opened a week ago today, and we are looking forward to it contributing to the overall impact of our operation in Macau.
I’m also pleased to announce that we have instituted, announced previously, we have instituted our first quarter dividend of $0.25 a quarter, which will be payable to stockholders of record on May 12th and paid down on May 26th.
With that, I’ll take questions."
Q: From Cameron McNight @ Buckingham: "And then secondly, Steve, you’ve got a lot of cash. You’ve extended out a lot of your maturities. What are you thinking about capital allocation here?"
A: From Steve Wynn: "We don’t think that economic disruption is behind us. We think the deficits have potential for enormous negative impact in the United States. So we are playing it safe like we always do in this company."
I found this to be very interesting, especially in light of the 25c dividend that WYNN declared. Wynn's strength is that he's kept his balance sheet in check and not levered himself to the point where he risks bankruptcy. In the past several quarters, he's expressed a very cautious view, which he does again in the answer above - so why is he paying a dividend?!?!??!
Q: Tom Marisco, Marisco Cap Mgmt: "I was just wondering how you thought about the very high growth rates that you’re seeing in Macau? Why you’re seeing growth rates as high as they are, the sustainability of those growth rates and just more of your philosophy as how you’re seeing that market play out?"
A: Steve Wynn:
"Well, it’s great to have a question from a real live major shareholder like Marsico Capital. It’s not very often that the buy-side guys speak up on these conference calls. Tom, the inherent strength of the market in China has been the subject of great discussion and it has been explained and I know that you’re one of the people that has spent a great deal of time with all of your investments in Marsico Capital and understanding the depth of that market. And the pent-up demand that exists there among the 300 million Chinese who are experiencing upper middle class and beyond wealth in that country, that is not to minimize the fact that China faces great challenges for almost 1 billion people or maybe over 1 billion people who have yet to experience such prosperity. But we have to keep in mind that this explosive growth in China and the desire for a consumer experience, and incidentally to a great extent it is encouraged by the government, which is trying to enhance the consumer economy in China. So it is not considered improper to want to aspire to the good life. And to Chinese people, part of the good life is going to Macau and partaking of all of the excitement and activities that take place there. Not just gambling, but shopping and fine service and dining and branding is very important to those people. So we’ve learned that over the years here in Las Vegas. When we opened Mirage, we got all that business away from Caesars because we were the newest greatest thing. When we opened Bellagio, the Chinese business immediately switched to Bellagio. When we opened Wynn we had big-time Asian baccarat business because we were the newest and fanciest thing. The Asian market is very, very aware of the top brands, and that’s why we’re so meticulous in making sure that we meet that demand. For example, it is non-productive for us to appeal to the low-end market in China, because the government does not encourage the low-end of China to go to Macau. They don’t mind if people who can afford it go and gamble but they’re sensitive to people who can’t afford it going across the border to Macau. That’s why they pulled back on the visas. But for those people in Hong Kong and South China from [Dagen] Shanghai who can afford the good life, there’s no stigma attached to that in China. And there are so many of them. The market is so deep and rich and successful people who are in search of the good life that Macau is a natural place and Hong Kong and Macau are natural markets to absorb some of that energy. And we are experiencing it along with the other operators in Macau. We’ve maintained our niche in that market because we protected our brand. Encore was more of the same. And coupled with that, we stay on the good side of the government by attending very carefully to a proper Chinese protocol, which is to be humble as a guest of that community, to be grateful for being allowed to be there, and to show our appreciation in every way possible for that privilege including going public on the Hong Kong exchange to increase our Chinese ownership of our company. Those things have all conspired to produce a result along with the natural flow of people across the borders that have affected all the operators to protect our market share and allow it to grow. And in respect to that Tom, there’s one final point I would make, one young analyst several months ago said, ‘Mr. Wynn, as these hotels have opened, your market shares has gone from 17% to 14% or 15% or 13%.’ And I said, well naturally, when thousands upon thousands of tables are added to the market, our market share would drop in terms of gross revenue. But when you’re analyzing and evaluating a gaming company; whether it’s in the United States or in Asia, the right number is not market share in terms of gross dollars, it’s what percentage of revenue per table you have over the ratio of 1 to 1 that you would have if your revenue equaled the same percentage as the amount of tables you have, or to simplify that if you had 10 hotels each with a 100 tables, they would each do exactly the same amount of revenue than the percentage of tables and the percentage of revenues would be equal. That would be total parity. The ratio of revenue to equipment would be 1 to 1. If the ratio of revenue to equipment is greater than 1 to 1, then you operated a more efficient and more positive way than your neighbors. And as more hotels have opened in Macau, our ratio has grown, not shrunken. And that’s the number, that’s the number, the win per table compared to the percentage of tables, the percentage of revenue you have compared to the percentage of tables you have, and in that respect, our market position has improved, not slackened. Those are the things Tom that come to my mind as I think of this subject. Matt, do you have anything to add to that?"
Then later, this, again from Steve Wynn:
"I think there is one another point that Linda and I have discussed that’s worth sharing with all the people on the conference call. The goal of broadening and bringing in new concessions in Macau in 2002 was to broaden the appeal of Macau in the Pacific Rim and around the rest of the world to bring new customers, not just baccarat players into the marketplace. And it is fascinating to see exactly how that process works. So I’m going to explain it with regard to Encore. Macau has junket operators that have a budget that we give them a fixed amount of money to pay for their complementaries for their customers in their rooms, unlike the Las Vegas method which just sort of pays for the rooms. There the house pays for the rooms. Now when we built the Wynn Hotel in Macau, we did what a normal hotel operator does. We built a very commodious large generous typical room at 626 square feet. That’s bigger than Bellagio and the same as Wynn America. And then we built extravagant suites starting at 1,800 feet and going up to 3,000. And those rooms were priced at 200 odd dollars, and the suites well above $1,000 as you would expect in any hotel operation including Shanghai and Hong Kong and Tokyo. And that’s what we did as hoteliers. In the hospitality business, it was very, very normal, right up the middle. The junket operators came to us, they came to Linda actually and said just a minute, that’s not what we need. The typical room is beautiful, but it’s not sexy enough for a gambler, and the suites are too expensive for us to waste all of our money at $1,500 or $1,200 a night. What we want is a very theatrical and beautiful room that we can buy for under $400, preferably at $350. Well, there was no such product. And all of a sudden the pressures exerted by gambling interests caused us to create a product an 1,100 square foot suite. We went and did it, and that is Encore. Now what we have done is built a room that is at $350 the most incredible piece of hospitality real estate in the world. And it has an enormous appeal to everybody, especially non-gambling people, because it represents the greatest bargain in the world. So now here’s Macau, creating a product from its organic gambling roots that now changes the city and the market to be more appealing, more broad-based in its attractiveness to everybody. How interesting unintended consequences are or maybe they are intended, but here is a product that was engendered by gaming requests that becomes a non-gaming plus for the city. The most lovely room in the world at a price that is almost half of what a regular room at the Peninsula costs, which would be less than half its size. Interesting how things work. I call that, and I’ve made this point to the government, organic growth. That is not the same thing as trying to pick up Las Vegas and drop it on Macau that will never work. One is China, one is the United States, and China is China is China, and in relationships with the people of that country, in relationships with your employees, you must not forget that it is not Las Vegas, it is not America. And so dropping Las Vegas strip into Macau was always an idea that did not respect the basic fundamental notion of Macau. And so we try in our observation of the people, what we’ve learned since ‘06. We could never have built Encore Wynn in ‘06. We did not have the hands-on experience with the customers. We learned from our customers, as all good businesses do, we learned from our customers and our employees, how to better run our business. And so what we have in Encore Macau is an organic product that grows in Macau out of the soil of Macau’s own beginnings. And I’m glad that that question was asked Robin, because it gives us a chance to clarify what we’ve done. And I hope that adds some color to your question."
That's a free lesson in how to think about the hospitality industry, courtesy of Steve Wynn's expert view. Again, I think he expresses these concepts better and more openly than any other CEO I've ever heard.
Getting away from the earnings call transcript, and back to the earnings release itself, there were a few interesting items. The Las Vegas results:
"Net casino revenues in the first quarter of 2010 were $139.5 million, up 18.8% from the first quarter of 2009. Table games drop was $556.9 million compared to drop of $520.0 million in the 2009 quarter and table games win percentage of 23.2% was within the property’s expected range of 21% to 24% and higher than the 17.7% reported in the 2009 quarter."
In plain English, earnings were up vs the same period last year, but that's largely because 2009Q1 was, to put it bluntly, somewhat "unlucky" for WYNN - their win percentage in 2009Q1 was 17.7%, vs 23.2% in 2010Q1. Table games drop was only up 7%.
Then, the doozy:
"Gross non-casino revenues for the quarter were $225.2 million, a 1.4% decrease from the first quarter of 2009, driven primarily by lower hotel revenues which were partially offset by higher entertainment revenues.
Hotel revenues were down 8.8% to $77.6 million during the quarter, versus $85.1 million in the first quarter of 2009 as Average Daily Rate (ADR) decreased 8.6% to $203, compared to $222 in the 2009 quarter. Our occupancy was 89.4%, flat with the 89.5% generated in the prior year period, generating revenue per available room (REVPAR) of $181 in the 2010 period compared to $199 in the first quarter of 2009.
Food and beverage revenues decreased 1.0% to $95.9 million in the quarter and Retail revenues were $18.9 million in the quarter, 3.3% below last year’s levels."
I wrote a post last week asking for anecdotes from my readers regarding economic recovery. I interpret WYNN's Las Vegas results as a clear sign that the Vegas economy is certainly not recovering - the numbers continue to deteriorate, even from Q1 2009's miserable levels.