MGM Resorts International (MGM) — Q2 2015 Earnings Call Transcript

Well, thank you, Arthur, and good morning and welcome to MGM Resorts International's second quarter earnings call. This call is being broadcast live on the Internet at www.mgmresorts.com, and a replay of the call will be made available on our website. We furnished our press release this morning on Form 8-K to the SEC as well. On this call, we will make forward-looking statements under the Safe Harbor provisions of the federal securities laws. Actual results might differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in these forward-looking statements is contained in today's press release and in our periodic filings with the SEC, including our most recent Form 10-K. During the call, we will also discuss non-GAAP financial measures in talking about the company's performance. You can find a reconciliation of these measures to GAAP financial measures in our press release, which is available on our website. Finally, please note that this presentation is being recorded. And with that, I'll turn it over to Jim.

Well, thank you, Dan, and good morning, everyone. I am quite pleased to report strong second quarter results for MGM. Our wholly-owned domestic resorts increased our EBITDA by 11% year-over-year, driven by both our Las Vegas Strip properties and our regional properties. Margins increased by over 150 basis points year-over-year, and profit growth was broad-based across our entire portfolio of assets and operating segments. CityCenter resort operations' EBITDA increased by 4% year-over-year driven by growth across the entire campus. MGM China reported EBITDA of $132 million down year-over-year due to the continued market weakness, but despite this decrease, Grant and his team have been able to improve margins sequentially quarter-over-quarter. Our strong operating performance provides a great platform to launch an internal transformation that we call our Profit Growth Plan. This is the product of 10 months of hard work aimed at redesigning our entire company to produce sustainable gains in profit. So, I'd like to take a few moments to provide some context to this plan. As you know, every year, we go through a strategic planning process and that includes an in-depth review of the current macro trends and a holistic view of our industry. We also look for ways to constantly improve profitability. When we undertook this process late last year, we recognized that the U.S. economy, though growing, was proceeding at a slow pace. As operators, we have prided ourselves on our ability to consistently improve our margins, end results and outpace the market. So since last year, we went deeper across all components of our business and challenged ourselves to rethink how we operate. In doing so, we developed hundreds of ideas and formulated a rigorous process to evaluate these ideas. We brought in outside expertise to assist us with the execution of the ideas and strategies that we deem most viable and to track and report on our progress. Our Profit Growth Plan will allow us to increase revenues through enhancing sales and pricing while leveraging our assets, and reduce expenses by reevaluating how we run our business more effectively. In the second quarter, we introduced the plan internally within the company and officially launched it in July. Our plan will strengthen our company's organizational structure, permanently improve the way we operate, organically increase margins and profitability, and strategically position MGM for the future. This is a collaborative effort that requires participation at every level within our company. There is still much work to be done and it will not be easy, but we know we can make this work because we have the best teams in our business. This requires a focus on change management, as the most impactful improvements necessitate a different approach to operations and marketing than the industry standard. While upper management has initiated this charge, we have made a concerted effort to engage all levels within our company, soliciting ideas from employees who truly understand these processes. Among other things, this process is about empowering our employees, ensuring that we do not compromise in any way the guest experience at our resorts, but rather improve it ultimately to drive value for our company. Of the ideas we've identified, we've focused on a subset of high-value initiatives which will be rolled out this year and in 2016. By 2017, we believe we will generate approximately $300 million of incremental profit. To be clear, this benefit is incremental to our normal business growth projections. Approximately $250 million of this improvement will be driven by our wholly-owned domestic resorts and the balance will come from corporate expenses and our joint ventures. We believe we can drive our property EBITDA margins back to the 30% level in 2017 and this effort will be a major catalyst in achieving this goal. Our Profit Growth Plan will proactively allow us to better align ourselves in today's business environment and continue to drive value for our employees, guests, communities, and shareholders. I am extremely excited about how our company is embracing this effort to uniquely position ourselves as a leader in the industry. We will update you on this every quarter regarding our progress on the Profit Growth Plan. And with that, I'll turn it over to Dan to discuss our operating results and financial position.

Well, thank you, Jim. In Las Vegas, we guided for at least 5% REVPAR growth in our wholly-owned strip properties and achieved 6% in the quarter. Our wholly-owned strip EBITDA margins increased roughly 140 basis points to approximately 27%. We saw increases in many segments of our business, including our casino, hotels, and food and beverage businesses. During the quarter, our convention business improved year-over-year, and we also had a strong event calendar highlighted by the Mayweather-Pacquiao fight in May. Our diverse portfolio continues to benefit from an improving marketplace as evidenced by our non-luxury strip resorts producing REVPAR and EBITDA growth of 9% and 14%, respectively, while our luxury strip resorts grew by 5% and 9%, respectively. Looking forward, we continue to see strong convention bookings in the back half of this year. We expect to outperform 2014's record year in terms of that convention mix. Based on current trends, we expect third quarter wholly-owned strip REVPAR growth to be approximately 6%. Our regional properties had another great quarter as we continue to gain share. Our regional resorts grew EBITDA by 10%, with Detroit and Tunica each up 8% and Beau up solid at 17%. These resorts collectively increased margins by approximately 150 basis points in the quarter. CityCenter resort operations' EBITDA increased 4% year-over-year driven by strength across the entire campus, as Crystals and Vdara achieved record results. Aria reported EBITDA of $63 million, primarily driven by record year-over-year REVPAR growth of 8% and increased catering and banquet business. Looking at the balance sheet, cash and cash equivalents and deposits on hand at the end of the quarter were approximately $2.5 billion, of which approximately $522 million was at MGM China. We had $1.1 billion in available liquidity under our corporate revolver and approximately $1.7 billion of excess cash on hand. On July 15, we repaid $875 million in senior notes with cash on hand and reduced our total debt by $2.3 billion at MGM Resorts this year. CityCenter cash at the end of the quarter was approximately $192 million and total debt was approximately $1.5 billion. In June, with the support of our lenders, MGM China amended and restated its senior credit facility, upsizing the term loan by $1 billion. The amendment extended the maturity date by 18 months to April 2019. MGM China has approximately $1.55 billion outstanding in term loans and roughly $1.4 billion in available liquidity under its revolver. In terms of CapEx during the quarter, we invested approximately $197 million in total CapEx related to our domestic operations, which included about $98 million on National Harbor and Springfield in the quarter. Additionally, we invested approximately $15 million as part of our arena joint venture equity contributions. During the second quarter, MGM China spent approximately $8 million at MGM Macau and $96 million on MGM Cotai development. We expect to incur some one-time expenses at both Luxor and MGM as we relocate some existing shows to those venues, with anticipated expenses of approximately $6 million in each of the next two quarters. Corporate expense for the second half of the year will be up slightly, as we incur some upfront costs to implement our Profit Growth Plan and other corporate initiatives. Corporate expense in the third quarter is expected to be $60 million to $65 million. With that, I'll turn it over to Grant for an update on Macau.

Thanks, Dan. Good morning, good evening everyone. In the second quarter, Macau's total gaming revenue was down 37% year-on-year, while MGM China's net revenues of $557 million were down by 33% year-on-year. We recorded an adjusted EBITDA of $142 million, a decrease of 37% year-on-year before the license fee of $10 million compared to $14 million last year. Despite the opening of a new property in Macau, MGM's market share in June actually increased over April and May. More importantly, we've been able to maintain our margins in the current market as Jim indicated. Our property EBITDA margin before the license fee was 25.5% during the quarter, a 20-basis-point sequential improvement compared to the first quarter. Over the years, we have run our business with a lean and efficient operation in this dynamic market and continue to manage our costs while remaining focused on our main floor business by offering high-quality experiences consistent with our namesake property. Our main floor table games win dropped by 23% year-on-year, in line with market performance and declined by 5% sequentially compared to the broader market decline of 7.5%. In June, we completed the first phase of expansion of our supreme lounge, adding 61 high-limit slot machines. Early feedback shows customers have reacted positively to this remodeling. Our mix shift towards the high-margin main floor business continued in the second quarter with 80% of MGM China's profit coming from the mass segment. We continue to shift tables from VIP to mass with an additional 49 tables to the main floor versus last year, now representing nearly 60% of our table allocation. Despite additional tables on the main floor, we've had stable average headcount per open hour. Our strategy of capacity and resource allocation has driven incremental main floor play visitation. VIP table games revenue decreased by 43% year-on-year, primarily driven by lower turnover, which declined 54% year-on-year, while hold percentage increased to 3.2% from 2.7% in the prior-year quarter. MGM China continues to compete with a focus on precision in marketing efforts like quality offerings and best-in-class service standards. Our targeted marketing initiatives are expected to drive existing customer share of wallet while seeking opportunities for new customer acquisition. We are expanding and yielding the database, which remains a key priority. Today, the board of MGM China also announced an interim dividend of $77 million, representing a payout of 35% of net income. At MGM Cotai, we are on target to complete all floors in the hotel tower by early November this year. Our spectacle roof structure is progressing quickly with a completion milestone in September. We will commence the setup of the casino areas in August. We remain on target for a fourth quarter of 2016 opening. With that, I'd like to turn back to Jim for his closing remarks.

Well, thank you, Grant. The second quarter is a vivid example of how our company differentiates itself with our dominant entertainment position and the diversity of our resort offerings in our markets. We hosted a great variety of events showcasing all of our properties on a worldwide stage. All our properties delivered across the board. Bellagio's margins were the best among strip luxury resorts in the quarter. MGM Grand shined as the host of the big fight. Aria has secured its place as one of the most profitable resorts in Las Vegas. Crystals is leading the way on the retail experience and our core properties again outperformed the market. We believe we're just getting started. The first phase of the expansion at Mandalay Bay's Convention Center opens this month, and the demand is significant. The Las Vegas arena is progressing well, and we've also recently announced a 5,000-seat theater at Monte Carlo. The park in the entertainment district will create a truly unique experience. These are great additions to Las Vegas, our entertainment offerings, and to the benefit of the neighborhood. We own the neighborhood. We will continue to work on growing this market and we're encouraged by the strong forward convention calendar, increased visitation to Las Vegas, strong airline passenger growth, as well as projected additional airline capacity. This dynamic, coupled with the implementation of our Profit Growth Plan, we believe, will allow us to grow our business and outperform in the markets in which we operate. To be clear, this plan sits on top of our company and does not mean we have lost focus on evaluating all strategic options. In fact, our board and management teams have been aggressively exploring various great strategic options for our business going forward. We have the advantage of a broad portfolio of properties and brands, more than most, and that creates multiple options for us, but also an obligation to take the appropriate time to thoroughly vet these opportunities. This includes various real estate structures, and we need to narrow the field in terms of what is best to continue to maximize sustainable value to our shareholders. I'm pleased to say we're getting closer to that decision and we'll be able to provide our conclusions by the end of the year, if not sooner. We have the right advisors in place and the proper internal focus. With that, operator, I'd like to turn it over to Q&A.

Good morning, everybody. Good evening to you, Grant. Not surprisingly, I have a bunch of questions, Jim, related to your Profit Growth Plan. One, can you talk about the $300 million that I know was over a period of time? Can you clarify how much of that is operating expense related versus revenue related, and then how much of the $250 million that you said relates to wholly-owned relates to the Las Vegas Strip? And I have a couple of follow-ups.

Joe, I'll tackle that, and then I'll turn it over to Corey or Chris if you want to correct me or add to it. First, I want to stress the complexity of this plan. We focused on this last year with the idea of not looking for quick fixes or one-time gains, which would be detrimental to our business going forward. So it was the effort of literally hundreds of senior managers here engaging in this process. As I said, months of work and hundreds of ideas were evaluated for implementation plans. A lot of what we're doing requires a change to how the industry has always conducted practices in operations, which requires significant change management. We've worked on this internally, brought external help, and benchmarked against companies in other industries. This Profit Growth Plan involves about a third for revenue uplift and two-thirds being about changing the way we do business to reduce costs. In terms of Las Vegas versus regional properties, the majority of the $250 million projected improvement will be in Las Vegas, so about $225 million will be here, with the balance spread across regional properties.

Great. And just so I understand, of the two-thirds related to how you do business, even those characterized as reducing operating expenses, you would still expect to see margin benefits as well?

That's correct. Also, the Profit Growth Plan's benefits are on top of any other growth we expect in our markets. We are quite constructive on Las Vegas from a macro perspective. We have sized this and viewed it as a margin growth plan as well as a profit plan alongside our growth.

There are some labor opportunities, including centralizing some areas that we believe can provide significant labor savings and better output.

Great. Then I have two quick follow-ups on this. How do you see improvements pacing between what you started last month and by the end of 2017, and will the profit improvement be reinvested in the business or used to pay down debt?

We'll provide a more precise number on this next quarter. Many initiatives will yield significant profit growth, which is why we are prioritizing the key projects. The impact of larger portions will be felt mainly in 2016, while others will take longer setups. Therefore, we believe that by the end of 2016, we will see the full impact of this plan in 2017.

To answer your question about the use of proceeds, the focus remains on reducing leverage and improving our balance sheet, thus continuing to pay down debt with incremental free cash flow.

Hi. Just a quick follow-up. The $300 million, Jim, does that also factor in the impact of inflation, just basic lift in your overall costs or is that a number that by the time we get to 2017 really should be flowing through the income statement?

It should be flowing through the income statement, and we'll be tracking this and reporting on a quarterly basis from the next quarter on.

Okay. And then, Jim, just following up on the strategic options. There's been discussion of The Mirage being on the market. Can you clarify whether or not it's actually on the market?

The Mirage is not on the market. The Mirage is an outstanding property with tremendous employees that we respect dearly. We do not actively list properties for sale. That said, we meet with potential buyers, and significant market interest exists for Las Vegas real estate. We will come to a conclusion about our corporate structure shortly.

So just a final thought about the valuation gap we perceive. Are you confident that it will close?

I am highly confident that it's going to close.

Hi. Thank you. Just moving on to your results in the quarter, can you help us understand how much of your performance benefited from the Mayweather-Pacquiao fight, and how should we think about your flow-through goals going forward?

We benefited from the Mayweather fight, but it negatively impacted our flow-through accounting in the quarter. Flow-through isn't our focus; we prioritize margin improvement. The fight was profitable and factors into our future events as we continue to host significant events.

The fight led to increased traffic and revenue, but tracking flow-through is complex due to accounting rules. We're focused on improving margins and expect that a stronger convention calendar will drive future growth.

Given the environment, we need to drive for growth despite the new capacity in the market. We need to focus on process reengineering. Our growth should bode well for future performance, and we are testing our strategies diligently.

Can you comment on potential FTE savings as you think about opening your new property?

Absolutely. We're adopting shared service strategies with significant performance improvements. We're focused not only on cost savings but on improving labor quality with the skills required.

Good morning, everyone. Jim, regarding your assets and the REIT structure, how do you view potential sale-leaseback structures, and how do your development projects fit into this?

We're not opposed to sale-leaseback structures, especially as they could apply to our strong, predictable cash flows from regional properties. Our development projects are also candidates for this as we expect them to succeed in the current market environment.

Regarding the 6% REVPAR guidance for the third quarter, do you expect to see a similar growth pattern between your luxury and non-luxury assets compared to the second quarter? Yes, I believe that is fair. We see growth in the non-luxury properties, particularly in their pricing as we enter the third quarter.

We believe that we have considerable upside due to the ongoing convention business and the macro environment surrounding Las Vegas, thus supporting our optimism.

Jim, regarding the Profit Growth Plan, what are the margin targets across the Las Vegas Strip properties versus regional properties?

Our wholly-owned Las Vegas properties and regionals can achieve similar margins, benefiting from the plan and streamlining management. We are reducing waste and costs, improving processes, and enhancing guest experience.

Regarding joint ventures, can you talk about the opportunities you see in your joint venture portfolio?

We've recently exited some joint venture assets. We are focused on our existing ventures, especially the CityCenter, and have plans to maximize cash returns while considering future monetization opportunities.

Can you discuss casino revenues on the Vegas Strip and how they compare to market performance in Nevada overall, particularly in terms of your regional strategy?

In the second quarter, our performance was driven mainly by our domestic side of the business. Events like the Mayweather fight brought significant traffic and revenues, which were crucial to our performance, offsetting other challenging markets.

Our domestic quarter was particularly strong, benefiting from high-quality events that attracted a variety of customer segments beyond the typical clientele we see.

Overall, domestic-driven events have led to a good third quarter start. We believe our REVPAR guidance stands strong due to our proactive strategy and successful event execution.

On your 3Q REVPAR guidance, why do you believe your performance will differ from weak forward rate surveys?

Our strength is underwritten by a robust convention schedule, and we expect to surpass 2014's peak in terms of business bookings. This increase reflects our growing presence in this market.

Our focus on attracting diverse types of customers, innovative event strategies, and solid planning have all contributed to our strong outlook for the future. So, with that, I think we've taken up everyone's time. Thank you for participating in the call; as always, we're here to answer any additional questions you may have. Thank you.