MGM Resorts International (NYSE:MGM) Q4 2022 Earnings Call Transcript

MGM Resorts International (NYSE:MGM) Q4 2022 Earnings Call Transcript February 8, 2023

Operator: Good afternoon, and welcome to the MGM Resorts International Fourth Quarter and Full Year 2022 Earnings Conference Call. Joining the call from the company today are Bill Hornbuckle, Chief Executive Officer and President; Corey Sanders, Chief Operating Officer; Jonathan Halkyard, Chief Financial Officer and Treasurer; Hubert Wang, President and Chief Operating Officer of MGM China; and Andrew Chapman, Director of Investor Relations. Please note, this conference is being recorded. Now I would like to turn the call over to Andrew Chapman. Please go ahead.

Andrew Chapman : Good afternoon, and welcome to the MGM Resorts International fourth quarter and full year 2022 earnings call. This call is being broadcast live on the internet at investors.mgmresorts.com. We’ve also furnished our press release on Form 8-K to the SEC. On this call, we will make forward-looking statements under the safe harbor provisions of the federal securities laws. Actual results may differ materially from those contemplated in these statements. Additional information concerning factors that could cause actual results to differ from these forward-looking statements is contained in today’s press release and in our periodic filings with the SEC. Except as required by law, we undertake no obligation to update these statements as a result of new information or otherwise.

During the call, we will also discuss non-GAAP financial measures in talking about our performance. You can find the reconciliation to GAAP financial measures in our press release and investor presentation, which are available on our website. Finally, this presentation is being recorded. I will now turn it over to Bill Hornbuckle.

Bill Hornbuckle : Thank you, Andrew, and thank you all for joining us today. I’m proud to announce that MGM Resorts International drove record fourth quarter adjusted property EBITDAR for Las Vegas and regional resorts. What’s more, our full year Las Vegas Strip adjusted property EBITDAR increased by more than 80% year-over-year. These outstanding results are evidence of our focus on optimizing growth in our business and operations as well as our strategic vision of becoming the world’s premier gaming entertainment company. These outcomes are also a testament to our employees who will go above and beyond every day to take care of our guests and create an amazing, great experiences, which drive loyalty among our customers. Our employees are true heroes of this story, and we need to be celebrated.

I couldn’t be proud of them for delivering these financial results alongside the steady improving guest and record employee satisfaction scores we are enjoying. As we look forward, we expect many of the drivers for our 2022 performance to continue into 2023. Importantly, we are well positioned on weathering a variety of environments, given the inherent long-term benefits of MGM’s diverse portfolio. In fact, we have the most diverse offerings in the gaming space. And as such, we are a well-balanced organization that benefits from both scale and a host of premier brand offerings. This distinction — the distinct pieces of our business that creates this diversification are number one, our number of nine Las Vegas Strip and eight regional domestic properties in the U.S. that cater to all market segments and produced consistently strong profitability; two, our two integrated resorts in Macau, the pre-pandemic generated EBITDAR of over $700 million and are just now beginning to see a very real return to profitability; three, our digital strategy with 50% ownership of BetMGM, one of the leading U.S. digital sports betting and gaming operators.

BetMGM is the leader in what is financially the most important segment in the nation, iGaming, and is making overall progress towards its profitability. And our ownership of LeoVegas, which we’re using to grow our digital business internationally and extend both MGM’s brand and content reach. And ultimately, our balance sheet, allowing significant flexibility to invest in areas with the highest return on capital including New York, Japan, further expanding our digital footprint via LeoVegas and other substantive international opportunities we’re pursuing in that space as well as funding and continued share repurchases. In fact, as you know, we have just announced that our Board approved another $2 billion repurchase program. Looking ahead, we see multiple opportunities for growth and momentum in our business, coupling these opportunities with a relentless focus on free cash flow per share, our operating model, our margin control and disciplined expense management, which we believe gives us a great confidence that our best days are ahead of us.

Let me walk through the business case for ’23, starting with our U.S. properties. First, we are encouraged by the early success of The Cosmopolitan of Las Vegas as we migrate the business into MGM Resorts infrastructure. On an annualized basis, we have double-digit growth in revenue and EBITDAR compared to the reported 12-month period prior to the acquisition. We are already beginning to produce cross-property play with hundreds of high-end players from The Cosmopolitan database attending MGM Resorts customer events and driving millions and win at our other sister properties. This is a trend that we saw continued for the Lunar New Year celebration at our properties in Las Vegas, and we expect to expand to the mass market as we integrate MGM Rewards into The Cosmopolitan system.

Next, we have a strong event calendar in Las Vegas. CES has a 115,000 attendees last month, up from 45,000 in 2022. CONEXPO and CON/AGG next month is setting up to be the best ever. And March Madness, Sweet Sixteen and the Elite 8 games are coming to Las Vegas. Together, the calendar in March is positioned to have us have the best hotel revenue month, we believe, in our history. Additionally, Formula 1 is expected to bring $1 billion in economic value to the city, which we believe we are the best positioned to take advantage of. Las Vegas also has Allegiant Stadium, which has brought 40 events and over 1.5 million visitors to Las Vegas in 2022 and is expected to bring even more visitors, even higher quality events in 2023, driving significant spend, particularly at our South end properties.

Another tailwind is the ongoing growth in visitation. The LVCVA expects domestic flight growth capacity to reach 120% of 2019 in the first quarter of 2023, and international recover further with 80% of 2019 available seats. Harry Reid Airport hosted a record 52.6 million passengers in 2022. Outside of our domestic business, we also see tremendous opportunities for growth. Starting with China, fully stated Macau is back. As you well know, COVID restrictions impacted our Macau operations in 2022, causing an operational loss that negatively impacted our overall results. But we are experiencing a rebound in 2023 as our guests are returning in force just that they did in Las Vegas when restrictions were lifted here. In fact, quarter-to-date, we are excited to report that MGM China’s combined properties are the highest earning businesses within our company.

As part of the concession renewal process, we committed to bring nongaming entertainment events to Macau. Those events were strong drivers to visitation to our property during the Lunar New Year and at the end of January. We see these early results as validation and our confidence in Macau markets recovery and the long-term viability upon which we are retendering commitments were built. And unique to MGM China, we have secured 200 additional tables as part of our new gaming concession, which combined with our premier mass positioning, should allow us to drive market share into low to mid-teens. In fact, during the month of January, our market share was 16%, which compares to high single-digit market shares pre-pandemic. This outstanding performance was driven by the MGM Chinese team, strategic focus delivering full gaming floor renovation, a complete hotel product mix for our targeted customers various marketing efforts in producing strong nongaming events, shows and promotions plus our team’s improvement in service levels and operational efficiencies.

These collective efforts position us for a long-term growth story in Macau. We’ve also reason to be optimistic about the growth prospects of our business well into the remainder of this decade, especially in light of the two new gaming licenses that we hope to receive in the near future. We expect to submit our RFA in New York in the first half of this year, and we hope for response in the near future. One advantage we have over the competition in this market is our ability to add tables to our existing casino floor and thus incremental tax revenue for the state almost instantly once approved for license. We expect to spend about two bed in New York inclusive of the license fee. We will fine-tune our program and planning. But right now, we’re expecting extensive property improvements such as a significant entertainment offering, new food and beverage opportunities, covered parking and an overall increase in the casino floor space.

As you may recall, we also submitted our RFP in Japan for an integrated resort license to operate in Osaka approximately 10 months ago. Unfortunately, I’m still waiting for the response from the government, but we are being patient and believe we will hear so soon. MGM Resorts has presented a compelling offer with our partner, ORIX, to develop an integrated resort, which will develop international tourism and growth to that region. We’re extremely excited for the ROI opportunity in a market in which we may be the sole operator for some time in the future. Each of the projects I just mentioned are expected to generate returns well above our current free cash flow yield. These are all future capital investment decisions, we weighed upon that same standard.

In closing, 2022 was a phenomenal year for MGM Resorts, and we’re confident we will see progress into 2023 and beyond. With that, I’ll turn this over to Jon for more color on the fourth quarter and the year.

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Jonathan Halkyard : Thanks very much, Bill. Before I dig into the financial results, let me also thank my colleagues here at MGM Resorts for an outstanding quarter and a truly amazing year. I’ll now share with you some of the exceptional financial results that we achieved. Las Vegas Strip same-store revenues, and so that’s excluding The Cosmopolitan and The Mirage, grew 11% and adjusted property EBITDAR grew 6% in the fourth quarter compared with last year. Fourth quarter occupancy of 91% was up 500 basis points year-over-year and ADR was $260 in the fourth quarter, which grew 30% over last year. Several volume metrics for us set records as well as our Las Vegas slot handle set its seventh consecutive quarterly record in the fourth quarter.

Demand in Las Vegas remains strong across all segments, driven by our exceptional entertainment offerings and other customer demand drivers. The strength continued into January, where occupancy was 90% and rooms booked during the month were on record pace with rates up double digits to last year. In the regions, fourth quarter revenues grew 10% and adjusted property EBITDAR grew 3% year-over-year. While EBITDAR was down 1% versus the third quarter, this sequential decline is in line with normal seasonality for the fourth quarter. Importantly, labor expense as a percentage of revenues was flat sequentially and our current headcount remains approximately 20% below 2019 levels, all while we achieved historic highs in NPS and other indicative customer satisfaction.

In the fourth quarter, corporate expense, excluding stock compensation, was $113 million, which includes $5 million related to MGM China, global development costs of $6 million and transaction costs of $2 million. Going forward, we expect corporate expense for the full year 2023 to be approximately $380 million to $400 million, a decrease of approximately $30 million to $50 million from 2022. Included in MGM’s corporate expense this year is $44 million for MGM China and approximately $37 million in anticipated development expense related to Japan and New York. We intend to invest approximately $800 million in domestic CapEx in 2023, and this compares to the $727 million in CapEx invested in 2022. Maintenance capital will be approximately $600 million of this spend this year.

And this year, it includes room remodels in the Bellagio Spa Tower, Borgata’s Water Club and the completion of our New York-New York room renovation. Since 2019, we’ve reduced the average age of our room since renovation by roughly 3.5 years, and our room age will continue to decrease over the coming years as we refresh our room offerings. The remaining CapEx in 2023 is growth capital, projects that include the Mandalay Bay Convention Center remodel, a new pedestrian bridge connecting The Cosmopolitan to Vdara and investments in technology to drive better customer experience, ease and engagement. Finally, on the development front, we expect to contribute $70 million — $75 million to BetMGM in 2023 and the only material investment in New York this year will be the $500 million license fee, depending upon the timing of the license awards.

I’ll conclude with just a few comments on our strategy for capital allocation. First and foremost, we’ll maintain a strong balance sheet by sustaining adequate liquidity for our enterprise. And as you can see in the presentation that we posted today, we concluded 2022 with $5.3 billion of domestic cash against domestic debt of $4.5 billion. Our resources this year were bolstered by the disposition of The Mirage in December for $850 million in net cash proceeds after tax. Next week, we expect to close on the sale of the Gold Strike in Tunica, which will be in $350 million in net proceeds after tax. Next, we’ll prioritize capital investment to deliver the highest return for our shareholders. Our acquisition of The Cosmopolitan of Las Vegas expanded our reach into the high end of the Las Vegas market.

Our acquisition of LeoVegas jump-started our international iGaming strategy. Our new President of Interactive, Gary Fritz and his team are evaluating a number of opportunities in this area, and our shareholders should expect that we’ll be deploying more capital to grow the MGM brand internationally in iGaming and in digital content development. And finally, we’re going to return capital to shareholders. During 2022, we repurchased 76 million shares for $2.8 billion. Since the beginning of 2021 through yesterday, we’ve repurchased $124 million for a total of $4.7 billion and have reduced our share count to 375 million shares. And we’re not done. As Bill mentioned, our Board of Directors yesterday approved an additional $2 billion share repurchase program.

In evaluating our share repurchase strategy, I consider a number of factors, including the liquidity profile of the company as well as the development and M&A opportunities that are before us. But I also consider the free cash flow yield available in our own shares. So as I conclude, consider the following: adjusted property EBITDAR from Las Vegas last year was approximately $3.1 billion and from our regional operations was $1.3 billion. From that, we had adjusted domestic corporate expense of $400 million and cash rent of $1.7 billion on an annualized basis. Consolidated cash interest was $574 million, but that includes $205 million related to MGM China. And cash taxes and domestic CapEx totaled about $750 million. But our company also has significant reservoirs of value that did not contribute cash earnings in 2022.

This includes excess cash of over $2.5 billion; our ownership position in MGM China, which yesterday had an approximate value of $2.6 billion; and of course, our stake in BetMGM. It’s a lot of numbers, but when taking all of this into account, I see a double-digit yield opportunity in our shares, which is why I see share repurchases as a responsible and accretive use of our capital. Bill, back to you.

Bill Hornbuckle : Thanks, Jonathan. I hope the comments that — you’ve conveyed the excitement that we all have towards our business this year and ultimately beyond. In all my time with the company, I’ve never been more excited about our present and future as I am right now. I think we’re stronger, more agile, more focused and more determined than ever to win. And with that, we’re happy to take your questions.

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Q&A Session

Operator: And our first question will come from Joe Greff from JPMorgan. Our next question then will be from Shaun Kelley from Bank of America.

Shaun Kelley : Thank you for all the detail and color. So a lot of different places we could start, but I want to start with a high-level, strategic one. Jonathan, you ended on walking through a really robust liquidity position, still a lot of cash on the balance sheet that’s either collecting interest at a better yield than before, but not a huge yield. So the question we get all the time remains kind of that ownership interest in upping the stake in maybe one of those areas that you discussed, BetMGM being the big one. And obviously, we know there’s a partner there, but if you could give us your latest thoughts around the strategic value there and how you fold that in with your comments around maybe a more organic or stand-alone international online expansion?

Bill Hornbuckle: Thanks, Shaun, for the question. And I’ll just step in and kind of give the first part of it because I think it’s time to be definitive and give a little direction. The simple answer on Entain is no, we’ve moved on. While we remain highly focused on BetMGM’s business through our partnership with Entain and making sure that, that business continues to grow, we see great potential in LeoVegas expansion capabilities. I’ve said before, we like their technology platform and their leadership team. We’re also interested in the content studio business, we think there’s a real play there. We’ve seen that proven effective with brand when we combine great product in our brands at BetMGM. And over time, we like the live dealer business and the expansion of other global markets and frankly, and directly under our own purview.

So for now, the answer is no, not within Entain. We’re going to go down our own direction, and we begin to allocate capital. We think Gary Fritz has got the right motive, the right drive and the right person to help us lead this forward. We value the relationship with Entain. We value BetMGM. But as it comes to rest of the world, we’re going to move forward with a different proposition.

Jonathan Halkyard : And Shaun, just a couple of comments, the broad strokes around capital allocation as we look forward. We do have a maturity in March, $1.25 billion at 6%. So present plan is to, of course, redeem those bonds and that will capture about $75 million of free cash flow for the business. We were active share repurchases just in the past three quarters. We spent almost $2 billion at a price of about $33 to $34. So we’ll continue to be repurchasers of our shares, but we’ll moderate that depending upon market conditions. And then, of course, funding what Bill described, which is our interactive ambitions, which will be predominantly through M&A but we’re reserving a significant amount of capital for those activities as well.

Shaun Kelley : And I’ll — I don’t want to be greedy with my time here, but just the follow-up to stay on the same theme then, Jonathan, you directly hit it kind of M&A. Or could you just give us some parameters around are we thinking more bolt-on options? Or are there still platform-level investments that could be made to drive up and expand that opportunity to be meaningful to the base business?

Bill Hornbuckle: It’s a combination thereof. When you talk studio business or even live dealer, the technology aspect of that is on our scale, relatively de minimis. When you talk about stepping up to other marketplaces, whether it’s South America over time or rest of Europe, we’ll have to take a different view on that as these opportunities unfold. But for now, it’s more bolt-on and relatively small.

Operator: And for the next question, we’ll move back to the line of Joe Greff from JPMorgan.

Joseph Greff : Can you hear me okay now?

Bill Hornbuckle: Hi, Joe.

Joseph Greff : All right. Nice speaking with you. In Las Vegas, can you talk about how you’re thinking about FTE count and payroll expenses and how they’ll trend this year? Maybe you could break it up between both sort of on a same FTE basis as well as just wages. And what kind of revenue growth do you need to offset wage expense growth in Las Vegas? I’ve got another one.

Bill Hornbuckle: I will open it and I’ll kick it to Corey. If you go back and you look at FTEs, particularly in Las Vegas against 2019, we’re down anywhere from 12% to 15%, depending on the property. Obviously, wage inflation since ’19 has crept. And just so we’re all on the same page, looking forward, we have substantive labor negotiations later this year with about 28,000 of our colleagues, which we’re going to have to contend with and work our way through. And so Corey, maybe the second part of it, just scale…

Corey Sanders : I think from the standpoint of levels of FTEs, from a fixed cost perspective, there will be no increases. It will all be on variable. So if there’s additional catering and banquet business, it would match that revenue component of it. But I think we’re pretty comfortable that we could service our properties, service our guests at the levels we’re at today. And then I don’t know, Jonathan, if you want to take the revenue.

Jonathan Halkyard : Yes, I think on the revenue growth side, if we’re running now with occupancies that are basically full on the weekends. There’s a bit of room during the weekdays. So really, it will need to come through pricing as opposed to occupancy gains largely in Las Vegas. And I think if that’s in the low single digits, we should be able to cover any increases in payroll adequately.

Bill Hornbuckle: I mean, overall, I think we think our margins are going to sustain is really the guide, I think the answer to that.

Joseph Greff : And then Bill, we’re dealing with another earnings call and release today as well, so I want to make sure I understood your comment — your prepared comments you talked about Macau being back that in the month of January, it led the company in profitability or something along those lines. Can you just explain that? Or give a little bit more detail on that?

Bill Hornbuckle: Yes, I can put a little color around it, and then we have Hubert on the line, these guys have worked hard at this for three years. So I’ll let him talk a little bit about the business. But look, the rebound was, interestingly come January 8, fairly instant. I think we peaked during Chinese New Year, making a little over 5 million a day. I mentioned in my prepared comments, 16% share. And for us, for all the reasons I mentioned, our mass piece, volumes were 100% over our ’19 levels. Now we’re talking about a whopping 30 days here. But for the company, particularly from where we have come from, we activated 150 to 200 new tables we have. We’re very excited about what’s happened in the first 30 days. And so Hubert, maybe any other color would be helpful.

Hubert Wang : Sure. Thanks, Bill. Thanks, Joe, for the question. For — since the beginning of the year, I think the market has been growing back and has exceeded the expectations of many participants and observers. For us, in January, on the gaming side, we have seen very healthy, above the market average recovery in both mass and direct VIP segments. And for the month of January, as Bill has mentioned, our market share reached 16%, which is a record high for us. Our daily mass GGR was on par with the 2019 level for the month of January during Chinese New Year, far exceeded last year’s Chinese New Year level actually. And we are also encouraged to see that direct VIP segment in terms of rolling volume far exceeded 2019 level as well. It is also very encouraging to see that January run rate extend into the first week of February so far. So all in all, we are very confident in a solid and sustainable recovery of Macau market this year and beyond.

Operator: The next question will be from David Katz from Jefferies.