In preparation for MGM's Q2 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from MGM’s Q1 earnings call and subsequent conferences/releases.



Post Earnings Commentary

July 22: Amendment to Borgata Settlement Agreement

  • “The amendment provides that the mandated sale of the trust property be increased by 18 months to 48 months.  During the first 36 months (or until March 24, 2013), MGM Resorts has the right to direct the trustee to sell the trust property.  If a sale is not concluded by that time, the trustee will be responsible for selling MGM's interest in the Borgata during the following 12-month period.”

June 17: Closing of $300MM in Senior Convertible Notes

  • “Closed the previously announced private offering to Emerging Corporate Limited (an entity owned indirectly by Ms. Pansy Ho) of $300 million in aggregate principal amount of its 4.25% convertible senior notes due 2015.  The Company received approximately $311 million in net proceeds from the offering.  The net proceeds will be used to repay a portion of the Company's outstanding revolving indebtedness under its senior credit facility.” 

June 3: Completion of MGM China IPO

  • “Pansy Ho and MGM China Holdings Limited (SEHK: 2282) today announced the successful completion of the previously announced initial public offering of 760 million shares, representing 20% of the post issuance base capital stock of MGM China, at an offer price of HK$15.34 per share reflecting the top of its previously announced range.”


Youtube from Q1 Conference Call

  • “Convention room nights represented 20% of our room mix in the first quarter. That’s an increase of 5 percentage points year-over-year and the best Convention mix quarter we have had since the first quarter of 2007… For the remainder of this year, we’re pacing ahead of last year in every month in terms of convention bookings.”
  • “Consumer spending is strengthening, and we will take advantage of this through a very strong event calendar that we have throughout the summer and into the second half. We see evidence that consumer spend is in fact strengthening. One metric for example which has been slow to recover has been the revenue-per-occupied room excluding Hotel and Casino, in other words, the Retail, Entertainment and Other type of revenue.”
  • Over the next four months we’re consistently outpacing last year’s rooms on the books. April occupancy end rate, for example, up nicely, driven by strength in those Retail segments. Our event calendar is also improved and it’s up significantly year over year. I think it’s up over double digits in terms of events booked at both the Mandalay Event Center and the MGM Grand Garden.”
  • “Since we launched this program, we have enrolled over one million new customers into our loyalty program… Our regional properties have seen an increase in the number of active players and in terms of trips in the first quarter, led by Beau Rivage, where trips were up approximately 10%. Our gold and platinum levels, our higher level customers, have seen trips up in the double digits indicating people are migrating up the benefit scale and the benefits are compelling.”
  • “On an actual basis, our net revenue was up 3% and our adjusted property EBITDA attributable to our wholly-owned operations was up 12%. Both of these would have been higher, up 6% and 25% respectively, had we held at the midpoint of our normal range. And to remind folks that range is 19% to 23% on our table game hold side. That negatively impacted our wholly-owned EBITDA, adjusted property EBITDA, by approximately $34 million of which over half of that $34 million was attributable to Bellagio alone.”
  • “Excluding resort fees, RevPAR was up 11% in the quarter year-over-year.”
  • “We also received approximately $31 million in distributions from MGM Macau during the first quarter. And just last week, we received a tax refund of $175 million, thereby taking our pro forma liquidity of excess cash and amounts available under our revolver to over $1.1 billion currently.”
  • 2Q11 Guidance:
    • Corporate expense:  $30MM - $35MM
    • Stock compensation expense: $9MM - $10MM
    • Depreciation expense: $150MM - $155MM
    • Gross interest expense:  $265MM - $275MM with no capitalized interest
    • RevPAR: “up in the mid single-digits in the second quarter, and we’re on pace from that standpoint, actually did a little bit better than that in April already”
    • FY2011 Capex of $275MM
    • City Center commentary:
      • “Aria experienced a higher than normal hold percentage for the first quarter, which contributed to EBITDA and had an impact of approximately $13 million”
      • “ We continue to be more efficient with the operations of Aria, which has allowed us to further reduce expenses and improve margins while overall traffic and volumes have sequentially increased each quarter. Additionally, Aria benefited from a favorable property tax adjustment in the first quarter of about $6 million… On an annualized basis, the benefit going forward is going to be about a $17 million benefit annually.”
      • “First quarter Convention business at Aria was extremely strong with over 72,000 room nights. Future bookings continue to be strong. 2011 convention room nights on the books have already surpassed forecasted totals for the year. Convention business for the 2012 year and beyond looks extremely positive as lead volumes and bookings continue to outpace last year and our forecast “
      • As of March 31st, 82% of Crystals’ leasable area was occupied by tenants open for business following the opening of Tag Heuer. Jimmy Choo is scheduled to open this August, and we are in final negotiations with Dolce Gabbana for a men’s and a separate women’s store with an estimated January 2012 opening.”
      • “Cash at CityCenter is approximately $100 million of which $20 million is cage-cash.”


It’s hard to even get excited about the long term with this kind of uncertainty.



WMS’s F4Q left little reason for investors to stay optimistic.  Considering the company’s track record, investors could have looked past one quarter of poor performance and given management the benefit of the doubt.  However, two quarters in a row of pitiful results and lots of excuses extinguish confidence in even the most bullish of analysts.  As we sat and listened to the call last night, we couldn’t help but shake our heads and ask - why is Gamache trying to sell us junk in a box?


There were so many things wrong with the quarter, that we don’t know quite where to begin.  One thing that became clear though is that WMS is now a ‘turnaround’ company and will remain in the penalty box for many a quarter to come.  While the March quarter was filled with operational issues, management’s forward outlook took a major step down.  Management claims that more uncertainty in the economy vs 3 months ago is driving the outlook and we at Hedgeye do not disagree with their macro assessment.  However, WMS probably had a “come to Jesus” moment that they have little to no visibility in their business – due to the economy, heightened competition and worse ship share - but also maybe to a disconnect to what their customers wanted.  Was WMS was pushing junk in the box to their customers as well?  


We’re going to be revising our estimates for the FY12, but below are some thoughts following a conversation with management.

  • Color on the write downs and impairments in the Q and to come:
    • Product sales:
      • Orion was the unit that produced the Helios platform – which wasn’t selling. Customers prefer the higher priced xD machines than the cheaper Helios platform.
      • The original plan was to wind-down the BB1 cabinet over a few years but now they have decided to accelerate that wind-down
      • Impairments represent the layoff in work force of these two product lines and remaining inventory
    • R&D:
      • Postponed many projects which led to a write down
    • Gaming operations:
      • The write down was on licenses which largely had to do with postponed R&D and delays in release.
  • Lease business:
    • Units are basically being leased based on the present value of selling price plus some nice financing rate.
    • They will look to do more of these deals if they can expand floor share vs. doing a straight sale and if the ‘economics’ make sense… yes, they are essentially just doing more financing for customers and deferring revenues.
    • Italy:
      • Italy has been a big disappointment.  Novamatica is the competitor that they referred to as ‘mucking’ things up for everyone else.  Regulators aren’t happy with the integrity of the games and therefore, they are continuously tied up in the retesting phases which is holding up the approval of their games and likely those of BYI’s games.
    • Used game sales and lower margins?
      • All of the used games are basically received as trade-ins which count as a reduction towards new purchases for customers.  A year ago, they were making 20-25% margins; now only 10-15% on trade-in re-sales.
      • WMS claims that they aren’t giving more discounts to their customers but rather that the resale value for used machines has declined since the market is ‘flooded’ with them.  Regardless of the excuse, WMS is eating the lower margin – so this is just another form of discounting… hence, their ability to keep high ASPs.
    • They will likely sell less international units next year. 
    • Their view of the NA market is clearly more bearish than ours.  We feel that some of that may be conservatism, but a lot of it is share losses and more deals that will come in the form of leases rather than sales
    • Other game operations should be flat sequentially and then begin to grow. The growth will come from :
      • Annual royalty payments that just come in at year end
      • Online Casino
      • Network gaming – portal applications
      • Operating leases – Seminole was place at the end of the quarter but was a very small contributor given the timing of installation
    • Reasons for delays in the gaming operations titles:
      • They put too much network functionality into too much of their product line and as a result, have had too many reworks and approval delays.  Expect 2 more quarters of declines in their install base.
    • We estimate that flooding caused almost a $1/day decline in average daily yields this quarter

The Week Ahead

The Economic Data calendar for the week of the 8th of August through the 12th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - 1. CAL

The Week Ahead - 2. CAL

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Europe’s Dislocated Jaw

Positions in Europe: Short EUR-USD (FXE); European Financials (EUFN)


As Keith wrote today in this morning notes: “From a research/risk management perspective, yesterday was one of the best days we’ve had versus our sell-side competition since ‘08. It was also the biggest down day for stocks since ‘08, so that makes sense. Having 0% asset allocation to US/European Equities helps.

  1. GROWTH – is slowing… Period. The #1 headline in Europe this morning isn’t about a lying politician, it’s all about GROWTH. Slowing growth makes any leverage problem worse at an accelerating rate. IP growth down 2% y/y in Spain in June.
  2. STAGFLATION – stocks pay a lower multiple for that… Period. The #2 headline in Europe this morning isn’t about Europigs, it’s about UK input prices ripping higher to +18.5% Y/Y in July vs +17% in June. That will come down in AUG, but that’s bad for margins.
  3. LEVELS – bearish and broken… Period. Every Global Equity market in the world (other than Venezuela) is now officially broken on both my TRADE and TREND durations. In commodities, both Copper and WTIC Oil snapped TRADE and TREND lines this week. And in Fixed Income, UST bonds are hitting new highs as Growth Slowing + Deflating The Inflation is bullish for UST bonds.

Every bear market gets immediate-term TRADE oversold, and that’s what I see this morning. That said, I want to be crystal clear on this, sell all rallies in Equities/Commodities because the Street is still too long and needs to take down gross and net exposures.”



As it relates specifically to Europe, European equities took it on the chin this week. On a one week performance basis: Finland’s OMX -14.0%; Italy’s MIB -12.1%; Greece’s ATHEX -11.8%;Germany’s DAX -11.7%; Ireland’s Overall Index -10.1%; France’s CAC -9.4%; and Portugal’s PSI20 -7.9%, to name a few indices. Neither the periphery nor the heart of Europe was immune to the decline.  


The EUR-USD saw substantial day-over-day gains this week, but traded within our range of $1.40 to $1.43. Importantly, we want to stress that if both our TREND level of $1.43 and TRADE level of $1.40 on the EUR-USD pair break, we don’t see downside support until $1.28.


This week our Financials team had a call with Peter Atwater, and among his many astute comments I agree with his assessment that France is one key country to monitor as it relates to sovereign debt contagion. In particular, Atwater notes there’s a real threat that France could lose its AAA credit rating. This point is critical for the AAA rated bonds issued by the EFSF can only maintain this rating so long as the countries backing the facility maintain their AAA status. And France, behind Germany, has the second largest collateral guarantee on the facility—therefore a downgrade of France would be a huge impairment on the facility, which already looks significantly underfunded should Italy and Spain require assistance.  


This leaves us increasingly comfortable to short France and Germany on a bounce.  Below we show CDS spreads as one indicator of the building risk premium for the two countries commonly understood as Europe’s backbone. While both are far from CDS levels reached by the PIIGS, or even the 300bp line that we’ve noted as an important breakout line, both countries will be front and center on our screens.


Europe’s Dislocated Jaw - 1. CDS


Given that the EU parliament doesn’t return to session until mid September to vote on the terms of the newly crafted EFSF, we have a number of weeks of indecision ahead of us – we think this bodes poorly for a region that has struggled over the last two years to present credible plans to arrest sovereign debt contagion.  Further, comments yesterday from ECB President Trichet that the Securities Markets Program (SMP) to buy up sovereign bonds would partially resume indicates that the Bank will need to continue to support demand for future PIIGS auctions, especially until the terms of the EFSF are finalized in September. On this score, we’re particularly worried about Italy and Spain, given their steep maturity schedules into year-end and rising bond yields.


Europe’s Dislocated Jaw - 1. DEBT


Sentiment shock waves also came in the form of an announcement yesterday from Spain’s Treasury that it has suspended a bond auction originally planned for August 18th, but noted the cancellation of the auction was not a response to market turbulence (throat clear).


Below we show two charts that stood out in today’s data—UK input cost inflation, which highlights our call on the stagflation component of our sticky stagflation thesis in the UK; and slowing high frequency German data, including Industrial Production and Factory Orders.


Europe’s Dislocated Jaw - 1. UK


Europe’s Dislocated Jaw - 1. Germany


Matthew Hedrick

Senior Analyst

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