Wynn Resorts, Limited's (WYNN) CEO Stephen Wynn on Q2 2016 Results - Earnings Call Transcript

| About: Wynn Resorts, (WYNN)

Wynn Resorts, Limited (NASDAQ:WYNN)

Q2 2016 Results Earnings Conference Call

July 28, 2016, 04:30 PM ET

Executives

Stephen Cootey - Chief Financial Officer, Senior Vice President and Treasurer

Stephen Wynn - Chairman of the Board and Chief Executive Officer

Matt Maddox - President

Ian Coughlan - President, Wynn Resorts (Macau), S.A.

Gamal Aziz - President, Wynn Macau, Limited

Robert DeSalvio - ‎Senior Vice President, Development, Wynn Resorts Development

Analysts

Joe Greff - JP Morgan

Shaun Kelley - Bank of America Merrill Lynch

Carlo Santarelli - Deutsche Bank

Jon Oh - CLSA

Felicia Hendrix - Barclays Capital

Thomas Allen - Morgan Stanley

Robin Farley - UBS

David Katz - Telsey Group

Operator

Good afternoon. My name is Nicole and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

I would now like to turn the call over to Stephen Cootey, Chief Financial Officer.

Stephen Cootey

Thank you very much and good afternoon. Joining the call on behalf of the company today are Steve Wynn, Matt Maddox, Kim Sinatra and myself here in Las Vegas. Also on the phone are the operational management teams from both – our Boston, Las Vegas and Macau properties.

Before we get started, I just wanted to remind everyone that we will be making forward-looking statements under Safe Harbor federal securities law and those statements may or may not come true.

And with that, I’m going to turn the call over to Mr. Wynn.

Stephen Wynn

Hello, everybody. And it’s very nice to have this call. I think you’ve seen our earnings that we were happy with Macau. We held a high, but we made $20 million more than we did last year and it’s another increase in our quarter. And even though we held a high, we were also carrying an equal amount of extra payroll for the Palace, which opens next month. So the increase is real.

We’ll be transferring all those employees in the next few weeks – in the next few days actually. And so, we’ll have a different expense pattern for the Peninsula operation of Wynn and Encore in the months ahead as we equalize the payroll.

I think we mentioned table allocations in our press release and I’d like to take a moment or two to comment upon those and give some insight to those 160-odd people that are on this call according to the operator.

We haven't analyzed, in the past, as we headed towards the opening. We’re unable because of the table cap to predict how many tables we would get, so we established, long time ago, various scenarios where we could operate from 100 tables to 280 tables, and new tables, on how to operate both hotels – all three of them actually – efficiently and profitably.

Some of the things that you may find interesting, for example, in a recent month – and this is pretty typical – we had 180 tables allocated at Wynn and Encore to VIP to junkets. And then, we analyzed, as we do now, for the past year, we’ve had a completely different focus in this company about the gambling activity of our clientele.

And instead of analyzing the casino on Wynn or turnover, we’ve analyzed both in the United States and in the People's Republic of China and Macau. We’ve analyzed and we’ve run our business on a completely different model. And that model is contribution to EBITDA, to profitability of each unit in the casino regardless of Wynn or turnover or activity of a gambling customer. What instead we look at is how much money do we make with such pieces of equipment, whether it be a table, a baccarat table or a slot machine.

And the results of our inquiry, both in the United States and China, have been very, very enlightening and I’ll share them with you. As an example, of 180 junket tables in a month, 60 of them were responsible for all of the EBITDA. The other 120 were either breakeven or, in some cases, losses, taking all costs into account. That is to say that our profitability was limited to a much smaller group than one would have first imagined. And we made a number of very startling changes in the way we laid out our casino, the policies that we employed with regard to the rules of the game – craps, blackjack, and Baccarat, roulette included – that embraced limits. The moments with the client when we would give free promotional allowance, allocations of rooms, food, beverage or airfare, we took a different look at all of that.

And since last July 10, a year ago or a little over a year ago, we changed Wynn Las Vegas and Wynn Macau because we were the largest recipient of Asian business in our hotel in Las Vegas. And when that business tailed off, as it has in the industry, we lost $150 million in Wynn at one point – that’s how big our baccarat business was that we could lose $150 million – and we were left with a smaller number.

We used to give discounts to blackjack players and crap shooters. We dealt blackjack at three to two if you got 21. We started putting in tables where we paid six to five and dealt single decks or double decks. We changed the layout of the floor. We put our higher yielding games in more prominent locations. We put destination-type games, like craps, in secondary locations. We changed the amount of free odds that we gave at dice games from what was commonly referred to as the 3-4-5 game, and that had to do with the amount of free odds you get if you made a line bet to double odds. To give you an example, when someone has a 3-4-5 crap game, the house advantage is 37 basis points, 38 basis points. When you go to double odds, the house advantage is 58 basis points or 57 basis points. Now that doesn't sound like a lot. That’s a very narrow margin of a house advantage mathematically. However, 20 basis points is a 60% or 70% increase in the margin of a dice game, so that the outcome in terms of profitability was based upon a rather granular analysis of each game.

We made a bunch of changes; and in so doing, we were able to overcome in terms of profitability what would ordinarily have been a massive loss of top line revenue. So the gaming industry is a little deceptive in many respects. It takes a very sharp analysis and very high degree of self-awareness – because when you take rooms away from the casino block and you can sell them for cash, our margins in the hotel rooms are very high as they are in slot machines. Casino table games, in Las Vegas, if you were to do an analysis, would have a profit margin in the teens at best. We were able to take our profit margins in table games up into the 40s, which I think is unique in our industry.

Well, this kind of analysis applied to China is also very enlightening and instructive. Having allocations, having table caps, as we are experiencing in places like Pennsylvania – this week, I stopped at Bethlehem at the Sands facility. And I was watching what an alert management team did to offset limitations imposed politically on the amount of tables. And they used a concept known as stadium games where you use three or four dealers for roulette and blackjack and have 150 automated digital stations for players that allow people – it’s a much more efficient use of an allocation of tables because you get 150 players with four dealers. And in the case of Bethlehem, when I watched the other day, on Tuesday, they were able to take advantage of that and introduce people at lower minimum table limits to roulette and baccarat who might not have played those games were it not for the low entry-level afforded by this stadium concept. Now, we use those at the Wynn Macau and the – and they’re being used in Singapore and around the country. And I suspect that because of the payroll efficiency inherent in such concepts that we’re going to see more of it and it allows us to make better use of our staffing levels and offer the opportunity for excitement on a playing level to customers in a manner that’s very efficient.

Having said all that, we anticipate the following aspects of our business, which will not impact our profitability, that by having fewer games, you get to have a higher utilization. Remember, in most casinos around the world, utilization is less than 50%. You’re sort of keeping the payroll and the games for peak periods, weekends, a few shifts a week. By having fewer tables, you increase utilization dramatically and you’re able to control limits.

So let's get to the second part of my presentation, which is this, a close analysis of the market in Macau will demonstrate that the bulk of the profitability in business is in what is now referred to as premium mass business.

We distinguish between mass and VIP because, in the mass, very much like America, people buy in for cash, they play with regular chips that are negotiable as opposed to the VIP or junket end where we use non-redeemable chips that are purchased by junket operators who supply to us and then the customer is forced to bet that non-redeemable chip and they keep betting the non-redeemable chips and they save the redeemable ones and then either cash out or buy more non-redeemable chips, in which case they get a little discount.

My point is this, the money we make and the margin that we enjoy is based upon the vast premium end. And that premium mass end is not a hard line of division. It isn't a question of, ‘well, one guy bets $25 using US currency for a moment, bets $25, and a premium guy bets $500. No, there is a whole range in between where people bet $2000, $3000 a decision, but they’re playing in the mass area of a casino. We refer to those as a more premium customer.

Now, the Wynn Palace in Cotai was designed from day one, six years ago, specifically for premium mass business. Some of our competitors, who are very intelligent operators, they’ve designed buildings that are specifically designed for the lower end of the mass market. The Wynn Palace is not such a structure. The rooms, the restaurants, the retail, all of the amenities, the layout of the place, its entire conceptual framework was based upon getting the higher type of mass player.

So we were always in a position to operate our casino with less equipment than our competitors. Incidentally, to give you an example of that, when we opened Wynn Las Vegas, we had close to 2,900 slot machines and we won $180 million a year. Today, even with Encore, we win well over $200 million with less than 1,800 machines. Technology has played a role in this and it is playing a role in table games as well.

So to close this little presentation of mine, we feel positive and comfortable about the hotel and we’re looking forward to the opening on 22 August. And I’m hoping that some of the things that I’ve just highlighted in my comments are instructive to all of you.

One other note away from China and the United States – and Las Vegas, for a moment, is, on Tuesday at 5 o’clock, we expect to get our final environmental permit in Boston and begin full-scale construction on Wednesday. Although we’ve had hundreds of people at work already on areas that were not impacted by the environmental permit, work that was necessary to build our building on things like a slurry wall and other preparatory construction aspects of the foundation, but hard construction begins on the tower itself Wednesday morning and we don't anticipate any other interference with that process.

I think that about covers it. Matt, Steve – Bob DeSalvio is on the call from Massachusetts and is happy to elaborate on any of the comments that I’ve made or any of the questions you may have which you can begin asking right now. Thanks for your attention.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Joe Greff from JP Morgan.

Joe Greff

Hello, everybody. Steve, thanks for your comments, your perspective putting on the top of the table game allocation. Along the same lines, along the same topic, does – the fewer initial amount of table games than, say, 150 to 250 that maybe some people were thinking, does that alter the amount of labor-related OpEx shift from Peninsula to Cotai?

Stephen Wynn

Ultimately, depending on utilization, it will as it always does. You adjust your workforce based upon the demand that you have from your customers. But that’s something that you see as time goes by, Joe.

Joe Greff

Got it. And then, just to make sure we all understand this, is there a chance that you could open with more than 100 and – I ask it knowing that Galaxy, I guess, went through a process, maybe got a little bit more to open and then got 50 more and then 50 more after that. Do you have a timetable for when more tables would be released? I guess, with a second go around of additional table games being allocated, would that be more of a 2017 event or could that be a late 2016 event?

Stephen Wynn

Joe, we haven't been formally notified in the manner that the government does such things yet, and I suppose it is possible. What we do in the absence of official notification is we make plans to run at a minimum efficiently; and then, if demand calls for it and the government decides that it’s a good idea, then we respond when they give us the tables. But they don't tell us, in advance, about such things. And so, the best thing for us to do is not to plan for it.

Joe Greff

Got it. And then a final question for Steve Cootey. Can you allocate the EBITDA impact, the positive favorable EBITDA impact, in Macau from the high hold?

Stephen Cootey

About $20 million.

Stephen Wynn

It was about the same as the extra payroll we’re carrying, Joe.

Joe Greff

Yep, yep. [indiscernible] just wanted to clarify that. Great. Thanks all.

Operator

And our next question is from Shaun Kelley from Bank of America.

Shaun Kelley

Hi. Good afternoon. Maybe just to follow-up on that payroll comment, so the $20 million of extra headcount that was being carried, that’s still – those are all employees that are currently at Wynn Macau, will be shifted over to the Palace. And then, in addition, was there additional staffing that’s going – that’s feeding the pre-opening line, which is why we saw that expand?

Stephen Wynn

Let me clarify that. We were carrying $20 million to $25 million a quarter of extra payroll in the Peninsula operation for Macau. All of those people are being transferred, as we speak, and they are employed at the current table limit level. The extra tables, were we to get them, would have been reflected in new hires which have not taken place. So the people that we said we’re transferring, we are transferring and they are employed.

Does that answer your question? I want to make sure I’m responding properly.

Stephen Cootey

And I think from an accounting standpoint, what you’re talking about, Shaun, is, to be clear, Wynn Palace will have 7,000 employees; roughly, 2,000 will come from Wynn Macau. So when you see pre-opening ramping up, that’s the other 5,000 people that are coming on-board right now and came on-board in the second quarter. That’s that $40 million in pre-opening out of the $45 million. It was related to Wynn Palace hires outside of the transfers.

Shaun Kelley

Perfect. No, I understand. That makes perfect sense. And my second question would just be on, we look a little closer at the VIP line, it looks like perhaps the rebate percentage was a little higher than normal. Usually, that may have to do with what’s going on in the direct VIP business, but any color you could provide on that?

Stephen Cootey

There was no change in commission structures in the second quarter.

Stephen Wynn

Yeah, you got me on that one. I’m not sure what line you’re looking at. Linda is on the call or Ian is. Ian, do you have a comment on that?

Ian Coughlan

We haven't altered our commission structure. It remains the same. We’re very parsimonious. I’m not sure what’s being referred to.

Shaun Kelley

No, just sorry. Maybe to be more clear, just asking about, was there any kind of hold outside of the norm on the direct VIP business?

Stephen Wynn

Was there any hold? You mean, did we play lucky?

Shaun Kelley

Yes.

Stephen Wynn

We did.

Stephen Cootey

We did.

Stephen Wynn

We did. I did to the extent – I think we played lucky almost exactly to the extent of the extra payroll we were carrying. So what I’m saying is the $20 million increase is real.

Stephen Cootey

We played lucky in both direct and junket, both sides. They make up that combined number of 3.98% or percentage [ph].

Shaun Kelley

Okay. Got it. Thank you very much.

Operator

And our next question is from Carlo Santarelli from Deutsche Bank.

Carlo Santarelli

Thanks, guys. Matt, for starters, you just mentioned playing lucky in both direct and VIP and junket. Could you maybe clarify a little bit what the mix in terms of drop or something is of the two segments at this point?

Matt Maddox

Carlo, we normally don't do that, getting into the mix of direct versus VIP. We always – I can tell you, both held high in the 3.98% on the $11 billion in turnover.

Stephen Wynn

Generally, what is relevant to this conversation is that we have three or four very priced junket operators, who consistently produce for us and produce profitable business for us compared to any other equipment in the building. And they’re going to be both – they’re all established with proper tables in both Cotai and in the Peninsula, in August, at the opening regardless of anything that we’ve discussed so far. But we also run our own program, very much like we do in Las Vegas, where we give credit to people in Hong Kong where we’re permitted to do so. And those numbers jump up and down depending on who shows up. To give you an example, in the last week in Las Vegas, in five days, we won $22 million in our own program in baccarat from a handful of customers.

So we get this – we benefit from having an extremely loyal, high-end group of customers that come to us in a number of ways, some through junkets in China and some in our own programs here. And they vary – the volatility or the attendance of such clientele varies unpredictably from month to month and week to week. So the reason we don't discuss it is because it would be irrelevant. It’s not instructive and it’s unpredictable.

Carlo Santarelli

Okay.

Stephen Wynn

Which is why we don't give guidance on it because we really don't know what to say other than what I've just told you.

Carlo Santarelli

Great. That's helpful. And then, if I could just understand a little bit more how you’re thinking about the positioning. You’ll, obviously, open Wynn Palace with 350. If I’m not mistaken, your allocation or your table allotment coming, it was like 509 or somewhere around there, plus the 100 is 609.

Stephen Wynn

It’s 520 plus 100. It’s 620.

Carlo Santarelli

620. Okay, sorry about that. So you’ll have 270 at the existing, plus your 350, how are you thinking about the splits between mass and VIP at each of the properties now? Will you try and lean more heavily…?

Stephen Wynn

60 or so in both hotels in the junkets and VIP. And the rest are in mass. So the mass floor is unaffected.

Carlo Santarelli

Great. Perfect. Thank you very much.

Stephen Wynn

The adjustment takes place in the VIP section.

Carlo Santarelli

Understood. Thank you.

Operator

And our next question is from Jon Oh from CLSA.

Jon Oh

Thank you. My question pertains to the 250 tables that you are shifting from Wynn Macau. I think this number is a little higher than what we are modeling generally speaking. So as I am thinking about the cost shift and the expense shift that will be moving from Wynn Macau to Wynn Palace, that’s a positive thing. How should we also be thinking about the potential that you’re actually peeling off more of Wynn Macau's tables and what it would do to your revenue of your existing Wynn Macau?

Basically, I'm trying to understand, this risk of self-cannibalization, which I think, Steve, you brought to point that maybe only 60 tables out of the 183 in VIP are contributing to the profits, so you have some slack to pick up there. But what about some of the mass market tables and premium mass market tables in existing Wynn Macau today that you may have to shift to get Wynn Palace to the right size? How do you feel about this risk of self-cannibalization in the coming weeks as you open Wynn Palace?

Stephen Wynn

Well, that’s the good news. The shift is irrelevant because the tables that are left at Wynn Las Vegas are the ones that – and in Encore are the ones that were making the money. We’re not touching the mass floor. That’s the point. We had an enormous amount of tables that were idle with payroll in anticipation of the shift to the other place. So, in one way, it’s fortuitous that we’re not affecting our premium mass capacity or potential in terms of tables at Wynn Macau and Encore Macau. The adjustment was made in the junkets and sending out the junket operators and the tables they allocated to them. Our mass floor doesn't change. Our premium mass floor doesn't change in either place.

Stephen Cootey

What you see, Jon, is if you look at the numbers, we have some poker games that are more of an amenity that would likely go. That’s about 14. And then, of the 20 or so mass games that would need to be transferred to get to those numbers, those are underperforming games in certain areas that we rarely open. So…

This may be a fascinating – those of you who watch this industry so closely, and our competitors as well, may find this to be a fascinating observation. When we concentrate this business on the tables that we have predetermined to be the ones that are most profitable and increase their utilization, some of this speculation has to remain as speculation, but I think you’re going to see the results quick enough in August, the last week in August and in September leading up to Golden Week. And I think that we might find this very instructive before it’s over.

And we don't do much spinning here. We let the numbers speak for themselves. But I want to point out that the trend in our industry has constantly been to less equipment and more efficient utilization of that equipment. I also want to remind everybody that you cannot get dynamic in a casino. You can only get dynamic in the non-casino area where you create attractions that produce people of a certain income level that make the place profitable. I can't overstate that simple observation more strongly enough.

In a hotel casino, in these integrated resorts, the hotel itself is the show. A lot of conversation has been promulgated about the diversification of gaming away from just gambling to non-gambling things, and that conversation has widely and largely been misunderstood. So let me make a point about that now.

When you say diversify to non-casino things, you have to understand that isn't a simplistic thing – ‘well, we’ll have more restaurants; we’ll have more shows; we’ll have more this or that other than a slot machine or a baccarat table.’ Diversification means how well do you make the entire place an attraction from a hospitality and touristic point of view, so that you don't just rely on a baccarat player or a slot machine player.

Now, that diversification involves the entire building. We spent, without exception and without any possibility of contradiction, more money on non-casino attractions in Wynn Palace than has ever been spent on any facility of that sort on the planet Earth. And it has been done in the things that really matter to people – the width of the hallways, the height of ceilings, the attractiveness, the decor, the size of the rooms, the elegance and luxury of the retail offerings and, most importantly, the entertainment quotient of each and every food and beverage outlet.

The customers of Macau, in the past – since 2002 and even before with Stanley Ho's operation, the customers have a very distinctive personality. They shop, they eat and they gamble. Their attendance to traditional entertainment attractions has been unpredictable and, in most cases, unsatisfactory. We saw a Cirque du Soleil show – remarkable company that we pioneered ourselves in Las Vegas – we saw that show open and close at the Venetian. The entertainment attraction at the City of Dreams is primarily being supported by freebies, when people that go in and are offered the experience complementary. What we have seen at Wynn Macau and Wynn Las Vegas, the only five-star facility in Macau and the most complete in terms of five stars in spa, five stars in food, five stars in rooms – that’s very unique in the gaming industry – that is diversification.

When Wynn Palace begins, at 8 o’clock in the evening, on the night of August 22, everybody will experience visually for the first time – the press will see it the week before with me – the most diverse, the most elegant, the most completely diversified attraction in the hospitality industry that exists anywhere in the world. I say that unequivocally because it took us six years to be able to make that statement. And all of you who have enough interest in the matter and the press will get to see it for themselves. You’ll eat the food with the incredible array of chefs from pastry to – we have Alain Ducasse chefs in our coffee shop in this hotel. It’s on the water, experiencing $70 million or $80 million worth of entertainment on the fountains. That filters through to the entertainment quality in each of the restaurants, even in the gaming areas.

So in the lobbies, tens of millions of dollars have been spent on floors that open. The theme of the hotel is flowers. We’re talking about Ferris wheels, carousels, 25-foot-tall Fabergé eggs that open, all made of flowers. Everywhere in the hotel, there is entertainment, public entertainment. And in every aspect of the hotel, the hospitality diversification has been intensified and redoubled.

And those are the things – if you want to take a hotel to another level, not a casino, a hotel, then you have to revisit each and every component down to the most minute detail and revisit them, ask all of the questions, question your history, question fundamental assumptions, the ones that survive have survived cross-examination and re-cross and the new stuff emerges as you apply a great deal of self-critical judgment in the design/development phase. All of this will be self-explanatory and self-evident at 8 o’clock on 22 August to the rest of the world when this hotel takes its first breath publicly. The press will get to see it and the financial community in the days preceding August 22.

Incidentally, we adopted a technique. I was asked, ‘how do you want to handle the opening, Steve?’ I said, ‘I’ll tell you how I want to handle the opening. I want to show the world. I want to show the political leaders who don't attend these hotels. I want them to see the villas, the penthouses, the entertainment attractions alone, in small groups of tours in each of these remarkable moments in this building before it opens.’ And then, during the month, that’s what I’m going to do on 22nd to our invited guests. But in the weeks preceding August 22, all 12,000 or 13,000 of our employees will be in small groups of eight to ten and experience the identical tour and visualization of this hotel in tours with music and with full-tilt presentations, so that by the time we get to August 22, there will be an awareness in the community of what we have built. That is the policy we are following. And it begins in two days and that is the indoctrination and the display. When you talk about the villas and the penthouses and the other attractions in this hotel, normal people will never get to see them. They’ll be reserved for special guests that are being entertained, that are being fed in these restaurants. The politicians and political leaders, union leaders, line employees will never see every part of this place because they’re specialized in certain parts of it. But our job from August 1 to August 22 will be to make sure that anybody who works for the Wynn Macau company, in either the Peninsula operations or the one in Cotai, are completely exposed to what we have built for them as a place to work because, at the end of the day, this is all about our employees because if our employees have a sense of the place and its luxury and its special nature, then they will pass that on to the public. Those are our strategies. Those are our philosophies. That’s our thinking. And we’re going to bring it all to bear along with 40-odd years of experience to see if we can get this place off and running in a nice way.

It was built to take market share, no question about it. No need to pussyfoot about it. And we’ll see if we can keep the promise. Personally, I saw it three weeks ago. I thought it was the most joyful place we’ve ever built. My wife, Andrea, and I walked through the building and we were quite dazzled by it. I’m hoping that all of you will be [indiscernible].

Jon Oh

Okay, thank you for the color. If I may follow-up with another question, I think you made a statement earlier about premium mass and it seems like that’s going to be the front and center of the Wynn Palace strategy. Could you size up the state of the premium mass market today, specifically if you could maybe give us some sense as to some visitation trends you’re seeing and also customer spend? Are you seeing any encouraging signs right now? And how do you feel about the state of this market. We know your position very well given the product that you’re building, but any color on premium mass as a segment will be very helpful to us. Thank you.

Stephen Wynn

Ian Coughlan, my Irish boss, do =you want to talk?

Ian Coughlan

Sure. What we’ve seen in premium mass at Wynn Macau, specifically, is very sticky customers. And we’ve been allowed, over the last 18 months, to grow the mid-tier premium mass. We’ve cultivated a lot of new players. It’s been very strong for us. We’ve allocated more tables to premium mass and it suits the property. So they’re our type of customers. It’s been running very well. And we’re very confident about premium mass at Wynn Palace. We have the product to support it and we’ve built the place for our premium mass and Wynn Macau is no different. So we are seeing, finally, a return of some of the higher-end premium mass players. We’ve seen that particularly over the last eight weeks. So it’s strong, it’s steady, it’s stable, and we’re looking forward to Wynn Palace and Cotai being a different market with lots of premium mass there to harvest.

Stephen Wynn

And, Jon, on all three months – April, May, and June – we were up in the mass segment year-over-year.

Jon Oh

Thank you. That’s very helpful.

Stephen Wynn

Who’s next?

Operator

Our next question is from Felicia Hendrix from Barclays.

Felicia Hendrix

Hi. Good afternoon. I just want to switch gears for a second, if I may, because my question is on capital allocation. So, Steve, so you’re opening up Wynn Palace in about a month, a little less than a month, right? And then, we move to Boston and – by the way, congratulations on getting closer to commencing construction there. So in a few years, Boston will be open. And then, following those two projects, you should be back to generating strong free cash flow. The next project in line is, obviously, Paradise Park if that gets approved. So I'm just wondering, how do we think about your free cash flow as you’re building out that project in Vegas? Is there a scenario where you’re returning cash to shareholders, while you’re also embarking on construction in Vegas once Boston is open?

Stephen Cootey

Felicia, I think we always return cash to shareholders and we’ll continue as long as our business remains robust to pay dividends. That’s been our policy from the beginning of this company. And once – as you look at our balance sheet, it becomes quite strong, we expect, over the next 12 months and our capital allocation will be exactly what it’s been.

Stephen Wynn

We’re in construction, Felicia, and we have been for several weeks on our Wynn Plaza shopping center on the Strip, on the sidewalk on the Strip between Wynn and Encore. So we’re very happy with that and the leasing is proceeding and that project is underway and will finish next year.

Felicia Hendrix

Okay. I'm sorry.

Stephen Wynn

I'm sorry. That’s all. I just wanted to throw that in. We did start that job and it’s going well.

Okay, great. And then, Steve, so when we think about Macau, right, and a lot of the questions, I think, that were being asked today are kind of coming from the base of people trying to figure out what’s going to happen in the very near term, right? Like, is the new supply going to grow or cannibalize the market? And that’s an interesting debate.

But when we look out further, a year, two years out, and given the stabilization the market is seeing now, especially given the market – the stabilization that the market is seeing now, do you feel more comfortable about your growth projections for the market as you look out a few years?

And just as a follow-up to that, how much of your vision in Macau relies on proper infrastructure being in place, like the bridge and the light rail, that sort of thing?

Stephen Wynn

Well, we’re seeing numbers today that have no bridge, no monorail, none of those remarkable infrastructure additions that the government has instigated. They’ve not yet matured and come into season. So what we’re seeing is the picture that you’re sharing with us at the moment based upon the numbers from ourselves and the other gents and the other companies in Macau. The things that are in the pipeline, the bridges, it’s mightily being constructed. Monorail, with its growing pains, seems to be settling in and work is proceeding on that. Those things all add to the viability of all of the operators in the special administrative region. And they can do nothing but help as far as I understand them. All they can do is make it easier for more people to get to Macau.

The penetration of Macau in terms of the general population is still small. The room for growth is astronomical when you consider coming to play and how many folks there are. The visitation in Macau is being augmented and enhanced not only by these infrastructure projects that are breathtaking, that bridge and the monorail, the light rail, but by the very facilities that the concessionaires have invested in and that have opened. Galaxy and Venetian and the City of Dreams and the Studio City are very aggressive, massive projects. And then Parisian comes on shortly and then, eventually, we’ll have the SJM property, which I think they’ve, in a stroke of real originality, called The Palace. That comes on at some time next year, I guess. When is that due, Matt?

Matt Maddox

I'm not sure. I think it’s further out.

Stephen Wynn

Further out. But the Parisian is around the corner.

Matt Maddox

It’s a couple of weeks after us.

Stephen Wynn

Yeah. So those things match and enhance the future of the market, coupled with those infrastructure things that you mentioned. Now, I don't know the final date of the bridge. Have they announced one lately when they expect to function, to have functionality on the bridge? I know the light rail – when?

Ian Coughlan

2020 or 2021. It keeps moving.

Stephen Wynn

Yeah, in three or four years. And what about the light rail, Ian?

Ian Coughlan

2018, first phase; 2019, the second phase.

Stephen Wynn

The first phase goes around two sides of our property and has its first stop right in the middle of the lake by our gondola station. That’s the first stop from the ferry terminal. And it goes around the north and the west side of our property and stops right smack in the middle next to our gondola station. No exit there, of course. We did it deliberately. And then that gondola station feeds the MGM which is coming along in a few months. It feeds Parisian. It feeds the City of Dreams and Wynn, the Palace. So I like the interaction of the infrastructure as it comes on-board and it sort of matches and enhances the performance of the buildings and the projects that have been built. That’s how I look at it, anyway. It’s just sort of a – but I tend to be a longer-range looker at these things than quarter-to-quarter, but that’s my job here. So I’m feeling good about it.

I love our position in Macau. That concession was one of the most remarkable benefits ever bestowed on companies. Those of us who are privileged to have such privileges in the SAR are very lucky. The amount of money we’ve been able to make and the opportunity to create these places has been fabulous.

Felicia Hendrix

Well, thank you.

Stephen Wynn

Yeah. Is there another question? Apparently not.

Stephen Cootey

I think there is.

Stephen Wynn

Is there another question?

Stephen Cootey

Yeah.

Operator

Our next question is from Thomas Allen from Morgan Stanley.

Thomas Allen

Hey, how are you? So you announced about a month ago the opening date of Wynn Palace and you started booking rooms, can you give us any color around bookings? You also have been hiring hosts. Any color you’re hearing from hosts on potentially pent-up demand of people who haven't been coming to the market and maybe will start coming again once the Wynn Palace opens? Thank you.

Stephen Wynn

I think we’re at 70% occupancy already and we’ve only had the booking machine turned on for a matter of days.

Ian Coughlan

June 21, Steve, we’ve started online sales and taken reservations. And we’ve had a strong demand basically and our rate is at a premium on both the gaming and the non-gaming. So we're looking very, very strong for the first five weeks prior to Golden Week and then we go up from there into the 80s.

Thomas Allen

That's helpful color. Thank you. And then, just talk about the Macau Peninsula property. Your slot volumes are really weak this quarter. I think it’s the weakest number I have seen or we’ve seen since 2009, anything driving that?

Ian Coughlan

Just the movement of big players. They can affect the month and they can affect the quarter. So the previous quarter was excellent, so they’ll be coming back.

Stephen Wynn

The slot machines are very much like the tables. There are very big slot players in China. And in our particular case, when they show up, it gets very exciting. When they don't, it’s a little bit more subdued.

Thomas Allen

Thank you very much.

Operator

Our next question is from Robin Farley from UBS.

Robin Farley

Great, thanks. I have two questions. One is, how should we think about, for the Palace, what percent of rooms will be sold cash sales versus given to players, just how to think about that. And then, also, I wonder how you think about how the US election outcome may impact business in Vegas?

Stephen Wynn

What a good question that is, Robin. I’ll take the second question. Yeah, go ahead, Ian.

Gamal Aziz

Steve, this is Gamal. We initially planned for the initial period to be at 30% non-gaming or cash business and 70% gaming and then we will eventually get into a 75% gaming, 25% cash business.

Robin Farley

Okay, great.

Stephen Wynn

The election in the United States, I think we’re all in the same position. It’s almost impossible to predict exactly what effect that will have. Without getting into an economics discussion, we have – sooner or later, our political establishment is going to be forced, regardless of party affiliation, to deal with $19 trillion in debt that’s climbing by around $1.6 billion a day. That means that, in the Treasury auction each month in downtown Washington, we’re printing money at the rate of $40 billion or $50 billion a month, which is, of course, increasing the money supply and directly impacting the living standard or the buying power of the US dollar or people who are being paid like everybody on this call today.

Now, part of the frustration in America is the fact that the deficit is having an enormous impact on the living style and the living standard of Americans, but not all of this is well understood by the folks, to use Bill O'Reilly's term. The folks are being – their living standard being clipped by the deficit and by the printing of money and the increase in the money supply.

How long can this go on? In the history of the Western world, inflating your way out of this kind of a problem, taken to its extreme, to use the Weimar Republic as an example, people went grocery shopping with wheelbarrows full of currency. Now, before the recession, the euro was $0.87, $0.85 on the dollar. During Quantitative Easing 1, 2 and 3, it went up to $1.48. That was a devaluation of the American currency by 20%. Now, it’s $1.10. And to use that as a benchmark for a moment, it isn't that the dollar got stronger, it’s that the euro got weaker because they started quantitative easing and printing money in the euro community.

So this deficit issue impacts the mental health, the frustration, the positive sense of tomorrow that working people feel in America. It hasn’t got to do with rich folks. It’s got to do with government, fiscal and monetary policy. We have $14 trillion in public debt and $5 trillion in intergovernmental debt. The coupon on that $19-trillion-and-climbing is around 2.3%, and that’s with short-term interest rates at zero virtually. Now, the current Fed, the lady is going to keep interest rates where they are. That, of course, protects all of the credit card debt of $1 trillion that’s out there. And so, we don't have mass panic on the credit card interest. But I know that the government is in a quandary as to what to do about this.

Now, the issue about what’s going to happen with the election isn't so much an issue of Trump versus Clinton at the moment. It’s a question of whether the House and the Senate and the Executive branch can get together and make Americans feel safer and have a fiscal and monetary policy that isn't self-destructive, which currently it is. Now, I know that, in this time of year, everybody is making all kinds of promises and declarations that they can do things or they will do things that, of course, they cannot without exacerbating the problems that are currently plaguing the country.

What is lamentable is that the public discourse today on both sides misses the point entirely. We’re in the chicken for every pot season where everybody is promising the moon. I recall that one of the most popular themes this year is that we’ve got to get student loans and the burden of student loans off the back of the kids. Well, when the Affordable Care Act was passed and it was going to have a negative impact on the deficit, which its sponsors had promised it wouldn't, the sponsors went looking for a way to offset $8 billion or so in additional deficit and they came up with the kind of a stunt that we did with Fannie Mae and Freddie Mac when we eliminated mortgage brokers and we just took the loans directly into Fannie Mae and Freddie Mac and that led to the collapse of $5 trillion off the system. Well, they did the same thing with the Department of Education. They gave the student loans directly from the Department of Education and eliminated any middle people. And then they charged 6.5 points or 650 basis points for student loans instead of passing the savings because the Department of Education doesn't really have a cost of money. But they’re making the student loans direct since the Affordable Care Act. Bernie Sanders didn't talk about that. But that 650 basis points, that carry is being made by the government to offset what would have been an even greater impact on the deficit by the Affordable Care Act. Well, if you really were sincere about making a better life for the kids, you would have passed the loans from the Department of Education to the kids at cost, which would have been interest free.

But this kind of hypocrisy, which sort of is endemic to the whole system regardless of party, has got to come to a halt. Because if it doesn't, then it insinuates itself into economic demand for services and products. It certainly insinuates itself into the price of everything from Walmart to shoes and sneakers. Those things haven't been by themselves become more precious. The value of the dollar has declined.

I know that we talk about China fooling with their currency. The United States has fooled with its currency even more aggressively than the People's Republic of China. I’m not an apologist for China or anybody. I am simply stating the fact. But you won't see this in the conventions of either party. You won't hear this sort of thing because it’s so uncomfortable to talk about it. But the election could put America on a better track if all the Senators and Congressmen and the Presidents and the cabinet members decide that they should or it won't. I don't know about anybody on this call, but I’m not in a position to make that prediction. But it surely, surely impacts the life of every American. Tax policy and all the rest all roll into this and businessmen across the country and people that work in businesses will be affected by this as sure as sunrise tomorrow. And there seems to be a fear to deal with it directly. So count me as one of those old white guys that’s frustrated.

Robin Farley

Okay, thank you.

Stephen Wynn

Robin…

Operator

And our next question is from David Katz…

Stephen Wynn

I want to say something to Robin. Robin, there's 465 agencies in government and there's 4.15 million federal employees. 1.5 million are in uniform. 2.65 million of them are civilians covered by the SCI Union and the Civil Service Act. If you want to make government more efficient, you’ve got to have a big idea that resonates with all of the government employees, all 2.65 million of them and 460 agencies and it is going to have to be the kind of big idea that we used to run businesses, which is namely to reinforce positively the behavior that we wish to encourage. And that can be done with tax policy and with employment techniques in the federal government that works so well in the private sector.

If we told everybody in those 465 agencies, you ran the business for X amount of dollars last year. If you maintain service levels and you can save a dollar, we will distribute $0.20 on every dollar you save to those of you in those departments, you’d see the government contract in terms of its cost of operation overnight. But you’d have to incentivize the people in those 2.65 million employees the way we incentivize people in the private sector and gain efficiency and better functionality. But those big ideas don't seem to apply in Washington. Enough of the speech.

Go ahead with the questions.

Operator

Our next question is from David Katz from Telsey Group.

David Katz

Hi, afternoon. Two quick ones. Now that Boston is becoming more of a tangible property and that this may involve getting Bob into the act, I’m curious how you can update us on how you plan to position it. As we look around the geographic region, there are other large properties, other small ones, but I think they tend to be more slot driven, if you can talk about who your target market is. And then, I'm curious what your kind of long-term commentary might be around the table game business in Las Vegas, which candidly has been a little bit hard to model. Whatever thoughts you have would be welcome. Thank you.

Stephen Wynn

Bob and I will do that together and I’ll lead. That building in Massachusetts is the Wynn in every sense of the word – the rooms, the suites, the service, the food, the beverage, the public entertainment, the theatrical entertainment is everything that we do here. We’re bringing a five-star, frontline, integrated resort right into the center of Massachusetts. We're the largest private investment in the history of that commonwealth and we are the second biggest employer except for the hospitals in the commonwealth. And it’s going to be a doozy. And it’ll deal to the same level of the market that we are dealing here.

Bob DeSalvio, we’re very lucky to get him come join us. I was with him this week on the East Coast in Pennsylvania. And, Bob, you can pick it up from there.

Robert DeSalvio

Sure. We think of this market in a couple of different ways; first of all, an incredible local market. We’ve got the only casino with 5 million people in the Greater Boston area. And then, when we branch out from there, we’ve got about 25 million people of gaming age within a 400-mile radius of the property, so probably the most incredible local market available with one casino. Massport has been excellent in terms of the international destinations coming in and out of Logan. And we’re now up to 54 non-stop international destinations coming into Logan, so the opportunities for picking up areas that are very good for Wynn with direct service to Hong Kong, Shanghai, Beijing and, of course, all the major capitals around the world provides us with a great opportunity for the international market. And so, we look at this on many different levels – local, regional, national, international – and feel we can qualify for all of them, so we’re very, very bullish on it.

Stephen Wynn

What about room rates in that City of Boston, Bob?

Robert DeSalvio

Right now, extremely high and continuing to climb. There’s a real shortage of rooms. Of course, with healthcare, life sciences, biotech, the universities, there’s so much activity and so much building going on in the area and not enough quality hotel rooms. So the rates continue to climb and we’ll be at the top of the market. There’ll be nobody in the market that will have rooms even close to this. So we are actually predicting that we will do very high ADR in this particular property.

Stephen Wynn

And we are the largest hotel in the metropolitan area in terms of total rooms – the biggest rooms in the East Coast, the largest room outside of Las Vegas in the United States of America in terms of footage and decor and the most amount of rooms in Central Massachusetts. 12 minutes from Logan airport. The first hotel we’ve ever had that had non-stop service from China. No Gulfstreams needed. I’m sorry [indiscernible].

David Katz

I think the other part of my question was about the table game business in Las Vegas, which has been a little bit hard. If you have any sort of longer-term thoughts on it, it would be very helpful. Thank you.

Stephen Wynn

Well, we do. And it’s what I led the conference call with. Gaming hasn't changed the price of gambling in 70 years, and yet our cost of operating these places has climbed steadily over that period. And the mentality of the marketing people and the gaming people to deal directly with that sector of the business has been trained, has been grown and matured with a focus on the top line – the average bet, the length of play, how often does the customer come, what is our chance of winning X dollars – and then let's get that customer, give him a room, pay for his airfare, send a limousine, give him a bottle of Lafite Rothschild, do anything, give him a shopping spree. These are the earmarks of the superficial thought that has guided casino management for decades when it should have been focused on what is the profitability of every table and every customer.

Now, I’m not suggesting that they don't have profitability meetings and reviews at these various enterprises, but I’m in a position to say that any examination by any financial person in or out of the industry will reveal that the profit margins of table games in the gaming industry in the United States of America stinks, lousy, less than 20%. Now, these businesses end up with margins close to 30% because they have slot machines and rooms and bars and nightclubs. But the forgotten sector has been profitability of table games.

We decided to take another look at that a year ago. I remember exactly, it was at the end of the second quarter and I went after it the first week of July and started moving furniture and changing rules in collaboration with my colleagues, like Maurice Wooden, who happens to be on vacation in Hawaii this week, Matt Maddox, Linda Chen, Ian Coughlan, Gamal Aziz, Steve Cootey – my Chief Financial Officer – and everybody in China. And we decided that there had to be a better way to do this. You say it’s tough to model table games. You, I don't know how you do your model. But if you do a deep dive in companies like the ones that line the Strip in Las Vegas, the regional casinos, and take a look at the profitability of table games, that model is shaky. We've changed that here. We don't care about the drop. We don't care about that. We care about the profitability of every foot in the casino. We take a very merchandising retail approach to the floor.

Incidentally, I think Sheldon has done that in China when he opened up years ago. It’s harder to do it when you’re not living in an avalanche of revenue the way we did when casinos first started in Macau. In a day-to-day disciplined grind of normal operation, it requires re-educating all of the marketing and casino personnel to look at the customers differently. We don't even issue promotional allowances or comps based upon past performance. We do it on current business activity. That is to say, if you play this trip at a certain level, we will give you free meals or free rooms. But if you played that way last year and you show up this week, we are waiting to see what happens this week. That’s a big change in the way they though in this business and it requires a lot of discipline and, frankly, re-education of the people that work in the casinos. It took us months to get to where we wanted to be in Las Vegas.

But, imagine, we were able to overcome a loss of $50 million or $80 million in baccarat drop to make the same money or more in Las Vegas. That’s hard to do. But, now, when someone plays, it’s a business. It’s a business. Otherwise, we sell the rooms to cash customers and we reallocate the space in our building. The business model is constantly morphing and changing. And is it not doing so in every business in the world? And the prize goes to who’s agile. We’re trying, we’re trying. We are, so to speak, in a commercial sense, constantly in a yoga class. So factor that into your modeling, maybe you'll be able to follow us soon.

David Katz

Appreciate it. Thank you.

Operator

And there are no further audio questions at this time.

Stephen Wynn

Thank you, everybody, for paying attention today and giving us your time. Looking forward to sharing the results of all these exciting new projects as we go forward. Bye-bye.

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