MGM Resorts International (MGM) Earnings Call Transcript & Summary

Hi, everyone. I'm Thomas Allen, Morgan Stanley's U.S. gaming, lodging and leisure analyst. I'm very happy to be joined by Jonathan Halkyard, CFO of MGM Resorts. Before we get into our Q&A, 2 housekeeping points. First, for important disclosures, please see the Morgan Stanley disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. And then second key point, if you do have any questions for this webcast, please submit them over the webcast, and I will ask them for you.

So Jonathan, thank you very much for taking the time. It looks like you're in the office, beautiful office. So you've been in the CFO role at MGM for a little less than a year now. Can you just talk about what most excites you about the opportunity?

Thanks, Thomas, and it's good to be joining you this morning. A few things really excite me about this. It's hard to believe it's been already a year. But having started in January, certainly, the business was quite a lot different back then than it is right now. So I think one of the things that excites me most is just the overall resilience of this business over the past several months. And it's been in some unexpected places. We're still, I think, performing very well despite not having some of the group business that we anticipate is going to come back strong in 2022. And so the ability of our company to really capitalize, given the types of demand that we've had, the ability that we've had to adjust over the past several months, I think, has really been probably the thing that's excited me the most.

And then you had a long career. You were at Caesars. You were at Extended Stay. You always kind of looked at MGM from the background. What -- now being at the company and being the CFO of the company, what do you think investors misunderstand the most about MGM?

Yes. I certainly competed against MGM for many years while I was at Caesars. And you never fully understand a business until you're on the inside of it. I guess as a general matter, I believe that investors understand our business and other businesses quite well. And so I'd probably -- I wouldn't say there's a lot that's misunderstood although it's a very good question. And one of the things I've discovered here at MGM that I think probably investors don't fully appreciate is the opportunity that's before us really to capitalize on the database and the network of properties that the company has. This is something, of course, while I was at Caesars that we worked very hard, and I think we're very successful in doing over time. And our company, MGM, I think, has a fantastic network of regional properties, each of which is a leader in the market in which it operates and operates at a premium position. And we, of course, have a real center of gravity here in Las Vegas. But at the same time, we really haven't taken advantage of the opportunity to appeal to those customers in our database when they travel to Las Vegas from the regions. Some of that is technological. Some of it's cultural. It's a huge opportunity for MGM. And in a related way, within Las Vegas, the ability of our customers and the incentives for our customers to make one of our MGM properties their second stop when they're moving from place to place within Las Vegas is something that's a huge opportunity for MGM. I think because of the nature of the company's brands and its properties, MGM has never had to do that as much or needed to do it as much. But I think that it's something, again, back to my days at Caesars, we did particularly well in certain cases because we really needed to. And I think it's a significant upside. And as we go into 2022, the company is going to have some interesting and important announcements about how we're actually going to enable that to happen.

So one of the things you've obviously done or you're in the process of doing is upgrading your portfolio. You bought the other half of CityCenter that you did not own. You bought the Cosmopolitan. You're selling the Mirage and then unrelated, you're selling your MGP stake. Can you just kind of discuss what the end goal is? Like why you've been so transaction heavy and kind of what the big picture plan has been?

When I joined the company, I was hesitant to come with any preconceived notions about what the company needed to do in order to move forward. Although one of the views that I certainly did have in researching the company and then coming here was that our corporate structure was far too complex. We had done certain transactions, I think, for good reasons. But it was difficult, I think, unnecessarily difficult in communicating the company's financial performance and our strategy. And so certain elements of those transactions that you described, the sale of MGP, the acquisition of the other 50% of CityCenter, there were a number of merits to doing that. Value is foremost among them. But I think one of the other benefits is it makes our company, I think, far easier to understand and makes our results far more transparent as we go forward. So the deconsolidation of MGP, the consolidation of CityCenter and the Cosmopolitan of Las Vegas is a bit of a different case, but it's related in that that's certainly bad. And the sale of the Mirage taken together, I think, are going to overall improve our portfolio in Las Vegas and bring us closer to our goal of being the world's premier gaming and entertainment company. And part of the appeal of simplifying our corporate structure is to make the performance of the business transparent and to really bring the realization of that vision to our investors in a very transparent way. So that's the end goal. That's the overarching strategy is to achieve that vision and make it very plain for our investors to see and prospective investors to see and understand our company's performance.

We had Caesars' management team here yesterday talking about hoping to achieve $3 billion to $4 billion of sale proceeds from their asset sale in Las Vegas. Can you just talk about how you're expecting -- what you're expecting to get out of Mirage? Obviously, a little different where they own the land underneath those properties, you guys don't, but just talk a little bit about it. Thank you.

Yes. I'll give you, I guess, just a broad view of the structure that we are -- the way it will work because, as you know, it is subject already to a lease with MGP. Assuming that we continue forward and are able to consummate a transaction with the Mirage, the buyer of the operating company will assume a lease with MGP or with VICI, depending upon the timing of the transaction. And we will be selling the opco. So in recent transactions and you would know this better than anybody, probably those opcos have priced -- we bought the opco of Cosmopolitan of Las Vegas at about an 8x multiple and most have been done and around that range. I think an important element for the Mirage and potential buyers looking at the Mirage is the real estate that is available there. Its location is fantastic. It's obviously an historic brand. And I think -- we think that it's going to have a lot of appeal to a number of buyers. But as you noted, the valuation is going to be a bit different because this is an opco that we're selling and not the entire enterprise.

Maybe talking about kind of fundamental trends for the -- for your core casino business. Vegas and regional casino revenue started rebounding above 2019 levels around April this year and have remained very strong. I mean Vegas market revenues for October came out yesterday and they're up about 30% versus 2019 levels, pretty incredible. Big picture, do you think these levels of revenue are sustainable?

I do think they're sustainable, first, for some different reasons. So in the regions, it is true, and I think others have commented on this that we are seeing an elevated level of spend from both rated and unrated players. Much of this is due to our own marketing communications and, of course, the strength of our brands. But it's also -- we believe it's due to other factors, some of which are, I think, sustainable and some of which will probably taper over time. On the other hand, there's still a good number of guests that we're still not seeing or not seeing with as much frequency and this is in the regions. And those are mainly our older customer demographics, the 65-plus demographic, which is pretty important in a number of our regional markets. They've started coming back, but they're still lagging well behind the other demographics in terms of visitation and frequency. So I think a counteracting mechanism over the next several months will be the continued return of that demographic, which would more than offset, we believe, any normalization in the spend levels that we're getting from some of those rated and unrated guests. So in the regions, I think it is sustainable. In Las Vegas, we're very optimistic about the revenue outlook. And while we're still seeing a similar dynamic to what we -- that I just observed around our regions in terms of the elevated gaming spend and just overall visitation from casino guests, we still are operating at roughly half the load of group and convention meetings business that we would normally have at this time of year. And that we see increasing through 2022, by the end of 2022, getting to our historic levels of group and meeting business. So that's -- we're kind of delivering these record results with one hand tied behind our back, which is the group and meetings business, which is an important business for MGM. So I think overall, these revenue levels are certainly sustainable.

On the Vegas side, you didn't mention international, which I would think would be another tailwind. Is that like -- does what's going on in China concern you? Or is that just a smaller kind of less -- it's important but less important? How are you thinking about that?

Yes. It is certainly a tailwind. And it's an important part of the business for MGM. I probably should have mentioned that. I don't consider it to be quite as great an opportunity for us in kind of getting back to more normal patterns of visitation as is the group and meetings business in Las Vegas for MGM, but it's certainly a tailwind for us for sure. And we're all kind of cautious about how that's going to develop, and it will probably be bumpy over the next 6 or 12 months. But I have greater conviction of the return of the group and meetings business to Las Vegas. That's for sure.

And as one short-term question, has Omicron so far had any impact on your business really?

No. No, not in the current business that we're seeing or in our booking right now.

It's interesting -- yes, your data around -- STR data came out for the broader U.S. hotel market for last week. And RevPAR was 20% above 2019 levels. I mean it's unique because Thanksgiving and so you have pent-up leisure demand. And you also know a lot of people weren't able to travel last Thanksgiving to see family, so that probably had a tailwind. And it was very the beginning of Omicron, right? So -- but it's -- I think from everyone else we've talked to at this conference, they really haven't felt an impact from it either. So it makes a lot of sense.

Yes, and you can be sure -- I mean we're looking closely at all the booking channels, talking to the meeting planners and the rest. And -- but the truth of the matter is, right now, we're really seeing no impact.

Okay. Perfect. And then just on the margin levels, you had about 39% property-level margins the past 2 quarters. That's almost 1,000 basis points above 2019 levels.

Thank you for noticing that. Appreciate it.

I focus on absolute, I was like -- everyone was like, "Oh, it didn't hit exactly the number." I was like, "No, it's 1,000 basis points higher, people." And that's [ higher ] than you, guys. It's other people who was like expecting it to be way too high. Anyway, can you just describe what's driving that and how sustainable this upside is?

Yes. The -- as you noted, the margins in the high 30s, both in the regions and Las Vegas, are certainly a very nice improvement over a couple of years ago. It really comes down to a couple of things. One is labor costs and the other is, generally, promotional or marketing investment. Labor costs have been difficult. We are certainly seeing the difficulty in bringing folks back to work. Right now at MGM, we have about 4,000 open positions. Much of the -- many of these are frontline positions. Some are salaried and back of the house or administrative positions. And we have -- and that has translated into a number of things. First of all, we've certainly learned how to do more with less. We -- either through technology or process improvement or changes to our operating model, we've been delivering the occupancy numbers that you've seen with a substantially smaller labor complement, but that has certainly helped our margins. We do think it's important to bring most, if not all, of those folks back in order to staff our properties appropriately, provide the level of service that we commit to with our customers, but that's been a contributor. The second has been promotion -- overall marketing and promotional costs being substantially lower, particularly in the regions than they were a couple of years ago. Again, some of this has been by design, changes that we made to our customer reinvestment programs. But others have been because the business has not been as competitive as it has been in the past. So that's something that I'm optimistic is going to continue. I think we have disciplined competitors. We have a strong market position, but those are 2 contributors. The final and most important one is actual actions the company has taken on the cost side, beginning well before the pandemic, to improve its operating performance and its margin performance. And those are certainly sustainable no matter what the level of businesses that we're seeing.

Perfect. Then last question for me on the brick-and-mortar business. You've historically been a company that's spent on kind of internal projects, thinking return to Monte Carlo into Park MGM and NoMad. You've added convention space here and there. Do you see a lot of projects like that in the future and kind of describe what they could be?

Yes, it's certainly possible. I mean our view is, without question, the energy in the Strip has been moving south. And we, of course, very much like that. That's our neighborhood down towards New York-New York and Excalibur, Mandalay Bay and Luxor, MGM Grand and The Park, as you mentioned. So the reality is -- and I don't think many people fully appreciate this is there is substantial opportunity for our company to do additional development in that area, if that's something that we think is going to be remunerative for shareholders. For example, there are 7 acres in front of the Excalibur. That's the -- that is equal to the entire footprint of the Cosmopolitan of Las Vegas. Now I'm not suggesting we're going to build a 3,000-room tower there. But that's a significant development opportunity potentially. MGM Grand is right on Las Vegas Boulevard and Tropicana. And yet it's -- that's -- the front of that building is a bit difficult to access if you're coming over from New York-New York or if you're a pedestrian. So there's another opportunity there over time to improve that, to improve the connectivity and accessibility of that property. Those are probably the most significant ones. Clearly, we're allocating capital in Las Vegas in the form of the acquisition of the Cosmopolitan in Las Vegas. We think that, that's going to be -- going to drive terrific returns for our shareholders, be a great benefit for our guests. And so that's probably, in the near term, the most important allocation of capital we'll be making to this market.

And then New York, there's an RFI for physical casino property. You have a racino here, that's a racetrack with slots. What kind of opportunity you see in New York? And how aggressive are you going after the New York market?

Yes. We think it's a significant opportunity for the company. Empire is a terrific business, but the potential to have that be a full-fledged casino with table games in addition to what we're operating right there now, we think, is a great opportunity. I think time will tell what the terms of that will be and what the magnitude of the investment would be that would be required on all the other economics of it. But I love our position having that as an option for the future. And listen, between our operations in Atlantic City, the database for Las Vegas and, of course, our digital offerings, having a full-fledged bricks-and-mortar casino in New York, we think, would be very appealing.

Now moving over to the digital side, which everyone likes to talk about. Just talk big picture, like how excited are you about online gaming and sports betting? Where do you see the best opportunities?

I mean this is one of the biggest opportunities for our company and I think for this industry in probably in 30 years since the beginning of riverboat gaming in the Midwest. I mean when I look at the growth rates associated with this business, the TAM that's available both in the iGaming, online sports betting and how we at MGM are going after this opportunity through our JV with Entain, with BetMGM, I mean I just -- I couldn't be more excited about this as -- on a number of different fronts in terms of its financial return, the building of our brand, which BetMGM is doing, the opportunity for omni-channel and more continuous engagement with our guests. It wasn't too long ago when the vast majority of MGM guests were visiting properties just here in Las Vegas, 1 to 2 times a year, and that was it. And now we're in a situation where we have 8 regional businesses in major markets. We have greater connectivity before those -- between those businesses and our Las Vegas properties. And we now have BetMGM present in 16 states with online sports betting and I think 5 in iGaming and millions of customers who are engaging with our brand almost on a daily basis. I mean that is a huge change from the way this company was just a few years ago. That, combined with the growth rates and the TAM available, I mean, I don't know how you could be anything but really excited about that possibility.

John, I must sneak one in here. You were obviously at Caesars where you saw very high frequency of visit from your customers. And the key point you're making is that MGM doesn't see that. Can you give us a view on like what the divergence was at Caesars when you were there versus what you see today at MGM?

Well, I think it really -- I think, if I understand your question, it really depends upon the market. So in the regional properties, the frequency is much greater than it is in Las Vegas. And from my memory of when I was at Caesars to what I observe now, the frequency is not much different at all in the regional properties or in the Las Vegas properties. What I do think the difference was and probably continues to be is the frequency with which regional customers visit the Las Vegas properties in the family. Our customers are coming here from the regions. They're just not spending as much time at the MGM properties as they certainly could. And that's the thing that we're going to be addressing next year and the years beyond, which I think is a huge opportunity for the company. I was just trying to make the point that -- and this could probably be said for a few companies in bricks-and-mortar gaming that we are moving from a model of less frequent engagement to one potentially of much more frequent engagement. And I just think that's a sea change for the industry and for our company.

Yes. You're moving more and more -- well, so beyond the omni-channel side of it, but from the brick-and-mortar side, Caesars and previously total rewards was all about hub and spoke, right? And the sense I get is you've come in now and you realize that MGM hadn't maybe lived up to the full potential that it could have from kind of a hub-and-spoke model, right?

Yes, absolutely. And then within Las Vegas, capturing a greater share of our customers' time within the family of MGM properties. And I don't think this is being too boastful, but I think the potential for MGM to do that is far greater within Las Vegas just given the diversity of offerings that we have and the quality of the properties than what I've seen before. But it's on us to execute on that and make it worthwhile for our guests to do so.

Makes total sense. So then on -- just going back to focusing on the digital side. You've built up to be 1 of the top 1, 2, 3 players in the space. What do you feel has driven that success?

Yes. I mean we're kind of high-teens in online sports betting share in those markets where we're active, and we're 30% or better in online gaming, iGaming share. So these are putting us certainly #1 in iGaming and firmly within that top 3 in online sports betting. And I think there are a few reasons for it. One is we have been very good -- the BetMGM team, I shouldn't say we, because we really do have a fantastic management team there who's running this business. They've been very good at getting into new states on day 1. And not just being available but having anticipated those entries and -- together where it's relevant with our properties in those markets, really getting in front of our customers and signing up those first-time depositors right out of the gate. And that has helped us establish a beachhead in market share, which we've been able to defend even as some new entrants have come in. I think the second element is the quality of the product. I think the usability of the product, the ease of registration, the user interface has probably been underappreciated in terms of its importance in maintaining market share. And together with Entain, it is really, as you know, driving the technology development and innovation. I think that that's been a key contributor. And then finally, the relationships that we have with M life customers, the existence and power of the MGM brand even before BetMGM really entered into this business has, at the top of the funnel, helped BetMGM, I think, dramatically in building that customer base. But all credit to the BetMGM management team and the way that they've executed. I think that that's been the key to their success.

And digital businesses like this, people focus a lot on LTV to CAC. Can you just talk about kind of what you see in your customer base so far?

Yes. It's -- Thomas, I'd just say it's still kind of early in -- for us to really come out and give some of those specific numbers. I can tell you that we have a road map for how we -- the management team refers to them as these J curves as we invest in customers and then through retention and driving down attrition in those customers, the experience of the cohort in a particular state turns profitable. And so you really start to get a good view longitudinally as to what the value of a customer is versus their acquisition cost, that we're really starting to get some good information on that. We do it by state. We do it by cohorts. So when people actually signed up and initiated their relationship with the company, we benefit greatly from the experience of our Board members from IAC, who have been through this drill many times with other companies of theirs. And I think as we go into 2022 and some of these markets get more mature, we've lapped a few seasonal variations in the business, we'll be in a position where we can share some of those KPIs more broadly with our investors and research analysts. But we're -- literally, it's not even been a year since we opened in Michigan. It's been just a year since we started in Pennsylvania. So I think it's still a little bit early to kind of give a clear-eyed view as to what those LTVs and CACs are.

And then New York, you're going to be 1 of 9 operators in this market, but obviously, a very high tax rate. Can you just talk about your strategy here and what you see as kind of profits here, if there are any?

Well, sure. I mean we talked a little bit about Empire. So speaking with my MGM hat on, it's certainly an important business to us. We think that there is a bright future there in terms of a full-scale casino operation. In terms of BetMGM, they -- that management team believes -- and I certainly agree that if your aspiration is to be the leader in online sports betting in North America, you really need to be in New York. It's a huge population, huge economic power. Sure, the tax rate is high. That will make the economics a bit more challenging there. But we've seen this in regional gaming going back 25 years, where high tax rates can work with other elements of the cost structure and regs around licensing and so on. So it can work economically for the participants. But I think the fact -- the bottom line is it's a huge market, it's an important market. And I can't see us aspiring to be the leader without being in that market.

Perfect. You operate in Macau. You won 6 concessionaires there. Can you just talk about your outlook for that market, both on kind of the revenue side and then on the concession renewal side?

Yes. On the revenue side, look, I mean there's -- we all saw all the revenues that were reported recently. It's operating at kind of at 30% of 2019 levels. Even though sequentially, it was a bit better. This is a market that has been impaired by the travel restrictions into it, and that's going to last for a while. We think it's going to improve, but it's unknowable at this point how quickly that will improve. I don't think any of that speaks to the long-term opportunity associated with Macau. The demand side for Macau, generally speaking, is going to be fine going forward. So we've got 2 big businesses there. We're committed to it. We have a great management team. It's just going to be a tough row for a while. On the concession front, I was pleased that back in September, we had that -- we got that process started. We provided our input on the different elements that the government had asked us to respond on. We're -- we think we're going to have a pretty rapid review of that. I don't know if we'll make it by next June, but we feel like our company is in a very good position for concession re-tendering. We're taking the process very seriously, of course, but we're very optimistic about it.

Okay. We have a question from the audience that I'm going to read verbatim. You can address it if you think it's fair or not. Can they update on their change of tone? 2 months ago, it seemed their priority was to get control of BetMGM. Now they seem to be fine like they are.

Yes. I think that's a very good question. So the first part of the question was really in the context of the offer that we had understood that DraftKings made for Entain. And we wanted it to be very clear to our shareholders and other observers of that whole situation that we cared about 2 things. One was that we had a consent right to such a transaction. And the second was that it was important to us in the context of that transaction or a potential transaction that we had control of BetMGM. So we just wanted to be clear that we had a consent right and that we were interested in control of BetMGM. During that whole time, though, and we continue certainly to feel this way, we really like our position. And that really goes to the competitive performance of BetMGM. Sure, with something like this business, which we think has a great deal of value, you'd always like to have -- you'd always like to own more than less. But there's no problem with BetMGM in that its performance has been great. We're happy shareholders of 50% of it. We love its competitive position, and we were good with the way things were. So it was more a reaction and a stipulation of terms in the context of that deal that was rumored in the market.

Okay. Then one more that just got sent in. What is your reaction to the news of Alvin Chau's arrest and the closure of all Suncity VIP clubs in Macau? And will this change MGM's VIP operations in Macau moving forward?

Well, it certainly means that the Suncity operations -- and I think folks have seen that we've suspended those at our properties. I think the reality is that this, while it represented a fair amount of revenue in the market, did not represent much EBITDA in the market, particularly in recent months. And so I do think that it does call into question, in the future, the extent of the junket business. But MGM's business has always been more oriented towards the mass VIP business, which has much better margins than the junket business. We think -- I think many would agree that's, for a while, where the business has been going. So I don't think it's a dramatic impact on MGM.

All right, Jonathan. Well, thank you very much for taking the time to talk to us. Audience, thank you for listening. And everyone, have a great rest of the day.

All right. Thanks, Thomas. Thanks, everyone.