美高梅國際酒店集團 (MGM) 2003 Q4 法說會逐字稿

Welcome to the Mandalay Resort Group fourth quarter year end 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 press the star then the number one on your telephone. [Caller Instructions].

As a reminder this conference is being recorded Thursday, March 4, 2004.

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

Please go ahead, sir.

Good afternoon and welcome to Mandalay Resort Group's fourth quarter earnings and full year call for the fiscal year ended January 31, 2004.

With me today are Les Martin, our Chief Accounting Officer and Treasurer; and Tony Alamo who is SVP of Operations.

Before we begin let me read the customary disclaimer.

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

They can be identified by the fact that they 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 THEhotel, our new 1122 suite tower Mandalay Bay which opened December 17, 2003, Mandalay Place our new retail center located between Mandalay Bay and Luxor, the status of the development of our casino in Detroit, expectations regarding room rates, occupancy levels and RevPAR, our future dividend policy, future share repurchase activity, anticipated financial transactions, anticipated capital spending levels, the potential impact of additional competition, the potential impact of changes in gaming taxes or other taxes, estimates with respect to our future income taxes including cash taxes and estimates regarding depreciation, operating lease rent, interest expense or capitalized interest.

Forward-looking statements 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 included under the caption factors that may affect our future results, item one of our annual report on Form 10(K) which is filed for the year ended January 31, 2003.

We do not undertake any obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise.

Any further disclosures made on related subjects in our subsequent filings with the Securities and Exchange Commission should be consulted.

The foregoing statements have been provided as permitted by the Private Securities Litigation Reform Act of 1995.

Our fourth quarter represents the strongest comparison of same quarters on an operating basis since the IPO of this company in 1983.

We reported 35 cents against 15 cents on an operating basis.

While in this quarter, we endured a subpar hold percentage on table games at Mandalay Bay and that weak hold amounted to five cents per share.

Yet given the strong opening success of THEhotel at Mandalay Bay and a surging RevPAR through the quarter, including January, Mandalay Bay recording, in January, its highest operating cashflow ever thats a record that lasted until February.

So if you normalize for the weak hold through the quarter, we would have posted a 40-cent operating quarter; and as you may recall in last year's numbers the tax rate in Illinois on the Grand Victoria was lower than this year's, and the difference to our earnings and the difference in tax rate is 5 cents.

So on the same hold and the tax rates were the same we would have tripled our EPS year-to-year.

Its pretty much the power of RevPAR at work in this company that is driving our break out earnings growth.

For the year, our EPS on an operating basis was $2.40 against $1.88 last year, which is nearly a 30% increase.

If you look forward from here, and our first quarter will still probably be our largest quarter of the year, the weighting or the sequence of performance in our quarters will be different than in past years.

This is because of the convention mix of business, the convention sector that we have brought into such strength in just a year's time.

Our first quarter should now been weighted somewhere between 30 and 33% of our full year's earnings whereas in past years it had been closing closer to 40%.

In the fourth quarter our RevPAR result exceeded our record-setting result of the third quarter.

We were up 22% in RevPAR along the Las Vegas Strip.

Operating cashflow at our Las Vegas Strip resorts climbed 25% in the aggregate, which was a largely shared outcome across our property portfolio other than Monte Carlo.

We are not only on a breakout path in earnings, and our first quarter will keep the faith, but we've broken away from our pack of competitors in Las Vegas.

For its part our flagship Mandalay Bay generated operating cashflow of nearly $37 million in the fourth quarter against roundly $30 million last year.

If you adjusted for the whole percentage, it would have been through $40 million.

As noted RevPAR was up 26% in the quarter.

THEhotel, in its first full month in January produced RevPAR of $200, roundly 80% occupancy at a $250 average rate.

Our convention center at Mandalay Bay continued to perform above our initial expectations and was a prime factor in our year to year results.

Luxor produced operating cashflow of $28 million in the quarter against $22.6 million last year, boosted by a RevPAR uptick of 18%.

Excalibur, still and always a castle, posted our best quarter with respect to percentage increase in operating cashflow among all of our Las Vegas Strip resorts.

This property was up 35% to $21 million in operating cashflow, exhibiting a 20% RevPAR increase plus a 15% rise in casino revenues in the quarter.

Not least, Circus Circus Las Vegas reported a 32% increase in operating cashflow.

That up to $12.7 million while posting a 12% hike in RevPAR and, finally, Monte Carlo turned in a 5% increase in operating cashflow.

In other Nevada markets, Reno, Laughlin and Jean, where we were defending only 3% of our cashflows in the quarter we held the line pretty well.

Beyond Nevada, we showed strength in both Detroit and Mississippi.

At MotorCity Casino we generated $34.2 million in operating cashflow compared to $27.9 million in the fourth quarter a year ago.

Casino revenue was up by 6% there in the quarter.

That's above the markets overall growth rate.

We beat the market every month of the quarter, so we are building share.

In Mississippi, the Gold Strike, likewise, is building share in a flat environment.

We were up 16% in casino revenue in the fourth quarter, and we rose a dramatic 57% in operating cashflow comparing $7.5 million to $4.8 million a year ago.

Mandalay's profit mix is slanted definitively, 75% in fact, towards the dynamics of the Las Vegas Strip which is on a historic tear.

Our RevPAR focus, as our company has transformed its business model, positions Mandalay Resort Group as the growth leader in the world's leading destination for entertainment.

Across our portfolio resorts, but notably at Mandalay Bay and Luxor, we now experience a remarkable profit leverage on incremental room rates as high as 90%.

This year ahead of us our company should climb to a 30% EBITDA margin as a whole, reflecting the surge in Las Vegas.

We have a bright path of ascent in front of us at Mandalay Bay where the mix of higher paying conventioneers mid-week will be more pronounced this year than last; we're on a bigger base of rooms, and more next year than this one.

In the month of February our RevPAR increase on the strip was 20% across our portfolio of resorts and that compares against a month a year ago that was already up 10%.

That rare animal, known as pricing power in consumer America, is in its fullest form in Las Vegas, and Mandalay Resort Group is the purest play on this phenomena.

Mandalay is also a free cashflow story.

If current conditions obtained through the balance of the coming fiscal year, we will produce closer to $6 in free cashflow per share than our previously announced $5.

This calculation also takes into account about $100 million in capital spending for the year.

We do not have other large scale project in prospect this year and may not for the next year; meaning that Mandalay could churn out, if conditions stay the same, in excess of $700 million in free cashflow over the foreseeable period.

Capital not required to run this business.

Thereby we have positive flexibility to raise dividends or buyback stock or retire debt and the better expectation might encompass all three.

We can't very well raise dividends every quarter, but our financial policy tends to accentuate capital distributions and return of value to shareholders and it will not change in the future.

Over a five-year outlook it is fair to presume that our company could generate $1 billion of excess capital inclusive of any major new project of scale whether on the Z site, on the Mandalay Mile or elsewhere.

This magnitude of excess capital, relative to our market capitalization, is all together rare in corporate America.

It presages a smaller balance sheet at this company as we go forward, even as our assets increase in both value and earning power.

Our rate of return on invested capital, on a climb be since last year, seems destined to stay on an up trend for an extended period.

Typically high free cashflow yields, cash based earnings growing at double-digits, and rising rated of return on invested capital are staunchly predictive of increasing shareholder value.

For your earnings models this year you should estimate that our total interest expense should come in at about $190 million, maybe a little higher.

As previously stated we have trimmed $35 million off of our debt service over a two-year course, clicking in full by this summer, and next year our interest expense will be under $190 million.

Depreciation expense will be roundly $180 million.

Our tax rate should be 36% and shares outstanding at the moment are 66 million.

So with that wrap up in color on the quarter and the coming year we'd be happy to entertain questions.

Operator, would you please take questions?

Thank you. [Caller Instructions].

The first question comes from the line of Larry Klatzkin with Jefferies & Company.

Hey, Glenn, congratulations on a nice quarter.

Always so nice to see you beat the Street.

First housekeeping, debt, cash on hand, capitalized interest, cap ex for the quarter.

Sure, cash on hand at the end of the quarter was $153 million.

Debt was $3 billion.

What else did you want to know?

Capitalized interest.

And cap interest for the quarter or the year?

The quarter.

Larry, for the quarter, it's Les, it was $1.7 million for the quarter.

How about capital expenditures for the quarter?

They were $90 million for the quarter.

Okay.

One question is, you have tons of cash coming in.

Where do you go next?

Well, we are ready, willing and able.

Look, it's a good problem to have.

This is the strongest free cash flow mode in this company's history.

So we are available to opportunities and, as we indicated in the call, we are believers in distributing value back to the shareholders.

What do of, since you still have time to get in, looking at the U.K. market.

Well, as soon as they announce what the laws will be in the U.K., given what the expected depth of that market would be, we'd have an interest.

How about this idea that everyone seems to be trying to jump on the band wagon of joining the existing licenses in the cow and partnering up.

That's subjects a little trickier to answer, Larry because we haven't seen rules or regulations there either.

Detroit timing, what's the word on that?

It's still winding its way through the courts.

I guess we are ready, willing and able to build our permanent facility which will be at the site of the MotorCity Casino, when we are allowed.

We do have a second chance to be first.

Okay.

And prospects for Reno going forward?

Is this just a market that you just--

Well, I mean the California indian gaming market is large, but it's pretty well identified by now.

Reno will have some more challenges in front of it, but we think the California threat, as a whole, is pretty much the size it's going to be.

They may get more slot machines there but it's not a linear effect.

Okay.

I guess THEhotel is doing well.

How are the bookings in February?

Bookings in February were strong.

I mean, February, we are sort of at a point where each month we have a chance to set our record, but if you look at year-over-year, I'm not sure we've ever had in the history of this company, in 21 years, a stronger month over month performance than we had in February to February.

Excellent.

Congratulations.

Thanks, Glenn.

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

Good afternoon, Glenn.

A couple things, one, could you just tell us what the hold percentage was this year versus last year, and I'm assuming all of it was at the Mandalay Bay property?

I'm sorry, Steve, Mandalay Bay is where the high-end play in the company is located and during Chinese New Year's; it was good for the Chinese, better for the Chinese better for them than for us, they'll be back.

We were three points underneath what our normal hold percentage would be, and that's really over the course of the quarter, but it was Chinese New Year's that took the bigger bite.

And last year you were at a normal hold rate.

We were, around 19%.

Then on the convention side of the business you mentioned that you were moving it more towards the latter end of the year.

Is that citywide or is that a Mandalay Bay issue or--and what does that mean for the whole company.

Was that just a comment Mandalay Bay or was it for the whole company that you think the quarter should be more spread out toward--

It's the whole company.

In the past you've seen years when we would sometimes have 40% of our earnings in the first quarter.

I think a better expectation going forward, because of the convention part of the business today, which is more spread out through the year; is that the first quarter's weight will be 30 to 33%.

Okay.

Thanks.

Next question comes from the line of Joe Greff with Fulcrum.

Please proceed with your question.

Hey, guys.

Glenn, you mentioned that RevPAR in February was up 20% on the strip.

Yes.

Can you break that out between price and occupancy?

Well, I mean for us, you are basically talking about price, Joe.

Okay.

Is there a chance that March is as strong as February?

I don't think it will be.

There are some other factors at work here.

I think a pretty good expectation for us is we will have a double-digit RevPAR increase first quarter to first quarter when we report in June.

Great.

And your Mandalay Bay RevPAR numbers, that obviously includes the rooms from THEhotel.

If you were to same store that number, or break away those hotel results what would same store RevPAR have been, the change in RevPAR year over year on a same store basis?

Not quite as high but, look, THEhotel is generating between $40 and $50 higher average rate than Mandalay Bay itself.

Okay.

Great.

With respect to THEhotel, do you want to talk about what the margins were just for that operation in January and February, or can you give us a sense of how that is trending?

Well, it's trending up, Joe.

When you are running a RevPAR as we did in January and we were right on top of it again in February, of $200, this is a very profitable project.

Are there any costs that you are taking out just because you might have some efficiencies.

We will get there.

You always find things that you can do better when you open a new project.

I think you will see a rising margin there as the year goes on.

My final question, any hold issues so far in the first quarter?

No.

Thank you, guys.

Your next question comes from the line of Jeff Logsdon with Harris Nesbitt & Girard.

Please proceed with your question.

Hi, Glenn, great quarter.

Can you give us convention utilization for fiscal '04 and then give us some sense of where you are directionally for fiscal '05?

Yes.

Our utilization will be higher by 50% this year than it was last year.

We are on a run here to get, it's really days you have for sale over the course of the year, delegate days, and by next year we'll be selling 80% of our delegate days at the convention center.

So we are on a pretty swift ascent.

Great.

Keep it up.

Thanks.

Your next question comes from the line of J. Cogan with Banc of America Securities.

A couple questions for you.

First, you have raised the dividend 17% since you initiated.

Can you give us a little bit of background given how strong the trends are as to why that didn't happen in the quarter?

We do it every quarter so we don't want to mislead.

We have plenty of money as we look into this year to determine what we are going to do.

The financial policy of this company, as I indicated, has been one of accentuating, whether through share repurchase which we were pretty vigorous in that space during the first couple years of the new decade.

And last year we initiated a dividend and then raised ourselves the first two times out.

I think it's fair to say that we intend to be thought of as a leader in the dividend space, and we are still working through how to do this on a sort of a regular basis so that people's expectations are met.

Gotcha, understood.

In regards to the RevPAR question, the month of March and April last year I remember was impacted somewhat on the strip in regards to the war.

Obviously you a strong February, the comments you made on March, and I'm not sure about April.

I'm wondering if you can talk a little bit more about that, if there's anything going on in the market or what might have impacted; and I was wondering if you wanted to give some guess as to where the full year '05 might come out on a RevPAR basis if things continue to stay as strong?

The tough part there is that we get so much of our RevPAR out of that last ten days of yielding up.

So even when you are looking at the prices that you guys follow, it's really hard to, in advance, say come July we think this will happen on this weekend.

Though strip typically grows 5% a year in RevPAR.

I think the strip, from what we so far, we're early will grow higher than that and we will probably grow faster than the rank of people we compete with; but I'm not in a position to predict what quarter over quarter RevPAR is going to be in the future.

Okay.

And then last one for you, just housekeeping, could you just go over once again the depreciation and interest outlook for the fiscal year?

Did you say the depreciation would be less than $200 million?

D&A will be about $180 million this year, J.

In terms of interest?

We'll be right around $190 million.

With depreciation in the quarter wasn't a little bit closer to 50, and I'm wondering how you get to $180.

Les?

The way you get there, J, frankly is this property hits its five-year mark in March and so all the five-year property which is sizeable here drops off the depreciation schedule.

So that's really counterbalancing the increase that you are seeing from the assets that we added last year.

Great.

Thanks a lot.

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

Please proceed with your question.

Hi, how are you?

I just wanted to clarify a couple things.

You mentioned February RevPAR up 20%.

Can you just give us some color on what it is, not counting any part of Mandalay Bay, just to get a sense of properties without the additional cap ex?

Say that again, Robin, I didn't understand the question.

In other words, RevPAR increases at properties other than Mandalay Bay, to get a sense of the RevPAR increase without the additional capital?

You are talking about without the new rooms at THEhotel.

And the new rooms at the convention center, just a same store just looking at the other properties outside of Mandalay, the RevPAR increase.

They are up double-digit, Robin.

If you look at a property like Luxor in February it was up about 18%, Excalibur was up about 11%, Monte Carlo was up 13%, this is a shared, really the way we are managing our room inventory across our property portfolio.

At one point you had talked about THEhotel and, the all suite tower, getting a 50% premium to the standard room.

No, we said $50.

Fifty dollars.

Okay.

And also in your the calculation of free cashflow per share, the $5 you are saying potentially being $6, is that included free cashflow being generated by the Detroit property?

We are distributing from Detroit to date but the answer is yes.

So potentially, though, that cashflow would have to go towards the permanent?

Not necessarily.

I think we probably would build on the rest of the facilities the rooms and more restaurant space, et cetera, with a bank line, it would be a partnership responsibility.

Okay.

And last question, you talked about some other potential things, I don't know if you gave us any timing on projects Z.

I can't give that one today.

The Z site clearly has great potential but it's not going to be this year and don't know about next.

So it's going to be free cashflow time for awhile.

Okay.

Great.

Thank you.

Your next question comes from the line of Dennis Forst with MacDonald Investments.

Please proceed with your question.

Glenn, good afternoon.

Hello, Dennis.

Just a follow up on the last comment about free cashflow time, what's the current authorization?

We have an authorization to buy 10 million shares.

Where do you stand on that?

Ten million shares.

Okay.

So you haven't--

We haven't used that new authorization as yet.

Okay, and then looking at your forecast for a 30% cashflow margin, that's corporate or is that.

That's corporate, that's across the company.

So that's up a couple hundred basis points.

Yes, it is, this year.

When you get this high flow through and you have a great leverage on these room rates.

Is a lot of that going to come from Mandalay?

Will Mandalay with the new tower contribute.

Mandalay.

More than less.

That's where the most change is in the margin is at Mandalay Bay.

The January quarter had about a 23% margin at Mandalay, that's basically just start up?

It's never our best quarter in our company.

You can expect that over the course of this year we will be right around 30 maybe a little better maybe EBITDA margin at Mandalay Bay.

At that property.

Yes.

Okay.

Great.

Then the last question had to do--

Dennis, it used to be 25 or 26.

Right.

So then a separate issue, the monorail is eventually going to open on the strip.

It's going to be on the east side of the strip which is counter to where all your properties are.

What do you think if any will there be an impact?

Oh, Dennis you and I can take ride down Paradise and look at those back yards and close lines.

I'm not going to, but people from Des Moines are.

No, I think we have our own cluster here and we have a very good capture rate of customers.

Once they get under our roof tops here they don't leave.

Okay.

Very good.

Thanks.

Keep up the good work.

Thanks.

Your next question comes from the line of David Anders from Merrill Lynch.

Please proceed with your question.

Great.

Thanks.

Hey, Les, I haven't seen a full release yet, I'm actually scrambling here; corporate expense, what was that in the quarter?

About $8 million, I think; $8.8 million in the quarter.

On a going forward basis, David, it's $30 to $31 million corporate expense in this company.

Thirty or $31.

Okay.

And with respect to, Glenn, your definition of cashflow again, could you help us, is that net income plus depreciation?

No, we start with-- basically we take operating cash flow and you are going to take out cash taxes, ordinary capital expense, and all debt service.

Got it.

Okay.

Any consideration as far as condos, time shares, down by the Mandalay Bay?

No, not at this time.

The Z site is pretty valuable.

That will be the site of another hotel casino when the time is right.

Okay.

Thanks.

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

Hi, Glenn.

Most of my questions have been answered.

I just wanted to ask one more on the convention center comparing this year to last year.

Can you give us some sense what the change has been or what you expect it to be in the second full year versus the first, in revenues and then what margin you would expect out of the convention center?

Well, I mean last year as you know we rebated the people who signed up for multi-year commitments with guaranteed room blocks.

This year the difference, I will give you an example, in the fourth quarter we generated nearly $4 million in revenue there against a little less than $2 a year ago.

This year we are going to generate probably $12 million in revenue there; against $2 million a year ago.

So we are going to-- that's going to be a profit contributor and a significant one.

And turning to THEhotel really quickly, have you gotten a sense of what the nonhotel revenues per room night that were generated either in January or in February either in the casino or--

The sign here Harry for us to do this on the air I will tell you one thing.

In our return calculation for THEhotel we didn't count casino revenue and our slot machines in Mandalay Bay are up more than $10 a unit since we opened THEhotel.

So it's paying off better than we knew.

Okay.

That's great.

Thanks a lot.

Your next question comes from the line of Larry Haggerty with State Street Research.

Please proceed with your question.

Two questions.

Number one, do you think Las Vegas and you in general are going above board in raising prices to the detriment of casino revenues?

I mean your RevPAR, the prices at Celine Dion, the restaurant prices are going up, there's been a tremendous amount of retail space particularly at the high-end; and then an auxiliary question about your level of complimentaries in the casino, are they as you look at it more or less the competition?

Larry, our view of the strip and, seems to be by now, the winning view; is this is more and more a destination market for resort seeking, more sophisticated customers than in the past.

Everybody and the indian has a slot machine today, but there is only a few rooms that are branded under Mandalay Bay.

Look, if customers didn't want to spend the money they wouldn't.

The fact of the matter is that where you are going to get revenue growth in this business to any appreciable degree, is going to be on the hotel side of the business which is very profitable.

Slot machines are a commodity.

They all say IGT on the top of them.

And relative to our comps, there's not any difference in our policy.

We still get and we got this year, we get about 10% of the high budget play on the Las Vegas Strip.

If you use baccarat as your proxy, and we do that at Mandalay Bay, and this year was the same as it was last year.

Okay.

Thanks a lot, Glenn.

Our next question comes from J. Cogan with Banc of America Securities.

Please proceed with your question.

Hey, Glenn, I just wanted to ask a question, when you said Excalibur is still and always a castle; other than smiling a little bit, it also kind of brings to mind the whole question about maintenance cap ex for Mandalay, which has always been an issued that has kind of dogged you at least for a little while.

I'm wondering if you could talk about, a couple things; one, in regards to what Excalibur is and Luxor is and where they are going, can you talk about just the capital required, are you looking at changing the product significantly from what it is?

And then secondly with depreciation running off, as you talked about, on Mandalay Bay;

I was wondering if could just give us an update as to will there be significant capital going into that beyond what has already been talked about in terms of THEhotel and the retail space, etc?

From a maintenance standpoint should we expect these numbers to change too much or where are you in that process in terms of putting capital back into that property now that it's a few years old?

We did all that that's why nobody liked us a few years ago, we put the capital back in these businesses.

Let's recognize that today Excalibur is the portal to the south mile and just did $97 million in EBITDA.

If things don't change from here we'll go through $100 million in EBITDA this year and our invested capital there's about $330 million, and the rooms are in good shape.

We're adding a spa.

We've added a spa.

This is, for the sector of the market it serves, a quality property.

We have the newest or freshest assets in every product segment that we serve on the Las Vegas Strip.

Luxor, for its part now, is a total destination resort.

It wasn't that when it opened.

We put a fair amount of capital in that building a few years ago.

You know Luxor has been kind of our secret weapon because in the year which would have been our fiscal year '02 we'll call calendar '01, when 9/11 interrupted, Luxor was on its way to about $130 million in EBITDA.

No one ever saw that $130, so in their linear wisdom most analysts had Luxor, which made $106 million the following year doing $106.1, $106.2, $106.3, as the years ticked off it did $122 this year.

It's RevPAR is growing pretty similarly to Mandalay Bay, and I've said before max is accessible to anybody when we get $115 average daily rate there at 92% occupancy that property is going to make $140 million.

It is fresh.

We keep the assets in good shape.

And we are in free cashflow season.

Nothing is going to sneak up on you.

Okay.

Thank you.

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

Please proceed with your question.

Quick follow up.

Corporate D&A or just total D&A in the quarter can we just sum up the various properties, or is there anything at corporate we need to allocate?

There is a piece at corporate, corporate D&A was $1.7 million in the quarter.

So we just sum up the other and add $1.7.

Thank you.

Mr. Schaeffer there are no further questions at this time.

I will now turn the call back to you.

Thank you very much.

Les and I will be around if anybody has any further questions.

Thank you for joining in.

Thank you, ladies and gentlemen.

That does conclude the conference call for today.

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