MGM MIRAGE (NYSE:MGM)
Q4 2007 Earnings Call
February 20, 2008 11:00 am ET
Terrence Lanni - Chairman & CEO
Robert Baldwin - Chief Design & Construction Officer of MGM MIRAGE, President & CEO of CityCenter
James Murren - President & COO
Daniel D'Arrigo - EV & CFO
Gary Jacobs - EVP, General Counsel & Secretary
Aldo Manzini - EVP & CAO
Lawrence Klatzkin - Jefferies & Co.
Joseph Greff - Bear Stearns
Robin Farley - UBS
David Katz - Oppenheimer
Bill Lerner - Deutsche Bank
Cameron McKnight - JP Morgan
Celeste Brown - Morgan Stanley
Jeffrey Logsdon – BMO
Good morning and welcome to the MGM MIRAGE fourth quarter conference call. Joining the call from the company today are Terry Lanni, Chairman and Chief Executive Officer, Jim Murren, President and Chief Operating Officer, Bobby Baldwin, Chief Design and Construction Officer of MGM MIRAGE and President and CEO of CityCenter, Dan D'Arrigo, Executive Vice President and Chief Financial Officer, Gary Jacobs, Executive Vice President, General Counsel, and Secretary, and Aldo Manzini, Executive Vice President and Chief Administrative Officer. (Operator Instructions)
Now I would like to turn the call over to Mr. Dan D'Arrigo. Please go ahead sir.
Thank you, Heather, and good morning everyone and welcome to MGM MIRAGE's fourth quarter earnings call. This morning the call will be broadcast live on the Internet at www.mgm-mirage.com and at companyboardroom.com. A replay of the call will also be made available on our website. In addition, we furnished this morning this earnings release with the SEC on a form 8-K and additionally we provided supplemental financial information on the company's website for each of you. (Technical Difficulties)
Before I turn it over to Terry, I've just a few opening comments here and some safe-harbor disclosures. The information we present on this call may contain forward-looking statements as defined by the SEC. Such forward-looking statements are protected by the Safe Harbor's Amendments of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainty that could cause actual results to differ materially from estimates. Listeners should also refer to our disclosures about risks and uncertainty made in our filings with the SEC.
And now I'd like to turn it over to Terry Lanni for some commentary on our development initiatives in CityCenter.
Thank you, Dan, and good morning, ladies and gentlemen. Before I get into some detailed information on our development activities, I would like to take a few moments to make some comments regarding our results for the year 2007.
We clearly had an excellent year in 2007. We generated revenue growth of 7% with very strong top-line performance in all areas of our operations. Our industry-leading operating margins remained very strong, excluding obviously, the items discussed in the release. Our property EBITDA margin was 36% in both the years of 2007 and the previous year 2006.
As a result of continued revenue growth and stable margins, we earned record profits in each of the four quarters last year. We opened two new resorts in 2007; the very exciting MGM Grand Detroit on October 2, last year and then MGM Grand Macau with our partner, Pansy Ho on December 18, again, an amazing facility. We entered into several new joint ventures and strategic partnerships with world class organizations which will truly set the framework for near-term and long-term growth.
Our future in this year, 2008, and well beyond, is very bright. And our management team will remain focused on expanding our operations domestically and internationally and operating our existing resorts to maximize their appeal to our visitors.
MGM Grand Macau as I mentioned, has had promising initial results. We have received very positive feedback from various parties. The property is absolutely beautiful. It takes time to build the business overall in Macau, in meeting our initial expectations. The high-end business is considerably stronger than we expected, particularly the junket room operators business, which is the mainstay of business, as you know, in Macau. We see significant opportunities in the mass market table games and slot business, as these operations have been below our expectations to date but continue to ramp up in the early weeks of operation there.
We believe there is significant opportunity to grow the Macau business and gain synergies with our existing properties and international marketing operations in various parts of the world. Our joint venture recently amended the bank credit facility to provide for the additional $400 million to fund expansion and provide seed money for our second site on the Kotai Strip.
With that, let me turn to the discussion of CityCenter. By now, everyone is aware that on November 15, last year, we closed on a transaction with Dubai World to contribute CityCenter to a 50:50 joint venture. This transaction represents an historic event for our company and we are honored to be working with Dubai World. Upon closing, we received a cash distribution from the joint venture of approximately $2.47 billion. We continue to be the developer and the manager of CityCenter on behalf of the joint venture, and Bobby Baldwin will provide a lot more detail on the developments in his comments in a brief period of time.
We also completed a private placement with Dubai World during the quarter for 14.2 million shares and the company received proceeds of $1.2 billion. We look forward to a productive relationship and an expanding relationship with Dubai World as our joint venture partner, and as a major stockholder of this company.
On the development side, further in Abu Dhabi – I'm going to take a couple of minutes to talk about that. During the quarter, we and our partners, Mubadala Development Company, announced plans to develop a $3 billion plus, non-gaming mixed-use resort in Abu Dhabi. And frankly, that's just phase one. They have plans for phase two and phase three beyond that. The initial phase will include an MGM Grand hotel, and two additional MGM branded luxury hotels. The development will also feature a major entertainment facility, high-end retail shops, and world-class dining and convention facilities. We are not investing any capital into this project. We will earn fees for managing the development and ongoing operations.
In the People's Republic of China, we and our partner, the Diaoyutai State Guesthouse, are moving forward with projects in major Chinese cities, including Beijing. We continue design work on our planned MGM Grand Atlantic City, a previously announced $4.5 billion - $5 billion destination casino resort, announced several months ago. We and our partners, Kerzner International, and Nakheel Hotel - part of Dubai World – continue to work on our planned mixed-use development on the North Las Vegas Strip. Within the next few weeks, the venture should finalize selection of the lead architect on this exciting project.
I'd now like to turn this over to Dan for a few detailed comments on our operating results for the fourth quarter.
Thank you, Terry. I'd like to provide a short summary of certain financial results for the fourth quarter, which were outlined and detailed in our press release this morning. About two weeks ago, we provided an estimate of our earnings with a range of approximately $0.60 - $0.65 per share excluding the impact of the gain we were to recognize on the CityCenter transaction. This morning, we reported diluted earnings per share from continuing operations for the fourth quarter of $2.85, or $0.62 excluding the CityCenter gain, compared to $0.68 in the prior year's quarter which is consistent with the previously announced guidance.
Obviously, the CityCenter gain represented $2.23 per share and is one of the most meaningful items affecting the comparability in the quarter, but I'd also point out there's other items in the quarter that affected these results, one of which is the fact that our Signature at MGM Grand had completed its development and sales process in the third quarter of this year. And last year we had significant sales in contributions to EPS as a result of selling Tower 2 in the fourth quarter of last year. And as we outlined in the release, these factors are clearly stated in the year-over-year comparisons that affected. And we also had additional pre-opening expenses of roughly $0.09 more this year, due to Macau and Detroit, than we did last year. Obviously, you can roughly do your own calculations based on the items listed in the release, but on a comparable basis from EPS excluding all of these items, EPS was up roughly 8% in the quarter year-over-year.
Although, it's difficult to compare to some of the analysts' consensus, we've laid out the table such that you can do each of the analysis yourself, as certain of you included insurance proceeds or excluded, or included pre-opening and other items. But in order for a real apples-to-apples basis, we've laid out all the details in the earnings release, but on a comparable basis year-over-year, excluding these items, we're up a pretty nice 8% in the quarter.
On an operating performance basis, our net revenues increased 4% to $1.9 billion, driven by a strong Las Vegas Strip performance and additional revenues from the new MGM Grand Detroit resort. As outlined in the release, our overall property EBITDA was essentially flat on a comparable basis and looking at property EBITDA on a strip basis, excluding the certain charges of pre-opening, restructuring and property transactions, our property EBITDA on the Las Vegas Strip actually grew about 2% year-over-year to roughly $513 million, bringing our overall property EBITDA in the quarter to roughly $594 million which is slightly lower than last year, at about $600 million, excluding those items.
When we look on the Strip, our margins held up extremely well despite additional labor costs, as a result of our new union contract with that averaging annual increase of about 4% in our wages and benefits, and our margins continue to be pretty solid, and continue to be industry leading.
Now I'd like to turn it over to Jim, for some more detailed discussion on the operation.
Well thank you Dan. Honestly, we're proud of the fourth quarter. Revenue and profits rose in every department, and the fourth quarter punctuated a really terrific and record year for us in 2007. Specifically in the fourth quarter, hotel revenue was up $23 million or about 5% in the quarter, if you exclude Detroit, because that opens, obviously, this year. In the fourth quarter of '07, revenue was actually up 4% year-over-year, still quite strong. Las Vegas strip REVPAR was up 4% that was our 18th consecutive quarter with REVPAR increases. We had a good rate, average rate was $156 in the quarter versus $151 in the prior year fourth quarter. Occupancy continued to be strong in the fourth quarter at our strip resorts: it was 93% in the fourth quarter, and that was consistent with the 2006 fourth quarter.
Over on the food & beverage side, food and beverage were up 7%, entertainment revenues were up 8%, really a continuation of our strategy to invest in non-gaming areas. These strong results are continuing our ability to maximize our competitive advantages, and we have many more projects of that nature that will open up in 2008 and beyond.
We made investments here in Las Vegas and outside of the strip, particularly here in Las Vegas. Things to look forward to this year would be the brand new theater at Luxor that opens up in September, with Cirque du Soleil and Chriss Angel. Another great restaurant venue over at the Mirage, we have rooms that are being remodeled almost throughout the portfolio properties, in particular at Mirage, TI, Excalibur, and New York. New York is going through a pretty significant transformation right now, the entire casino is being remodeled, and we're opening up a hot new club there, and a bar, and a bunch of good stuff.
From a standpoint on the gaming side, gaming revenues are up 2% in the fourth quarter, led by very strong baccarat volumes. Baccarat was up 17% in volume in the fourth quarter. The high-end segment was very strong as we've been indicating to you all in the fourth quarter, continued into the first part of this year. Our overall whole percentage was in the normal range in both quarters, the fourth quarter this year and last. It was a little bit higher this year, in '07 than in '06, but both within our stated range. By the way, this was the best fourth quarter internationally in the history of this company, and, you know, a very strong December that punctuated a good year in international play.
Over on the slots side, we had several really solid increases on slot revenues. Mirage was up 13% in the fourth quarter on slot revenues, Bellagio was up 10%, MGM Grand up 7%, Mandalay up 4%. We were down at some other properties, but overall strip slot revenue was up 3% year-over-year in the fourth quarter.
Moving to Detroit, because we're proud of our new property there; it's doing well. It's below, from a profitability standpoint where we know it will be. It's made significant gains in revenue and in market share. Before we opened up the new facility our market share in Detroit was about 35%; now it's over 40%, about 41% in December. Our margins are improving, as is the case when we open up new properties, we overstaff them, and we work down the FTEs as we smooth out operations. FTEs are actually down significantly in Detroit, and equally importantly, our overtime costs are diminished to just about nothing, and it was a significant number in the fourth quarter. So you should expect to see margins - even in that difficult market - you should expect to see margins improve, as we continue to right-size the expense ratios in Detroit.
From a standpoint on what we're doing, we're obviously aware of the economy, we read the papers and we know what's going on in the world and here in the United States. We have been, really since August, working pretty aggressively to maximize the profitability of our resorts. We've been consolidating many areas that don't touch the costumer, in many departments, I think payroll and compensation would be a good example of that. We've been deploying capital not only in places where you see it, but in places we think we could lead to greater efficiencies, such as, for example a table rating system that we've been deploying. We've been coordinating as a company more than ever, to drive revenue. We have room rate committees that establish themselves and meet on a weekly basis, and monthly basis. We have significant gaming coordination and we're finding that there's a lot of opportunity to drive revenue by working stronger together. We think in general, there's very fertile territory here to drive revenue, even in a tough economic environment, and certainly we can improve and continue to focus on costs, and as I say, it's been a very productive exercise so far.
So on balance, we're pleased with the fourth quarter results. We are well aware of what's happening in the economy; we'll drill into that as we talk about the first quarter and going into 2008. We're well prepared to handle these challenges, certainly more so than any of our competitors here in Las Vegas, or in the industry, and we feel like we have some good momentum, particularly as the year progresses, as we get into the third and fourth quarter. So with that I'll turn it over to Bobby to chat about CityCenter.
Good morning everyone. Thanks, Jim. As you're all aware, on Friday, January 25, the Monte Carlo experienced a fire, on the roof of its 32 story hotel tower. The fire forced the immediate evacuation and subsequent closure of the hotel. The evacuation and fire suppression systems worked as designed and thankfully there were no injuries. The fire damages were largely contained to the roof; however there was smoke and severe water damage to many of the guest rooms and corridors. Construction and remediation work commenced immediately the next day, and Monte Carlo successfully reopened Friday, February 15, with a total of 1,224 rooms ready for occupancy. The casino is fully operational and will have a total of 2,026 rooms open for this weekend. And that includes all the rooms except the top six floors, which are 570 rooms. These rooms were more heavily damaged, primarily by the water, and these rooms are going to be completely redesigned and opened sometime this summer. The Monte Carlo is covered by insurance for property damage and business interruption. Our preliminary estimate of the claim associated with this fire is in the range of $90 million.
Update on CityCenter: Construction continues and remains on schedule, with an anticipated opening in late 2009, and we currently have 5,600 construction workers on the site. The number of construction workers on the site is expected to peak later this summer, at a total of 7,000.
The Hotel Casino Tower at CityCenter is expected to top-out in September of this year. The concrete structure currently is up to level 36, drywall stud framing is ongoing through level 27, structural steel is completed in the west podium and 65% complete in the east podium, and 60% complete in the Convention Center. Vdara is expected top-out in August. Concrete structure is complete through level 42 currently. Curtain wall installation is complete through level 31. The Mandarin Oriental Tower is expected to top-out in September. Concrete's through level 24 and curtain wall is through level 15.
Concrete structure for the Veer Towers is complete through level 6, with one tower at level 2, with the other, while concrete decks have been placed through level 4 at the Harmon Hotel. Structural steel for Crystals retail area is approximately 80% complete. CityCenter residential sales update: Despite a tightening housing and credit environment that Jim has been discussing, we continue to be satisfied with our residential sales results. In the fourth quarter 97 units were sold for a total of $141 million. To date, we have now sold 1,336 units for over $1.67 billion with an average sales price of $1,269 per square foot. We are also encouraged that we have not yet received any contract rescissions and second deposits are now being received. This demonstrates a high quality in financial stability of our customers.
New marketing initiatives for 2008 include two new residential city center galleries at the MGM Grand Hotel and at Mandalay Bay. We also will expand our interim marketing efforts with collateral and television promotions as well as increasing our marketing efforts to our existing twenty plus million names on the MGM MIRAGE database. And finally, we are very excited that we are going to begin sales efforts in Dubai in April. By the end of the second quarter we will open a sales and marketing office in Dubai. And that completes my report, and I will send it back to you, Dan.
Thank you Bobby. Just some quick updates and some additional numbers, on the financial results, a little bit of guidance, and then we will have plenty of time for questions.
For the quarter, we invested approximately $515 million in capital. The breakdown is listed in our earnings release, this morning. This brought our total 2007 capital expenditures basically in line with our guidance, roughly about 2.6 billion, excluding the strip land that we had purchased in April of this year.
Our balance sheet was significantly enhanced as a result of the cash we received, as Terry mentioned, on the CityCenter transaction and the private placement of our shares to Dubai World, this quarter. We paid down approximately $3 billion in debt. We bought back, approximately 7.4 million shares in the fourth quarter for approximately $652 million. And as we stated in the release, after year-end, we initiated the joint tender offer with Dubai World, which expired last Thursday. We will collectively purchase 15 million shares, of which MGM MIRAGE will purchase 8.5 million shares for approximately $680 million. That will leave about 10 million shares available under our current December 2007 authorization plan.
In February of this year, 2008, we repaid $180 million of senior notes using our credit facilities, and have only approximately $200 million in maturities remaining this year. So that gives us a lot of financial flexibility in 2008. After giving effect to the recent tender we have approximately $2.9 billion of availability under our senior credit facilities.
A little outlook on our future operations; we had given some preliminary indication of our first quarter results, through January, on our pre-release, a couple of weeks ago. Consistent with our experience in January, our forecast for the fourth quarter is for REVPAR to be slightly down, verses last year's quarter.
We are definitely seeing the effects of a weakened economy. It's mostly prominent in markets outside of Las Vegas and to some degree on mid-market properties, here in Las Vegas. Our larger resorts are faring much better then people give them credit for, but we are seeing some impacts from slightly higher attrition rates in the convention business, and our forecast for that business is to see that continue to ramp up and pick back up in the back half of this year.
On the gaming side, we recently concluded our Chinese New Year events, and as Jim mentioned earlier, we had a record fourth quarter high-end season, mostly over our western New Years period. And due to certain factors, including the closeness and timing of the two events, Western New Years and Chinese New Years, and the high volume over the Western New Years period, our volume and win this year were lower in the Chinese New Years events than we experienced last year, which was much later in February, than experienced this year. Many of our Asian customers made visits during these periods, but with the holidays being much closer together, that did affect certain travel plans here, in the Chinese New Year period.
The over all tone of our high-end business remains solid. And we firmly believe that as we continue to grow our business in Macau that will continue to give us the opportunity to maximize some cross over visitation and introduce our product to new customers, going forward.
As it relates to Monte Carlo, as Bobby mentioned, related to the fire and the incident there, we can not yet measure the financial statement impact, though as we stated in our previous release, we maintain significant insurance coverage and expect the economic impact of this incident to be minimal.
Some below-the-line item modeling and guidance line items: Our total stock expectation expense expected in the first quarter is estimated to be roughly around $11 million. Our corporate expense is projected to be, in the first quarter, $35-40 million, which includes roughly about $4 million of stock compensation expense. Pre-opening expenses will be minimal in the quarter. Our net interest expense is estimated to be around $200 million for the first quarter, with depreciation around $200 million as well. Our effective income tax rate is estimated to be approximately 36%. And looking forward, for 2008, we are anticipating our capital expenditures for 2008 to be approximately $1 billion, excluding and spending as a result of the Monte Carlo fire.
The composition of this $1 billion includes up to about $100 million relating to spending on our MGM Grand Atlantic City project, the remainder of which is divided almost a third each between our maintenance programs, our room remodel programs, which are currently underway, remodeling all the rooms and suites at the Mirage. TI will also undergo a room remodel program this year and later on this year we'll begin a multi-year remodel of our standard room product at MGM Grand Las Vegas. The remaining third is for our growth initiatives within our existing resorts, as Jim mentioned, the Cirque du Soleil Theatre at Luxor, several new restaurants at many of our resorts, and new and improved guest experiences throughout the portfolio.
So, with that, I would like to turn it back over to the operator. I think we have about roughly 30 minutes to take your questions.
(Operator instructions) Your first question comes from the line of Larry Klatzkin with Jefferies & Company.
Larry Klatzkin - Jefferies & Co.
Hey guys. Glad to hear Vegas is still strong and living. A couple of questions. One, Dan, for clarification. If you were to back everything out, I'm coming out with about $0.43 on about $552 million of EBITDA. Do those numbers sound right, because everyone coming up with slightly different numbers?
I think your $0.43 probably includes a couple of cents, I think, depending, it may include a couple of cents for Signature. And so it depends on how you are looking at that piece and after corporate expense you're probably around 540-550ish, sounds like about the right number, after corporate.
Larry Klatzkin - Jefferies & Co.
Ok, good. Macau, January, February. How does that look right now? And what was the EBITDA in December? I realize it was probably a loss, given a short period in the start-up.
Well, the EBITDA for the fourth quarter, obviously, we only had about 12 days worth of results and there was a lot of business ramping up over that time period. As far as from an earnings contribution perspective, excluding pre-opening, we probably had about a penny or two loss in the EPS number for the fourth quarter as a result of weaker hold over that period.
Larry, I'll take this, it's Terry Lanni. As far as the operation, as you know, there are four components in Macau that are significant. Rooms, food and beverage is not one of those four, or any of those four. The four components obviously tend to be the mass market, which is broken down between slots and table games, and then we have the In House VIP, and we have the Room Operating VIP. If you take each of those categories, we are well ahead of any forecast we had in the room operators. We are running somewhere between 60%-75% in volume, over what we expected. And we are holding at the proper level.
As far as the aspect of our In House operations, that will be kicking in. It's ramping up. We are probably running about 40% below in volume in that area, but it was a higher differential before, it's ramping up as we go along. The mass market is the area that we have seen has been weakest to date, not unexpectedly, because our competitors have the same situation when they first opened. That has to do with the mass market table games and the slots, and those continue to ramp up. We are running on the table game aspect down about 15% from where we had expected to be. And on slots we are more like, about, 35% down. But those, again, are ramping up in the weeks that have continued. And so far we are on budget, as far as the EBITDA is concerned.
Larry Klatzkin - Jefferies & Co.
Okay. Good. As far as AC goes, any more enlightenment as far as what the project is going to be like and timing of when you think it might be opening?
Well, we are in the process now, as you probably are familiar with CAFRA, the Costal Area Facility Review Act, we are in that process now. I spoke with Ken Rosenberg, who is the development person for that project, just yesterday, and he thinks we will be through CAFRA sometime this year. Maybe earlier in the year then we had originally anticipated. The design phase, we are finalizing that now, we have the preliminary work, and then we have the design work to be finalized and then we have to price that all out. And I would suspect that would be accomplished, all three of those components would be accomplished, during the year and everything finished by the end of the year, in that regard which would give us the ability to go into the ground in early '09.
Larry Klatzkin - Jefferies & Co.
Oh, excellent. Okay. And then, are you guys still looking - you can't buy stock for another two days, but given the low level in the stock are you guys still going to go out there and aggressively look at buying your stock on an opportunistic basis?
As Dan told you, we have about ten million shares available under the authorization from our board of directors, who will evaluate that from time to time.
Larry Klatzkin - Jefferies & Co.
All right. Thank you, guys.
Your next question comes from the line of Joe Greff with Bear Stearns.
Joe Greff - Bear Stearns
Good morning everyone. I hope you can just give us a sense of how the group business looks on the strip and maybe you can break it out, first half, second half '08. I believe that MGM Grand had a difficult comparison in the first half of the year, but if you can help us to understand trends there, that would be helpful.
Are you talking about in the convention business?
Joe Greff - Bear Stearns
Okay, sure. Well, we had a good fourth quarter net regarded well. In the first quarter of this year, if you add up all our convention business we are going to be down for sure. We think we will be down around 10% on room nights related to conventions. That is going to improve throughout the year. We think we will be down about half of that in the second quarter, maybe 5%-6% in the second quarter, in terms of convention room nights. We are actually showing a forecast of being up 6% in convention room nights in the third quarter and up again the fourth quarter.
So, kind of consistent with what – Terri, I think you were the first to be quoted back in August, that we saw weakness in our convention business for the first quarter of this year. That is turning out to be the case. However, that trend looks like it is going to improve throughout the year, particularly as we get in to the second half. We think it will be up pretty solidly in the second half of the year.
Joe Greff - Bear Stearns
And Dan, would you be able to break out the Beau Rivage 4Q, property level EBITDA?
Sure Joe. As we laid out in the release, the Beau Rivage had a 39.2 million credit to their G&A in the quarter. We will grab that number for you. I think, year-over-year they were down, excluding insurance proceeds in both periods, I think they were down about seven or eight million. I think they were about 18-19 million last year verses about 11-12 million this year, on a comparable basis.
Joe Greff - Bear Stearns
And do you have the construction in progress balance at the end of the fourth quarter?
I don’t have that in front of me, just yet, but we will be filling our 10-K by the end of next week.
Joe Greff - Bear Stearns
Your next question comes from the line of Robin Farley with UBS
Robin Farley – UBS
Hi thanks. Two questions. First, just to clarify on CityCenter, two things. One is, can you tell us at this point what percent of your costs are under contract at this point or what percent may still be exposed to further project increases? And then also, just trying to square, you mentioned sales of condos at CityCenter, about half the rooms are under contract in terms of room numbers. On the last call you talked about half of CityCenter being under contract. Was the Q3 comment, was that referring to square footage? So that actually, in terms of square footage at this point you're ahead of where you were in Q3?Robert BaldwinHi Robin, it's Bobby. As it relates to the construction project costs for CityCenter, we now have GMPs in our possession for about 72% of the project, and 28% yet to be under maximum pricing contracts, and we'll get all that wrapped up this quarter.As it relates to the sales, I'm not certain what my comments were in the third quarter, whether we were talking about square footage or what we were talking about exactly, but of the Vdara Condo Hotel Tower, that's 42% sold, and all the other condos are 62% sold currently.Robin Farley - UBSI'm just trying to understand the trends that you're seeing on the room front, and trying to get a sense of when we might see a turnaround. On the last call, I think your forward guidance for group bookings was that it was up in the teens, it was up double-digit year-over-year, and now it sounds like the first half of the year is significantly below that. So it sounds like it's a pretty severe sort of rapid cancellation rate that you had in group bookings in the last two or three months, affecting the first half of the year. And I guess I'm just trying to understand better, when you talk about things getting better in the second half, is it possible that we just haven't seen those cancellations yet? In other words, when you talk about your group bookings being up, how much attrition is in those contracts? What percent is under contract and could it actually be 10% less than that, or is it 25% less than that when we'll get to the second half of this year? Terrence LanniSure, Robin, I'll tackle that, it's a good question. We did see significant levels of cancellations in the late part of December going into 2008, and we saw throughout 2008 here in the first quarter, we were able to backfill quite a bit of that lost room revenue with other conferences, and of course we get nice fees for the groups that do cancel, if they cancel within an abbreviated timeframe. We've also been able to, by the way, backfill those rooms with other segments, Tour and Travel, FIT, etcetera, but that wasn't really your question. As it relates to what we're seeing in the forecast that I just gave you, that assumes a higher than normal attrition rate throughout the year, including the third and fourth quarter. We've backed that out of the numbers, so the 6%, for example, in the third quarter would have been about 12% the last time we chatted about this. So we have seen a slowdown overall throughout 2008. There's no question that the market is weaker than it was intended to be. We think the trend is consistent with what I said, that the rooms will improve, and the overall impact on occupancy can be mitigated dramatically. For example, our occupancy on the Strip, in January, was down, but it was only down a couple of percent year-over-year. Occupancy right now on the Strip was actually flat in February; we're achieving less ADR, obviously, but the occupancy is what we've been focused on and we've been able to backfill those lost rooms, re-occupy the buildings and our occupancy trends are holding up quite nicely right now, but on lower room rates, because the mix has shifted. Robin Farley - UBSGreat, thanks, and then the last question, just a quick one. Can you just remind us when you will anniversary the higher labor costs that are affecting you in Las Vegas?Terrence LanniJune 1. Exactly, it's June 1. Robin Farley - UBSGreat, thanks. OperatorYour next question comes from the line of David Katz with Oppenheimer.David Katz - OppenheimerHi, good morning. Could you remind us, specifically focusing on Bellagio for a second, last year the margin was quite high, and not that this year's was bad, but what happened last year margin-wise at Bellagio and just help us with the year-over-year comp?Daniel D'ArrigoWe'll kick it over to Jim and Bobby, but real quickly, just to remind everybody, Bellagio's high-end room was out for a significant portion of the fourth quarter, and reopened on our about the 18th of December, so we were operating in the Fontana Lounge for quite a bit of the second half of the year, which wasn't optimal from a high-end business perspective. They had a tremendous rest of the year's period. The high-end room being reopened has been exceptionally well-received since we opened it on the 18th by our high-end customers. So that is one thing to point to. Robert BaldwinDavid this is Bobby. We also had a one-time, $6.3 million settlement of a lawsuit in our favor that was recorded in that period. David Katz - OppenheimerIn the prior year?Robert BaldwinIn the prior year. David Katz - OppenheimerOkay, and then one more, sort of, broader question. Could you talk about your strategy and the degree to which you're able to shift demand around from property to property, or level it off, so to speak, across the portfolio, between like product, let's say Mandalay, Bellagio and some of the others, where we might see in the future less of one property having a very strong quarter and some of the others maybe being a little bit weaker. How well are you able to do that?James MurrenMaybe I'll tackle that on the room side, and anyone maybe can jump in. As I said earlier, we have a room strategy meeting, we have that every week now, and they meet in a more comprehensive way every month. And we are much better now at understanding the marketplace and how we can coordinate from a standpoint of understanding what's going on with conventions or particular events at our sister property so that we can better utilize our rooms. I think the Monte Carlo experience would be a good one to cite here. When Monte Carlo was forced to shut down, the logistics of not only redeploying those customers into sister properties, but to divert 1,000 people that were due to check-in that day, and the thousands that were due to check-in in subsequent days to our sister properties, was very gratifying to us. We did, I think, a heck of a good job of moving people around the portfolio properties and we really understood the value of being a large company during that crisis. So we have a very highly-tuned level of coordination amongst the company, it's never been more so, and we're able to maximize occupancy and remember, in the casino hotel business, as opposed to the hotel business, we focus on occupancy first and then drive rates. And what we're seeing here in a tough economy was little bit lower occupancy in January, but already we're flat in occupancy here in February, at lower rates, granted, but not dramatically so. And we're able to keep people in the buildings and spend money in our F&B outlets, other non-gaming and gaming outlets, and that's what it's all about for us. So, yes, there's more coordination, properties due operate independently, that's done by design, we think that's the best way to do it, but the cooperation has resulted in better yielding of all of our portfolio properties. Robert BaldwinAnd then David, of course we synchronize all of our marketing efforts, so we don't double-hit weekends and holidays and that sort of thing, so everything is far more coordinated than it has been in the past. David Katz - OppenheimerThanks very much.OperatorYour next question comes from the line of Bill Lerner with Deutsche Bank.Bill Lerner - Deutsche BankThanks, hey guys. Dan, first one's for you. Even though you may tap credit facility to buy back stock, where do you think you peak out with regards to net leverage in the next couple of years - let's call it, next few years? Daniel D'ArrigoWell I think, obviously we're spending $1 billion this year, is what we've projected to spend mostly here in our Las Vegas resorts, and obviously we have a lot of flexibility in that number, to dial it down or dial it up, since all of our buildings are in terrific shape, there's no deferred maintenance issues, and that provides us with a tremendous amount of flexibility.As Terry mentioned, Atlantic City really doesn't start gearing up for us until sometime next year, and you're probably not looking at any heavy spending until probably sometime the year after, as that project starts to ramp up with a potential completion in 2012. So I think we've maintained through this period a tremendous amount of not only flexibility, but a pretty solid and strong balance sheet, that even with building out Atlantic City on the balance sheet, probably doesn't get us any higher than mid fours in leverage over the next couple of years. Terrence LanniI think that's the point, Dan, I mean, over the next five years our leverage, we project, will never exceed four and a half times. And that includes very significant investments in our existing properties, a very large new resort in the Atlantic City market, and a few other things we've got in mind. So given our balance sheet, which is obviously uniquely strong in our industry right now, and our flexibility on capital, we feel very comfortable that we have all the flexibility that we need. Bill Lerner - Deutsche BankOkay, thanks guys. And so, it's probably a good segue into my second one here. So why - I guess this is more theoretical - but why cap a well-capitalized partner in Dubai World at ultimately 20%, when the market clearly isn't paying for that pipeline, and on top of it obviously you guys have plenty of flexibility on the debt front?Terrence LanniBill, let me take that. Clearly when you have one shareholder who owns in excess of 50%, and you're a public company, you have another shareholder at 20%, we'd like to have some ability to have some shares to be able to be traded in our stock. And that was the purpose of that discussion and the negotiation that we completed with Dubai World. We enjoy being public and we think that that's an appropriate way to handle our business. Bill Lerner - Deutsche BankOkay. And Terry, I guess ultimately my question really was, what's the appeal of access to the equity markets over the next several years, that's really what I was getting at. Terrence LanniWell you know nothing's forever, you can't make decisions in the future. At the time we made that decision, of course the world was going private and our competitors were drinking the Kool-Aid and accepting nine and a half times leverage. We felt strongly that that was not the right path for MGM MIRAGE, and that certainly is the case today. We felt that there's great value in being a public company, certainly everyone in this room is a shareholder of this company, and we feel that is a wonderful way to retain, recruit, to motivate and to provide us with more flexibility as we continue to pretty rapidly grow this company, accessing new markets. But we reserve the right to make decisions based on current environments and what the expected future environments may bring. So it was the decision that we made, we're glad that we made that decision. We have a unique position here with our great balance sheet, and the fact that we have two extraordinarily well-heeled, very loyal and supportive partners in the form of Tracinda and Dubai World, and it affords us many opportunities to look at any type of corporate structure in the future.Bill Lerner - Deutsche BankOkay, thanks guys.Operator(Operator Instructions) Your next question comes from the line of Cameron McKnight with JP Morgan.Cameron McKnight – JP MorganGood morning guys, thanks. Just with respect to baccarat, with 17% growth in volumes during the quarter, that was pretty impressive with Bellagio's main room out of action for the bulk of the period. With Macau now open and driving, how do you feel about that business going into the first half?James MurrenWell, maybe I'll take a quick stab, and then go ahead Terry, correct me if I'm wrong, as I occasionally am wrong. You know, I think we said earlier Cameron, and I think we still believe this to be the case, the international business is very strong, and we finished off a good year in 2007, and we think we're going to have another good year in 2008. The reasons are obvious. As we've said before, America's on sale, people are coming here in record numbers from overseas, and so are our international gaming customers. We believe that there are a lot of reasons why we should expect a solid international level of activity in 2008. Our Chinese New Year's business was down, as Dan said. There are a variety of reasons. Sometimes when you're down, you make up excuses, but the reality is it was down, but we feel like it's in very good shape for the year. My guess is that we'll see continued activity in that area, especially given where the dollar is right now, and especially given the level of wealth that our customers have achieved in the markets in which they operate. Anything to add?
Terrence LanniNo, the only thing I'd add is that it was clear, and after 31 years in this business, and having been involved with Caesar's and here at MGM MIRAGE, we've seen the high end, and something very strange happened this year, and it was a significant amount of our North Asian customers from Taiwan, Hong Kong, and Peoples Republic of China came in over that Western New Year’s period, which is normally not the period of time in which they tend to visit. We tend to get more Southeast Asians during that period of time. We see a lot of people form Indonesia, Malaysia, Thailand and Singapore. That was very different this year, and this is anecdotal but I , looking at our numbers and hearing other numbers in Macau, I think a number of people in that part of the world, North East Asia, if you will, compared to Singapore and Malaysia and Indonesia and, Thailand, I think a number of them tended to stay in the Macau area over the Chinese New Year’s period, and a number of those same people decided to come here to Las Vegas. And I suspect that it was the same for our competitors in that end of the business for Western New Year’s.
Cameron McKnight - JP Morgan
Okay, great. Thanks. And you mentioned you’d increased debt facilities in Macau to accommodate seed costs on the second project. Can you give us some idea of how you’re thinking in terms of the framework around a second project?
Well, we’re still working not only with our partner, but with the government Cameron there to secure the actual land. So until that’s done, which we think will be by the end of this year, we’ll be working on different development plans for that site, which right now have not been firmed up yet with our partner, but the site is a great site in a good location. It’s not as big as say the Venetian site or some of the other sites in Kotai. But it’s about double the size of the site we have on the Peninsula, and it’ll probably be another high-end boutique type hotel. But the absolute plans and program just haven’t been finalized yet.
And Cameron, if I may add, our job number one at Macau is to expand the existing facility, and we’ll be moving into phase two and finishing the design work on that. And we’ll shortly move then from there into the construction phase, and that's well ahead of this but I would hope that we’d actually close on the second site before the end of this year.
Cameron McKnight - JP Morgan
Okay, great, thanks, and just finally; Have you seen the impacts close to the opening of Palazzo?
I think it’s fair to say we have not and we’ll leave it at that.
Cameron McKnight - JP Morgan
Great. Thank you.
Your next question comes from the line of Celeste Brown with Morgan Stanley
Celeste Brown - Morgan Stanley
Hi guys. A couple of questions. First, it sounded like you’re suggesting that Chinese New Year in Macau was quite strong just because people were staying in the region rather that coming to Las Vegas. Did you see any impact from the weather? Did that offset any of that potential growth?
I learned a long time ago not to use weather as an excuse for things. I can’t focus on that. I don’t really know. I just anecdotally - because we don’t have a lot of comparative figures, and talking to our people there and looking at the numbers on a daily basis, it’s pretty clear that the very strong business in Chinese New Year's in Macau from our standpoint. That’s the point. I can’t say if it’s from weather of what.
But I do think that, as it was pointed out by us earlier and Dan specifically, the close proximity between Western New Year's and Chinese New Year's had a significant effect, and as Jim had mentioned earlier and Dan did also, we did rather well against those people in Western New Year’s, and generally when you tend to lose a fair amount of money you like to recoup, and they may have stayed home and spent a little bit more time with their businesses also so that they could come back. But we’ll see them on a continuing basis.
Celeste Brown - Morgan Stanley
And then, just for Jim. Can you tell us what kind of groups have been the most aggressive in cancellation - in canceling - and then, for the people who are still coming, they’re spending less their hotel room, obviously. Are they spending less on their gaming and the other non-gaming components as well?
Well, it’s the kind of groups, kind of broad, this is a generalization. We’ve seen some tech companies cancel, more actually defer than cancel. We’ll see if they ultimately cancel. But they’ve pushed things off into the second half of the year, which kind of gets back to Robin’s question why we feel it will get better.
We’ve seen some, you might find this surprising, but people in the financial services industry have reduced or delayed or cancelled their conventions altogether. For the most part, we’ve said that those would be the two areas I would point to. In terms of what they’re spending while they’re here, it’s really hard to drill into that too much. We have seen an impact on some of our food and beverage venues, but we’re still doing well on food and beverage and of course it’s always an indicator, always still selling out, and our shows are doing extremely well. And so most of our non-gaming venues, which would be convention oriented, retail is doing pretty well, holding up.
On the gaming side, I think it would be more specific to the broader discussion that Dan mentioned in terms of the economy and middle market properties that we operate and own, we’ve seen a reduction in gaming volumes. And we’ve seen that, actually, for several months, not just recently, whereas we’re seeing pretty robust trends in our higher end.
Celeste Brown - Morgan Stanley
Heather, I think we have time for one more question. That would be great.
Okay. Your final question comes from the line of Jeff Logsdon of BMO
Jeff Logsdon – BMO
Thank you. It looks like your receivables were up 13% or 14%. Is that all gaming related, and does that have any impact on what was going on with the new opening in Macau?
Well, Macau is treated, from a financial statement standpoint, much like (indiscernible), so it’s not a consolidated entity on the face of our balance sheet, Jeff. And most of it’s attributable to the high-end play that we’ve talked about on Macau over the Western New Year period, and some of that doesn’t get closed out obviously until early this year when people either pay those balances or close them out while they’re here. So it’s basically a little bit of a timing issue. But with the strength of the high end play over Western New Year’s we had more receivables out this year.
Jeff Logsdon – BMO
Is there a critical path to getting some closure on licensing of Pansy Ho or is that just in limbo or twilight zone?
Well you know, as you recall, Pansy is not going through a licensing process; this is a finding of suitability. We can’t speak to where New Jersey is at in their process, but we’ve been, we, and she, continue to cooperate with them and hopefully we’ll get to a resolution soon.
Jeff Logsdon – BMO
Heather, I think, with that we’ll wrap it up. Thank you everyone for joining us. If you have any follow-up questions, please feel free to call my office directly and thanks for joining us.
Thank you. This concludes today’s MGM MIRAGE fourth quarter conference call. You may now disconnect.