Friday, July 30, 2010

WYNN: Q2 2010 Conference Call Tidbits

As I like to do every quarter, I'm about to sit down and read the transcript of Steve Wynn's quarterly earnings conference call.  Like David Einhorn's quarterly letters, I think Wynn's calls are indispensable for the knowledge he usually disperses simply and eloquently.  Let's see what we find this quarter:

Steve Wynn: "the nightclub and younger-person recreational market represented by Tryst, Blush, XS, Surrender and the Beach Club. That's a business that could do over $150 million for us, with a profit margin in the mid-40s. So we're really happy about that."

In case you were wondering exactly how much money the clubs made...  $150mm gross, almost $70mm net.

Wynn then begins to expound on a politically tinged "rant."  I'll let him explain:

"We hope for continued improvement in Las Vegas. Or let me put it differently. We hope that we'll get smarter in Las Vegas in dealing with the peculiarities of this market and this very, very mercurial national economic economy that we're living with. The national economy and the political environment in the country as we head up to the elections is very, very touchy. And it is impacting all businesses.

Today, we got a report at a -- various of our board committees meetings about the impact of the bill, the Financial Reform Bill that the President signed, with its hundreds of new committees and regulations to be formed, bodies and government bureaucrats to be created who will then tell us what we should be doing or what standards we have to live up to, both at the SEC and in other bureaus that have been created by this Financial Reform Act that the President was so enthused about. There isn't one single person in the United States of America that has a clue of where the Financial Reform Act will lead and what it really means. In spite of the fact that there are undoubtedly some good things in it, it has the potential of being a catastrophic interference with business, very much like the Healthcare Bill. So we're living through this along with the rest of America. And you can decide whether you want to be pessimistic or optimistic. You can decide whether the glass is half full or half empty. I'm at the point where I hope we just don't tip the glass over."

Later, responding to a question:

" We began -- this is more a third quarter than second, but we began the remodel of the 2,700 rooms that is Wynn Las Vegas because they're five years now since it opened. And thank goodness, the rooms were fully utilized, with high-90s occupancy. And it's time to remodel them. And consistent with our personality, we've upgraded them. And I think between the regular rooms, the suites and the villas, we’re going to spend $99 million between now and January and February -- April"

I found it surprising that they're renovating already - after only 5 years.

"We're also remodeling the baccarat game starting in October. It’ll be ready for Christmas, New Year's. And we're making our baccarat pit much sexier."

 Sexier baccarat!  

"One of the things that's happening here as the market softened and many of these companies with very bad capital structures neglected their properties rather severely. And the properties are all showing the wear and tear. They're showing the lack of capital expenditures. And the public, of course, takes note of this immediately. There's no secrets. The minute the place is not clean or it's getting threadbare, it has a very bad effect on your clientele. We go in the opposite direction, take advantage of our capital structure and make sure that we're pretty and all fluffed up all the time."

well - there you go - that's why he's renovating Wynn already.

Joseph Greff - JP Morgan Chase & Co
It’s Joe Greff from JPMorgan. Two questions, one is on Las Vegas, and it's great hearing you're raising room rates here. Are you seeing any improvement in spend per occupied room outside of room rates?

Stephen Wynn
I'm going to let Andrew answer that, but I want to point out that at the time when we decide to raise room rates and it’s happening successfully, within three weeks after making that decision, we also reduced the available inventory associated with this remodel, which gave us a perfect opportunity to do it. Because under normal circumstances, we're going to take 15% or 16% of the inventory out until we're done. And so that gave us some more leverage why we could lean on the rate. Andy, you can talk about the spend per room.

Andrew Pascal
And the short answer is no, no material change.

I highlighted this portion just to illustrate that Wynn is careful to point out that reason they were able to raise room rates in Vegas is because they reduced supply, by taking rooms off the market to remodel.  In other words, higher rates, lower numbers.

Later, responding to a question about Cotai:

" I got everybody that had anything to do with customers and the business in a big conference room and went around the room one person at a time and asked the very same question that you ask. Who are we? And what are we doing in Cotai? Where are we going? How are we going to present ourselves? Where do we fit in? What should the public expect? Because consistency and -- is very important to business, just as it is in life, so -- and I was really excited and very gratified that there are very diverse personalities in the group. And they were relaxed and comfortable enough to express themselves. And what was really fascinating was that to the man and woman that were in the room -- there were men and women. Every one of them, in their own way, said the same thing. Dance with the girl that you brought to the party, or dance with the guy that brought you, whatever that old anecdote is. We know who we are. We know what we do best. Stick to what we do best. Take advantage of Cotai, and do it better than anybody's ever done it, including us, in history."

"We're going to be Wynn Resorts, Cotai. Wynn Cotai. We're not going to look like Sheraton or a Hilton or a different company. We're going to look like us. And you know what to expect when I say that."

Bill Lerner, who I think is the finest gaming analyst out there, then asks this interesting question, and gets in interesting response from Steve Wynn, probing a bit before moving on:

"William Lerner -Union Gaming Group
Question for Steve, and then Andy, just a follow-up or a quick second follow-up. The first one is, Steve, you, of course, talked about the beginning of the room remodel in Vegas. What about the new rooms or the design of the new rooms in Vegas do you think will encourage folks to pay more per night, besides you charging them more, ultimately?

Stephen Wynn
Yes, it’s a good question, simple answer, Y-E-S.

William Lerner - Union Gaming Group
Yes, meaning...

Stephen Wynn
Well, they’ll like it more, they’ll pay more.

William Lerner -Union Gaming Group
And that’s a -- there’s nothing structurally changing about the rooms, it’s just...

Stephen Wynn
No, no. It's reragging, reaccessorizing."

I didn't get the sense Lerner was satisfied with the answer.
"William Lerner - Union Gaming Group
The last one here, and maybe this is for Andy. What are you seeing -- are you seeing anything reflective of the euro weakness? By that, I mean the currency now? I know, of course, those trips -- Europeans book trips further out than folks from regional places around the U.S., of course, and I would think that strength in the euro over time takes some time to play out. What are you seeing, if anything, Andy?

Andrew Pascal
We're not seeing anything. It's not materially affecting our business in any way.

Stephen Wynn
There was a period when the euro was really up there around $1.58. There were some guys from Europe that were coming over here and thought they were playing with pesos. They were playing with dollars. And I can’t say that we didn't get a little lift from that. Some of the Europeans really liked the cheap dollar when it came to gambling, because they were paying off at -- they thought $0.67 on the dollar. Now that has tamed, I don't know that it will hurt us or anything. But we had a lot of customers from the United Kingdom, so we get the pound sterling as an item, now and then."

I love the "playing with pesos" line to describe Europeans coming to Vegas when the Euro was at $1.58.

"Now there was one of our neighbors, who's got a great ambition and doing a big job is Sands. They released earnings yesterday, and they had a $300 million number in for three or four places in Macau, three places. And we had $215 million or $216 million. EBITDA has as much meaning as snow on top of Mount Everest. It's a worthless number, because you've got to pay interest, you got to pay taxes, and depreciation’s as real as the payroll. I just got through telling you what it cost to change the rooms and keep them fresh. So you ask yourself, what really is going on? So you subtract the cost of ferry boats, subtract the interest payment on the first quarter of both companies, subtract the...Whatever the depreciation is that both companies use. And just make it equal, whether it’s on a forty-year schedule or a ten-year schedule. Makes no difference to me. And you'll get to the fact that the money left over afterwards is greater with the smaller company, in terms of Macau. Bigger ain’t better. Better is better. Because when you borrow all that money, you got to pay it back. And when you build all of those facilities, you got to depreciate them and take care of them. So you better damn well make sure that they carry their weight. Now I'm a big fan of the development in Cotai and the things that my competitors have done. And they're making the future bright for Macau, and I'm proud to be part of it and proud to be their neighbor. But when you're analyzing what's going on, don't get confused. So we're a younger company than the Sands and MGM. And we are a little bit more, oh, steady, or a little slower. And it's the old hare and the turtle story. We're a little bit more like a turtle than a hare. But at the end of the day, we're going to build Macau, and it's going to be the Cotai project. And it's going to be a big increment to the wealth of our company. And we'll go somewhere else at that same time. And when you take the four- or eight-year difference in age between us and the Sands or the 20-year difference between us, 16-year difference between us and MGM, we'll catch all those guys. We'll catch all those guys. But we'll do it in a very steady, processional way. And each of our properties’ll have the kind of characteristics we're describing now. And we wouldn’t do as well if it wasn't for them. Don't misunderstand. I'm not deprecating them. But I am pointing out that we’re a different kind of company. And we’re going to stay that way. And maybe we don't move quite as fast as the other guys, but we don't borrow money quite as flagrantly. We don't take on projects that we can't really control down to really fine point. And maybe that disadvantages us competitively on occasion. And I'm willing to accept that myself in exchange for having security for my employees, predictability for my investors. I’m willing to make that exchange. I'm willing to take longer to get where I want to go. And where I want to go is where we dominate the gaming industry in terms of quality and performance."

That right there is the reason to read the conference call transcript.  A big long statement that sums up Wynn's philosophy on running his company, and comes back to the line I quoted last quarter:  "Bigger isn't better, better is better."

"Robin Farley - UBS Investment Bank
Yes, I got a question on Vegas and one on Macau. In Vegas, I wonder if you could give us a little color on -- your table drop was down slightly after being up nicely in Q1....

Stephen Wynn
Robin, the reason the table drop is off is because there's so many more tables around here, even though they're not doing a very good job for their owners. And secondly, the reason our customer acquisition cost is up is that when companies, namely, our competitors, get desperate, there’s two things happen. They stop taking care of the building, and they increase their promotional allowances, to no avail, I might add. It's a one-way street to oblivion. But that's the natural knee-jerk reaction when they get desperate. They don't take care of their building, and they grasp for customers. And then it has an effect in the marketplace, and it takes everybody down. The person who starts this kind of stuff doesn't do themselves a bit of good. It takes awhile before they wake up to it, and then they get new executives or something. It's been the oldest story in the history of Las Vegas. We go through this cycle all the time with inexperienced help and unsophisticated management. They spend too much. They over-comp. They do all this stuff. This is as old as Methuselah around here. Maybe I'm getting old. I've been doing this for 42 years. But I’ve seen this about 11 times. And then there's a new group of young, inexperienced managers. Again, they fire the other guys, and the people, okay, well, we can’t do this anymore. Stop -- we can’t comp people that don't play that much. We can’t afford this. There’s no margin in this business. They got Blackjack at some of these hotels down to where the game isn’t worth it, the space it takes up on the floor. But what the hell? They got the tables. They got the dealers. They want to protect the jobs. They go and give the joint away. If their rooms are empty, they figure they've got nothing to lose, even if they’re new rooms."

"Robin Farley - UBS Investment Bank
In other words, the competitive situation that you saw in Q2, it sounds like it's continuing here into the second half of the year in terms of customer acquisition costs and table drop being down.
Stephen Wynn
In a word, yes. But we've got these nightclubs, and there, we're able to get an advantage because it's the management of atmosphere. And so there, knowledge and experience really matter. A Blackjack game’s a Blackjack game. Unfortunately, a slot machine’s a slot machine. They're all a commodity. When we get into the areas where there's a difference that matters, like the way we treat people, how beautiful the places are, the management of environment, then the competition can't run with us, and we're safer. And that's where Linda's customers come in. They're brand-oriented. They’re very conscious of the little things, the quality of their experience, how clean the place is and how they're cared for. Nightclubs, believe it or not, in a strange way, it's a similar kind of thing. So those are the two segments where we hold our own."

Interestingly, there wasn't discussion in either the prepared remarks or the Q&A of the fact that Wynn's numbers were actually helped this quarter because they were a little lucky in Macau - their hold % was slightly higher than expected.  Contrast this with last quarter, where they were slightly unlucky.

disclosure: I have no positions in LVS, WYNN or MGM.



EconomicDisconnect said...

'What are you sayin Mike, you think Im skimming off the top?"
"No. You're unlucky, maybe we an do better."

Great coverage of the call. Would love Wynn to come to Boston.

Hammer Player a.k.a Hoyazo said...

Another great post and great coverage, KD.

Steve Wynn could be my CEO any time.

Anonymous said...

Steve Wynn is so typical, all criticism and zero solutions. So easy to lob shots from the sidelines. Lower taxes that's the only arrow in his quiver. Move to Macau Steve. Remember China is much more stable. You said so yourself. So why don't you move there?

Though I do like the EBITDA = snow on Everest line. EBITDA by the way is earnings before I trick da auditor....