美高梅國際酒店集團 (MGM) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Mandalay Resort Group first 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 4 on your telephone keypad (INTERRUPTION BY ANOTHER OPERATOR) this conference is being recorded --.

INAUDIBLE

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

Please go ahead sir.

Good afternoon and welcome to Mandalay Resort Groups first quarter earnings call.

With me today are Les Martin, our Chief Accounting Officer and Treasurer, and Tony Alamo our Senior Vice President of Operations.

Before we begin, let me rehearse 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 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:the hotel and its expected impact;

Mandalay Place and its expected impact; the status of the development of our casino in Detroit; expectations regarding room rates, occupancy levels and RevPAR; future dividend policy; future share repurchase activity; anticipated financing transactions; anticipating capital spending levels; the potential impact of additional competition; the potential impact of changes in gaming taxes or other taxes; estimates with regard to our future income taxes, including cash taxes; and estimates regarding depreciation, interest expense, or capitalized interest.

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

Information concerning factors that could affect our future financial results included under the caption by same title item 1 of our annual report on form 10K year ended January 31, 2004.

We do not under take any obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, however, 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 first quarter earnings per share were $1.30 compared to 70 cents on the same basis last year.

Our first quarter results are an all-time record for any quarter by more than 80%.

We performed strongly on all fronts with exceptional results on the Las Vegas Strip from Circus Circus up to Mandalay Bay.

Notably, our RevPAR comparisons for our five resorts on the Las Vegas Strip were, on a weighted average basis, up 25% against a year ago.

The single best RevPAR uptick in our corporate history and one of the most dramatic surges in the entire history of Las Vegas.

Our operating cash flow at the five resorts combined rose 43% year-over-year, aided by an 18% jump in casino revenues.

Other than Circus Circus, our Las Vegas Strip resorts each reported their all-time record quarterly results.

Mandalay Bay in the quarter generated $77.4 million in operating cash flow.

That compares against $46.4 million in the first quarter a year ago.

It's an increase of two-thirds.

RevPAR at the resort, including the first full quarter of the hotel's 1117 suites climbed 16%. the hotel alone -- at the hotel alone, we clocked a $239 average room rate at an 86% occupancy rate.

Significantly, our slot revenues at Mandalay Bay rose 30% in the quarter as cross traffic from the hotel and the new Mandalay Place, which connects Luxor to Mandalay Bay, activated the back half of the casino floor.

Our current outlook holds that the convention center at Mandalay Bay and the hotel together could achieve of 20% cash on cash returns in this fiscal year if present trends of business persist.

This would be a good year early from our original forecast.

Luxor's also in the zone.

The pyramid produced $42.3 million in operating cash flow, up 30% from $32.5 million in the first quarter last year.

Foot traffic facilitated by Mandalay Place is likewise driving stronger results on the slot floor over there and casino revenues in total grew by 21%.

RevPAR in the quarter was up 24%.

At Excalibur, operating cash flow rose 27% to nearly $32 million, and RevPAR was up 23%.

This is a year when the castle could well turn in $110 million in operating cash flow on what amounts to a $330 million investment.

By every standard, medieval or otherwise, this is a topper.

Down the road at Circus Circus, operating cash flow was $21.3 million in the quarter, up 35% from the prior year.

RevPAR improved by 18%, and casino revenues clicked up by 12%.

And for Monte Carlo, which we own 50%, there was a 33% increase in cash flow to essentially $30 million, while RevPAR increased by 24%.

Our profit model of emphasizing the hospitality side of the business, capturing price yields from the rising visitor counts to the Las Vegas Strip is paying off, and it is a sustainable proposition.

Historically, visitor counts climb by 5% annually.

Nearly that same amount every year.

And the higher spending, longer-living baby boomer travelers make up an ever-increasing component of that visitor count.

Room prices on the Las Vegas Strip will likely outperform heights in the ordinary hotel industry by 50% in the foreseeable term.

Mandalay is the company most geared to rising room rates for its earnings growth among its entire competitive set.

This year, 75% of our company's profits will derive from the Las Vegas Strip.

At other Nevada properties, we also saw an upward trend in the quarter in Reno, Laughlin, and on the highway.

The combined increase in operating cash flow among them was approximately $7 1/2 million when compared against last year's first quarter results.

Beyond Nevada, the news was positive on whole.

The stiffer tax regime in Illinois was the entire reason that resulted Grand Victoria, which we own 50% in Elgin, Illinois, fell below a year ago.

The effect of a 70% tax rate on casino revenues above $250 million annually, cost us 6 cents in the quarter, compared to last year.

It so happens that our casino revenue rose by 5% in the quarter, good for the state.

But operating cash flow for the Vessel, again, we own half, was $14 million in this quarter against $23.8 a year ago.

MotorCity Casino in Detroit for its part, saw a 26% increase in operating cash flow to $41.4 million in the quarter.

We continue to build share of the gaming market among the four operators, including Windsor in the greater Detroit region.

We own 53 1/2% of MotorCity.

In Tunica County, in a flat market environment, our Gold Strike is likewise building share.

Operating cash flow for the first quarter was $8.7 million against $7.3 million last year.

As we mentioned on the conference call a quarter ago, our free cash flow story is only becoming more pronounced.

After capital spending this fiscal year of roundly $100 million, our free cash flow will -- all factors staying in motion -- approximate $6 a share.

With no large-scale project in prospect for this year and effectively for next, Mandalay could churn out $800 million in free cash flow inside of a 24-month period.

This position enhances our positive flexibility to raise dividends, buy in stock or reduce debt.

The better expectation is that our financial policy will encompass all three avenues.

We declared a 27-cent dividend for payment on August 2nd at the Board meeting yesterday.

For the moment, our earnings are telling a pretty dramatic story and our tendency to return value to shareholders should only enhance that story.

This is also a year when, on the non-operational side, the company will experience a substantial benefit from our refinancings of the past couple years.

We have shaved roundly $30 million off our interest expenses in that time.

Even as our debt actually rose a bit.

And for this fiscal year, our interest expense should drop below $190 million, as indicated in the quarter.

D&A expense, meanwhile, should come in at roundly $180 million and the tax rate will be between 35 and 36%.

So with that overview, we'd be happy to entertain your questions.

Operator?

Thank you.

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

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One moment please for the first question.

Our first question comes from the line of Larry Klapkin of Jeffries, proceed with your question.

Hey, Glen.

Hello, Larry.

You need a longer disclaimer. [ LAUGHTER ]

It takes up about two-thirds of the whole speech!

Really!

But I have to say, congratulations and great results!

Thank you.

Well, a couple questions.

One, Detroit, the tax situation here.

Any feeling on what the risk is on that?

Well, we don't have enough data.

I mean, we have the same news that you have, and this will be the month we find out.

Okay, okay.

And then obviously you're delaying any plans there until you find out what's going on?

We still can't go forward under the presence of that lawsuit there, so we have another gating item, despite the proposed tax increase.

Well, you're all revved up and no place to go with all this cash.

Any chance project Z finally rears its head?

It one day will, but for the moment, there's nothing wrong with being in a free cash flow zone.

Okay.

Convention bookings, what are you up to and what do you think you're gonna be for next year?

Oh, we're gonna be over 40% next year.

I mean -- which is what we said all along in a 3-year ramp-up there.

Which is to say that Mandalay Bay mid-week is principally, almost entirely, a convention hotel.

Okay.

How about the quarter so far?

You're through a month, or a third.

Look, in the quarter -- there's gonna be strength.

I mean, the summer quarter's typically not as strong as the first quarter, though, as I indicated in the conference call a quarter ago, you'll see more balance in our quarters than you have in some years past.

The only news I can give you at this stage is, you know, May was a very solid month, RevPAR on the strip -- I don't know what it was on the strip -- in our company and five places, weighted average we were up 15%.

All right, all right.

And then I guess the only other thing is, are you looking anywhere else at this point, you know, Singapore or Mexico or England or any -- you guys are just sticking at home and enjoying the sun?

Well, you know, in general you tend to fare better when they legalize gaming and you have an actual opportunity in those places.

Remember, we're the company that's built the most new product in, I think, the history of the space.

And so if and as large scale opportunities presented themselves, we would participate.

Okay, Les, housekeeping: Corporate for this year?

Corporate expense this year, Les?

Oh, the rest of the year is gonna run around $12 million a quarter.

So we had a little over 10 this quarter and another 36 over the balance of the year.

All right, and then how about depreciation?

Oh, we're gonna be right around 180 for the year.

All right, great, thanks, guys.

Our next question comes from the line of Joe Greff with Fulcrum Global Partners.

Please proceed with your question.

Hey, guys.

Great results.

Thanks, Joe.

You mentioned, Glen, that next year you'll be up over 40% capacity utilization at the convention center.

Yes.

What does that translate into a year-over-year increase in the number of convention room nights sold?

Tony?

From 30% this year to over 40% next year--

Yeah, we'll go from the low 30s--

That's about what? 33%?

Next year will be our biggest year.

So next year you're saying low 30s to 40s.

So that's like a 25% increase?

About 30% increase.

Yes.

30% increase.

From nights sold here (INAUDIBLE) convention.

Wow, okay, great.

And Glen, were you active in buying back shares when the shares were off a little bit there earlier last month?

(INAUDIBLE) We were in the no-buy zone.

So we're free after another couple of days.

Okay, great.

Thanks, guys.

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

Please proceed with your question.

Hey, Glen.

Hi, Harry.

I've been trying to parse out how the hotel did and in round numbers, it looks to me like the hotel EBITDA was probably around somewhere between 15 and 17 million in the quarter, which would imply kind of a 20 to 25% EBITDA return on invested capital.

Am I in the right ballpark?

Yeah.

You're in the right ballpark.

You might even be down a little soft.

But yeah, you're in the right neighborhood.

Okay.

And there's been a fair amount of noise about how the back half comparisons get more difficult.

Based on what you see on the books so far, this is kind of asking a question that -- a different way -- do you feel confident that -- I'm not sure how to ask this.

Do you feel confident that we can see at least the balance of the year a high single-digit RevPAR growth for the rest of the year?

Let's take that question, Harry -- I mean, I think you're gonna be very close -- what we can see right now, yeah.

You're gonna be right at the double-digit would be our guess for the balance of the year.

That's good.

Thank you.

And then the quarter will be higher than just a 10.

I think we'll do better than that.

And your first question, which sort of where's the hotel.

Hotel was about $20 million, if you looked at the number.

A little higher than the number you were using, Harry.

Very good.

That's helpful.

Thanks a lot.

Our next question comes from the line of Jake Hogan with Banc of America.

Please proceed with your question.

Yeah, thanks.

A lot of questions have been asked and answered.

I've got a few more here.

Just on the dividend, Glen, I was wondering if you could give us a update.

You've obviously outlined that's going to be part of the equation in terms of free cash flow usage, but can you give us an update as to where are you on a policy basis, if at all?

We're only the second year into paying a dividend, so we don't quite have that hard and fast policy as yet.

I think, you know, we've indicated to people that with our free cash flow profile, we would intend to be, you know, a prominent dividend grower, and usually by the end of two quarters most American corporations have made their rates for the year.

So we'll be able to see you know, what's going on the dividend space and then decide how to act.

On the S & P companies that pay dividends in the first -- looks like the first four months of the year -- raise their dividend 9%.

So, I mean, we're looking for a couple benchmarks and then we'll act.

Got it.

And then regards, going back to Detroit for a second.

Let's assume that this lawsuit eventually, finally gets cleared up and there's a tax increase that's been discussed so far.

With you actually go forward with the permit?

Well, our economics, I think, on that would be better than anybody else's, because we're talking about anywhere from a 250 to $275 million expansion.

Yeah, on the same site, doesn't interrupt.

So -- and we don't know what that tax increase would be.

We know what's been proposed.

Why don't we wait and see what happens, but our intent would still be to perform.

We have definite economics there than a couple of our competitors.

Gosh, and the last question.

On the $400 million convert that's been outstanding.

There's been noise earlier in the year about the impact in terms of potential dilution.

I think there might be some nuances and I thought maybe you'd want to talk about that at little bit.

I don't think I can talk about that now, 'cause it would take an action, it would have had to be presented to the Board.

But I don't think I would believe that the dilutive effect would be what some people were publishing.

And soon as you guys move the stock back up into the zone there, we could have a little more factual conversation.

Thank you.

Our next question comes from the line of Dennis Forst with Key McDonald.

Please go ahead with your question.

Yeah.

First I wanted to also congratulate you guys on a great quarter.

The Mandalay Property is the talk of the town there, and wanted to just do some housekeeping on shares outstanding, Glen.

In the press release, it said 67 1/2--

That's where we ended--

Before dilutive effect.

If we add in the dilution, what's it look like?

Well, if you took the average diluted shares outstanding across the quarter--

That's right, if you add in the dilutive effect of options, et cetera.

Oh gosh, this is Les.

You're saying at the end of the quarter what's the dilutive effect of options on top of 67 1/2?

Right.

There's only about 800 thousand options that are left outstanding at this stage, so you know, treasury stock--

Maybe it's a half a million after you use the treasury stock method?

Not even a rounding error.

Okay, so if you didn't buy a share in the quarter, 68 is probably a fair number for the second quarter shares outstanding?

Yeah, that sounds--

Okay, and what was the Cap Ex in the first quarter, Glen?

You said it was $100 million for the year--

$37 1/2 million, Dennis.

37 1/2.

And the corporate expense, Les, what was the exact number, you said a little over 10?

It was 10 million 272.

10.272.

Okay, great.

Thanks a lot.

Keep up the good work, guys.

Appreciate it.

Our next question comes from the line of Pac Chung (ph) with Search Lake Capital.

Please proceed with your question.

Yeah, hey guys.

Two questions.

One has to do with what's the GAAP cash from operations for the quarter?

And the second question has to do with RevPAR.

I noticed you mentioned 25% RevPAR for the Strip, but if I look at the properties, it seems like the range is from 18% to 24% -- so.

I can answer that one.

25%'s a weighted average.

So, the hotel has effect on the weighting of the average RevPAR year-over-year, moved it higher.

So you can actually have a weighted average higher than any individual component.

Do you have a RevPAR number excluding the hotel?

We can give you one, but we can't calculate off the top of our head.

You mean just on Mandalay or the Strip as a whole?

Well, both.

Well, yeah -- I mean, Mandalay's RevPAR was up 16%, including the hotel, and without the hotel, it was still up 15%.

Okay.

And then just a question on the GAAP cash from operations.

Yeah, I mean, I think what you're asking Pac is, you know, just basically what operating income plus D&A is?

No, I just meant including working capital use, as it would show up in your 10Q.

Why don't you call us offline and we can get that number to you.

Right.

Sure, no problem.

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

Please proceed with your question.

Thanks great, I've got two questions.

First, is with these great results coming out of Las Vegas, what is kind of a pacing item for you as project Z?

Is that you want to get share repurchase to a certain level, or is it that you are waiting to see what the second half looks like in Las Vegas, or what is keeping you from moving forward (INAUDIBLE)?

All things in due course.

You got another major opening of a resort next spring.

We think our prices will go up when the Win opens, and so - and we're continuing to produce ever more profits on less capital invested.

That's a good thing for stock prices.

And you know, Z will come in its right course, Robin.

But so many people on this phone line have asked us, please don't spend money!

You used to be one of them.

You know, please don't spend money on new projects and grow your earnings at double-digit rates and your free cash flow per share at double-digit rates.

Got me!

That's okay.

And the other question is on RevPAR.

Can you give us a sense of what it looks like in kind of the forward months?

You mentioned that May looked great, but on a same-store basis, kind of what June or July--

Robin, you can't do that.

You do your price yielding inside, often two weeks, sometimes tighter than that, so you can't predict RevPAR that tightly.

As I said, May was up 15%, we'll be up double digits in the second quarter.

Okay.

All right, great, thanks.

Thanks, Robin.

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

Please proceed with your question.

Great, thanks.

Hey, Les, Cap interest in the quarter and depreciation.

I'm sorry if I missed it.

For the quarter?

Cap interest and depreciation?

Depreciation was 50 million on the nose and capitalized interest was only a couple hundred thousand.

Okay, thank you.

Our next question comes from the line of Neil Barski (ph) with Folsom Capital.

Please proceed with your question.

Hi, Glen.

I've got more of a conceptual question for you.

You've been in the business a while, a lot of people on the call have covered Vegas for several years.

As great a quarter as you've had, you're not the only ones.

It seems that the Strip is really undergoing some kind of resurgence or surge.

Yeah.

And speaking conceptually, if you could, just what do you think is really going on?

These kind of RevPARs are nothing I can ever remember.

Remember, in passed years, what's driving -- companies didn't manage for RevPAR--

What's driving, just the, what seems to be a, you know, either a cyclical or secular renewed popularity for going to Vegas?

Well I think it's a new popularity for going to Vegas.

Vegas is hip.

It provides a traveling consumer of entertainment, a totality of experience they can't get anywhere else.

It's the most exotic trip you can take in the United States and still stay home, and next year there will be no fewer than five scripted television shows on the six networks that cover the new Las Vegas.

So it's in the air, but I -- it's not flukish, it's secular.

The baby boom customer, as I said, not only spend more, they're living longer.

Someone can be a baby boomer into their 70s by today's health standards, and this is the best thing they can see and do at the price.

And I know that this is speculative, but you've also lived through several openings of competitive properties as well as your own.

Given the environment today, can you just give us your opinion about what the environment will look like next year when Win opens?

Steve Win, every time he's opened a property, has raised everybody's prices for them on the Las Vegas Strip.

I think we'll be a primary beneficiary.

We are the company that's most sensitive to climbing room rates with respect to our earnings growth, and so we know he'll set a high price on rooms and we'll be able to come up right behind him.

So we very much positively wait for that to happen.

Okay, thank you.

Thanks, Neil.

Our next question comes from the line of Joe Greff with Fulcrum Global Partners.

Please proceed with your question.

Hey Glen, I'm sorry if you mentioned this earlier, but Cap Ex for the quarter?

I know you said something about Cap Ex for the year being $100 million.

It's $37 1/2 million in the quarter.

It was $37 1/2?

And then for next year, I know Detroit is kinda' the thing that's tough to handicap, but excluding Detroit- (INAUDIBLE)

We don't have any new projects of scale, and we had some of that hundred this year, we're still paying on the Tower.

I mean, we're right now at about a 75 to $90 million maintenance Cap Ex schedule.

And everything's fresh.

So I mean, this company in terms of the quality of its asset, in every class in which we compete, has never been in better shape.

Great.

And this might be kind of an embarrassing question for me to ask, but why is the operating leverage so strong at Luxor, at least in relation to the other strip properties?

Luxor has 4400 rooms, and of the properties on the Strip, the mix of casino revenue to total revenue is smaller.

It's got a very high operating profit margin on an incremental room rate.

Gotcha.

Great, thanks again.

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

Our next question is a follow-up question from Dennis Forst with Key McDonald.

Please go ahead.

Yeah, Glen and Tony maybe can answer this.

To the 18% increase in gaming wins on the Strip, that has to be higher than the number of guests that are occupying the hotel?

I mean, you have control over room rates, you don't really have control over casino.

Are people spending a lot more because they're more comfortable with the economy?

Are you raising the prices at the tables?

You know, why -- why the big spike in casino wins?

I'll let Tony--

Good.

I think it's a combination of all those factors that you just mentioned.

Obviously yes, we are experiencing an economic boom in Las Vegas, and the economy of the country is what it is and is in great shape for disposable income, and I think that we are doing a better job.

We are increasing the RevPAR and increasing the ADR, we are also increasing the quality of the customers that we are bringing in.

I think that's also gotta be taken into consideration.

Total spending per occupied room unit goes up all the way around when you manage to RevPAR.

Okay, well, whatever you're doing, keep it up.

Thanks, Dennis.

Thank you, Dennis.

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

Please proceed with your question.

Hey Glen, just a follow-up question, please, on gas prices.

In May, did you see any evidence in any of your markets of a negative impact of higher gas prices?

No.

In fact, this year we're getting for the first time in a few years a decided increase of market share from Southern California.

So they're actually driving by those Indian casinos that come to the Las Vegas Strip, and of course that's our most -- in terms of drive-in market, that's where the principle part of it comes from.

Historically, Harry, you do not see a positive correlation between rising gas prices and visitor-- a negative correlation, I should say, between the rising gas prices.

They don't effect visitor counts on the Las Vegas Strip.

Gotcha, thank you.

Yeah, it's only gasoline shortage that troubles us.

And we haven't seen that.

Our next question comes from the line of Jane Fedrerra with Lehman Brothers.

Please proceed with your question.

Hi.

I just had a couple of administrative questions.

Can you give us your cash balance, your total debt balance, and also any amounts outstanding on the credit facility?

Sure.

The long-term debt at the end of the quarter: $2,868,800,000.

The cash: $153,063,000 and at the end of the quarter we had $330 million drawn on the revolver and $520 million in the bank.

Alright.

Thank you.

Congratulations on a good quarter.

Our next question comes from the line of Robin Farley of UBS.

Please proceed with your question.

Thanks.

Yeah, Glen, just a follow-up to, you were mentioning earlier your maintenance Cap Ex and that all the properties are fresh.

When you look at the Bellagio, I guess that property's just a couple months older than Mandalay Bay and they, a months ago completed a, you know, a complete room renovation there.

Can you talk about when you think Mandalay Bay's rooms would need to be refreshed?

I'll have Tony Alamo address that.

In terms of what?

When we're gonna do refurbish on the rooms at Mandalay Bay.

Considering the age is similar to Bellagio's, and they have just redone their rooms.

We do refurbishing somewhere between five and six years, and obviously Mandalay Bay's coming to that cycle.

So we'll be doing the planning stages by the end of this year and probably incorporate the refurbishing of probably half of it for next year, on the Cap Ex for next year, and probably do it over a 2-year period like we have done in the past with the rest of the properties.

But we do half of the room at the end of one year and then we do the other half of the rooms at the beginning of the following year, so we split it in two years and we accomplish the same objective without interrupting the continuity of the refurbishing.

So, this year for example, Robin, we're finishing Monte Carlo and we'll do 2,000 rooms at Luxor.

And that 75 to $90 million will include the Mandalay refurbishment?

Yes, it will.

Okay, thanks.

Mmm hmm.

Mr. Schaeffer, there seems to be no further questions at this time.

I will now turn the call back over to you.

Please continue with your presentation or closing remarks.

Well, thank you very much for your time and attention and both Les and I are available for any further comments offline.

Thank you.

Ladies and gentlemen, this does conclude the conference call for today.

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