MGM Resorts International (MGM) — Q2 2019 Earnings Call Transcript

Thank you, Chad. Good afternoon and welcome to the MGM Resorts International second quarter 2019 earnings call. This call is being broadcast live on the Internet at investors.mgmresorts.com and we have also furnished our press release on Form 8-K to the SEC. On this call, we’ll make forward-looking statements under the Safe Harbor provisions of the federal securities laws. Actual results may differ materially from those contemplated in these 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. Except as required by law, we undertake no obligation to update these statements as a result of new information or otherwise. During the call, we’ll also discuss non-GAAP financial measures in talking about our performance. You can find a reconciliation to GAAP financial measures in our press release and investor presentation which are available on our website. Finally, this presentation is being recorded. I’ll now turn it over to Jim Murren.

Well, thank you, Cathy, and good afternoon, everyone. We had a fairly straightforward quarter with minimal deviations one way or another. We’re extremely busy executing on our MGM 2020 plan. Our operating model transition is complete, and our headcount reductions as part of this transition are now behind us. We continue to make progress with our real estate committee and we hope to report back to you in the coming months. As we look to the future, we expect to benefit from quite a few tailwinds with improving property earnings, strong Las Vegas macro trends and MGM 2020 benefiting us in the back half of this year and into next year. This gives us confidence in our ability to hit our financial targets next year, and as an example of this confidence, we bought back 11 million shares in the second quarter alone. So let’s get into the second quarter. We came in pretty much in line with our expectations with consolidated net revenues up 13% and adjusted EBITDA up 9% year-over-year to $756 million. We have lower hold at our Strip properties and some one-time items that totaled about $35 million. And I guess the best way to understand the earnings power of the business is to add those two numbers together. Here in Las Vegas results were in line with expectations as we saw strong demand across our hotel, food and beverage and entertainment segments driving 1% growth in overall net revenues. Our non-gaming revenues were actually up 5%, REVPAR up 2.3% driven by both occupancy and rate, and this was led by strong demand in all of our segments. Gaming revenues declined by 12%, which was two-thirds driven by overall table games hold and one-third by baccarat volume; partially offsetting this were stable mass gaming trends as our non-baccarat table games were roughly flat and our slot handle was actually up year-over-year. Our Strip EBITDA declined 4% to $418 million mostly driven by lower than normal table games hold of 21%. As a reminder, we’re also comparing against a 25% table games hold percentage in the second quarter of 2018. The year-over-year EBITDA hold impact was roughly $26 million, that’s about 6% of our Strip EBITDA. On the hold adjusted basis, Strip EBITDA was actually up 2% year-over-year to $436 million. The baccarat volumes are still down year-over-year and that’s driven by less Far East play. Second quarter volumes have actually leveled out from the first quarter, which is consistent with our forecast. To size it for you, Far East baccarat represents just about 6% or 7% of our Strip EBITDA, so the lower level of play represents only about 3% of our Strip EBITDA. Our second quarter Strip EBITDA margins were 28.5%, that was down 145 basis points year-over-year, but excluding the impact of baccarat and year-over-year hold variance, our EBITDA margins would have actually been up slightly. Turning to our Regional properties, we, of course, have many of the premier assets across the United States, and we are the profit leader in many of the markets in which we operate. This helps us drive market share gains over our peer group. Our regional properties continued to perform well in the second quarter; revenues were up 29%, EBITDA was up 34% with the majority of the growth coming from the inclusion of Springfield, Empire City, and Northfield Park. EBITDA at our Mississippi properties increased 24% during the quarter and continued to benefit from the increased visitation because of sports betting, which is encouraging for us as more states come online with that product. Over to MGM China, revenues grew 26% to $706 million and adjusted property EBITDA was up 43% to $171 million that’s due to the continued ramping of MGM Cotai. We did have a weaker than normal VIP hold in the quarter, which negatively impacted EBITDA by about $10 million. As we all know, the VIP market had been a bit rugged, but the mass for us continues to show strength. By property, MGM Macau achieved EBITDA of $116 million, up 17% year-over-year. Mass business there was stable, and though as I said VIP volumes were impacted somewhat by transitioning some of the junket rooms over to MGM Cotai. MGM Cotai continued its ramp with $56 million of EBITDA, up 171% over the prior year quarter. Our Mansion is still fairly new and ramping; 20 villas are open, seven more will follow shortly. These villas are already allowing us to better attract premium mass customers. As always, Grant is on the line to answer your questions. Moving to MGM 2020, we’re happy with our progress in MGM 2020. We now believe we will achieve $100 million of EBITDA uplift this year versus our prior guidance of $70 million. While we think it’s a bit early to revise our overall MGM 2020 guidance, the progress we’ve made thus far gives us increased confidence that we will achieve our phase 1 goal of $200 million in incremental EBITDA by the end of 2020. As I mentioned earlier, our operating model work is now complete, and while we have reduced our fixed labor, it’s important to know that MGM 2020 is not just a cost-cutting exercise. We’re laying the groundwork to position the company for future growth, creating efficiencies and giving our properties the ability to scale key initiatives and best practices. So it’s worth taking a moment to talk about our thinking. We spent years refining our structure with some of the most expert management consultants to land on this model. Models designed to foster collaborative relationships between our Centers of Excellence or COEs, and the properties. While strategies are set and enforced at the COE level, this is after thorough due diligence and guidance from the properties. COEs ensure that the brand identity of each property is preserved and the MGM portfolio offerings are complementary to each other, which also minimizes cannibalization. We have kept senior leadership at the property level. This is especially the case at the regional properties where we know market knowledge and physical presence is key. Property presence remains keenly focused on the customer experience and employee engagement. By centralizing the strategic functions with our COEs, and our portfolio presidents, as well as clarifying and realigning roles and responsibilities, our property leaders can focus their full attention on enhancing the customer experience. While this has been a transformative change internally, it’s worth repeating that we have not been distracted in our day-to-day operations and the customer experience has not been adversely impacted. Let me provide some numbers on phase 1. By the end of May, we reduced headcount by 1,070 people resulting in approximately $100 million of annualized savings. These were nearly all managerial or supervisory positions. It was a 12% reduction off the base of around 8,700 positions, with some more back office departments seeing heavier reductions. On the other phase 1 components, we’re making good progress on variable labor, sourcing, and revenue optimization. We expect to implement the majority of these initiatives by year end. Looking out further for 2019, we feel comfortable where the Strip consensus is for the year. This outlook reflects client volumes that remain at current levels and as we’ve highlighted in our previous calls, the majority of the building blocks for the rest of our business are improving throughout the back half of this year. The fundamental backdrop in Las Vegas remains very sound, and we see robust demand in nearly all of our business segments. Convention bookings in Las Vegas continue to shape up very nicely in the second half and are actually tracking better than we expected earlier in the year. We’re expecting a near record convention mix this year, benefiting from a couple of favorable group rotations. Our expansions at MGM Grand and Aria are helping drive momentum into next year. Over the medium-term, the Las Vegas Convention Center expansion is expected to drive even more citywide business to the city. While leisure booking windows are naturally always shorter, current trends are also improving there, especially as we progress through the summer months. This is helped by the strong base of our group business, but we also continue to strategically manage our leisure mix to place the right customers in the right hotels at the right time and opportunistically lean to fill in periods where we need to. Our entertainment calendar in the second half of this year is one of the strongest in the company’s history. We’re maximizing our leadership in live entertainment and sports. Of course, we just hosted the MGM Resorts NBA Summer League, which sold out its first two days and hit new attendance records in the dead heat of the summer. The Las Vegas Aces, currently number one in the WNBA, will host the All-Star Game this weekend at its home at Mandalay Bay. Mandalay also recently hosted the NHL Awards ceremony, and of course, the NFL Draft is also coming to Las Vegas next year. Excitingly, the Las Vegas home of the Raiders Stadium continues to shift the center of gravity down to the mid-to-southern end of the Las Vegas Strip. Raiders Stadium will be a catalyst for our south Strip resorts, especially Mandalay Bay, as we take full advantage of its location by hosting an amazing tailgating experience before and after all events at the stadium. Before we turn over to questions, I’d like to touch on a few of our key strategic objectives. We remain committed to our long-term growth strategy and are on track to achieve our stated goals of between $3.6 billion and $3.9 billion of consolidated adjusted EBITDA and free cash flow per share of $3.50 by the end of 2020. The key drivers remain the ramp up of our newly opened properties and our project MGM 2020. Our major development projects are complete, and our CapEx is dramatically lower and known. Our properties are all in excellent shape with no deferred CapEx, and as such we expect to generate accelerating free cash flow. We have worked diligently this year executing on MGM 2020. Our operating model today gives us far more control over our cost base and positions us well through this cycle. We are running a very disciplined capital allocation strategy, focused on reducing our net leverage to between 3 and 4 times on a consolidated basis by the end of 2020. We aim for steady growth in our dividend and to buy back shares where appropriate. We have further opportunities to create long-term value in four key areas being Japan, Sports, Digital, and by maximizing the value of our real estate. Before we get to the Q&A, let me quickly touch on our real estate committee, which has been in the news lately. The committee was formed back in January and has been working diligently with the help of its advisors. Our work streams are right on track with our internal timetable. It’s worth mentioning that the committee is exploring all options with very clear guideposts in mind. Any recommendation must support MGM’s goals of enhancing free cash flow per share, maximizing the value of our owned real estate, preserving the company’s financial flexibility, and creating sustainable shareholder value. I am increasingly optimistic that the committee’s work will achieve these goals and anticipate sharing their results in early fall. With that, I’d like to turn it over for Q&A.

Good afternoon, everybody. Jim, with respect to MGM 2020 and the updated target for 2019, the $100 million versus the prior $70 million, can you talk about what that $30 million relates to? Is it more of a timing issue than just finding more cost and more efficiency? In the $100 million benefit to this year, can you talk geographically or what reportable segments should we see this EBITDA uplift from?

Sure, Joe. I’m going to turn that over to Corey Sanders, who has been leading the charge more than anyone else and is leading a group of very talented men and women here to achieve these better-than-expected results.

Hey, Joe. MGM 2020 is about literally 50 different initiatives and the $100 million and the upping of it is really from the initial operating model work, which we felt would be more around the $80 million number. We exceeded that area and we’re exceeding in some other areas too. We want to ensure that all other initiatives also have the same impact that this one does. Generally, it’s money that we think is not necessarily additional that we’re willing to bank, but we’re feeling pretty optimistic and confident about 2020. The second question was on the impact in each area.

Right. Reportable segments or geographic segments?

Yeah. So 60% of it is going to probably impact the Strip, 30% will impact regionals, and 10% will impact corporate.

Great. Thank you. And then my follow-up is for Grant, good morning to you. Grant, just trying to get a sense of the ramp in the 2Q at MGM Cotai, the $56 million of EBITDA in the quarter, how much of that was more weighted towards the back half of the quarter just with The Mansion ramping? Trying to get a sense of what sort of the exit quarterly run rate was coming out of June?

Thanks, Joe. Good question. We were actually pretty pleased to see the price of the ramp-up increase. Yes, there was additional enhanced earnings in the second half. The critical point with The Mansion, as I think we’ve always discussed, is we’re building momentum and we’re seeing that growing pretty well. I would say we’re continuing to see the pace of that growth continuing into the third quarter. We’re very happy with how we’re seeing it. Most importantly, we’re seeing solid return visitation. We’ll have all the villas online by the end of September, which is great because we’re now starting to run into demand issues, which is really positive, and then we can start cranking the yield. The pacing is good, primarily in mass, but we’re also seeing really solid performance growth from returning reactivated in-house VIP customers as well.

Thanks, guys. Good job.

Jim and Corey, thanks for the detail on the 2020 plan, I think it’s really clear. As investors think out now that you’ve started to hit your stride here, can you give us, I know we want to steer clear of any sort of hard guidance, but can you give us your view on the baseline underlying earnings growth or algorithm that you expect for the portfolio as we start to think out 12 months and 24 months from today on this kind of new earnings stream? How do you think about broad-based cost growth that you’re trying to fight? What do you expect this portfolio can do on the top-line basis to sustain or grow margin?

At this stage, we’re just going to reiterate that $200 million number. Recall, back in the PGP plan, I think we were about 9 to 10 months into that before we revised the number at all. So we’re a little bit early to talk through what could happen going forward. But I will say that the institutional memory of that and the horsepower we have gives us a lot of confidence in how holistically we’re tackling this plan. I have to reiterate – this is not just the cost-cutting plan; it’s literally about reengineering our business from the top down in a way that is unique to the gaming industry and more akin to companies in other industries. Disney would be a good example of that, where we are using our top organizational talent and marrying that with strong operating people at the properties. This gives us more flexibility to manage our expenses in real time.

What I would add, Shaun, is on the inflationary cost of our business, we feel the organic growth should more than offset that, and anything that we do here on MGM 2020 phase 1 should all go to the bottom line. The pure costs we could cut here, not just what we’ve done on labor, but also on the sourcing side, where we spend approximately $2.6 billion a year in product and services, we see opportunities to also increase the bottom line of the company and achieve our margin goals.

Great. Thank you very much. One follow-up: there was significant consolidation related to Las Vegas and Regional gaming. It has to do with the alignment you’re laying out here, but it also relates to what you've done with Northfield Park, Springfield, Borgata, etc. How do you think about database and the importance of Regional gaming network and feeding Las Vegas as an overall strategy and how you’re positioned for that?

I’ll take the M&A part of that, and then maybe Bill or Corey can take that. Just to be clear here, we like what we own and I’m not really interested in owning much anything else. We didn’t look at the Caesars assets before the El Dorado trade, and we’re not looking at other opportunities to own bricks-and-mortar businesses just to be in a market. If we don’t believe we can lead the market and bring an entertainment component to a resort, we’re not interested in investing the shareholders’ money just to be bigger. We believe that sports betting will continue to provide a strong opportunity for the company over time, not only in and of itself, but more importantly, to enhance the profitability of our existing resorts. This strategy is also true for our loyalty program, which I’ll turn over to Bill now.

Thanks, Jim. With our Regional strategy, it’s been a couple of years since we took over management of Borgata, and now we have full access to that database. Springfield is ramping and growing, and adding over 1.25 names to our database helps us immensely. Interestingly, Empire City had its best quarter ever in Q2, besting results right before the Aqueduct opening. So we’re encouraged by both businesses and our ability to get cross-regional play and cross-traffic into and out of Las Vegas. Park MGM has helped that – over 250,000 sign-ups since the new brand launched. We’ve seen cross-play go up close to 50% and our room nights about the same compared to a year ago. So the strategy in the Northeast is working, allowing us to bring people back and forth from Maryland, New Jersey, now from Empire into Springfield, ultimately to Las Vegas as a price point.

Thank you very much.

Hi, thank you. Good afternoon. Jim, earlier in your prepared remarks, you talked about your EBITDA goals for MGM 2020, which we all know very well. You reiterated the drivers of that, which included ramping of your new properties. In the past, it’s been suggested that the new properties could look like $350 million to $400 million in Macau, slightly below $100 million in Springfield, and Park MGM around $100 million. Are those still achievable?

As you know, we haven’t gotten into the property by property building blocks. We do know how those properties are doing, all of them. We are reiterating cash flow numbers for next year and the free cash flow numbers because we see continued growth in those properties and frankly, a better macro setup in Las Vegas than we talked about late last year. There’s no doubt that Las Vegas is performing well and we will continue to do better in the back half of 2019 and into 2020. The business we have on the books across multiple channels is encouraging. I would describe our company as very dynamic. If we are behind in one area, like Springfield, we’re ahead in many others, and that is valuable for a diversified company. We have a very good understanding of the MGM 2020 initiative, and we’ve dug deeper than we discussed in the first half of this year, which should benefit the back half and into 2020.

That’s a helpful perspective. I appreciate that. And Grant, hello. I know you’ve talked a bit on the call about the ramping of Cotai, but I also know you’re optimistic about the potential for Peninsula, which slightly outperformed expectations. How do you think about that property in light of the Cotai property ramping and the market in general?

If we look at the market in general first, we’re still positive and optimistic as we always are in the mass market. That’s where we’ve positioned ourselves. The junket market is going through correction, and we don’t expect significant change in those growth patterns. The focus for Macau is to replace any customer traffic shifted to Cotai, which has stabilized significantly, and we’re starting to see share in that regard. Refurbishment at Cotai continues, and we’ve been working on the east side of the casino the last few months, which is where we expect any effects from the transition. We’ve had some, but not significant, and we’re accelerating that work to finish it before the October holiday. We’re very positive about our momentum at Cotai; it's important to note that the continued performance in Cotai has led to collective momentum across premium mass segments.

Thank you. It’s very helpful. Appreciate it.

Hello, everyone. I wanted to first follow up with you, Grant. The roughly 24% margin in the second quarter looks like there could be several hundred basis points of eventual upside. Can you talk about that? At least on the Peninsula in 2017, you achieved 28%. Do you get economies of scale that might get you beyond 28% depending on the mix within some reasonable time frame?

We’ve always guided on the stabilized margin in the sort of 26% to 27% range. We really achieved significantly higher margins in Macau for a period. Cotai is a bigger property, and some of the reinvestment rates are higher. Of course, we will strive for those sorts of numbers, but we think it’s prudent to guide in the 27% range. If we see significant market growth, I think anything is possible, but margin depends on market strength and revenue generation cost.

Is it too aggressive to think that you can get there by 2020 or is that probably closer to 2021?

If we see some significant market growth, yes, that’s possible. However, I would suggest that’s probably a tricky trigger for that.

Very good. And returning to Vegas, Jim, I had just a quick follow-up question that encompasses the size of the Vegas portfolio. Is there any thought to shrinking the size of the portfolio to match the size of M life? Would that make sense as a means of increasing efficiency and reducing reliance on third-party booking engines, particularly given the cyclical nature of group meetings and conventions?

We look at everything; we view our business as portfolio managers. We see scale certainly by having more than one property here on the Strip. Some properties perform better than others. However, having properties at multiple price points benefits us. The Summer League was a good example of this; having properties in multiple segments has been advantageous when attracting diverse groups from major events. Circus Circus is the outlier, as it is not integrated fully within MGM Resorts. Most other properties are part of M life and we do look at how we’re managing this company as a portfolio.

We manage our business by putting rooms on a gross profit basis. We understand all of our segments. Even in the OTA segment, we drive incremental EBITDA and high-margin business because they typically involve low investments above the fee. We use OTAs strategically and think we’ve managed the balance better than we have in a while.

Our OTA partners are essential to our business. While I understand the question's nature, it’s important that we strike a balance with them. We think we’ve managed that effectively.

Jim, I was wondering if you or Corey could kind of opine a little bit as it pertains to the real estate committee. How are you guys thinking about the balance between opco and propco? There’s a healthy amount of EBITDAR that you guys wholly own on the Strip and then own indirectly through MGP. How are you balancing the financing it provides you versus the ownership versus opco model?

A few things are clear to us. We’ve learned a lot over the last several months through our advisors. We know that our real estate is undervalued in the marketplace, which offers opportunities for enhancing financial objectives. The real estate committee is focusing on options aligned with improving the financial outlook. We recognize that there’s a mix between owning assets and operating them. An asset lighter model makes sense, but we won’t sell assets that diminish MGM Resorts' value. We have a strong understanding of the real estate necessary for our operations and the capabilities of MGP and its assets.

That’s very helpful. Just to follow up, you mentioned being comfortable with Strip consensus for the year, which I believe on a property level is about $1.7 billion. Is that the number you were referring to?

That is correct.

Two quick follow-ups. First on Park MGM. It looks like it’s starting to ramp up again. How should investors think about the cadence? Are you seeing or expecting any cannibalization or even halo benefits in the properties around it?

Our full ramp will occur through 2021 to achieve full value. We’re seeing strong performance from Italy and NoMad, both performing exceptionally well. Our job is to create stickiness in the casino on unrated play, and we’re working on that. Entertainment at T-Mobile and Park Theater creates significant traffic. The new pedestrian bridge, finishing in October, will help us capture eastbound traffic and create linkage across our properties.

We’ve seen benefits in the neighborhood. New York-New York had a tremendous month, with second-quarter revenues approaching top EBITDA levels. We’re seeing flow-through into Aria as well, which is continuing to outgrow its peers in REVPAR quarter over quarter.

And once the bridge is opened...

That’s a good point. The pedestrian bridge’s completion in October will facilitate traffic across I-15, especially benefiting Mandalay.

That’s helpful. The second follow-up is just on Macau. Given that Cotai is still ramping, how are you evaluating and prioritizing reinvestment or expansion over the next few years? How dependent is your thought process on further clarity on the next concession renewal?

On the capital front, we’re deep into the design process for additional suites, and initiating a preliminary Phase 2 expansion strategy. We built foundations for expansion when we constructed the property. Depending on the product mix, we might not see significant investment until around 2021 or 2022. We continue to be responsive and perform well with government engagement as we navigate the midterm review, focusing on localization strategies and small business development to ensure we’re well-positioned.

I have two high-level questions. One for Corey: it sounds like you've picked up group business in the back half; can you elaborate on whether it was sales-driven or if existing groups are getting bigger? And Jim, your outlook seems more confident this quarter vs. last; is that accurate and what’s driving that broad-based optimism?

In the back half, the majority of the increase is due to year-over-year bookings, particularly at MGM and Mandalay Bay.

We have more data now than we did last quarter. High-performing segments include non-baccarat tables and very encouraging developments on the non-gaming side. Convention bookings have strengthened, and the leisure business, which was challenging last year, is moving positively this year. The entertainment calendar is the best we’ve had in a long time. The growing infrastructure and Assembly ongoing preparations position us favorably through significant events.

Congratulations on the quarter.

On Macau, Grant, one of your peers reported that premium mass revenues were down year-over-year while the rest of mass was up. Are you observing that trend, and how do you see that going forward?

Simply no. We’re still seeing solid premium mass growth; we might be in a different cycle than others. However, the mid-mass segment is strong as we enter summer. It is difficult to judge how the gaming business will behave during this time, but we remain optimistic about growth in both core segments.

Help with the REVPAR question; has the shift away helped manage your business better? Can you quantify that?

Yes, it has improved our perspective on business. We’re managing the REVPAR alongside cash yields to maximize occupancy across the board. Ultimately, we manage the totality and this has helped with casino marketing and yielded better results.

I wanted to follow up on the opco–propco subject. Jim, you used the term asset light, which can refer to fee streams versus gaming spaces owned by a REIT, but where much of the servicing is still borne by the operator. How do you think about this issue?

We’ve studied many models. We are a gaming and entertainment company creating unique experiences. We can expand revenue streams through non-capital flyways; sports betting is a good instance of this. Aligning with brands and partners provides opportunities to collaborate without heavy capital investments. We manage all capital expenses; we’re in great shape regarding capital expansion in future cycles and upgrades required right now.

As a follow-up, can you clarify what the boundaries might be for M&A? Given the focus on internal initiatives, is a meaningful property acquisition altogether off the table?

It’s hard for me to foresee acquisition pursuits. We liked the assets we have. We recently considered a high-quality asset in a major city where we have strong brand affinity, and we passed. We’re not actively pursuing other opportunities; our focus now is on our existing portfolio. The only reason we would even consider acquisitions is if they support ROI and align with our capital allocation strategy.

Thank you; the responses are clear.

I want to thank you all for joining us today. We’re satisfied with the second quarter. We’re pleased with the property performance, both throughout the United States and over in Macau. We’re proud of the implementation of our MGM 2020 Plan, which is bearing fruit as we speak. We’re confident we’ll hit our 2020 financial targets amidst prudent capital allocation. Thank you.