MGM Resorts International (MGM) Earnings Call Transcript & Summary

All right. Good morning, everybody. We're excited to have MGM that lead off this morning. Welcome, everybody, and it's nice to see everybody back, and it looks like a normal sized level of attendance here, which is good to see. And if anybody was here this weekend, I mean, every restaurant, casino floors packed everywhere. So it's also good to see that. From MGM, we have Jonathan Halkyard, Chief Financial Officer. And then in the front row, we have Sarah Rogers, Senior Vice President of Corporate Finance; Andrew Chapman, who is taking over or has taken over from Investor Relations. And I'm sure all of you will get to know Andrew and reacquaint yourself with Sarah, who is doing IR way back when. Thank you. And Jim, thank you, Jonathan, for attending. So the format of this is a fireside chat session. I have a list of prepared questions. We'll go through what I think are relevant topics, and then we'll open it up to your Q&A. And I believe from the guys in the back, this is also being webcast, correct? Great.

All right. Well, let's get started. Can you just talk about what you're seeing from the consumer in Las Vegas and then the regionals? Not necessarily in Macau, we can talk a little bit later.

Sure. Well, good morning, everybody, and thanks very much for joining us this morning. It is really gratifying to see so many people gathered even if it's at a competitor, we're happy for -- we're happy these kinds of meetings are coming back in Las Vegas. I mean the -- our outlook on the consumer generally is really positive right now. It's been a wild year of twists and turns and almost constantly changing demand dynamics and constraints upon our ability to provide the type of products and services that we're capable of providing. But I would say right now, almost exactly a year from the time that we really saw demand start to pick up, it was early March of 2021. We've just had an increasingly strong backdrop of consumer demand. So specifically, here in Las Vegas, we really did see broad consumer demand, and there's a few different segments, of course, but really everything but the group segment really was returning in force starting in October last year, and that really continued up through New Year's. We did see a pretty significant drop in demand, particularly amongst groups in early January. But starting toward the end of January, that's recovered very nicely here in Las Vegas. It takes a bit of time for that demand ultimately to be monetized through our properties, the casinos and the room nights and so on. But we're really seeing that kind of build through the first quarter and expect that to continue into the second quarter. The regions have really been less affected by those recent events. Our regional properties virtually all of them had record quarters in the fourth quarter, driven as the regional properties tend to be by casino demand. And that progress has really continued quite nicely with a couple of exceptions. Only those properties where the more recent Omicron variant introduced some operating restrictions, but those circumstances were pretty limited. By and large, the regional properties have really continued to perform well.

Great. And when I think about the Las Vegas Strip and sort of what's really kind of left to recover, it's the midweek business, the midweek group convention-related business. Obviously, January saw a little bit of a step-back due to Omicron when you guys reported in February 9, you talked about strong forward bookings. So when you think about the 2Q through the 4Q and what you have in the books knowing that things can change, what percentage of that represents the percentage of group for the like periods in 2019? Are you at pre-pandemic levels for group, excluding the first quarter for this year? Because when you look at leisure pricing, you look at obviously casino spend, which is a 40% year-over-year in the fourth quarter, you are way over where you were pre-pandemic?

Yes. Our view that one we expressed during our earnings call on February 9, was that by the end of the year, our group business would be at about 90% of 2019 levels. And we're still with that view. These groups, many of them, particularly the larger ones, so say, above 1,000 participants, they'll book several years out. And so the groups that we had that canceled in the first few weeks of January and February, some of them have rebooked later in the year. Some of them wanted to but were unable because we were at capacity as we get into some of the higher demand periods of September, October and so on. So we've recaptured some of that business, but we still think we'll be at 90% maybe not quite 100% as we exit 2022. But as we look to our book of business for 2023 and beyond, we're comfortable that we're going to be at or above those 2019 levels with groups.

And then just sticking with the Las Vega Strip topic for a second. Room rates, food and beverage pricing significantly higher than where they were pre-pandemic and not seeing at least recently any diminution in demand. Why do you think that there's such demand in elasticity relative to higher prices? I mean, second quarter room rates for the strip that -- those that have looked at our room rate survey, significantly higher for the 2Q of '22 versus the 2Q of '19, particularly the midweek business, which is a function of more groups that coming back. But why isn't there sort of this relationship that the higher the prices go, the demand maybe kind of takes a step back?

It's kind of hard to say. I'll offer 2 explanations and views of that. One is on the weekends, for now many months, we've essentially been sold out on the weekends as driven, of course, by quite a lot of leisure and gaming demand. And there's just an incredible desire propensity to visit Las Vegas now. It's enabled us and others here in Las Vegas to have that kind of price compression and it hasn't resulted in that reduced demand. Midweek, it's really all about the groups and the ongoing trade that we have and it will continue through the next few quarters at least, where what had been in prior periods, perhaps lower rated casino demand and FIT travel being replaced or augmented by group demand and paying higher group rates. It's important to note that it's not just in the ADR that those customers are monetized. The catering and banquet revenue, which for MGM is a $350 million a year annual business here in Las Vegas, those customers present those revenue streams too. So I think it's really about just aggregate demand on the weekends, which has been incredibly strong and then the groups in the midweek. And I can't tell you how many people we meet customers of all stripes and all travel purposes saying, I've waited 2 years to travel, this is the first trip I've taken and so on. And so we're really fortunate to experience that kind of resurgence here.

Great. You and others in the industry, whether it's in the Las Vegas Strip or sort of the U.S. regional markets, have seen a significant increase in margins relative to where the margin performance was pre-pandemic. How do you think about the sustainability of that? What's sort of the potential giveback on certain parts of that margin improvement or increases in OpEx? And what do you think is -- that you keep permanently?

On in the regional properties -- our regional properties, which are delivering through much of 2021, margins close to 40%. In the fourth quarter, those were a bit lower, around 34%, 35%. Some of that was due atypically to hold issues in our regional markets. But I still think that, that's probably a -- that's a reasonable margin objective for us in the regional markets. In the regional markets, those businesses are pretty much back to their full -- what will be their full complement of employees and pretty much their full complement of offerings. There's not many situations in our regional markets right now where kind of impaired in any way in terms of what we're offering for our guests. So I feel comfortable that, that's a reasonable margin goal for our company, and that's about 500 basis points or more higher than what it was back in 2019. In Las Vegas, -- the mix is, unlike the regional markets, the mix is still not what we believe it ultimately will be. We talked, of course, about the group dynamic that's going to continue to change and that can have the effect of reducing our margins but growing our earnings over time as we bring those higher yielding on the topline customers to our properties. But the regions are pretty much business as usual now.

On the most recent earnings call, you talked about the relaunch of your customer loyalty program, MGM Rewards, sort of the next evolution of the M life program. Can you talk to the audience about how that program has changed, what the financial benefits are for both the land-based casinos, whether it's Las Vegas Strip and the regionals or both and then maybe also then how it ties into the MGM.

Sure. I appreciate that question. I know many of the folks in the room from my time back at Caesars Entertainment, where I was there for 15 years and about 5 or 6 years as Chief Financial Officer. And we evolved over time, Caesars, the rewards program, total rewards -- and when I came to MGM a little over a year ago, one of the first objectives I had was to understand the current state of our rewards program and particularly our ability to market against it. And what I found was in the M life program, it had some, but clearly not all of the attributes that I was familiar with and that I saw could really work in the context of a casino loyalty program. At the same time, I saw a -- the company had a road map, which has developed prior to the pandemic, which was spot on with what I thought we needed to do at MGM. And that's what you see now in the MGM Rewards program. So the key elements of it are simplifying the tiers from reducing the number of tiers, improving and making clear to some of the benefits. So the benefits that really matter to our customers are things like portability of the rewards, a standard earning rate across properties, the ability to earn loyalty points on nongaming as well as gaming spend, which for MGM is a huge business; clear rewards, things like waive resort fees and parkin and things like that. So a whole suite of kind of simplification and improvements to the loyalty program. One of the things that MGM has not focused on much in the past is the movement of players from its regional markets into the Las Vegas properties. Those players come to Las Vegas, but when they do, there hasn't been as much of a benefit for them to stay at the MGM properties versus any one of our competitors. And so that is changing with the MGM Rewards program. And finally, keeping our players when they're staying with us, when they make a second stop to keep that within the MGM system, so that our players have gaming and nongaming alike, have a greater incentive through earning their loyalty rewards to stay within our ecosystem here in Las Vegas when they're staying with us. The integration with BetMGM is ongoing. So it started with really the conception of BetMGM. So anybody who opens a BetMGM account is automatically enrolled in the MGM Rewards program. And we're already seeing -- and earning MGM rewards. We're already seeing the benefit of that for the BetMGM players, when they come to Las Vegas they can participate in the comps and the benefits that our land-based customers get. So during Super Bowl weekend, we had a large group of BetMGM players who are here in Las Vegas enjoying the amenities of our properties. And we think that's a differentiator versus some of our other competitors that don't have this kind of network of properties. And then that integration will be ongoing with a single wallet and so on between BetMGM and MGM Rewards.

And how do you actually measure -- eventually measure the efficacy of the loyalty program? Is it just increased same guest spending? Is it greater frequency of visitation on the strip or greater visitation in the regional markets? Or how do you think you'll eventually try to monitor that?

Yes. The first measure of success is one of adoption. So it's the card sign-ups that we get, and it's the amount of our -- of the spend, which is being tracked through the program. So I made a comment on our fourth quarter full year earnings call that about 80% of our revenue -- of our gaming revenues are tracked through the rewards program now, only about 40% of our nongaming spend. So that includes hotels and food and beverage, entertainment. The rest are tracked. So that needs to grow substantially. That will be a sign of adoption and then a sign that the program is more effective is through increased frequency. This is not about getting people to spend more in the casino. It's about growing market share, so that when a customer -- a typical -- a non-gaming customer, we call them luxury travelers who come to Las Vegas they may not play much in the casino, but they'll spend quite a lot in our restaurants and our entertainment, right now, it's a bit of a jump ball between the Bellagio, Aria, cosmopolitan win for those kinds of customers. And our rewards program now speaking to them ought to increase their frequency with us.

Great. Maybe we can switch over to digital. Can you talk about the cross-play between the digital and the brick-and-mortar? Not to gloss over, but obviously, BetMGM has had significant share #1 share in casino and then significant top share on online sports betting and obviously launching into new markets today with Illinois. If you -- and then the second question, too, is how do you think about the evolution of this business in sort of growing the markets focusing on data or player acquisition and then eventually building to market share and then eventually building to rightsizing the revenues with profitability?

Well, first of all, it's still early days in terms of understanding the interplay between our online players and the casino players. The 2 markets where we really have some history and some overlap now are in Atlantic City and Michigan. And it's really with iGaming. That's where kind of the interesting analysis is, in terms of online sports betting in virtually every market, this has been a purely incremental activity. We haven't had physical sports books. So the issue of -- is that additive or not, it's not an issue at all. And iGaming, it kind of is. And we are all...

It is additive or not? It's not an issue in a negative sense?

Correct. Correct. Well, in online sports betting, it's completely additive than iGaming, even though it's early days, we began doing some work around those customers who are playing only in the casino, only digitally or both. What we are seeing is those customers who are playing with us across online and the casino are spending quite a lot more than just those who play with us in one channel. And there's clearly been dramatic growth in the iGaming side. I think it's a little bit early though to determine -- for us to determine exactly what that impact has been but it's clearly been additive so far.

And within digital -- within online sports and iCasino, we already have seen a decent amount of consolidation and what I would characterize as offensive M&A. Excluding MGM and Entain, and I'm not talking simply but you guys don't want to talk about it. Do you foresee additional offensive M&A? Or do you think we're kind of done here? I mean part of it is equity value as a currency to affect offensive M&A is a lot different today than it was 6 months ago?

I think it will continue. We expected that there would be consolidation in the market. We expected that there would be pretty aggressive spending to acquire customers in the early days of the legalization of iGaming and online sports betting in these new jurisdictions. We think we've remain disciplined at BetMGM and sticking to our playbook in our acquisition of customers. But none of this has really surprised us. So I do -- I guess in direct answer to your question, I do expect that this will continue. And the math will be dependent upon the customer acquisition cost associated with going in and spending to acquire customers or move customers from one operator to another versus acquiring those customers of that database through the acquisition of a competitor. And I think what we're also going to see is competitors operating with perhaps 2 different brands within the marketplace. Nowhere this has happened in many other industries. Nowhere is it written that each participant has to compete with just a single brand. So we might see that offensive M&A continue, and yet certain brands kind of remain.

Maybe we can switch over to balance sheet and capital allocation. Clearly, MGM has been busy since you joined the company a little over 12 months ago in terms of pruning the portfolio, announcing the transaction with VICI to divest your ownership at MGP, adding Cosmo, I might miss about 4 other asset sales divestures in there and creating basically a simplified business with an increasingly growing pile of cash. So if you can talk about how you envision near medium, longer-term capital allocation, balance sheet priorities, future investments, whether that might be Japan, medium term or whatever time frame you think that might be in.

Yes. MGM began a process of really evolving its capital structure almost 5 years ago, started, formed MGM Growth Properties REIT -- kind of a captive REIT and began a process of selling real estate to that REIT pretty attractive multiples. And that process went right up to the beginning of the pandemic with the sale of the Bellagio, Mandalay Bay and MGM Grand, both to MGP as well as to a venture with Blackstone and MGP. And then the pandemic hit and truncated that strategy, the company wisely, fortunately had capital liquidity going into the pandemic, so didn't have to do any capital raises during the pandemic. But as we started getting to what we thought was a more stabilized demand environment about a year ago, we started that process up again, it is additional real estate sales and ultimately, of course, agreed to sell MGP to VICI. So that's been one category of these activities. And I think -- and it will dramatically simplify our corporate structure. We'll no longer have this consolidated REIT. The second thing is some of the pruning of the portfolio we've done acquiring the other half of City Center, acquiring or having an agreement to acquire the Cosmopolitan and then selling the Mirage to Hard Rock, we think a very attractive valuation. So all of this has conspired to create additional liquidity for the company. And we've been deploying that in share repurchases. We acquired almost $2 billion of our shares during 2021. That has continued. You may have seen that one of our shareholders Corbex sold some stock, IAC bought some of that stock. We -- the MGM bought some of that stock as well. We believe a couple of things. First of all, with this new capital structure that we have, it's asset-light, we have a lease to -- soon VICI and Blackstone and some others that we ought to have an ample liquidity at the company at all times, and we think that, that's about $3 billion of liquidity, including the availability under our revolving credit facility. That still leaves a significant amount of investable capital for the company. And our priorities are going to be investing that in our system for projects that we think are in an attractive rate of return investing in our own stock, which we think at these levels, particularly this morning's levels, present a very attractive value. We will be retiring some of our more traditional debt. In fact, even this month, we have debt maturing. So we'll continue to do that because the capital structure is different now with the lease that we have. But it will be a balanced approach, but I really like our position right now in terms of our liquidity.

Great. now I'll open it up to see if there are any questions here from the audience. I'll chalk that up to -- there we go.

I would imagine which mean BetMGM and all the other things [indiscernible]?

As it relates to BetMGM and the data that they're collecting around their customer activity, it's at the BetMGM level. It's led by our Chief Marketing Officer, at BetMGM, Matt Prevost, and his team who are doing that analytics. If you're talking about the actual customer behavior at the BetMGM level.

Well, that's integrated into your physical assets and your existing used to call a [indiscernible]?

MGM Rewards, that's what we're calling it at.

[indiscernible] so you've got 37 million people, all of them have a dozen permanent data points and then activity data points. Some of that's physical, some of that's digital, overtime, as we emerge. You're going to end up with [indiscernible] and driving all kinds of interesting revenue opportunities entering those demand. So part of the question is we are even at process and how [indiscernible]?

Right now, it's still pretty early because most of the activity is occurring either in one domain, BetMGM, or the other in our MGM properties. Those customers who are signed up through BetMGM. So when you get open an account on BetMGM, you automatically become a member of MGM Rewards, our loyalty program used to be called M life. There's still limited but growing kind of play between those 2 domains with actual individuals. So the data set is still early, but it's growing pretty dramatically. In the future, I see it becoming almost seamless in terms of its integration. Our vision is that whether you sign up for the rewards program through BetMGM or when you're here at visiting in Las Vegas, and we begin that relationship with you and you're using the platform not only to navigate your way through our properties, but it's, of course, tracking all of your activity with us that when you go back to your home, whether it be in Colorado or in Nebraska, Illinois, Louisiana, that relationship continues but continues in a digital form, not, of course, in the physical casino at all. So that integration will be complete, we believe.

Any additional questions?

Coming at a similar question slightly different angle. How do you align incentives between BetMGM and [indiscernible] MGM, when you have people who were playing, the impact of physical properties as well as online?

Yes. I'm not sure I understand how they would be misaligned. I mean we...

[indiscernible] understand that some part of that [indiscernible] but do you want to have [indiscernible] 1 plus 2 or 2 plus 1 or one and a half versus one and a half?

I see what you're saying. I mean, certainly, we own all of our properties. We own 50% of BetMGM. And my view on this, it's a bit simplistic, but it's the way it works and the way it's worked in similar ventures like this in the past. Your ability to drive customers to do things that they don't really want to do is severely limited. So while there are customers who certainly play in both the digital and the real domains and move between those, there's not going to be a lot, I think, of profit in trying to drive customers who are going to be comfortable playing on the one platform into the other. So there's not -- well, it may seem in theory that there's those -- that misalignment, I think in practice, the 2 parents of BetMGM, Entain and MGM Resorts are unified in investing and trying to build this platform, BetMGM to be as valuable as possible. And so as a practical matter, that hasn't really been an issue at all. I also don't expect it will be.

Can you [indiscernible] relying on group businesses [indiscernible] how they got 100% occupancy in Q4?

You're going to have to ask the [indiscernible] team.

[indiscernible].

Yes. You'll have to ask them. I couldn't comment on them.

[indiscernible].

We're reminded always to refer to it as the Cosmopolitan of Las Vegas because of a magazine of the same name. So I just had to put that out there. Our lawyers would get upset with me. First half of this year, Yes. Yes, we think it's on track for the.

Given the capitalized structure that you guys talk on that right now and when you go forward, how should we think about who should be watching this and how do you guys plan next [indiscernible] how are you guys thinking about that?

Yes. We'll finance it with the cheapest cost of capital we can secure. And so my going-in assumption is that we would finance if we were to do a ground-up development. There's not many of those these days, but we would do that on our balance sheet. But we also have this great partnership with -- well, in the future, VICI, who I believe would be enthusiastic about financing projects on a lease basis. So I do view that as a possibility going forward. It's kind of an additional arrow in our quiver that we could use but only if it presents an attractive cost of capital for us.

Great. Thank you, everybody. Thank you, Jonathan.

All right. Thanks, everyone.