美高梅國際酒店集團 (MGM) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Mandalay Resort Group second quarter earnings conference call.

During the presentation, all participants will be in a listen-only mode, afterwards we will conduct a question-and-answer session.

At that time, if you have a question, please press the 1 followed by the 4 on your telephone.

As a reminder this conference is being recorded.

Tuesday, September 2, 2003.

I would now like to turn the conference over to Glenn Schaeffer, President and Chief Financial Officer.

Please go ahead, sir.

Thank you, operator.

Good afternoon.

Welcome to Mandalay Resort Group second quarter conference call for the results of the period ended July 31, 2003.

With me today is Les Martin, our Chief Accounting Officer and Treasurer.

Before we begin let me dispense with the customary disclaimer.

Information we provide during this call may include forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933 and Section 21-E of the Securities Exchange Act of 1934.

They can be identified by the fact that we do not relate strictly to historical or current facts.

Our forward-looking statements will be based on our current expectations about future events and may include statements related to our 1122 suite tower and retail concourse, currently under construction at Mandalay Bay, anticipated capital spending levels of the financial impact of additional competition, the potential impact of changes in tax rates, the status of the development of our casino in Detroit, future share repurchase activity, expected levels of depreciation, operating lease rent, interest expense, or capitalized interest, and future dividend policy.

Forward-looking statements may involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

Information concerning factors that could affect our future financial results is included under the caption of the same title Item 1 of our annual report on Form 10-K that we filed for the year-ended January 31, 2003.

We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise.

Any further disclosures made un-related subjects in our subsequent files with the SEC should be consulted.

In accordance also with the new SEC regulations, Mandalay has provided a supplemental schedule with the earnings release that reconciles operating cash flow, or EBITDA, with GAAP defined operating income, and net income.

Our second quarter markedly demonstrated the power of RevPAR in driving the operating results of Mandalay Resort Group.

With all the changes in one-time events, we reported on a fully diluted basis, 67 cents per share against 41 cents last year.

By the standards prevalent, as to which the Street compares our results, with equivalent as I to last year's operating figure of 51 cents our second quarter represented the most money Mandalay Resort Group has ever earned in any three-month period, 72 cents per share on the same operating basis.

This dramatic increase of 41% derived from our escalating performance on the Las Vegas strip, across our multiple properties.

We are running at record room rates at our five resorts for any summer season above those achieved in August 2001, which was our previous high mark.

For the second quarter, the company's RevPAR on the strip, on a combined basis was up 13 1/2%, over the prior year.

Mind you, Mandalay has already run better comparisons, since 9/11 quarter-over-quarter than any of our prime competitors so these weren't the easiest comps in the group.

Our metric that we rely on RevPAR is the one to which our earnings and free cash flow are most sensitive.

Mandalay Bay, the property, posted EBITDA of $47 million in the quarter, against $39 million in the second quarter last year, that's the all-time highest figure for any three-month period for this property.

RevPAR rose 18% year-over-year.

It is clear that our convention center at Mandalay Bay is instantly successful as a generator of strong room rates mid-week.

We will achieve our stated goal of utilization for this new space in year 1, and we are on track for stepped up performance from here, for next year, and then again in the following year.

Our new tower of suites will fit with our shift of mix and clientele, it will be finished in November, aimed directly at the convention market mid-week as well as for the highest paying customer, the FIT guest on weekends by offering a little something extra.

In case you like a little something extra in instant hits you should come and try our topless pool, the Moray.

Year in and out, RevPAR climbs 5% on the Las Vegas strip unless they're disruption by geopolitical mishaps.

Our company will grow its RevPAR faster than strip averages as we have already proven by the fact our improving mix of customers and our distinctly potent brand of Mandalay Bay, whose aura energizes our entire south mile along Las Vegas boulevard.

Luxor, for its part, also was a superior performer in the second quarter.

This is the resort in our product portfolio that is the most sensitive to RevPAR direction.

As I've mentioned in the past, without the intervention 9/11, in 2001, Luxor was on-course to finish at $130 million or higher in EBITDA for that year.

Luxor's room rates are now better than they were two years ago.

A point we reached in this July.

Four the quarter, Luxor made nearly $30 million in EBITDA, up 27% from a year ago, and historically this is that property's third best period out of four quarters, typically the quarters would rank first, third, second and fourth.

RevPAR was up 14%.

The better expectation for Luxor's earning power from here over the next 12 months is a resumption of its position of two years ago, if all else stays at even keel in the world.

Excalibur produced 24.7 million in EBITDA in the quarter, against 22.4 million a year ago, up 10%.

RevPAR climbed 11% in the quarter.

To a lesser degree, Excalibur possesses the upside material of Luxor.

In 2001, the castle was on its way to the upper 90s or $100 million in EBITDA, and it fell to the low 80s as a run rate as a consequence of 9/11.

This summer, Excalibur has regained the momentum of two years ago.

Circus Circus Las Vegas, in a different neighborhood than its kin, but still the runaway leader on the strip's north end, compared 18.2 million in EBITDA for the quarter against 18.1 a year ago.

Monte Carlo generated 22.3 million in operating cash flow, versus 18 million.

Itself another beneficiary of improved RevPAR at the property by 11%.

Apart from the strip, our Nevada experience was decidedly tamer.

Together, Circus Circus Reno and our 50% ownership of Silver Legacy were behind year ago results by nearly 2 1/2 million in EBITDA.

In Laughlin, our two properties were back by an equal amount.

Outside of Nevada, we bore the hefty tax increase in Illinois for part of our second quarter at the Grand Victoria Elgin, 50% owned, an effect of 5 cents to our earnings for the second quarter.

Otherwise, it would have been 77 cents.

In Mississippi, our Gold Strike in Tunica was up in EBITDA, 7.6 million against 7.1 million, we've gained some market share while in Detroit, our 53% owned Motor City Casino produced 36 million in EBITDA, compared to 33.7 million a year ago.

In the past 12 months, Mandalay Resort Group has restructured its debt, chopping a blended coupon rate of 7.8% to roughly 6.5% on a going-forward basis over the next 12 months.

That's nearly $40 million over what amounts to a two-year span beginning last summer and rolling through to summer next.

This reduction of interest expense, again much of it rolling through the next year has accompanied a rather daring recap of our equity during the years of the late, we hope, great bear market.

In combination, these financial moves only heighten the flow through of improving operating results to our EPS line.

Meanwhile, our company's credit statistics, whether debt-to-EBITDA or debt coverage ratios will be on the upswing after the fourth quarter, and within the next two years, if and as our income rises, we will restore our ratios to investment grade standards of the past.

I will note that Mandalay is among the fortunate few corporations in the consumer sector today that is achieving organic revenue growth from pricing increases well higher than the American economy's own growth rate.

We stand in a financial position to translate that organic growth and revenue from our same or expanded stores into double digit increases in earnings per share.

As a consequence, our rate of return on invested capital is also rising.

Indeed, we could accomplish this dual fact, higher prices, higher profits, without net use of additional capital in this company from this next year over the following several years ago.

We could well decapitalize to some degree in that span, if we so chose.

Our discipline is to invest capital for the right projects.

Our belief is that a project good enough to build is good enough to borrow for.

A financial market decision.

Our board of directors has approved an 8 1/2% hike in our quarterly dividend rate at a point where our dividend policy is not yet three months old.

We will pay 25 cents in quarterly dividend on November 1 to shareholders of record on October 15.

What lies in front of this company is a bounty of free cash flow.

Believe in it, we sure do.

Nobody in our group and relatively few in the American economy have shared our behavior in returning capital to owners over the past three to five years.

Reading across 200 years of stock market history, the dividend and its rate of growth, have described the majority of stock market returns.

Given the lucrative free cash flow yield that we anticipate over the next three to five years, that is our free cash flow in relation to our market cap, so given that expectation, we intend to be and can afford to be a dividend leader.

With that overview of current results and outlook, we would be pleased to take your questions.

Thank you.

Ladies and gentlemen, if you would like to register a question, please 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 answer and you would like to withdraw your registration please press 1 followed by 3.

If you are using a speaker phone, please lift up your hand set before entering your request.

One moment, please for our first question.

Our first question will come from the line of Joe Greff with Fulcrum Global Partners.

Please go ahead with your question.

Hi, this is Mark Strawn for Joe Greff.

Can you give us an update on RevPAR trends on the strip in August and FIT group bookings looking into the fall?

Sure.

In August -- now, August is the toughest comp of the year, it was the strongest month last year and the strongest month of '01 clearly.

We will be up between 5 and 8%, about 6, 7% in RevPAR in the month of August, right at that.

I would expect double digit in September.

And that's about as far as our booking window lets us look at the moment.

Okay, great.

Just one more quick question: with the rate of ADR improvements on the strip, would you think about pushing up your targeted room rate for the new tower?

It could be.

As I indicated to people on this call in the past, we have an expectation that the tower next year in its first full year would be about a $220 average rate, seeing how rates are behaving over the second part of this year, I guess the three-quarters of this year, if things hold that could prove to be a low number.

Okay, thanks a lot.

Our next question will come from the line of Larry Klatzkin with Jefferies and Company.

Please go ahead with your question.

Okay, Glenn, listen, thanks for a great financial reporting in the 8-K, that was definitely a better quality than most of your competition.

A couple of questions.

One, do you have capex for the quarter?

Our capex this year, Larry is going to be about 350 million, a little over halfway there.

We spent 95 in the second quarter and 180 year to date.

Okay.

As far as your bidding on the [INAUDIBLE] license in Illinois, is that true?

To understand the process better, we didn't submit a bid with the others, so we maintain an interest but we need to understand the process better.

Okay.

As far as Illinois, what actions are you taking at your facility to compensate for the ridiculous tax rates?

There's not a lot we can do since we were the highest grossing boat in the state, and we're the one that makes the most amount of revenue over the $250 million, 70% mark.

So, we've been operating our boat as we have in the past, and the interest of customers and I couldn't predict what our changes would be going forward.

I do recognize that some of our competitors have taken some actions, but it's hard to take our revenue from 400 to 250.

Okay.

As far as 2004 convention booking can you see what you're looking for in percent utilization and what you're seeing?

This year is -- as I've told you before -- not exactly a high moment in the convention and meeting business across America.

But it's been a good year in Las Vegas because Las Vegas is capturing market share from other places.

Particularly in the case of our convention center, it's from cities in the western half of the United States.

The convention center this year will run right around 35% total utilization, another way to look at that Larry, it's about 60% what have we have for sale, not all of your days of a year are for sale, they're not delegate days because of weekends, holidays, load in and load out.

Next year we should go through 40% utilization, about 70% of the days we have for sale and we think we'll be around 50% utilization in '05 and about 80% day are for sale, all of which would auger well for room rate increases as we go forward.

All right.

Great.

And then I guess the last question is: Any chance as things develop you'll be looking in England?

We like to play games when someone tells us what the rule book is going to say and we don't know that yet.

All right, Glenn, well good results.

Thanks a lot.

Our next question will come from the line of David Anders with Merrill Lynch.

Please go ahead with your question.

Thanks a lot.

Glenn, any comment on the booking window, I know you're going to say it's short, but any notice of it lengthening at all?

Well, David, I think I said in my last call, I'll hold by at least in our instance, I think that the booking window is going to be shorter than it was in the past.

Some part of that it's just because of the technology has improved.

You know, as a company today on the Las Vegas strip, we're selling about 50% of our FIT rooms online and we'll sell $250 million of our room nights on line this year.

We have a dynamic price calendar where people can pick and choose for themselves and don't have to guess, maybe I should book two months in advance to be sure I get a room.

We think the booking window is going to look more normally even in strong times of four weeks when it used to be six or seven already.

And last question for you on the operating lease rent for Mandalay Bay, the property, is that a good run rate that we saw in this quarter, 4.6 million?

No because we've gotten rid of the synthetic leases, the operating leases.

They were bought out on June 30.

Okay.

So there will be no rent expense going forward, it's been replaced essentially with depreciation and interest expense.

Got it.

Perfect.

Thank you.

Sure.

Our next question will come from the line of Harry Curtis with JP Morgan.

Please go ahead with your question.

Hi, a couple quick questions.

Any abnormal hold issues one way or the other?

No holds were normal in the quarter, Harry.

Okay.

And the second, it didn't look like you took any accrual for higher taxes in Elgin; is that correct?

Well, we -- Les, why don't you explain.

Pretty easy, we booked taxes as they have to be paid.

What we did, Harry the same thing we did last year, we basically deal with the prospectively from the point the tax was approved.

So from July 1 forward we'll bump up the accrual rate over the balance of the year to get to the correct year-end number.

So the bottom line is that in the October and January quarters, the tax rate will go up quite considerably then?

Yes.

Assuming no other increase next year, then yeah, it's going to be a higher run rate in the second half of this year than the run rate the following year.

You had a blend in the second quarter, Harry.

Basically had to catch up.

Very good.

Thank you very much.

Sure.

Our next question will come from the line of [INAUDIBLE] with Searchlight Capital.

Please go ahead.

I have a question regarding what -- on an operating basis, did you say that your earnings were 72 cents roughly?

Yes.

Well, I guess I'm just trying to say, if you back out over one-time items isn't there more of a 2 1/2 cent increase from the 67 cents?

I didn't hear that question.

I guess I'm just -- the one-time discharges included a gain of 4 million, and you're also taking out the 13 million of the [INAUDIBLE], and then you're subtracting 9 million due to the gain from the sale of the interest rate swap, isn't that the right way to look at it?

The thing thing we did last year, 51 cents, and 72 cents this quarter.

If your math shows different, use that number.

One other quick question.

Regarding the tax rate [INAUDIBLE] on what the tax rate for the second half will be?

For the year our tax rate should be about 35 1/2%.

Okay, great.

Thank you.

Sure.

Ladies and gentlemen, as a reminder to register for a question, please press the 1 followed by the 4 on your telephone.

Once again, ladies and gentlemen, if you do have a question at this time, please press the 1 followed by the 4 on your telephone.

Our next question will come from the line of Harry Curits with JP Morgan, please go ahead with your follow-up question.

Glenn, the $6.3 million loss equated to 7 cents in your press release, yet the gain of 9 million was only 4 cents.

What was the difference in tax treatment?

And does that account for the difference?

Both are being tax affected the same way, Harry.

I mean, it's 4 million was the gain, which was a four-cent hit, and the loss net of all the gain on the swaps and that was 6 million.

So of the 50% higher, so six to 7 cents, I mean, it's rounding probably is the only difference.

I'll talk to you off-line on that then.

Thanks, Harry.

Our next question will come from the line of Andy Henderson with Marion Capital.

Please go ahead.

I was wondering if you could provide additional guidance on your dividend policy and if that was tied to certain [INAUDIBLE] ratio or other metric?

No, we don't have a ratio that we tie it to.

We can only speak a quarter at a time, but that's probably unique in the American economic landscape for raising a dividend, you know, twice the rate of the growth in the economy, the second time we've paid one.

Okay.

Thank you.

Our next question will come from the line of Jeff Logstin with Harris, Nesbitt Gerard.

Please go ahead.

Great quarter, Glenn.

Thanks, Jeff.

What events do you have coming up for the rest of the year that might be attendance drivers or room demand drivers?

Well, I don't know that anything special, I mean, you're going to have a good weekend, we think, not at our place, but when detail De La Hoya has his rematch with Mosely.

Across the street, at a competitor, but it will be good for the city.

We are the site promoter for the James Tony/ Evander Holyfield fight on October 4th, it's not a Lewis or Tyson rematch, but we think it will be a pretty good event, we don't know when Lewis is going to fight next.

The boxing realm is getting on the thin side.

So we don't have anything on the back half of the year that's I think different than we would have had a year ago.

And nothing frankly as strong as the Vargas/De La Hoya fight we had last year in September.

On the other hand, this September is shaping up as much stronger than the one we had a year ago.

And debt and cash at the end of the quarter?

Debt at the end of the quarter, 3 billion, 30 million, and cash, at 158 million.

Great, thanks a lot.

Once again, ladies and gentlemen, if you do have a question at this time, please press the 1 followed by the 4 on your telephone.

Our next question will come from the line of J. Cogan with Banc of America Securities.

Please go ahead with your question.

Hey there Glenn and Les, out of pockets today so I've got a couple of quick questions for you, I want to make sure, I think it's pretty obvious but to hear you say it, the RevPAR comps you show in the second quarter and what you're talking about for August and September, from what you know so far are apples to apples with the restated 6% for the first quarter?

Yeah, everything's apples to apples.

These are the real true numbers.

Okay.

And secondly, I was wondering if maybe you can speak to the recent, not so recent, but earlier insider selling given the power and the results here in Las Vegas, and the raising of the dividend, I guess, I'm trying to understand you know maybe if there's anything to say about why your largest centers were selling at 33.

And if you can talk about what we can expect from an insider standpoint going forward?

You never know what the insiders are going to do, but I've said it before, and I'll say it again today, insider selling has no directional value in the stock market unless they're's trouble a brewing.

We don't have trouble.

So, anybody who thinks it's insider trading is an indicator of our future performance is going to make as much money as somebody who doesn't believe that.

There is not relationship.

People sell for all kind of reasons.

Peter Lynch told me that once, he was right.

Terrific.

Appreciate the help.

Okay, thanks.

Once again, ladies and gentlemen, if you would like to register for a question, please press the 1 followed by the 4 on your telephone.

Our next question will come from the line of Tok Chen with Searchlight Capital.

Please go ahead with your follow-up question.

Hi, a quick question on capex.

Regarding the Detroit property, it seems like from the filing that you guys are required to have the permanent facility in place by '05.

Would that probably involve some capex next year?

And you know, how does that litigation, which is still ongoing, affect that?

We don't know.

We're all awaiting a settlement of some shape or form with the [INAUDIBLE] Indian tribe there, the responsibility lies with the city of Detroit in those negotiations.

We're ready, willing and able to begin expansion of our Motor City Casino, which will be the site of our permanent, when we can get a green light.

As you know, there's currently an injunction in favor of the Indian tribe that prohibits going forward on permanent construction, if you will, from the three operators in Detroit.

So for the time being we're running an interim casino.

What's the total capex you expect for that project?

We don't know.

We haven't released those numbers yet.

Recognize that when there is capex there it will be at the partnership level, that debt would reside at the property.

In terms of, you know, some sort of expectations, probably in the range of $275 million from here.

Okay.

That would be the total number, right?

For cap ex, 275?

I think that's the number that's cited in your filings, too.

I think that's the right number, then.

Great, thanks.

Our next question will come from the line of Joyce Minor with Lehman Brothers.

Please go ahead with your question.

Hey, Glenn, just to follow up on your comment about September, do you have a sense as to kind of the consistency of the strength that you're seeing in September?

Would you track any of that up to sort of easy comparisons versus the week of September 11th a year ago, is it your sense that there's less concern this year than last and maybe you're getting more meetings and bookings this year than last, or would you argue it's more consistent throughout the month?

Two things.

One is last year there was sort of a commemoration of 9/11 in the travel market, and the month itself turned out not to be much better of September in '01.

The comps relatively easy.

Number 2, this is the first September we've had the convention center in operation at Mandalay Bay, which will help our comparisons here.

Okay.

So I know that it's harder to look forward into October, but would you argue that you probably won't see as much strength in October and September because you don't have that same easy comparison?

I think October will be relative, if you look at last year's third quarter for us, August was the strong month.

Softened in September because September had a kind of a stutter step in it because you had to recover from the fact that people didn't travel or think about booking travel for a week or two there in September.

So, from what we can see from here, which isn't a lot, if things don't change we should have pretty good comps in the month of October.

Thank you.

Our next question will come from the line of Daniel Davila with Hibernia Southcoast Capital.

I thought Davila would be a challenge.

Why don't you call your firm "Smith Jones"?

Smith Jones.

There we go.

Good quarter, as always.

A couple of housekeeping questions.

First I apologize if you've already said it, but when is the approximate due date for your tower and mall?

Mall will be -- we'll open in October, first part; and we'll have the tower finished about Thanksgiving.

Wow.

And secondly, do you have a corporate expense number in the quarter?

Yes, we do.

Our run rate in corporate expense is about 7 1/4 and it was 7.2 in the second quarter.

Perfect.

Thank you very much.

Good quarter, guys.

Thank you.

Once again, ladies and gentlemen, if you do have a question at this time, please press the 1 followed by the 4 on your telephone.

Our next question will come from the line of Tom Marsico with Marsico Capital.

Please go ahead with your question.

I was wondering if you could tell me a little bit about your repurchase program and where you stand on it now.

Well, we didn't repurchase any shares in the second quarter and I think in the three years up to this year we were on a percentage basis to market cap, the most aggressive repurchaser of shares of any listed company.

With the introduction of the dividend, I think it's fair to presume we probably would use some of both in terms of the distribution technique of returning capital to shareholders particularly given that the -- at least to the recipient, the tax code treats them equally.

So, how are you trying to balance that with your dividend policy going forward?

We have plenty of money.

One thing we're going to have after we finish this tower is --

-- is a lot of capital.

Free cash flow.

Where best to employ it?

It's clear that dividend has it's adherence in the current stock market.

We've got a multiple expansion, nothing deservedly, we need more for dividend.

We didn't get for the recap -- both the working together.

I think it's fair to presume that we'll continue to buy shares not in the amounts we did, first we'd run out of shares, we bought 52 million for five years, it will be a bit of both.

We're not in any particular rush to pay down debt at 2%, but as I indicated earlier, just because the income of the company is expected to rise, you see our credit ratios being restored to what were formerly for us investment grade ratios.

It just seems that the ability to borrow roughly at 7% and given the multiple on your stock here, it seem like it's the right opportunity to be buying back stock versus potentially increasing the dividend here.

Well, we're doing what the market likes for the moment.

We're doing -- we have plenty of powder to shoot so we'll do those things that, I guess, our customers, the shareholders would like us to do.

Actually we borrow on the margin today at, you know, under 3%.

Which translates into a rather large multiple?

Yeah.

Could you tell me what the insider ownership is of the company?

I'm going to have to do a calculation here in my head.

Probably in the teens.

Okay.

Thank you.

Teens probably.

Yeah, 15 or 16.

Thanks a lot, Glenn.

Sure, thanks.

Once again ladies and gentlemen if you would like to register for a question, please press the 1 followed by the 4 on your telephone.

I am showing no further questions at this time.

Please continue with your presentation or any closing remarks.

Thank you very much.

Both Les and I will be around to take any questions that you might have for further clarification.

Thank you.

That does conclude your conference call for today.

You may all disconnect and thank you for participating.