MGM Q2 CONFERENCE CALL NOTES

Takeaway: Finally, a good quarter in Vegas. Favorable US outlook (RevPAR) and profit enhancement plan could lead to positive earnings revisions

CONF CALL 

  • Domestic resorts was $1.7 billion, an increase of 4% compared to the prior year quarter. 
  • Growth across the entire US portfolio 
  • Domestic resorts increased 6% with a 6% increase in RevPAR at the Company's Las Vegas Strip resorts compared to the prior year quarter
  • Wholly owned Adjusted Property EBITDA up 11% driven by growth at our Las Vegas and regional resorts
  • MGM China's net revenue was $557 million and Adjusted EBITDA was $132 million, decreases of 33% and 37%, respectively, compared to the prior year quarter
  • CityCenter's Adjusted EBITDA related to resort operations was $84 million, a 4% increase compared to the prior year quarter.
  • Diluted earnings per share for the second quarter of 2015 was $0.17 compared to diluted earnings per share of $0.22 in the prior year quarter.
  • Sequential margin improvement in China 
  • Profit growth plan to take up to 10 months, and provide sustained growth. 
  • Economy seen growing, but at a slow pace. They want to outpace the market and grow faster. this plan is a challenge for themselves. they brought in outside help. 
  • Profit growth plan well help leverage assets, and reduce expenses, improve purchasing power, and use better analytics and technology
  • Tremendous work to be done, but the plan will offer new and refreshed views on how to grow out and perform better than peers 
  • Process is about empowering employees, and improving the guest experience. 
  • Initiatives will be rolling out in 2016 and 2017. 
  • The plan is expected to result in $300 million of annualized Adjusted EBITDA benefit.  The Profit Growth Plan commenced in July 2015 and it is expected to begin to show results as early as the second half of 2015 and be fully realized by the end of 2017.
  • They think margins can come back to the 30% level 
  • Will continue to drive value for all. Very enthusiastic about these developments 
  • Strip = 6% revpar growth
  • Margins +120bps 
  • All segments seeing increases
  • Convention business up YoY, expected it to be flat  
  • RevPAR up 9 and 14 at off strip properties 
  • Should see strong convention bookings going into 2H and FY2016. 
  • Now expect to outperform last year
  • Q3 strip RevPAR should be 6% - Street was expecting only flattish to slightly up, differs from analysts' surveys
  • New theatre project at Monte Carlo to cause one time charge of $6 million per Q in 2H. 
  • Corp expense up slightly in Q3. $60-65mm 
  • MGM China earned net revenue of $557 million, a 33% decrease compared to the prior year quarter;
  • Main floor table games revenue decreased 23% compared to the prior year quarter
  • VIP table games revenue decreased 43% due to a decrease in VIP table games turnover of 54% compared to the prior year quarter, while hold percentage increased to 3.2% in the current year quarter compared to 2.7% in the prior year quarter;
  • Market share seen increasing sequentially 
  • Continue to maintain costs and drive margins 
  • Win dropped by 23% YoY at MGM China
    • Declined by 5% sequentially 
  • Added 61 high limit slot machines on main floor
  • Record high 80% coming from mass segment 
  • Shifting VIP tables to Mass. Mass now 60% of total tables
  • Strategy is driving incremental main floor visitation
  • MGM China paid a $120 million final dividend in June 2015
  • Should finish MGM Cotai in Q4 2016. Construction remains on track. 
  • Bellagio margins were the best on the strip
  • Crystals leading the way in the retail space
  • New expansion at Mandalay Bay opening later this month, demand has been very strong
  • Monte Carlo new 5000 seat theater set to open soon 
  • Cite strong airline passenger growth, and ability for more capacity as tailwinds for 2H and into 2016
  • Cite that there is a value gap between how the market and management values the company, but see very good prospects in the future for this value gap to close
  • Must narrow the field to determine what is best for shareholder across all timelines

Q & A

 

Profit growth plan? $300 million pledged, how much is operating expense related and how much for the strip?

  • Not looking for quick fixes. Instead, looked through hundreds of ideas, and devised implementation plans. Trying to create sustainable change. 
  • 1/3rd of money is revenue uplift
  • 2/3rd of money looking to change the way they do business. 
  • Majority pledged for the strip. 
  • $225 million for strip 
  • $25 million for regional properties

Would expect to see margins benefit?

  • Yes that is the key focus. And along with this plan, they are also bullish on the macroeconomics behind the future of the strip. 
  • FTE's still down 15% since 2007. And they will remain down. Growth process is just a plan to show they can do better, because they know they can do better. 
  • Labor savings are in the cards due to the upgrades they will make 

How early can we see results and when? Profit reinvested in the business?

  • Can provide more color next Q. But each project has a project leader, and they have separate teams on each project. Big projects will be felt in 2016, and be accretive in 2017. 

Mirage on the market? PNK assets valued at 30% premium to yours?

  • Mirage not on the market. Will not just put a for sale sign on their properties. 
  • Asset values of the strip clearly show that waiting and not selling has been the right move. 
  • Tremendous interest for strip real estate. Continue to meet people that are qualified. 
  • Highly confident this valuation gap will close going forward. 

REIT? 

  • Should decide on that by the end of the year.

Able to sustain growth next year? Since the comps will be tough. 

  • Will continue to add more events, concerts, fights, etc in the future to maintain competitive edge. The fight actually hurt flow through by 400bps. Look to improve flow through but margins are the most important. 

Macau: Stabilization on the Mass side. Given changes to smoking bans and govt policies. Do you see the market growing or a share shifting game playing out? How do you intend to grow?

  • Critical to re-engineer their process along with the opening of Cotai.  

FTE savings due to the opening of the new property in Cotai?

  • Absolutely, lots of consolidation and process engineering. Difficult times giving them the opportunity to be challenged and better their processes. That is definitely the silver lining during these difficult times. 

MGM sees themselves in a position of unique strength. Predictability of cash flows. 

 

6% RevPAR guidance of Q3? Similar scale for luxury to non luxury?

  • Yes, likely to see a similar mix to RevPAR growth. 
  • Convention business a tailwind, macro environment a positives. 

Striving for 30% margins across all the properties? 

  • Yes, should see this growth across all properties. Many initiatives that look to weed out extra costs, everything from how their linens are cleaned and maintained to actions across the F&B segment of the business. 
  • Looking to push out the middle man and go straight to the source for food and beverage needs to drive margins. 
  • FedEx and Coca Cola have been helpful through these "improvement plans"
  • Will continue to update details each Q. 

Strategic alternatives? JV's? Color on future opportunity?

  • Reno sale, was a right fit transaction. 
  • Existing JV's? Not many left, but looking to continue to use them to return cash to shareholders. Cited City Center as main driver. 
  • An expansion of Crystals is very likely due to the 2 acres of land nearby. Actively having these discussions. 
  • Other JV's aren't really of strategic focus at this point. 

Chinese baccarat customer seen hurting other operators? How did this play out for MGM in LV?

  • Domestic side of business did very well, and was a big help. Table games ex. baccarat did very well. China source play continues to weaken. 
  • Best quarter ever from domestic business (since 2007). 
  • Plenty of events really attracted domestic customers. 
  • July off to a great start as well. 

RevPAR guidance a little high? 

  • Strength is largely underwritten by convention business. 
  • Clientele is strong. Tech companies and healthcare companies are customers going into 2H. 
  • They believe they have competitive advantage to accommodate broad based wants and needs of companies 
  • Retail and leisure business in Q3 should be strong giving seasonality, overlayed with convention business gives them the confidence that RevPAR will be around 6%. 
  • Room rate surveys are useful, but very tough to use for Q3 due seasonality. 
  • They see strong RevPAR growth for Q4 as well.

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