MGM Resorts International (MGM) — Q3 2016 Earnings Call Transcript

Thank you, Jamie. Good morning, and welcome to the MGM Resorts International third quarter earnings call. This call is being broadcast live on the Internet at www.mgmresorts.com, and we have furnished our press release on Form 8-K to the SEC this morning. On this call, we will make forward-looking statements under the Safe Harbor provisions under the federal securities laws. Actual results may differ materially from those contemplated in these forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from these forward-looking statements is contained in today's press release and in our periodic filings with the SEC. During the call, we will also discuss non-GAAP financial measures in talking about our performance. You can find the reconciliation to GAAP financial measures in the press release, which is also available on our website. Please note that this presentation is being recorded. During this call, we reference net revenues and EBITDA on a same-store basis, which excludes contributions from Borgata, which the company began consolidating in August of 2016, and Circus Reno, which the company sold in 2015. Our supplemental earnings deck is posted on our website, which we hope you will continue to find helpful. Finally, please be reminded that MGM Growth Properties will be holding a separate earnings call after this call at 12:30 p.m. Eastern Time. And with that, I'll turn it over to Jim.

Well, thank you, Dan, and good afternoon, everyone. And can I say, boy, we've been waiting for this call. We're incredibly proud of the entire MGM Resorts team that contributed to these really epic results. And since they speak for themselves, I'm going to keep my comments a bit more brief than normal to make sure we have plenty of time for your questions. But let's just be clear on a few highlights. Revenues were up 10% year-over-year, and adjusted property EBITDA was up 25% to over $750 million. Our domestic resorts revenue increased 8% and the cash flows remarkably increased 31% on a same-store basis, led by continued strength in Las Vegas as well as the very productive hard work to grow our share nationwide. We delivered incredible growth from both the top line and EBITDA perspective. This marks our sixth consecutive quarter of double-digit EBITDA growth and we produced the best same-store net revenues and cash flows at our domestic resorts since 2007. How did we do this? Driving on our profit growth plan with pristine execution, evidenced by our cash flow margins, which have consistently grown since we launched the plan. As of the third quarter, our margins stood at 31% on a same-store basis at both of our Las Vegas Strip resorts and our domestic resorts compared to 24% at the end of 2014. In the third quarter, we achieved $78 million of incremental adjusted EBITDA, which includes $5 million contributions from our 50% share of CityCenter. We're running a run rate close to our $400 million target today on PGP. But to be clear, this does not imply that we are done. The profit growth plan was designed to inspire a new way of looking at our business. We knew then it was not a quick fix, nor was it just another cost-cutting effort. It required months of careful planning across all 14 properties, each with thousands of employees, as well as thoughtful coordination and messaging to guarantee success and sustainability across our platforms. We put in a tremendous amount of effort, a truly unprecedented level in our industry. This resulted in a permanent cultural change in our organization of which we are all proud. We've changed this company literally at its core. From the level of sophistication in the way we look at our business and our customers to the future of the industry, its evolution, and what MGM's role is within this industry. We built the building blocks that have created the success we see today. We're leaders in innovation and operational excellence. We have a deep commitment to corporate and social responsibility and an earnest effort to invest in our people, the development of our corporate culture led by talented, passionate, and experienced leaders. That's what has led us to where we are today, committing us to building this powerful destination brand that's truly unlike any other in the entertainment and hospitality space. We have been disciplined and targeted in our capital investments with extremely high returning projects, such as the expansion of the Mandalay Bay Convention Center and the remarkably grossing T-Mobile Arena. We have scoured the landscape and found accretive transactions, which we have made as an opportunity to participate both from MGM Resorts' perspective and the premier triple net in the gaming space today, MGM Growth Properties, the company we own a 76% economic interest in. At MGM, again, we remain focused on generating free cash flow, strengthening our balance sheet, and we have a very near-term goal of becoming investment grade. But we didn't get there overnight. We've been working on that since the depths of the recession. It has been the result of the dedicated effort of over 70,000 men and women working at MGM Resorts, many of whom are listening today. To them, I say thank you for creating the company that we have today, a stronger company, more capable of growing than its peers, and more capable of winning in the future. We're excited about that future, about the future of Las Vegas, about MGM National Harbor, which will open next month in the Washington, D.C. area, MGM Cotai, which will help expand and define the growth of the Macau market, and MGM Springfield, which will turn around the fortunes of a once proud but struggling city, providing jobs for 3,000 men and women in that market. We know we can win if selected high-value markets open up because MGM represents the present and future in the gaming industry, and we're dedicated to providing value to all of our shareholders. With that, operator, I'd like to get right into the Q&A.

Hey. Good morning, everyone. I had two questions, one in Las Vegas and one for Macau. In Las Vegas, looking into next year, if you could discuss your visibility into the pricing power. This year has been a terrific success. Maybe direct your answers to demand after ConAgra to get a sense of what the same-store results might look like on a more normalized basis.

Sure, Harry. This is Dan. I'll take that one, and Corey you may chime in as well. But 2017 is shaping up quite nicely across the board. As we look at our convention group business, we're sitting on roughly about 90% of the contracted room nights in that sector already on the books. Usually by this time of the year we want to be at around 80% to 85%, so we're ahead of plan there. Obviously, ConAg is a big benefit in the first quarter, but the rest of the year looks equally strong overall. It might be a little too early to give specific 2017 guidance, but based on what we're seeing right now, I'd say generally speaking, we're seeing kind of mid-single digit rate growth into 2017, which is consistent with recent years in the Las Vegas market. So I would say it’s steady as she goes at this point, and 2017 looks as good, if not better, than 2016.

And my follow up is for Grant. For the time being, the MGM Cotai will have a locational and infrastructure disadvantage, but how long do you think that's going to last? And how are you marketing to overcome any temporary disadvantage?

Thanks, Harry. Hi. I don't see anything like that as a disadvantage. Clearly there are some challenges. We're excited to be opening in what we see as being the sweet spot of Cotai over time. We understand that we need to be focused on connectivity and transportation, and we're working through all of those issues. The new operators are ramping up a little slower than expected. What's critical for us is that when we launch our programs, we see our opening as the start of our activity. We will present many different activities, introducing and reintroducing elements as we bring on other facets of the property. We have indicated before that The Mansion and the theater will come on in a staged approach, giving us opportunities to create strong first impressions. We're very aware that we need to maintain the intensity in the marketplace to drive visitation. It's not a one-off; it's a planned, consistent execution, and we pride ourselves on those elements.

Can you give specifics on which segment or segments you're targeting?

Firstly, we want to focus on segments where we can drive traffic ourselves. The mass market is a strength, and we want to explore that along with potential opportunities for in-house VIP traffic. We've indicated we likely won't open the property with junkets, but we're still discussing this with operators, understanding that we want to build momentum before bringing those participants into the business. We're focusing on what's controllable, driving foot traffic through food and beverage operations, focusing on the Macau market, Hong Kong, and then expanding reach into China. We have an extensive program laid out and are working on the details of ensuring we can communicate that consistently. Remembering, Harry, as we've indicated, we drive the MGM brand, and it's essential that we maintain intensity in Macau because it’s crucial to us. Whenever we go out of market, we must not forget the new property in town will also occur with incremental business to the Macau property.

That's very helpful. Thanks, guys.

Thanks, Harry.

Thanks. And Grant, while you're kind of in speaking mode, anything on the mass side at the property? Clearly, tremendous growth in your mass table footprint. Is there color you can provide on that end?

I think it's actually looking like there are a number of sweet spots emerging. The high-end premium mass has been a bit quiet, but we're starting to see strength there come back with repeat visitation and increased frequency. The area we've worked on for a long time, the mid-upper mass business, is gaining positive traction. We need that to happen because obviously we need to build out for Cotai. It seems to be strength across the board, and I believe that will maintain momentum.

Great. Thanks. And then Jim, Dan. Jim, you talked about the status coming out of the 3Q on the profit growth plan and obviously through the goal for this year. Are you identifying incremental things as you're moving through the process, or is the view still the same with the $400 million target simply coming sooner?

It's hard to express how proud we are internally because you'd have to see how comprehensive this has become on every property. Hundreds of senior executives and thousands of people have bought into it. A project management office of 15 full-time individuals; over 500 initiatives have been discovered recently that we hadn't thought of a year ago. Internally, we believe we will always find ideas; we're moving into a mode of continuous improvement. So, yes, we're ahead of schedule for the $400 million target, but that doesn't mean there’s a finite end date to this program. We will continue to work through it and find more ways. We're operating this business more sophisticatedly than ever in our industry, leading to other innovations and improvements, and we'd expect to see more of that in the future.

And, Jim, I would add that many of the ideas we’ve found will also apply to Borgata. We’ve already begun to line those ideas up.

That's a good point, Corey. Borgata is becoming part of this process. And there are two elements we haven't discussed much about Borgata that will accrue to our collective benefit: programs we will put into place and the cross-marketing of Borgata with our East Coast presence.

Great. Thanks, everybody.

Good morning, everybody. Jim, on the topic of PGP, how have benefits in the 3Q evolved or differed from earlier this year and last year in terms of sources?

I'm going to hand that over to Chris Nordling who's been running the show.

Hey, Joseph. In the beginning, we were more revenue-centric, and then as we progressed with operations and became more efficient at the operating expense level, we found our stride. Now we're about balanced, one-third revenue and two-thirds expense. Many ideas took a long ramp-up to institution. As we got into the second half of the year, we instituted several programs whose full benefits will be seen in 2017, but we’re starting to see the run rate here in the third and fourth quarters. This has been a comprehensive endeavor; we had around 800 PMO meetings over the last 16 months and 100 steering committee meetings with senior executives to drive these initiatives.

Give them one example, Chris; perhaps something like zone maintenance?

Zone maintenance is a perfect example. We had to go property by property in the operating engineer area, consult with our employees, our union constituents, and our operators. We needed a series of meetings on our objectives, aligning our sourcing efforts for supplies and equipment. That took about eight or nine months to roll out and get set up.

Great. Thank you. And Grant, Macau came in much stronger than we and consensus estimated. Can you run through the revenue and EBITDA impact from the high VIP hold? Did you perhaps hold high on direct, and can you quantify any benefit from collections to get to clean net revenues and a clean EBITDA number?

Yes, we had a strong quarter. We've had a couple of less favorable quarters in the past. This quarter exceeded normalized hold by about $15 million, which adjusted-margin would bring it to around 29%. In terms of collections, it's really nothing substantial, but we've managed to maintain payment cycles. There might have been a couple million in collections, overall looking at margins close to that 28.5%, which we believe are stabilized. Previously, I stated margins were somewhere in the mid-20s. Does that clarify for you?

That's helpful. Thanks, guys. Good work.

Hi. Thanks for taking my questions. Jim and team, in the quarter you outpaced RevPAR growth forecast by about 400 basis points. What were the surprises you didn't anticipate and what could surprise you in the fourth quarter?

You want to start with that, Corey?

Sure. Part of this is that the market was strong, especially with the convention base we had. We leveraged our yield off of that as well as we’ve been focusing more on marketing prowess and have changed our marketing company. We are really aligning our advertising costs with yield, benefiting us. We expect to see growth in the fourth quarter despite tough comparisons.

Operational changes have certainly helped. T-Mobile Arena was the highest-grossing arena in the world in September, driving traffic in the neighborhood. We're also opening the Park Theater on December 17 with Stevie Nicks, expecting good attendance. The leisure business has been stronger than predicted, and we're going to end this year with a higher convention mix than anticipated. It will be over 19%, which will be a record.

That's helpful. While we're on the Park Theater, how should we think about Monte Carlo once that opens? There's some construction disruption now, but once that stops and the Park Theater is open, how much of an EBITDA lift do you think that property gets?

Monte Carlo will undergo significant renovations over the next three years. The Park Theater should help significantly with the lineup of events we have planned. The challenge is that Monte Carlo is getting a complete renovation, and it won't be one of our best-performing properties for a couple of years. New York-New York and Aria will likely benefit more from the new theater.

How can we think about the Park Theater in relation to MGP? Is it realistic that you could sell that real estate to MGP?

Their call is in about an hour, so I’d suggest you ask them. One concept we developed is if we can create capital that generates significant cash flow and identify a clearing price on an arms-length basis to the REIT, both parties would be interested in pursuing that. We have high hopes for the success of the Park Theater, considering its robust lineup and the consistent success of similar venues.

Okay, great. Thanks.

Hey. Good morning, everyone. Starting with Las Vegas, as we begin to cycle the PGP investment and enter a more normal environment, could you provide a ballpark for operating expenses? They're probably down about 3% year-on-year. Do you think they'll be flat, up, or down as we think about 2017 and these tough comps?

I'll take a stab at it and I'll be corrected by the team. I believe our revenues will grow in 2017 due to room revenues, which we believe will increase, and non-gaming amenities that's driving revenue, like Park Theater. I also think margins will expand, meaning expense growth will be more muted than revenue growth, resulting from higher margin businesses and residual benefits of previous initiatives. The limited supply in the market bodes well for margin growth in 2017. I don’t know if you two want to add anything.

I would agree, Jim. Cost of living increases exist, but we're offsetting a lot of that. Our goal is to keep operating expenses flat with labor initiatives we have in place. The labor component of PGP is just beginning.

Great. Thanks for that. My follow-up is on Macau. Grant, you mentioned stabilization, but also strength. Can you elaborate on what you're seeing recently? Has the late summer performance continued into the fourth quarter, and what impact have the Parisian and Wynn openings had?

We've experienced a long flat cycle, and 'strength' speaks to confidence—operational and consumer confidence. We’ve seen some positive trends recently. Parisian had a very successful opening, showcasing market capacity growth when executed well. Regarding impact, the openings have had negligible effect on the peninsula, which has shown resilience. Our market share is strong, and as we see growth coming back, we'll succeed. We’re excited to offer high-quality products across both properties in both locations. We believe we can leverage both the peninsula and Cotai for growth.

I'd like to add something. We have the best CEO in Macau in Grant Bowie, and the most sophisticated marketing machine in Macau. You can see that in our results; MGM is the market leader in mass on the peninsula. The peninsula is always relevant. There’s been discussion of shifts toward Cotai, but that's not accurate. The peninsula will be a large market, larger than all of Las Vegas combined. We just returned from a trip observing the neighborhood; the Wynn Palace is beautiful and will undoubtedly succeed. There's market growth for all operators on Cotai, and we're focused on presenting unique entertainment experiences. Grant, this is Jim. I want to emphasize we’ve been developing MGM Cotai for three years, diversifying away from gaming and creating an entertainment spectacle that people haven’t seen before. We’re also integrating diverse food and beverage offerings that cater to local tastes. When MGM Cotai opens alongside Wynn and City of Dreams, it will become the new Cotai epicenter just as MGM and Wynn are on the peninsula. We are prepared for the market's future growth.

Thank you very much. Congratulations on a great quarter.

Thank you.

Thanks, Shaun.

Good morning, everyone. About a month away from National Harbor opening, can you share thoughts on initial ramp expectations? I know reservations have only recently begun.

We’re incredibly excited about it. It's crushingly beautiful. The buzz surrounding National Harbor is unlike anything seen in a new resort recently. It opens December 8, with entertainment lined up starting immediately thereafter. We're concerned we might not have enough room for everyone eager to visit. Hotel bookings are rising, and occupancy rates are increasing all around National Harbor, prompting Gaylord to expand its convention center in anticipation. While there will be a ramp-up in terms of labor, we hold extremely high expectations for customer demand starting right from the opening.

Thanks, Jim. That's helpful. Regarding Japan, given recent developments and potential legislative action, what are your high-level thoughts about that market today?

Fresh off a plane from Japan, I can say there are positive signs regarding the Promotion Act. We’ll know soon if it passes, and indications are favorable, which signifies that the bureaucratic machinery may be activated for the Implementation Act. RFPs could emerge over the next few years. Many companies are competing, and we’re putting significant effort into becoming a frontrunner. The potential for Japan immensely surpasses that of Singapore and could be highly lucrative for all involved. Stay tuned—if the Promotion Act is passed, it's a good sign as Japan gets its machinery in motion.

Thanks for all the insight, Jim, and congratulations on a strong quarter.

Thank you.

A Macau question and a Vegas question. For Macau, you've discussed opening with just mass tables. Another operator opened similarly but is now adding VIP and junket tables. Does this change your thinking about opening without them?

We recognize it’s about a ramping-up process, and we’re committed to diversifying our product mix for Cotai. We understand the need to leverage all opportunities, but we'll focus on driving mass and premium mass businesses first while working with our existing junket operators. Our strategy is about driving profitable growth rather than just opening rooms. The growth is within the mass market, and we need to strengthen our footprint.

This is Bill Hornbuckle. I want to add some color: we have a massive international market supported by around 200 marketing executives worldwide. This operation will be active when we open The Mansion, which will be unique to Macau as it is in Las Vegas. While junkets will guide future judgment, all our activities domestically and in Macau will occur from day one.

Great. Thanks for the information. For the Vegas question, I’d like to understand what drove RevPAR growth in the third quarter. Can you break this out between convention business and cash-paying customers?

Sure, Robin. All of our RevPAR increases are primarily coming from the rate side of the equation, with a particularly strong quarter on leisure. We continue to maximize our convention footprint, allowing us to yield leisure and retail pricing.

The significant increase in convention mix allowed us to replace lower-end leisure business with convention business, enhancing our overall returns.

The end of year convention mix will be over 19%, a record for us. We're able to juggle business to accommodate substantial clients, signing on a major Fortune 50 company for the next five years. The ability to juggle within our facilities allows us to attract customers, significantly enhancing our convention capacity.

Okay, great. Thank you very much.

Hey. Good morning. Just one question for me. Your domestic U.S. casino revenues were up 7%. Jim, you mentioned returning Far East play in the Vegas market. Can you parse the performance between mass and VIP play in Vegas or in your domestic properties in the third quarter?

Looking at gaming, high-end play was strong in the quarter, driven by the Far East and Korea. Our market share remained flat, given our already high share. Slot play increased slightly, and we saw notable increases in blackjack and other non-international play as well. The hold impact for the quarter was around $30 million.

Do you feel good about the trajectory of gaming play, both VIP and mass, going forward?

Yes, we do. It's event-driven, and for 2017 we expect five times the number of events compared to this year. Between the Park Theater, National Harbor, and arenas in Las Vegas holding more events, this is a very event-driven business that positions us for growth.

I’m hopeful for the domestic side, especially with our new East Coast presence. Previously, we couldn’t access the Borgata database, but now with National Harbor and Borgata, we'll leverage cross-marketing into Vegas.

Great. Thank you.

Thanks, Thomas. And with that being the last question, I thank you all for joining us. If there are any follow-up questions, we'll be around all day. The MGP call will begin at 12:30 Eastern Time in a few minutes. Thank you for joining, and we look forward to seeing you soon.

Thank you.