MGM Resorts International (MGM) Earnings Call Transcript & Summary

Thank you and good afternoon, everyone. I'm Shaun Kelley, the US gaming and lodging analyst and my co-moderator for this session is going to be James Kayler. Our final conversation today is with MGM Resorts. [Operator Instructions] So with that, it's my pleasure to welcome MGM's Chief Financial Officer, Jonathan Halkyard. Jonathan, welcome.

Thanks very much, Shaun. It's good to be with you guys again.

So this is definitely not your first September conference with us. But it is your first with MGM. So congrats on that and you have been extraordinarily busy in your your first 9 months there.

Yes. When I started speaking with MGM back in November and -- or October, November, they said it would not be boring. And truer words were never spoken, I've certainly been busy. Yes. I'm looking forward to talking about it.

So leaves us a ton to get into. And we'll -- I think we'll just roll through some of the major topics that are out there. So let's just start with, I think, what we -- I typically -- James is going to laugh at this, I typically hold this to the very end. But cash and balance sheet are sort of the utmost -- both in your position as Chief Financial Officer but obviously, given all of the strategic changes that MGM has done and really, I think, it's culminated in this movement to an asset-light and/or sort of operating-driven or operating-focused business. So if we could start here, we follow City Center, the deal with -- between VICI and MGP, you're sitting on over $6.5 billion of liquidity now. I think most math takes that up to close to $11 billion pro forma for the MGP transaction sometime in early 2022. Help us break down how you're starting to think about allocating and/or prioritizing the uses of a cash balance that's that large.

Okay. Well, first of all, I think it's important to note the way this strategy began, which was really about 5 years ago when MGM established MGP as a vehicle for the monetization of its real estate. And that process continued apace, really culminating in late '19, I guess, early '20 with the sale of the Bellagio actually to, in that case, to Blackstone and MGM Grand and Mandalay to a venture between MGP and Blackstone. And then -- and that strategy was accompanied by fairly aggressive share repurchases and a large announced share repurchase program. And then, of course, it was truncated by the pandemic. And I think the company was fortunate to be in a position where it had liquidity that was raised as a result of those transactions that didn't require it to do any dilutive equity deals or really stress leverage beyond that, which was kind of stressed by the operating results. So as the -- as we got into the later innings of the pandemic, at least what we perceive to be that, we kind of began again with that strategy. When I joined MGM, I was unaware or unfamiliar with the specific operating challenges the company needed to deal with. But one thing I was certainly aware of and knew was that the company had far too complex a corporate structure. And we did need to simplify that. Two main parts of that were the CityCenter JV and the MGP -- our significant holding in MGP. So we've made progress, of course, on both of those fronts, acquiring the other half of CityCenter and simultaneously selling that real estate to Blackstone and then the transaction with VICI. So to address your question around the liquidity that all of these ultimately will generate, which you're correct, it totals around $11 billion by the middle of next year, we have a few priorities. Number one is investment in our own businesses, to continue to improve the product that we have, our physical businesses. So that will include some room renovations, technology investments to bring digital tools to the hands of our customers with increasing sophistication. Now these will not be accelerated or really any change, of course, because of the liquidity we've driven, but they are important investments. The second is funding BetMGM, which is, we think, a fantastic use of capital as that company continues to acquire customers. And then final is share repurchases. When we announced our earnings in early August, we had since mid-March, so only about 3.5 months' time. We had acquired -- we had spent over $600 million on share repurchases. And at these levels, we think that our shares remain an attractive use of capital, and so we're going to continue that. I think it's also important to note that the company has still a traditional bank and bond debt structure and that some of those bonds are maturing in 2022 and 2023. And I'm sure we're going to look hard at simply retiring those bonds as they do mature, given the fact that the company has now a fairly substantial lease burden and a capital structure that's different with the transactions we've done from what it was when we initially did those debt offerings.

James, do you want to jump in here?

Well, I guess maybe just to follow on that, Jonathan, we have talked about this, but in that context, how do you think the company will sort of position its leverage target or sort of parameters going forward, I guess, on both the -- we've talked about on sort of a traditional basis, but then on that lease adjusted basis?

Yes. I will certainly be looking at it and communicating it on a lease adjusted basis. And I know the convention is to take a lease obligation and apply an 8x multiple to it for the purposes of adjusting leverage for these leases. I think that's probably a fine way to do it. While -- it's just a different capital structure. I also look at it in terms of coverage, of our EBITDAR coverage of our lease obligation. And I think that's, practically speaking, a very important way to look at our leverage with this. On a lease-adjusted basis, as we look at the numbers and do our planning, we think that 4x to 5x lease-adjusted debt-to-EBITDAR is appropriate for a company of our size and our level of revenue diversification. I think one of the elements that will be, of course, watching closely, and I certainly would expect our shareholders and lenders to watch closely too is the way in which BetMGM, we expect over time, turns from a consumer of capital to a generator of cash. And that will have, we think, over time, very important positive effects on our leverage because it's really not -- it's a business that we think can be a strong cash flow generator. I'd make 1 other final comment as it relates to uses of capital, and that's our venture in Japan, which we've submitted an RFP and are in that process right now. The magnitude of those investments, along with the timing of those, we really are not reserving any of this amount of capital that we have. Given the timing and the magnitude, I would expect that those investments could be funded out of free cash flow come 2024, 2025 and so on.

So Jonathan, one priority that wasn't mentioned in there was M&A. And obviously, MGM has a history that traces back to sort of the architecture being constructed on M&A 20 years ago, but much more recently, it's been about development. And so could you help us think about maybe both those pieces a little bit? Is M&A still a viable strategy for us? I mean, as you've created some expertise here on an operating basis. Is there still an angle or an opportunity for you to add to the portfolio on an operating basis going forward? Is there a strategic merit in doing so? Maybe start there and then we'll talk about the development side.

Sure. Adding to the portfolio is certainly a possibility. It's interesting to contrast the MGM portfolio to the one I have been most familiar with in this industry, which was Caesars. We have a more substantial Las Vegas presence and a less substantial regional presence, and I think a great opportunity to increase the company's regional distribution points. and build more of a network. This is a strategy that came a little bit later with MGM just over the past few years.and I think has the opportunity to grow. Now we'll have to do it correctly. I mean, these are premium properties. We have #1 market share and the highest price points in every one of the regional properties in which we operate, perhaps with the exception of Yonkers. So it has to be the right type of property. But I certainly consider that an opportunity for the company if the right opportunity comes along, which is M&A in the regional markets. As it relates to Las Vegas, I think we're all comfortable with the amount of exposure we have in the Las Vegas market and relative to our revenues elsewhere. In terms of development -- so that's kind of on the bricks and mortar M&A front, that's the way we see it right now.

For the right opportunity or the right mix, would there be room to flex up Las Vegas? I mean, sort of have to ask given that I think we all believe there's a relatively large opportunity available out there. Could you fit those parameters? Would it be something where you could swap to something you think might fit better to the portfolio. You just want to change exposures elsewhere, perhaps at the lower end of the portfolio differently? Or is it really, no, look, our overall mix is comfortable, we're there across different price points, and we're going to look elsewhere?

Look, we're always looking at how to improve the portfolio and improve what's the variety and the quality of what's on offer. I just think on balance, we're comfortable with the level of exposure that we have here in Las Vegas. We wouldn't be -- and there have been a number of opportunities, both to increase and reduce our exposure in Las Vegas. We did, let's not forget, we allocated over $2 billion to acquire the other half of CityCenter in a transaction that will close in just a couple of weeks. So we have, in a way, we've increased our capital allocation to Las Vegas. But always try to improve the portfolio, probably comfortable with our overall level of exposure, rooms and et cetera, in Las Vegas right now.

Understood. And the other opportunity here would be in digital, right? So obviously, BetMGM is the vehicle that you have today to do this, which makes kind of controlling the M&A side of that or doing too much there right now, a little different, unless you were to look at buying in the whole opportunity. So how do you think about kind of the mix of wanting to probably get as much exposure as you can to the digital opportunity given what's going on in that landscape right now and how exciting it is, but balancing it with the vehicle that you have today? How do you kind of balance those priorities?

The BetMGM venture, it's our joint ventures -- most people on the call, I'm sure knows, it's our 50-50 JV with Entain. This JV was built to last. I mean it is exclusive. It's long term. It's 50-50 in every sense of the word. Entain generally provides the technology, we provide the brand, the retail, our retail books, which we contributed to the venture and so on. The management team is excellent and they're performing exceptionally well in the market, both in the markets they're in right now as well as the new markets that are coming online even as we speak today. They are our exclusive online sports betting and iGaming venture. So we really don't really give much time at all to the notion of doing anything outside of BetMGM. All of our efforts are with BetMGM. If you were to go out into the casino here at the Bellagio and approach 1 of our employees and shake them and say, "Who owns BetMGM?" They would probably say MGM. We don't try to draw any distinction here. We only own half of it and that kind of thing. We're all about just trying to bring all the resources of our company and our employees to that venture to make it as valuable as possible. And if it's valuable, then our 50% of it will be as valuable as possible. So there's really not much of a balance. I mean, we're all in with that venture. And fortunately, it's performing very well.

I mean, the performance has been truly exceptional over the last 12 to 18 months. I think we all are really aware of that. So then -- I know this is generally difficult to comment on, but obviously, because it was public that an offer was made 9 months ago. Can you at least sort of give us a sense of -- is that something that can be revisited by MGM? Is that a priority at some point to possibly think about? Or how do you kind of balance the opportunity to possibly control 100% of this joint venture with the other priorities that you've already talked about?

I can claim some deniability around this since when I started in January, that transaction or potential transaction was announced and then ultimately didn't happen just as I got here. So I didn't really have any involvement in it back in 2020 when it was going on. I'll just kind of stay with what I said earlier, which is that really, the extent of our involvement with Entain is as a joint venture partner and working to make that business as successful as possible. And that's kind of where we are.

You did mention the regional piece possibly being an opportunity. I mean one angle for that is expanding market access. Is that a priority that you can kind of add in your underwriting when you think about becoming most likely an opco partner for somebody in a transaction. But do you start thinking about the footprint? And again, Caesars, while you came up through that organization, I mean, I think that idea of a hub-and-spoke model, really stemmed -- really kind of, that was a lot of the foundation of Caesars. It's been a little different for MGM, but you've been perfectly situated for the states that have actually legalized. So it's kind of worked out. But moving forward, does that kind of venture into your underwriting?

Yes, there's no question, it does. I think it has to. And as time passes, we get better and better at forecasting and understanding what that -- what our ability would be to acquire customers online and ultimately monetize them not just through that online channel, but also through our retail channels. It's something that -- it's such an opportunity for NGM to become more effective at driving cross-property play between our regional markets and Las Vegas and within Las Vegas, something when I was at Caesars, we were just maniacal about doing, and there's a huge potential here at MGM. And I think also as it relates to omnichannel, I think there's going to be a time, maybe not in the not-too-distant future, where instead of talking volume indicators like table drop and slot handle in Las Vegas or the regions, we'll be talking about average daily users across multiple channels online and offline across the MGM system. And so I think that, that will certainly go into our underwriting to the extent we have the opportunity to look at some of those new distribution points.

It's really interesting you say it that way because it's sort of the last big strategy question I wanted to ask you was MGM has been tough to pin down, if we kind of really rewind over the last 10 years. You mentioned the transition that's been 5 years in motion, right? But there was also the 5 years of development to build up to that. There's just always been a lot going on with this company. And now we're starting to see some elements of clarity and I'd love to kind of like kind of push that forward 5 or 10 years. If we look out 5 or 10 years, how would you describe the vision for the company in that kind of time frame? So today, we've made a lot of progress on kind of I think cleaning up the corporate structure a little bit. But yes, where are we going? Is that right? Are we talking omnichannel, kind of off-line? Are we talking a much more diversified portfolio as it relates to regional? And then maybe specifically, you mentioned how global fits into that, too?

Yes. Our vision here is, as Hornbuckle has articulated it, has been premier global gaming. And so what it doesn't say is, in some ways, as important as what it says. So the company I know in the past has flirted with nongaming instances of its brand. And we have, over the past 6 months, Bill and I and some of the members of the management team have been unwinding or shedding some of those investments. They're all small but they take financial resources, management resources, and we're getting out of those. We talked about how we've been through the CityCenter deal, the MGP deal, kind of less financial engineering and more simplified and clear about what we are, which is an opco. The omnichannel right now is a -- more promise than substance at this point, just given the early days of it, but we feel like we're in a very good position with a leading brand, our brand with BetMGM. And as I think about what this company needs to be, definitely the best-known brand, most trusted brand, in gaming, casual, high-end and hopefully in as many distribution points and the highest availability in this country, and then with integrated resorts and to the extent where it's regulated, online offerings internationally. I think realistically, the opportunity for integrated resorts is not going to be in a wide number of jurisdictions and the capital cost can be pretty extreme. But in our spots, Macau, Japan, we would expect to be a player there. Best brands, trusted brands, available anywhere, premier and gaming.

So that -- so let's transition into the kind of the core operational performance a little bit. We can start in 2 areas. I actually wanted to ask a couple of questions about online, but I also appreciate that's more that MGM's area than your own. So help me out with your comfort level there. And -- but just in terms of where we're headed. Just would love your thoughts on maybe the full competitive landscape, right? Everybody is allocating capital to this vertical, you are as well as it relates to your investment in BetMGM. We're expecting a pretty big land grab for market share. So kind of -- What's your expectation for that marketing landscape? How is BetMGM going to defend some of its newfound strength and turf going into what we think is going to be a really competitive fall season in the digital sphere?

It's difficult to overstate how critical day 1 performance is in these markets. And it's something I think that I certainly learned and I think our team, they probably knew it, but it was certainly amplified in the experience in Michigan back in January, just how important that day 1 launch is. So our company, BetMGM, has been hands on-deck for Arizona for weeks now. And I think as a result, is going to get out of the gate very strongly in that state, south Dakota, Wyoming and on and on. So that's kind of the first thing that we do. The second, and it's -- I think it's underrated is the product quality itself. The -- how engaging fun, easy to navigate, availability and so on of the product we believe -- they believe makes a difference. A lot of the moves that we've seen relating to media partnerships, we've looked at a lot of those, the BetMGM teams looked at a lot of those and passed on most of them. We think that they can -- we have more targeted ways to acquire customers than some of the media deals that we've all seen announced. So I think it's going to be product and then getting out of the gate strong are probably going to be the most important.

And you were set up or certainly were named as one of the official partners for the NFL, I think it should allow you to advertise that through that channel. Is that a priority? Should we expect national media buying? Are you at a scale where that starts to make sense as a sort of another tool in the tool chest?

Yes, yes. There will be some of that, but I think it will be -- a lot of it will be through our MGM channels or M life channels. And probably a bit -- maybe less than some of the others on those national channels. But this is an area where I think I should defer to the management team at MGM themselves in terms of what they're -- how they're going to allocate their dollars.

Great. And maybe 1 last question. It was just -- it was a really interesting New York Consortium that we saw, right . That's one of those things that we just -- you just get to see. Just any thoughts about that development? And also some of your alignment on, I think, some valid initiatives. What are you doing to kind of press the industry's ability? And I think that's what we're starting to see, is like the industry is starting to align to open up some major markets. So could you just talk about that? And where you think progress might be underestimated, where you see a really big opportunity in '22 or '23?

Well, I think you're talking about California and of course, the New York Consortium. I mean these are efforts that are meant to speak for the industry. And I'm enthusiastic about them. I think it makes a lot of sense. We have a lot of opportunity before us even without those states for sure, but those are 2 enormous opportunities, we think. And kind of making the bold moves that we've made with other large players, I think it's perfectly appropriate given the size of the market opportunity.

So let's reserve the remaining time here for some, hopefully, easier but also more important questions around the operational performance. So obviously, Las Vegas is in the midst of a dramatic recovery off of COVID. I think we all know the reasons why it was a little bit more delayed beyond the region, the reliance on the convention business, et cetera. But could you just help us, first of all, level set how big sort of a setback is COVID for -- or is the Delta variant kind of as it relates to the Las Vegas recovery broadly? Is this a major concern? Are you seeing cancellations and enough behavior that it could materially push back either a group recovery or the overall strip's recovery? Or do you think this is a point in time. And yes, it might change by weeks or months, but probably not by much more than that?

That's the way I see it. We've seen cancellations. I think others have as well. At the same time, we're seeing kind of near record lead generation as it relates to group business. Now this is for '22 business largely. So the group, some of the midweek business that we had expected would be here in the late third and fourth quarter, has canceled. It's been largely filled by transient and FIT and leisure customers like we saw over the summertime. But none of this gives us any reason to think that '22 is going to be different from what we thought it was a couple of months ago. I think there's some evidence in some parts of the country that this thing, this fourth wave is now peaking. I wouldn't be surprised if the same as said in Nevada and some of our closer feeder markets soon. But yes, it's caused -- and it's caused some companies to say, "Oh, we're not sure we're going to travel yet, and that's had some impact on the group business. But I wouldn't say it's that dramatic net for what we can backfill it with.

Hey, Jonathan, talking about Vegas, I feel pre-COVID as a focus was so often on convention and group bookings. I've been kind of amazed by the gaming results. Each month, the last few months that have come out of the Nevada have been off the charts. I mean a couple of record months. I'm curious, your thoughts on sort of how sustainable that is? How much of it is just pent-up demand? How much of it is how all the operators there are marketing? Yes, just curious because we've seen this long-term trend kind of away from gaming towards nongaming business.

Yes, it was -- it's been pretty extraordinary, particularly the slot play from younger people over the past few months has been a standard deviation outside the norm. And my own view is that it does not represent a long-term change in behavior. There's a number of reasons that's happened. One is because these are the customers that were getting into the hotel who, in some cases, would have been yielded from the hotels with a stronger group base. Another reason is there hasn't been, during those periods in late second quarter, as much for sale in other areas, some revenue centers, entertainment and night clubs and the rest were not open. So I'm in the camp that thinks that some of these behaviors will return to more normalized levels over time. But look, it's been -- it has been great for operators. These revenues come with higher margins. Customers are coming, having a great time, and they're spending through the gaming offerings as opposed to some of the other offerings. I think that's great. Our view is, though, as things normalize, earnings will grow because we do not yet have what we consider to be an optimal customer mix for profitability for MGM. And as we get more that kind of wider variety of customer segments midweek and weekend, then we're going to be able to increase earnings even over what we did in the second quarter, which was pretty extraordinary.

So Jonathan, there were some cost reduction targets that sort of predated both, I think, COVID and your tenure. They seem to be sort of not so relevant in the world that we're at now where your margins are already structurally, I think step function higher than what we did before. So whether it's margins, whether it's kind of a reduction target, whether it's FTE count, whether it's just the margin itself, can you just help us think about what's the right run rate kind of profitability result of this, right? So we're going to have mix shift that may overshoot in the near term to gaming, that's a pretty high-margin profit center. But you still have hotel and group, which we also think is being pretty high margin that should be on the come. What's the sustainability of the margin profile? You were a little bit more cautious in your guidance there. So just help us think about that?

Yes. We -- you're right, these actions took place largely before I got here. I've done the forensics and the review and the quality of the work has been -- and it's been fantastic and it's been roughly $400 million to $500 million of sustainable cost reductions, which for a company this size is 300, 450 basis points of margin improvement. And the second quarter, in the regions and in Vegas, we grew margins by about 1,000 basis points versus the same quarter in 2019. So kind of overshooting that goal for the reasons we've already talked about. I am fully confident that the company can deliver margins 400 or 500 basis points higher than it was delivering back in 2019 based upon those cost reductions and additional learnings that the company has derived over the past 6 or 9 months from the pandemic. I do believe they'll come in a bit from where we posted in the second quarter as the business normalizes but I think earnings -- overall earnings will grow. I mean, in the second quarter, some of our key revenue centers were entertainment, food and beverage. We're still operating 10%, 20%, 30% below 2019 levels. And that will come back, that will hurt margins a bit, but it's going to grow earnings.

Last question, but we'll do lightning round to try and squeeze it in would be just wanted your quick thoughts on free cash flow conversion, right? There's a lot of moving pieces in the MGM model. But as we boil it down and as we move more towards an OpCo-centric model, I think it's relatively straightforward between cash interest expense, maintenance capital, cash taxes and rent. So could you help us just think about the key buckets going forward? And what some good ranges might be for people once we sort of hit a little bit more steady state and not on the top line, but for those items that we should have better visibility on?

Yes. The rent in this includes the CityCenter rent, will be $1.6 billion to $1.7 billion annually. Interest expense is about $220 million annually. And as I mentioned, we will likely be retiring some of that debt as it comes due. Capital expenses this year will be about $450 million. I think that's a pretty good number and about 1/3 of that is IT. And that may grow. That's a bit lumpy because so much of it is also due to room renovations and depending upon timing and the rest, can influence that number greatly. Cash taxes will not be a meaningful component or a free cash flow drain for 3 or 4 years due to the NOLs that the company has and those are the major buckets. And then funding for BetMGM. This year, it will be about $450 million between us and our partner. And we don't expect that business to begin generating positive free cash flow until probably 2023. So there -- so that will be an investment for us over the next couple of years.

Fantastic. Thank you for squeezing that in. Great to see you, and really appreciate you kind of targeting the end of the day for us and helping us wrap up a successful conference. So great to see you and look forward to seeing you out in Las Vegas, hopefully soon.

Likewise, Thanks, Shaun. Thanks, James. Good to see you guys.

Great see you.

Okay. All right. Bye.