美高梅國際酒店集團 (MGM) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Mandalay Resort Group third-quarter earnings conference call.

During the presentation, all participants will be in the listen-only mode.

Afterwards, we will conduct a question-and-answer session.

At that time, if you do have a question, you will need to press the 1 followed by the 4 on your telephone.

As a reminder, this conference is being recorded Thursday, December 5, 2002.

I would now like to turn the conference over to Mr. Glenn Schaeffer, President and CFO, Mandalay Resort Group.

Please go ahead, sir.

Thank you, operator.

Good afternoon.

We welcome to you our third-quarter conference call on results for Mandalay Resort Group.

With me today are Les Martin, our Chief Accounting Officer, and John Mars, our Senior Vice President of Marketing.

We read a disclaimer at the beginning of the call, so I'll do that.

This conference call contains forward-looking statements within the meaning of the federal securities law, including statements concerning the company's anticipated share repurchases and its current construction projects.

These forward-looking statements involve risks and uncertainties, which could cause actual results to differ materially from those expressed or implied by statements today.

Additional information concerning potential factors that could affect our company's future financial results will be included under that caption in our form 10-K and 10-Q for the quarter.

In this review today, we will discuss operating results for the quarter and their components.

In line with prior announcement, Mandalay reported 50 cents in earnings per share.

On an operating basis against 33 cents a share on the same basis last year.

That's an increase of 52%.

I'll note that a good driver -- a good portion of the driver for the increase was lower depreciation and amortization expense in the quarter, emanating from a change in the depreciation schedule at MotorCity Casino in Detroit, which now treated as a permanent facility as opposed to a temporary; and lower interest expense in the quarter.

Second topic today, we will provide some color on how the fourth quarter is shaping up, and, third, a sense of outlook or potential upside for the coming fiscal year.

The third quarter had a lot of moving parts.

Our operating cash flow was about even for a year ago.

I will talk about this later, but note, we had a substantial tax hike in Illinois one year to the next, which affected us by about 7 cents a share or we would have had higher operating cash flow than a year ago.

Revpar on whole -- on -- across the five resorts on the Las Vegas strip also ended flat with the year prior.

In 2001, last year, our trend of results was on a record pace from the first of August until September 11th, and so we had relatively tough comps in the first part of this quarter, and historic room rate trends have not been re-established just yet following the events of 9/11.

Put another way, almost every year, room rates go up on the Las Vegas strip, this year being a rare exception.

We are getting higher room rates year-over-year at Mandalay Bay, which is our flagship band, but not so far with our other resorts.

Mandalay Bay in the quarter generated $38 million in operating cash flow; that compares to $30 million a year ago.

Last year, the property experienced a higher-than-normal win percentage on table games.

This year, pretty close to normal, but it was subpar during the month of October, which means the last weekend.

With a -- without having the tough go in the casino net last weekend, we would have made $40 million at Mandalay Bay in the quarter.

Luxor, for its part, posted $25.2 million in operating cash flow.

That compares against $27 million last year.

And Excalibur earned $19.1 million against $21.1 million.

Down the block, Circus Circus Las Vegas recorded $13.6 million in operating cash flow against $14.7 million a year ago.

And Monte Carlo, which is 50% owned by Mandalay, produced 18.9 million against 19.6 million.

The results elsewhere or apart from the Las Vegas strip:

In Reno, our company recorded a total of $14.2 million in operating cash flow, that includes our share of Silver Legacy, along with Circus Circus Reno.

That is an uptick against $13.6 million last year.

And by the way last year, there really wasn't any appreciable 9/11 affect in Reno.

In Laughlin, the results of our two properties were $3.4 million in operating cash flow against $4.4 million.

In Elgin, the Grand Victoria, which is our 50% owned gaming vessel, generated $21.6 million in operating cash flow versus $33.5 million; again, the difference was the full effect of the substantially higher tax rate on casino revenue that became effective on July 1.

We also are having a catch-up effect in the third quarter.

So you should expect next year the impact of a tax increase would amount to about 20 cents per share, and I don't think that should affect anybody's prevalent earnings estimates.

In Detroit, MotorCity Casino, we own 53.5% generated $31.8 million in operating cash flow in the third quarter against $29.5 million last year.

And in Tunica County, our Gold Strike, -- this is in Mississippi -- produced $7.1 million versus $5.6 million last year in operating cash flow.

I'll note that next year we'll try to manage the calendar better in the third quarter.

We entered in on a Thursday night.

I know that people fixate on things like this.

They will have to check to see if we are using the Gregorian calendar or not, but if we had finished the quarter on Saturday, a mere 48 hours later you could have added 3 cents a share per quarter because that's what a Saturday does compared to a Thursday.

As we look into the fourth quarter, we have a full book of business at the convention center at Mandalay Bay in the month of January.

We will open that facility on time and on budget January 2.

Next year, in total, we are looking for essentially 35% utilization of this project.

That's 1.4 million square feet.

That's about 60% of the true selling capacity.

There are load-in, load-out days, weekends.

So 35% -- sort of 60% you can sell.

That's been our target.

Our convention year content will rise at Mandalay Bay next year from 18 or 19% this year to something in the 30's.

At about 175 dollar average room rate for those convention rooms.

That will be a significant contributor to the earning power of this particular property.

As I said all along to most of you on this call, no one month this year seems to foretell the next one, and so far, as consumer sentiment is shaping up in the fourth quarter, November is a notch better than October.

New Year's appears to be going well from the standpoint of our forward bookings, and with these January conventions coming to Mandalay Bay, I would say from this vantage, numbers in the fourth quarter should be in line or better than prevalent estimates on Wall Street if nothing changes from here.

The booking window does remain short.

On the share repurchase front, we bought 3 million shares during the third quarter for roundly $90 million and we have bought another million shares since we made our early press release on November 20.

So far in the fourth quarter.

We expect to continue making substantial progress towards finishing the 7.7 million share total authorization, another 3 million shares on the open market.

Between September of this year and March of next year, this company will -- or should have -- reduced its outstanding float by approximately 11 million shares or 15%.

Each million shares is about a penny to our earnings next year.

Meanwhile, our interest expense will be lower next year than this one, even with those shares gone.

As we have altered our fix to floating ratio, and we did that at midyear, took about 40 basis points off our total cost of debt, and next year as well, depreciation amortization relative to this year will be lower.

You should be using a number of 165 million for D & A defense next year.

Now as a sidebar, I'm going to ask John Mars, our Senior Vice President of Marketing, to describe current initiatives on the technology front.

We have stepped to the floor on these factors, and this will be the moment to report them.

John.

As Glenn stated, our investment in technology is a big priority for the company because it allows our marketing staff to truly understand our customers, a major factor in our continuing success.

Our approach has three dimensions, starting with our CRM strategy.

Unlike most of our competitors, we are interested in our customers' behavior inside and outside the casino.

How much a customer spends in a hotel and our restaurants and our spas and entertainment facilities is just as important to us as the time they spend on the slot machine.

For example, in the past, most casino companies would perhaps offer a glossy room or food discount for a customer who spends $500 in the casino.

But if we know there is a certain group of these $500 customers that will spend another $1,000 on their room and dining, why would we discount that revenue?

What we need to do is understand our customers' use of our products and develop relationships centered around those experiences.

We have developed a system that gives us a more comprehensive picture of our customers' spending patterns.

These systems will allow us to make smarter and more profitable marketing decisions.

To date, we are up and running at Mandalay Bay and Luxor, and we will be functional at Excalibur by the first of the year.

We have an aggressive schedule to get the rest of the strip properties on line by the spring of 2003, and entire enterprise should be completed in the next 18 months.

The second technical initiative is the One Club, our multi-property player program.

Although linking a player's gaming activity across multiple casino locations isn't a new idea, the simple design of One Club is an innovation in the industry.

Specifically, it allows our customers to play slots and table games at any Mandalay property and accumulate points and comp dollars.

We also allow our customers to redeem points and comp dollars at any of our properties.

Unlike our competitors, we don't expire our rewards on active accounts.

These accumulations, no expirations and bankability, especially for comps, has been a fundamental change of how casinos recognize and reward their loyal players, and our customers are responding accordingly.

I don't hesitate in saying that Mandalay technology factor is a step ahead of the industry when it comes to tracking and rewarding.

To date, the One Club is in place on the Las Vegas strip, in Laughlin, Reno and Tunica, Mississippi; we're working on [INAUDIBLE] and Jean, Detroit and Elgin now.

The last leg is the Internet.

Five years ago, we booked zero rooms on the Internet.

Today retail customers book between 15% to 20% of our total rooms on-line.

Of the FIT rooms, 40% are booked through the Internet.

Not only is the Internet the most cost-effective avenue for us to capture bookings, but if history is any indicator, it's a source of our highest retail room rates.

We believe that approximately 130 million in room revenue will be derived from the Internet by the end of our fiscal year in January 2003.

As we go forward, the Internet will pervade every segment of our business.

As everyone knows, we are opening a state-of-the-art world-class convention center in January of 2003.

It has a corresponding web-based application that, among other things, will give convention planners and attending the ability to book, plan, and even design their own set-up all on the web.

With that I will turn it back to Glenn.

Thanks, John.

We will be happy to entertain questions.

Thank you.

Ladies and gentlemen, if you would like to register for today's question-and-answer session, you will need to press the 1 followed by the 4 on your telephone.

You will hear a three-tone prompt to acknowledge your request.

If your question has been answered and you would like to withdraw your registration, you may do so by pressing the 1 followed by the 3.

If you are using a speakerphone, please lift your handset before entering your request.

Your first question comes from the line of Joe Grup with Fulcrum Global Partners.

Please go ahead.

Good afternoon, guys.

Hi, Joe.

I know this is sort of a nonissue the way your fourth quarter calendar falls, with new Year's Eve falling in the middle of the week, do you think that -- which weekend is booking to be the stronger of the two weekends?

The weekend prior or the weekend after New Year's Eve?

I don't think that the Wednesday day is going to -- probably the second half, if I had -- if I had to tell you today, Joe.

It would be the weekend in January.

So we will have a stronger -- probably better for us than on December 31st.

Is that your question?

Ah, yes.

Okay, so January 1, 2, 3, 4 will be the stronger weekend.

Let me give a more global response.

This New Year's holiday, despite the Wednesday day, is shaping up well.

Last year, clearly, you had a travel-impaired holiday.

The year before is what we call the witching millennium, but this holiday looks like it is going to be quite solid, even good.

A question on the convention center.

Is there a way you can kind of quantify what the room nights sold will be relating to going from 18 to 19% of room nights sold to 30% of room nights sold at Mandalay Bay?

Here is what you can do, you can take 90% times 365 times the number of rooms at this property, and we will almost double the amount of rooms sold at convention segment going from about, I'm going to say 18% this year to 35% next year at 175 dollars on that 35%, and in some cases those room rates are double what you would have sold those rooms otherwise in the wholesale segment.

This is a big number.

Thank you.

Your next question comes from the line of Larry Klotkin with Jeffries & Company.

Please go ahead.

Hi, Larry.

A couple of questions, will you please go over capital expenses and what you expect for the next year?

Third quarter, Cap Ex was $76 million.

I think we spent 217 in the nine months.

We will be right around $300 million Cap Ex for this fiscal year, and that number will be close, probably a little under, but close to that number next year, free cash flow.

Okay.

How about Illinois, how is it looking for any kind of changes in regulations, more positions or lower tax as soon as.

I wouldn't have high confidence in that occurring in the so-called veto section, but we will take whatever they will give us.

How about Laughlin, is this new Arizona rules going to affect you there?

I don't think so.

I think Laughlin has found its level.

It appears to be higher, but there's not much change in our view on what Laughlin produces for the company.

All right.

And I guess the last thing is, the -- the new tower.

What's the exact date of the new tower, the room tower.

We will have the tower on-line, we believe, for the whole of the fourth quarter next year.

November 1st on, 125 rooms, under construction now.

Okay, and Glenn, you know, some of your competitors have made comments in the last month that the lower end of the strip seems to continue to suffer, while the high end does well and some people have taken that as your places.

Can you respond to that?

I think people mistake us maybe for another competitor sometimes.

Certainly the fastest-rising prices on the Las Vegas strip is our place.

Mandalay Bay is right now the hottest brand on the Las Vegas strip, and you can see that with the room rate increases year-over-year.

There was in the third quarter and periodically this year some battles fought in what I will call the middle sector of the market.

And we are not immune to that certainly, at some of our other properties.

I think if you look over the course of the last year, we are doing better than most year-over-year.

Okay, Glenn, well, thank you.

Happy Holiday.

Your next question comes from the line of Harry Curtis of JP Morgan.

Please go ahead.

Hey, Glenn.

Hey, Harry.

A couple of questions, first of all, the difference between the 47 cents reported and the 50 cents operating, the other express line item or other income line item and the preopening?

This is Les Martin.

Harry, this is Les.

Preopening a million two and then fair value adjustment on our serve assets of 2.5 million and market to market on slots of 700,000 positive.

That will account for it.

I will say this, Harry -- this is on the surfside, they closed books September 30, not October 31.

Probably would have swung positive.

As I recall, October was a pretty good month in the stock market.

All right, the next question is, I notice that your minority interest increased, yet your EBITDA in Detroit declined.

Was there a catch-up there?

What do you think is going on there?

Harry, why don't you call us back and we can all get our slide rules out.

All right.

And last question is, with all the stock that you have repurchased, I would expect your fully diluted share count to be going down, but it isn't.

And if you can talk about maybe the impact of option issuance, or why --

That's not it, Harry.

What's that?

That's not the reason.

We bought the stock during the course of the quarter.

So we ended the quarter with 66.6 million shares.

Let me make a point.

This company has been the most aggressive repurchaser of shares on the New York Stock Exchange company in the last five years, probably most successfully.

We have cut the cap flow by about 50%.

That's where we will be in March.

And this has nothing to do with option dilution.

These are shares going away, and going away for good.

And they are going to put a turbo under EPS when we start getting positive REVPAR again on the Las Vegas strip.

That 66 million is fully diluted?

Those -- fully diluted.

At the end of the quarter we don't calculate that.

We're doing it -- that would be at quarter end.

Actual outstanding.

That's actual outstanding.

Okay, any idea what the fully diluted is over the same time period?

Probably -- you know, Harry, we will sit down and figure it out for you.

The shares are going away.

Very good.

Thanks.

Your next question comes from the line of Steven Kent with Goldman Sachs.

Please go ahead.

Hi, Glenn.

A couple of questions.

First, what are you seeing on the follow-through with how successful you are with the convention center and what it is doing to Mandalay Bay?

The original plan was it would help Luxor and Excalibur.

Are you seeing similar trends on room rate and also convention mix in those properties?

And then, just on booking trends and how short the booking window is.

The hotel companies all complain about this, are you seeing similar or just very, very short booking windows, is it getting shorter or longer as you look out toward next year?

It is still short.

So I can't tell you next year.

Typically in this company, the first quarter is often your strongest.

Certainly from the standpoint of convention content, first quarter will be our strongest next year.

So, it's varied with -- I wish I could tell you which metric exactly.

We will call it consumer sentiment, from several weeks to -- to a month.

And it's longer at, you know, Mandalay Bay than it is at some the other properties.

But all this year for the most part, you have had shorter-than-normal booking windows.

With respect to convention content, in terms of room nights sold at Luxor, Excalibur, we will go from a single-digit number at Luxor next year to probably 10 to 11%, which is a pretty good step up.

And Excalibur will be 5 or 6%.

Okay.

Thanks.

Sure.

Once again, ladies and gentlemen, to register for a question, you need to press a 1, followed by a 4 on your telephone at this time.

The next question comes from the line of Robin Farley with UBS Warburg.

Please go ahead.

Yes, thanks.

I wonder, Glenn, if you could comment.

I know there was a point when you had some overseas marketing offices that you closed down in Asia.

Have you reopened any or any plans to do that?

I know you just got approval for a private gaming room.

We are going to be representing-- I mean, we are no longer in a couple of those markets, Singapore, elsewhere.

We will have a Salon [INAUDIBLE] that we will open before the end of the quarter -- this just in, approved today.

I would expect that next year -- we do about -- I don't know 8% to 10% of the high budget play business on the Las Vegas strip.

We will have a bigger number than that next year by our estimate today.

Is that -- do you think that's going to be due mostly to the Salon Prevais [Phonetic].

The fact that we have redone suites which appeal to that customer mix, and we have a few new hosts that have very strong followings with respect to high budget Chinese players.

We didn't have that before.

That's the infrastructure you need.

And can you comment about drop -- I missed a couple of your introductory comments and I apologize if you said this already, but did you talk about drop in the quarter versus last year?

Drop in the quarter versus last year.

Drop in the quarter will be higher than it was last year because last year, we had a higher-than-normal hold percentage, which helped us in the quarter.

We were pretty close to the normal percentage over -- over the quarter this time, Robin, except for October, we -- if the quarter had either ended a week sooner or 48 hours later, I would have beat y'all's consensus by about 3 cents. -- at least 2.

Can you give a little more color in terms of -- you are saying it was a little bit ahead of normal in this quarter.

No.

Overall?

It was right at about normal.

It was down in October.

All happened in the last week -- last weekend.

Sold out Pavarotti and then some player forgot to check analyst estimates and beat us.

Thank you

Once again, ladies and gentlemen, to register for a question, you need to press the 1 followed by the 4 at this time.

I am showing no further questions.

Please continue.

That rounds it up from our side.

So we appreciate very much tuning in.

I am around for the rest of the afternoon, as is Les Martin, if you have further questions.

Thank you.

Ladies and gentlemen, this does conclude your conference for today.

We thank you for your participation, and ask that you please disconnect your lines.