Our notes from the Q2 earnings conference call.


“The Las Vegas operating environment remains difficult, but as we expected, we are seeing a gradual recovery.  Our Adjusted EBITDA improved compared to the first quarter, despite low hold percentages. CityCenter is seeing improved business activity. Aria is gaining brand awareness, which led to a 17 percentage point sequential occupancy increase in the quarter and higher non-casino revenues.”

- Jim Murren, MGM Resorts International Chairman and CEO



  • "Net revenue for the second quarter of 2010 was $1.54 billion. Excluding reimbursed costs revenue mainly related to the Company’s management of CityCenter, the Company earned net revenue of $1.45 billion, a decrease of 2%"
  • Total casino revenue decreased 6% YoY:
    • Slots revenue -3% YoY
    • Table games volume, excluding baccarat, -7% YoY
    • Baccarat volume was +10% YoY
  • "The overall table games hold percentage was lower in the 2010 second quarter compared to the prior year quarter and near the low end of the Company’s normal 18% to 22% range.  Lower than normal table games hold percentage at the Company’s Las Vegas Strip resorts resulted in an impact to Adjusted EBITDA of approximately $20 million."
  • "Bellagio, The Mirage, and Mandalay Bay were affected by the lower table games hold, partially offset by MGM Grand which benefited from a higher than normal table games hold percentage. These factors led to an overall decrease in table games revenue of 11% for the quarter."
  • Room revenues decreased 1% YoY
  • City Center details:
    • Aria Adjusted EBITDA of $7MM
    • $162MM of condo proceeds excluding forfeitures
    • City Center net revenue excluding condo sales or forfeiture revenue of $183MM, so Crystals, Mandarin and rental fees from Vdara contributed $26MM



  • Increased RevPAR for Bellagio and MGM Grand was driven by better convention mix
  • June was the first month where their company wide RevPAR was up YoY. In June ADR was up YoY as well
  • Convention room mix was 13%, up 2 points over last year and better than last quarter
  • Catering was up 27% YoY in 2Q
  • Pace of convention bookings has continued to be strong and expect 2H2010 to have better convention business than last year.  For 2011, bookings are 20% ahead of pace (compared to last year) and the rates are 15-20% better than what they are getting this year. So they still think that 2H2010 RevPAR will be positive.
  • Baccarat continues to be the main driver of growth for them. Baccarat grew 13% for April & May on the Strip and MGM properties saw a 20% increase in Baccarat business.
  • Domestic trends remain quite challenged and have not improved
  • Doing a good job cross promoting their properties and are continuing to improve their efforts there
  • City Center:
    • Aria's ADR is the second highest in their portfolio
    • Hold had a 24MM adverse effect on Aria's EBITDA
    • Attracting a lot of high end play
    • Total equity value: $2.65BN which resulted in the $1.2BN cash charge in the quarter. Charge also included a $29MM charge for inventory at Veer.
    • City Center has no financial covenants until June 2011
    • $8.8MM of Adjusted EBITDA
    • $34MM of adjusted EBITDA for CC residential
    • $48.7MM of casino revenue at Aria, $140.4MM of non-casino revenue
    • YTD through May, Aria achieved 14+% of the strip Bacc business
    • Maintaining hotel room rate integrity has been a priority
    • Aria booked 44,000 room nights this quarter for this year and future years
    • FTE's counts - 6,083 - decrease of 217 despite the increase in occupancy
    • Vdara occupancy reached 75%
    • Vdara also had staffing reductions
    • Mandarin- $8MM in 2Q vs. $6MM in 1Q.
    • 62% of Crystals was open in 2Q and over 70% of the space is currently leased. Crystals will be 72% occupied by 3Q end and over 80% occupied by year end.
    • Closed 18 units at Mandarin, 105 at Vdara
    • 142 unit / $86MM of revenues at Vdara
    • $57MM of revenues at Veer.
    • Closed 33 of the 232 sub contractor contracts outstanding.
  • MGM Macau:
    • Facility was oversubscribed and upsized from $850MM to $950MM.
    • July 2016 maturity date
    • Focusing on IPO later this year and expansion opportunities
  • Borgata sold 4 property leases for $73MM to Vornado, making up $11.3MM acres of land. Expect to finalize the sale of their share of Borgata within the 18 month time frame
  • Repurchased $211MM of principal notes : $136MM of 2010 notes, $75MM Feb 2011 notes.  Saved them $5MM of interest.
  • Looking at other non-core land - including some on the strip
  • 3Q 2010 Guidance:
    • $8-9MM stock comp
    • $165-$175MM of D&A
    • $291MM of gross interest; this quarter consisted of $267MM related to cash interest in the quarter, no capitalized interest
    • 285-295MM with no capitalized interest
    • 200MM of capex this year, 80MM of which has been spent


  • Hold at Aria
    • Related to baccarat hold in particular.  100% luck related. Had 11% hold at the property. Not a function of short play times. Have had 30% hold on the other side of that. Aria's market share is already at 14% for high end play.
  • Timing in IPO at MGM Macau?
    • $250MM of EBITDA on an LTM business. Think that they will continue to grow the business. Have added several operators there.
    • Are waiting for land on Cotai to get approved - officially- that's part of the hold up. It needs to get printed in the gazettte and then there is a comment period... let's move on.
  • Convention and group related business
    • Will end the year around 13% of total, and should be closer to 14% in 2011
    • In Mandalay Bay they had 40% in 2007, and is 34.9% to date this year
    • Bellagio: In 2007, it was 15.7% and in 2009, it was only 12% and it's 14.2% YTD in 2010
    • MGM Grand: 11.5% in 2009 and is 18.5% YTD
    • Doesn't look like they are that far off peak and the 1% mix improvement guidance next year is a rounding error
    • Aria - it's 11-12% this year and targeting 15% for 2011
  • There wasn't much of an increase in spend per occupied room in June, despite RevPAR growth in June.  Think that spend per room will be a lag - but will eventually follow RevPAR growth.
  • Macau Strategy:
    • Brought in new operator
    • Changing mix of tables to more VIP/Junket
    • Team has been adding hosts and marketing representitives in the region
    • Hired significant people in the marketing role
    • Junket incentives haven't changed though
  • Convention bookings at City Center into 2H2010 vs. 1H2010
    • They accelerated in 2Q vs. 1Q.  Got off to a slow start since they didn't have a lot on the books when they opened.  Mid week (57.4% in 1Q to 74.3% in 2Q) vs. weekend business (75.7% in 1Q to 95.8% in 2Q)
  • Forward bookings for 2011 (+20%)--same as the guidance on the last call. So what's changed?
    • Quality of the bookings has increased, so they are booking more fill in business now. So while the booking pace remains constant, pricing is better and spread across more properties (Mirage/Luxor/ Excalibur).
  • City Center - FTE's represent 60% of the cost base, but think that they can lower costs a bit more
  • City Center interest - cash? 50% is cash to 3rd parties and 50% is non cash to JV partners.
  • Hospitality division:
    • 2 openings in China next year, one opening in the 3Q one in the 4Q. Great from a marketing and brand awareness opportunities.  First of half a dozen in China
    • Signed one in India and Eygpt this year
    • Mgmt fee income will start coming in next year
    • Have about a dozen or so in the pipeline
    • Will eventually spin it off - ala Four Seasons (good luck with that - don't think that they will get the same multiple)
  • July - they are occupying the building at or above what they would be and rates are where they thought they would be. As advertised.
  • Have a $190MM receivable for taxes - should get some of that in April 2011
  • FTE's won't improve until the banquet business comes back in the convention space. But overall expect their FTE's to be down to flat going forward. Down 14% from peak to trough on FTE's
  • Attrition rates are improving a lot - under 10% in the month of June.  Conventions are booked with less excess room nights than in prior years, allowing them to plan better.
  • Pricing into 2H?
    • Already in mid-90s. Casino rates are down YoY (ie comp rooms). Casino mix is about 14% of total, but intercompany ADR is down. They track with the cash business. The RevPAR growth is driven by convention and transient; leisure is up a little bit too.
  • Baccarat business? How much of their total volume?
    • Company wide- 25% of table volume historically, but last 2 years it's more like 35%. In the longer term, it should help table hold since Bacc is higher hold.
    • Aria - 44% of the table drop YTD and it should come down over time as they build the other segments


The Macau Metro Monitor, August 3rd, 2010




Committee for Land and Public Concession Affairs President, Kwan Tsui Hang, said one project, which MDT believes to be Wynn's, involving a land area of 200,000 square metres, has already begun construction on a 5-star hotel, a casino and a convention and exhibition centre.  But according to MDT, the construction at that site has yet to start. At present, Wynn has only put up the fences encircling the area next to City of Dreams.  The applications for the other two development projects, which were submitted respectively in 2006 and 2007, both involve 70,000 square metres of land intended for the construction of a hotel and a casino.  Kwan mentioned that the Government explained that the delays were caused by “technical changes” and “constant adjustments in the development projects.


The three land applications will likely be approved as long as the development does not “violate the contractual commitments”, Kwan told reporters.  “To know which gaming operators they are isn’t the most important. What we need to make sure is that the Government policies won’t give preference to the gaming companies anymore and that the fourth land application [of this kind] won’t appear in the future,” she stressed.


Meanwhile, Secretary Lau told the committee that the revision of the law that governs land leases (known as “Land Law”) will “hopefully” be sent to the Legislative Assembly in 2012. 



July GGR reached MOP16.3 billion (US$2 billion), up 70.4% according to DICJ. Market share is as follows: Sands 19%, Melco 14.8%, SJM 32%, Wynn 15%, Galaxy just over 12%, and MGM 7%.


China's new loans are expected to reach 700 billion yuan in July, according to Shanghai Securities News, citing an industry insider.  According to the insider, yuan-denominated loans by China's big-four banks, Construction Bank of China, Bank of China, Industrial and Commercial Bank of China and Agricultural Bank of China, totaled 243 billion yuan, a 78 billion-yuan increase from that of June.  These loans account for 27.3% of all new loans, and extrapolating that number would result in 700 billion yuan new loans.



According to the Managing director of Centaline Property Agent in Macau, total property sales transaction in July was around 300, of which most of the sales transaction was made by the last 10 days before the end of July.  The sales figure was not as encouraging as compared to HK's.  It is anticipated that total volume of the sales transactions should continue to grow during August up to the end of this year.


Better hold you say? We had heard all quarter long that MGM held very poorly, but it wasn’t that bad – within their “normal” range. That didn’t stop management from mentioning hold 7x in one press release.



An astute client emailed me this morning that MGM used the word “hold” seven times in its earnings release.  After getting over my disappointment that I didn’t realize that first, I had a good chuckle.  This is, after all, the management team that decided a few years ago to provide a wide normalized hold range of 18-22% and get out of the quarterly hold blame game.  That strategy is no longer convenient, I guess, as management offered up that low hold impacted them by $20 million in EBITDA for the quarter.  Yet hold was still in the normal range, albeit at the low end.  Would management have been so transparent if hold had been at the high end of the range?


Probably not.  In fact, VIP hold percentage in Macau was about 70bps higher than that of Q2 2009.  Using the same hold VIP percentage as last year would’ve translated into $18 million less of EBITDA for the property, half of which would’ve accrued to MGM.  We didn’t see that discussion in the release.


So how were the numbers?  Well, despite the better than expected table hold in Las Vegas – we had expected hold well below the 18-19% actual - they slightly missed our EBITDA estimate which was below the Street.  So volumes were lower than we expected.  We aren’t even going to spend a lot of time talking about RevPAR since they can pretty much report whatever they want given the large number of comped room nights.  However, we will note that despite reporting higher RevPAR at almost every property that we projected, they still managed to report slightly lower revenue.  Put another way, higher "room revenues" were offset by lower "casino & other revenues."  We continue to believe that 2011 Street estimates need to come down.

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



Post Q1 Conference Commentary

  • “At this point, we’re not seeing anything in St. Louis that we weren’t expecting and actually the percentage of revenue we lost has declined, as it is not at the same level that we thought it would be, so we’re actually better off.”
  • “The goal is to retire debt and make the best use of free cash flow.”


Q1 YouTube

  • “Stock-based compensation, we’re estimating, will be 3 to 3.5 million in the second quarter. The projected tax rate will be between 42.5% and 43.5%. Capital spending--we do think we’ll spend a little bit more in the second quarter than we did in the first quarter, which was about 12 million; we think we’ll be in the 15 to $20 million range in the second quarter. Interest expense should be 34 to 35 million. And assuming Board approval, we’ll be issuing another $0.105 quarterly dividend later this quarter.” 
  • [Department of Transportation East Chicago road improvements] “By the end of this year, they expect to complete an initial phase that will allow a portion of the freeway to be used to get to the property that’s currently shut down in advance of the bridge. It will get it about as close as they can and then drop it off to a new exit, which will significantly improve access to the property. And sometime in 2012, they expect to finish the second phase, which will further improve the access on the surface streets with some alternative routes that will significantly ameliorate the current situation.” 
  • “Subsequent to the end of the first quarter, we’ve retired an additional $12 million of debt in April.” 
  • “It’s possible based on our expectations that we will reduce interest expense in the second half of the year by about $12 million because of the expiration of the swap.”
  • “I think it may take a little bit more time for people to get the confidence under themselves to increase their gaming spend. So, we still remain optimistic that the consumer will come back. There are clearly signs that get reported every day that retailers and some other elements of consumer spending are starting to say that the bottom is hit and it’s bouncing back up.” 
  • [Have you normalized costs at East Chicago?] “The costs are in line.” 
  • “I would say still the run rate for the year for corporate is going to be about 47 million… without stock comp.”
  • [Maintenance capex for 2010] “We are probably still looking at 70 to $80 million.”
  • [Black Hawk hotel] “The hotel occupancy has been relatively stable, just above 90%.  However, we’re looking forward to the prime tourist season in the Rockies that occur in June, July and August and are hopeful that that will produce even greater occupancy, but since this will be the first summer with the hotel, we’ll have to wait and see.”


Looking at the headlines, TXRH had a strong second quarter.  Earnings were in line with expectations but comps came in better-than-expected and were positive for the second consecutive quarter after nine negative quarters.  And, traffic was positive, +2% in the quarter.  Restaurant-level margin increased YOY and came in better than I anticipated given the expected decrease in benefit from food costs deflation.  However, cost of sales as a percentage of sales was still down about 70 bps YOY (versus -185 bps in 1Q10).  This positive margin growth, combined with positive same-store sales, put TXRH in the “Nirvana” quadrant of our sigma chart for a second consecutive quarter.  Management raised its full-year comp and EPS guidance.  The increased comp guidance of +1% is definitely achievable and the street’s FY10 EPS estimate of $0.82 implies 22% EPS growth, above management’s upwardly revised range of +16% to +20%.


So, that all sounds good.  When you look at the underlying trends, however, the +1.4% same-store sales growth for company-owned restaurants in the second quarter, which was better than the street’s +0.9% estimate, implies a 70 bp deceleration in two-year average trends.  The third quarter-to-date comp trend of +3%, which is lapping a -5.5% to -6% comp from the same period last year, points to a continued slowdown in two-year average trends of 10 to 40 bps from the 2Q10 level.  There were a lot of questions on the earnings call about whether management is being conservative with its full-year +1% comp guidance given that same-store sales were up more than that in 2Q10 and in the third quarter-to-date.  This deceleration in two-year average trends may be the reason for management’s conservatism; though management said its weekly trends have been pretty consistent over the last couple of months.


Restaurant-level margin compares get increasingly more difficult in the back half of the year on a YOY basis, but management guided to increased food cost deflation in the third and fourth quarters.  We will have to see how same-store sales trend from here but the tougher restaurant-level margin compares will make it more difficult for the company to remain in “Nirvana” for the balance of the year.  Same-store sales growth will likely remain positive during the third quarter, but comparisons get more difficult in 4Q10 and the company is expecting a slightly negative impact on comp performance from a Christmas timing shift during the quarter (falling on a Saturday in 2010 relative to a Friday in 2009).


Despite TXRH’s conservative comp guidance, management’s sounded optimistic and encouraged by the positive trend in new unit volumes.  To that end, management stated that it will be increasing its unit growth in FY11, above the14 to 15 units expected in FY10, and that it expects unit growth to move even higher in FY12.  Improving new unit growth is a good proxy for the health of the concept, but management also spent some time on the call yesterday talking about how trends have improved, “due in part to moderating [the company’s] development schedule over the last 12 months.”  I am interested to learn to what extent management increases its unit growth (company said it would provide more details on its 3Q10 earnings call) as it will be important that the ramped up growth does not offset the positive trends that have resulted from the slowdown in unit growth. 


TXRH – IN NIRVANA FOR NOW - txrh sigma


Howard Penney

Managing Director

Early Look

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