MGM Resorts International (MGM) — Q3 2020 Earnings Call Transcript

This call is being broadcast live on the Internet at investors.mgmresorts.com, and we've also furnished our press release on Form 8-K to the SEC. On this call, we will 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 in our 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 will also discuss non-GAAP financial measures in talking about our performance. You can find the reconciliations to GAAP financial measures in our press release and investor presentation, which are available on our website. Finally, the presentation is being recorded. I'll now turn it over to Bill Hornbuckle.

Thank you, Jim, and thank you all for joining us today. I hope you and your families continue to be safe and well. Over the course of the last several months, we've learned how to respond to the challenges posed by the virus, and I continue to be impressed by the resilience and the commitment of our team. We have developed a set of health and safety protocols that have proven effective. Our strong operating capabilities have helped us effectively adapt to an uncertain environment, and even amidst this uncertainty, we are charting a plan for growth: respond, adapt, and plan to grow, which has now become the philosophy that governs everything we do. We head into the end of the fiscal year with a hopeful but cautious view of the future. We continue to believe the fundamentals of our business are strong, and we're well positioned for the future. We saw sequential improvements in all of our markets in the third quarter, and our regional properties have led the pace of recovery with several properties generating record operating performance. While we saw promising signs of confidence and recovery in the third quarter, we continue to stay focused on the broader environment. Our strategies are centered around several key priorities. First, the health and safety of our guests and employees remains our top priority. We know that the success of our health and safety protocols is essential to building confidence among leisure and business travelers. We are particularly optimistic about our new Convene with Confidence health and safety plans for meetings and conventions, entertainment, and sporting events. We remain laser-focused on leveraging our operating model to effectively manage costs. Our efforts are evidenced by our declining cash burn rate, reduced corporate expenses, and improvements in our regional operating margins. We believe that many of these efforts are sustainable, and as we've stated in our last quarterly call, we identified $450 million of annualized costs we expect to achieve when business returns to 2019 levels. Our liquidity position is strong, which we further bolstered earlier this month with a successful debt offering. Lastly, sports betting and iGaming continue to gain momentum as states accelerate legalization and sports volumes ramp up. BetMGM has gained significant market share and has already become a top three player in each of our markets where data is publicly available. We remain focused on executing on the online opportunities while also increasing our long-term presence in Asia. Let's dive into the quarter's results. With the September 30 reopening of Park MGM and NoMad Las Vegas, all of our domestic and international properties are now open. Our third-quarter Las Vegas Strip revenues were $481 million, which grew $331 million sequentially from the second quarter. Our Las Vegas Strip property EBITDA was $15 million, compared to a $104 million loss in the second quarter. On a hold adjusted basis, our Strip EBITDA grew $134 million sequentially from Q2 to $21 million in Q3. Additionally, the company extended benefits to our furloughed employees through September 30 and negotiated certain union health benefit contributions, collectively resulting in a $29 million one-time expense in the third quarter, of which $21 million was attributable to our Las Vegas Strip properties, not including CityCenter. Our third-quarter hotel occupancy was 44%. While we continue to leverage our casino database, as well as our transient and leisure segments to help offset the lack of group business, midweek occupancies remained challenged at 38%. However, our results were bolstered by stronger weekend demand, where hotel occupancies were 60%, mostly by design as we maintain occupancy caps for appropriate social distancing. As we've reopened properties, we've aggressively monitored costs and managed variable labor to closely match demand. We have also continued to focus on creating a safe environment for all of our employees and guests. On September 29, Governor Sisolak expanded Nevada's mass gathering limitations from 50 people to 250 people, opening the door to restarting meetings and live entertainment. Under the new guidelines, we can host meetings for up to 1,000 people, provided the subgroups remain separated to no more than 250 people. Just last week, the Governor also announced that we are working on a plan to increase the capacity to 50%, hopefully by January 1. We have proactively developed a comprehensive health and safety plan for meetings and events called Convene with Confidence. We believe these efforts will help rebuild confidence in safely bringing meetings, conventions, and live entertainment back to Las Vegas. Our Convene with Confidence program is built upon our seven-point safety plan, which is a comprehensive layered approach based on guidelines from health experts addressing the entire guest experience from ticketing and planning to arrival and food and beverage services. We take pride in the new COVID-19 testing protocol we will be offering as an optional amenity to our meetings and events clients. MGM has partnered with biometric security identity company CLEAR to leverage a new health pass technology, which includes real-time health questionnaires, COVID-related test results, and temperature checks. This process was utilized during the National Hockey League's successful return to play at the Stanley Cup playoffs in Toronto and Edmonton. As part of this protocol, MGM is partnering with CUE Health to deploy their rapid, portable, molecular point-of-care COVID-19 tests that deliver results in approximately 20 minutes, allowing event organizers to create perimeters for their events and exhibitions. We conducted the first pilot at the MGM Grand Detroit with the Detroit Pistons, who indicated that our testing regime played a critical role in their ability to safely execute their workout program. We've also received encouraging feedback from meeting planners and existing group customers regarding our Convene with Confidence program. We currently have a group in-house using the testing protocols, and we'll be able to share more details in the near future. Looking beyond the third quarter, we believe the market will continue to stabilize, although seasonal challenges remain in the near term. Weekend booking demands have remained solid in October, but driving midweek demand continues to be a challenge without the convention business. We expect to see seasonal declines in leisure travel during the holiday periods in November and December. At the end of winter, we're developing slow pre-plans for the weekdays to minimize EBITDA losses. We are encouraged by the Governor's announcement on mass gathering limits, along with our Convene with Confidence plan, as initial steps to bringing back larger meetings and conventions, hopefully starting early next year. Additionally, we recently announced the return of seven of our live shows and the reopening of entertainment venues in Las Vegas. We remain optimistic that large-scale meetings and events will eventually fully return. However, we believe the material recovery in Las Vegas depends on the return of larger scale conventions and entertainment platforms, along with significant air travel. Turning to our U.S. regional performance, it continues to exceed expectations and gain market share. Our regional revenues grew sequentially by $468 million from the second quarter to $557 million in the third quarter. Our regional property EBITDA was $146 million in the third quarter compared to an EBITDA loss of $112 million in the second quarter. Properties that were open for the entire third quarter experienced a 15% revenue decline from the prior year period but delivered an adjusted property EBITDA growth of 7%, with margins improving by 768 basis points. Our drive-to regionals that were open for most of the quarter exhibited significant strength, with margin improvements ranging from 600 to 1500 basis points. In fact, MGM Northfield Park, National Harbor, and Gold Strike each achieved all-time record EBITDARS in the quarter, while MGM Springfield delivered a record third quarter EBITDAR. Our integrated regional destinations such as Beau continued to ramp throughout the quarter despite being impacted by two storms, and the property is currently addressing the aftermath of Hurricane Zeta. MGM Grand Detroit and Borgata are performing well and operating under tight restrictions. Overall, we observed incredible results delivered by our top-notch regional teams. We believe we are still benefiting from a lack of broader local entertainment alternatives and our ability to capture an outside share of wallet. This, alongside our focus on cost management, has driven margin improvements at our regional properties. We are encouraged to see demand carry into October, and we will maintain our intense operational focus as capacity limitations eventually ease and the broader business economy reopens over time. Regarding Macau, although the 14-day quarantine measures between Macau and Mainland China have been lifted and the issuance of tourism visas has resumed, logistical hurdles and testing requirements continue to impact the Macau market. As a result, third-quarter market-wide GGR was down 93% year-over-year. MGM China's third-quarter revenues and adjusted property EBITDA were $47 million and negative $96 million, respectively, which improved sequentially from the second quarter. Market-wide daily visitation has been steadily improving into October's Golden Week. Since the second week of the month, we are seeing improved volumes across all segments week-over-week. Month-to-date, we are encouraged that our properties have crossed property EBITDAR breakeven levels, primarily driven by a recovery in the premium segments. We believe the rate of recovery will continue to be gradual, driven by the premium mass market, which both our Macau properties are well-positioned to capture. We continue to believe in the long-term success of Macau and will continue to invest in strengthening our market position there. Currently, construction of additional suites in the south tower of MGM Cotai is underway and will be ready in mid-2021. We've also begun remodeling our MGM Macau villas and the gaming space on level 35. At both properties, we are adding food and beverage options focused on the gaming floors, and long-term we also have the capability and intention to build another hotel tower at MGM Cotai, along with meaningful entertainment assets to diversify our offerings. Given the unprecedented and uncertain operating environment, liquidity remains paramount. Our liquidity position is strong. As of September 30, MGM had over $7.8 billion of consolidated liquidity, which includes $1.4 billion at MGM China, $1.9 billion at MGP, and $4.5 billion at our domestic operations. Earlier this month, MGM Resorts opportunistically raised an additional $750 million of eight-year senior notes at 4.75%, further solidifying our already strong liquid position. Adjusting for this issuance, we had $5.2 billion of liquidity at our domestic operations, excluding MGM China and MGP, and we still have the right to cause MGP to redeem $700 million of OP units for cash. Before we go to questions, I'd like to spend a few moments discussing our position in the rapidly evolving U.S. online sports betting and iGaming market. Over the past few months, we have continued to gain significant momentum towards solidifying BetMGM as a leader in this space, and we're very pleased with the results. BetMGM is now live in eight states, soon to be nine as of Sunday with our launch in Tennessee, which we announced earlier this morning. We expect to be in 11 states by the end of this year. We currently have market access in 20 states and are actively working to secure more, ideally positioning BetMGM to be front and center of the action from day one, which is critical as states continue to launch. From a market positioning perspective, we believe BetMGM is now a top-three player in all the markets it's in. In September, BetMGM estimated sports betting and iGaming market share was collectively around 18% in the states in which it operates. We have demonstrated strong operating performance in iGaming with a 23% market share in New Jersey and a growing position in West Virginia. Importantly, we've also increased our share in online betting and currently estimate our online sports betting market share to be around 9%. This is exciting given that we have doubled our market share since January. Furthermore, retail sports have regained momentum since our property reopenings in Michigan and Mississippi, driving great results. Our partnership with Yahoo Sports is also starting to gain traction. Earlier this month, we launched a streamlined betting experience on Yahoo Sports, whereby 50 million average monthly users, including its DFS users, can directly link to BetMGM’s platforms from their Yahoo app, register, sign on, and make a bet. We have more features planned in the near future and remain excited about this relationship. We know that an omnichannel customer who plays in the retail casinos, iGaming, and sports betting is a higher-value customer than a single-channel customer. As such, we continue to believe that BetMGM's key competitive advantage is its exclusive access to MGM's physical destinations, its broad-based experiential offerings, and the M life loyalty program, which we aim to leverage as efficiently and effectively as possible for customer acquisition. Through a combination of strategic branding, direct marketing, on-the-ground brand ambassadors and hosts, as well as the integration of M life with the BetMGM app, we have been aggressively working to introduce new customers to BetMGM. While we are still in the early stages, we are excited to see early proof of concept in our ability to acquire higher-quality customers at lower costs. On the flip side, it is equally exciting for us to see our strong belief that BetMGM will naturally drive expansion in MGM’s customer base, ultimately fueling growth in our brick-and-mortar business. In fact, we are already starting to see cross-marketing opportunities in the near term and believe this will only improve over time as BetMGM continues to expand its player base. Given the better-than-expected progress, BetMGM is now on track to deliver net revenues between $150 million and $160 million in 2020, an increase from our original $130 million expectation. We continue to believe this is the largest growth opportunity in U.S. gaming, and we think we have what it takes to be a long-term winner. We are very excited about our progress, but we know we have more work to do and we remain focused on executing. Before I turn it to Q&A, I want to share a few closing thoughts. Over the past week, we've been monitoring COVID relative trends across the globe, reminding us all that we're not out of the woods yet. While I have yet to see any incremental impact on domestic business, we know we must remain diligent and disciplined. I have great confidence in our comprehensive health and safety protocols, which cover all aspects of the guest experience, which we have consistently adhered to. These protocols and our commitment to health and safety have allowed us to operate successfully in recent months, and we believe they will also successfully guide us through the future. While we recognize there are near-term headwinds, we remain confident in the long term. This optimism is driven by our proven ability to react, adapt, and ultimately grow. Despite our challenges, MGM Resorts is a strong company, thanks to an early unwavering commitment to the MGM 2020 plan, a new operating model, a solid balance sheet, high-quality destinations, and our path to recovery led by our regional operations, and of course, our amazing people who have delivered safe, welcoming entertainment experiences for all of our guests. Looking forward to the future, we continue to make progress in all our growth opportunities, including developing BetMGM as a leader in the U.S. sports betting and iGaming, expanding our footprint in Macau, and ultimately creating a world-class integrated resort in Osaka with our partners at Orix. With that, operator, I will be happy to turn it over to questions.

Good afternoon, everybody. My questions relate to your Las Vegas Strip properties. Can you talk about strip EBITDAR by month and quarter? I'm presuming September exceeded August and August exceeded July? I am really trying to get a sense of how to think about a monthly run rate of EBITDAR exiting the quarter. I know October is not over, but I'm presuming October EBITDAR exceeds September. If you can provide some color, that'd be helpful. Thanks.

Hey, Joe, I'll turn you over to Corey in a minute, but yes, sequentially, there has been improvement. We mentioned in my comments about a couple of one-time charges around union benefits that totaled $15 million EBITDA, which is significant for the quarter in context to performance. October is performing as expected and beyond that, but there is still a long way to go for the balance of the quarter.

Yeah, and Joe, just to give you some color sequentially without providing actual numbers, as we usually won’t provide monthly results, I would say the trends in all our divisions seem to be similar and getting a little bit better each month. The occupancy rooms in September, as you likely saw from the statistics from LVCVA, have increased in the city.

Okay. All right, maybe Bill, can you provide some additional details or some specificity on the seasonal lows in November and December? How are you managing the Strip during different demand periods, and how are you managing this with labor OpEx? Are you partially closing some of your properties like what's going on at Encore? Can you discuss that?

Well, let me start at 40,000 feet and work my way down. The general notion of being open versus closed for the quarter provided the company a net benefit of about $500 million. Collectively, we are pleased to be open for the company, for the communities, especially Las Vegas, for our employees, and for our stakeholders. It has been beneficial. As we recognize we have about 29,000 employees back, we will review what we keep open and what we may need to close. There are amenities or towers that may undergo closure for the mid-November timeframe through the holiday season. We will see how it goes, keeping a very close watch on the bookings, especially during this unprecedented election season.

Yeah, Joe, what I would add is that even pre-COVID, during slow periods, we adjusted our staffing, closed down towers, and rooms. We’ve actually now become adept at it due to COVID, and have to manage midweeks versus weekends. We are confident that we can be very nimble in adjusting based on volumes and current market conditions. As Bill mentioned, there are opportunities to reduce towers and hotel rooms during these slower periods.

Thank you, guys.

Thanks. So you put up really strong margin gains in your regional properties, and I’m guessing it's a mix of operating efficiencies and not marketing as much. Can you talk about the color around future operating cost controls? Also, how much do you think you can reset marketing spend lower long-term? Thank you.

Yeah, Thomas, this is Corey. In general, in the regionals, particularly, there isn’t much competition for the consumer dollar at this moment. We have streamlined our marketing component. Therefore, as we look forward, the cost structure is adjusting and there are some permanent elements, including marketing dollars. The bigger concern is whether the top line will be sustainable. What we’re seeing currently is promising, and we believe these properties are well-positioned.

Helpful, thank you, and you touched on the prepared remarks about hopefully Nevada will allow conventions to reach 50% capacity on January 1. Do you have a sense that demand will be there if that’s allowed?

Tom, we’ve seen large-scale events experience substantive cancellations; that won’t surprise anyone in the first quarter. What’s important is that we maintain a strong back half of the year. Thus, having demonstrated growth and our ability to execute safely will be comforting. Our back half of the year is holding extremely well. There may be ups and downs, but we are where we want to be, and we have always been relevant. So the fundamental takeaway is that people want to come back to the market, it just depends on the conditions the Governor allows.

Helpful color. Thank you.

Hey, guys, thank you for taking my question. Bill, you addressed a lot of it and Corey as well. But pertaining to your group and convention business over the last few months, have you had or what has your experience been with respect to groups looking to book in ’22, ’23 and beyond? As we think about the days of vaccines, how quickly are you able to ramp up pricing on the group and convention side after such a prolonged downturn?

September was an exceptional booking month for the future. It was the best booking month we’ve had in seven. People are still making future bookings, and there has been a sequential increase in confirmed contracts over the last couple of months. I believe that by 2021, once people feel confident about meeting, they will return, and fundamentally not much has changed. We need to navigate the current environment, and ultimately we must demonstrate our ability to execute safely.

To add to what Bill mentioned, especially in bigger groups booking multi-year contracts, they are trying to secure spaces, going out to 2025 and 2026. Rates are better than what's in the rooms right now. They haven't completely reset, but depending on demand and the periods they are booking, rates are similar to the past, with multi-year contracts carrying rent escalators.

Great, thank you guys. Just one follow up; could you quantify the exit rate of costs extracted from the business coming out of September compared to where you were going into Q3, specifically in Las Vegas, regionals, or on a combined basis?

What I can tell you Carlo is we were about $20 million a day pre-COVID. When we closed down, we went to $3 million a day. Currently, we are at about $10 million a day. Knowing what is still left to come back implies understanding our business better. The $85 million that we identified in our presentation is well-defined and will not come back into the system.

To quantify further, occupancies are down collectively about 50%, and our payroll is down 48%. When you consider overhead and foundational costs moving forward, we've effectively controlled those controllable costs and built half our business back with less than half our most significant expense.

Marketing expenses are part of the numbers we’ve identified.

Great, thank you guys. That's great color; I appreciate it.

Hi, everyone. Thank you for taking the questions. A bigger picture question for you; you have quite a stockpile of cash and a substantial liquidity reserve right now. Once we get through the pandemic, how do you feel about your net leverage and how you would consider deploying some of that cash if you hopefully don’t need it?

Thank you, John. We are in a great position. We must stay positive across the system, recognizing our strong liquidity. If necessary, we've got the resources to sustain this situation. However, if we don't, we are keen to return to growth in real terms, and we will invest in areas to maintain our market dominance. We will continue to invest in sports betting, as we are key players in every market we operate. We aim to pursue the opportunities in Japan, and we're actively exploring potential M&A opportunities if they arise. For now, we appreciate the security of our liquidity.

I assume you touched on my second question about M&A in Las Vegas. Can you provide insights on the occupancy mix you are experiencing? Any differences with customer segments in midweek and overall hotel occupancy?

Our current situation is generally similar to before, but more pronounced. The casino segment has a heavier lean now. Convention business is virtually nonexistent, and we see an increase in drive traffic. Occupancy levels are performing favorably compared to historical standards, with our transient casino marketing now in the 30s.

Thanks, Bill, appreciate the insights.

Hi, thanks for taking my question. You've talked before about the seasonal adjustments you're making. What are you doing to preserve price integrity at the properties and improve the customer mix? Are there new rules regarding parking? What else can you share?

Yes, Felicia, from our reopening, we focused greatly on both safety and customer experience. As noted, we've constrained weekend occupancy, achieving about 60% utilization. We have a disciplined pricing strategy yielding closer to our previous pricing standards. We have minimums for room charges during low periods, and ensuring all customers have access is key.

We’ve implemented Universal protocols about parking and admittance to ensure safety. The dynamic has improved recently, and the community has risen above the challenges, contributing to a better, safer environment for our operations.

In terms of the visa application process, it remains manual, with applicants required to go to the Police Bureau after obtaining an online appointment. However, we have seen some regions experience shorter application times. Overall, there have not been dramatic changes, but minor improvements have been observed. As for market liquidity, we haven’t seen significant changes or material impacts on our business.

Hi, good afternoon. Hubert, could you provide insight into October's performance, specifically comparing the declines we observed during Golden Week? Did we exit October on a better note, and what improvements have you seen recently?

The Golden Week was strong, but following that, naturally, the volume decreased. I’m happy to report that in the past weeks, we have seen some recovery across all segments, generating adequate GGR to keep us slightly above breakeven levels.

The recent investments by IAC during the third quarter have indeed been significant. They've actively participated, spending several days understanding our operations. Their focus is on improving BetMGM, and they help in areas such as digital loyalty programs. We're excited about their contributions.

Hi, good afternoon, everyone. Could you elaborate on the critical reasons for success in your digital efforts, particularly regarding your app strategy? Are you maintaining a unified app across all states?

We have a joint venture with GVC, and they manage the technology, giving us a clear advantage. We aim to unify our app wherever possible to enable smooth customer transactions across all facilities. Engaging this way is essential for customer retention and long-term loyalty.

Thank you, and just one follow-up; with the current competitive landscape, are you confident that your digital business can operate independently and efficiently within MGM?

We are ensuring that the digital segment operates independently, and we have recruited experts who understand the market. We are providing necessary support while allowing them to manage their growth sustainably. We will back the capital demands as required.

Hey, good afternoon. Bill, given your sizable retail sports book operations, how does that shape your expectations for BetMGM's margins? How do you navigate the current competitive environment?

As of September, 55% of our business is online. Retail sports betting is evolving to become a more engaged environment, encouraging participation. While we have increased digital presence significantly, we remain committed to providing excellent customer experiences in our retail outlets. Strategic ad spending is controlled, and we carefully assess the returns.

Thanks, Bill.

Thank you. Previously, all your properties in Vegas were cash flow positive, except for Mandalay. Can you confirm the current status of all properties now that they are open?

In general, all properties are positive cash flow, except for Park, which just opened at the end of the month. The operating properties’ third-quarter EBITDAR, factoring one-time charges, would have been around $70 million.

So you’re saying Mandalay Bay is positive?

Yes, Mandalay Bay performed well during the summer season, particularly due to the pool area, which attracted positive occupancy and RevPAR.

Can you provide insight into the timing of the $700 million in MGP units for redemption?

We have until February 2022 to execute that. We won't miss out on this opportunity. Recent bond market actions were timely and convenient. Timing will be based on our situation within MGP as we proceed forward.

How are you viewing potential changes in ownership of significant Las Vegas assets?

It's a big market dynamic and could positively influence Las Vegas overall. If competitors come in who aren’t as strong as us, it will certainly work to our advantage. However, we believe we are currently well-positioned.

Any updates on the Macau concession renewal process due in June 2022?

There is increasing pressure for the Chief Executive to announce the process, with discussions anticipated next month. As of now, the timeline seems on track without delays, but there remains some uncertainty.

As for the current environment in Macau, we have seen improvements in processing times for visa applications, though it's still a manual process. Market liquidity remains stable without material impacts on our business.

Thank you all for your participation today. Stay safe, and we look forward to our next discussion next quarter. If Jim, Corey, or I can assist in the interim, please feel free to reach out.