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MGM Mirage (NYSE:MGM)

Q1 2008 Earnings Call

May 06, 2008 11:00 am ET

Executives

Terry Lanni - Chairman & CEO

Bobby Baldwin - Chief Design & Construction Officer of MGM MIRAGE, President &

CEO of CityCenter

Jim Murren - President & COO

Dan D'Arrigo - EV & CFO

Gary Jacobs - EVP, General Counsel & Secretary

Aldo Manzini - EVP & CAO

Analysts

Larry Klatzkin - Jefferies

Felicia Hendrix - Lehman Brothers

Bill Lerner - Deutsche Bank

Celeste Brown - Morgan Stanley

Operator

Good morning and welcome to the MGM Mirage first quarter 2008 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 Executive Officer, Gary Jacobs, EVP, General Counsel and Secretary, and Aldo Manzini, Executive Vice President and Chief Administrative Officer. (Operator Instructions)

Now I'll like to turn the call over to Mr. Dan D'Arrigo. Please go ahead, sir.

Dan D'Arrigo

Thank you, Tina and good morning, everyone and welcome to the MGM Mirage first quarter Earnings Call. This call this morning is being broadcast live on the internet at www.mgmmirage.com, and at companyboardroom.com. A complete replay of the call will be available on the company's website.

This morning we furnished to the SEC on Form 8-K a copy of the attached press release and in addition we posted supplemental significant detail related to our resort properties on the company's website.

Before turning the call over just a quick Safe Harbor disclosure. 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 amendments of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties that could caution actual results to differ materially from estimates. Listeners should also refer to our disclosures about risks and uncertainties made in our filings with the SEC.

Now I'd like to turn the call over to Terry Lanni for his introductory comments and some initial commentary on our results and development initiatives.

Terry Lanni

Thank you, Dan, and good morning, ladies and gentlemen. Let me first make some comments regarding our results in the first quarter and how we see the current environment. The first quarter was obviously challenging. It was clearly impacted by the economy. We did expect this and certainly had already discussed our experience in January and part of February during our last earnings call. We still reported solid results and cash flows at all of our resorts. We have been continually adjusting to the environment and ensuring that we really maximize the volume of guests in each of our resorts. And we continue to look for areas of revenue growth that through marketing and other initiatives, as well as areas for managing expenses as evidenced by our recent reduction in management positions.

It's relatively difficult for us to forecast trends into the next few quarters, but so far in the second quarter we are seeing much of the same as it relates to customer volumes and our job is to manage within the context to maximize profitability in what will surely be a rather challenge alleging year.

We clearly have not reached our potential in Detroit as the Detroit market is also been challenged. We have the best asset in the marketplace and will continue to seek opportunities to maximize our returns.

Let me give you brief comments on the MGM Grand Macao results. MGM Grand Macao generated net revenues of approximately $298 million, and property EBITDA of $43 million. We are generally pleased with the resorts performance thus far, but clearly know that we have several areas to improve on going forward. We expect margins will improve at this joint venture as it grows in this dynamic marketplace and remain focused on improving results in all operating segments.

As many of you know, the Chief Executive of Macao, Edmund Ho has recently made comments regarding several initiatives, including placing a hold on new gaming concessions and sub concessions. We frankly see this as a positive development. We do not believe that it will have an impact on our expansion of MGM Grand Macao, which is under way or on our plans for a resort and co-tie] where we have submitted a development plan for that site and each of those initiatives seem to fall within the statements that Chief Executive Edmund Ho made and we'll define that as we have upcoming meetings with him but we feel pretty comfortable with that.

On the development initiatives, MGM Grand Foxwoods opens on May 17 , a little bit later this month and we’ll continue to earn a branding and licensing fee for the use of the MGM Grand name while the Mashantucket Pequot nation will operate Foxwoods. They own it and they will operate it, as I say. The new resort is part of the overall Foxwoods campus.

In Atlantic City the water club at Borgata will open in June this quarter. And we believe it will be another stellar offering in that marketplace and very complementary to our future MGM Grand Atlantic City, which is situated immediately next door.

As it relates to our development in Atlantic City we continue to design work with KPF, New York and we are in the midst of a CAFRA review, which for those of you who are not familiar with New Jersey is the Coastal Agency Facility Review Act which requires an additional look at anything within a close proximity to the coast line, which our project is. We are in the advanced stage of the selection process for a general contractor and will be able to note that some time in the near future.

Abu Dhabi we continue to assist in the design of MGM Grand Abu Dhabi and are close to naming an architect for this prestigious and significant project. Bobby is going to give you a full update so I won't mention any thing CityCenter he will give you at his comments.

I would now turn it back over to Dan for a few detailed comments on our operating results for the first quarter.

Dan D'Arrigo

Thank you, Terry. Tina, can you make sure that everybody is in a listen-only mode. We got a little bit of feedback there. Thank you.

Operator

Yes, sir, one moment. All line are muted.

Dan D'Arrigo

Thank you.

Operator

You're welcome.

Dan D'Arrigo

I'd like to provide a short summary right now on the results for our first quarter. The full details were laid out in our earnings release this morning, as well as the supplemental data that we posted to our website earlier today.

Our overall operating results this morning we reported diluted EPS from continuing operations for the first quarter of $0.40 per share compared to $0.55 per share in the prior year's quarter. The prior year quarter just to note was an all time company record for any first quarter in the company's history. So we had a pretty tough comp year-over-year.

On the operating basis as Terry has mentioned, the economy has certainly impacted our business results here in the first quarter, as well as the closure of Monte Carlo, which negatively impacted our results and we incurred some additional depreciation expense with the newer larger MGM Grand Detroit resort.

Net revenues decreased 2% to approximately $1.9 billion in the quarter. Our casino revenues decreased by 3% and our net non-casino revenues were 2% lower. Revenues were down in our Las Vegas resorts by roughly 5%, but excluding Monte Carlo in both periods our strip properties were down approximately 3% year-over-year. While we saw decreases this year again we are mindful of the fact that the 2007 first quarter was a record on most measures for the company.

As outlined in the press release our property EBITDA was down approximately 12%. This property EBITDA was impacted by the lower RevPAR numbers in the quarter, lower results at our Mississippi properties and continued ramp up of our Detroit facility, which impacted our ability to leverage the additional gaming capacity and new hotel and dining amenities at that resort.

Just a couple of quick comments on our Detroit facility. It's a spectacular facility and that facility in the Detroit marketplace now commands over 40% market share and continues to earn rave reviews. As Terry mentioned, this market is a little bit challenging at the moment but we believe that our investment will provide excellent long-term returns as we continue to focus on not only driving top line growth but improving our margins as we move forward.

Monte Carlo reported property EBITDA of $14 million this year compared to $34 million in the prior year quarter due to the closure as a result of the fire during this year's quarter. We recorded recovery of costs incurred during the quarter but did not record any recovery for lost profit and we will do so once all continued proceeds of our insurance claims have been resolved.

Excluding Monte Carlo property EBITDA in both periods was down 10%. We earned a little less from our unconsolidated affiliate line this quarter as both (inaudible)10 1:04 and Silver Legacy decreased slightly year-over-year and the prior year results also included about $8 million of profit from the signature at MGM Grand condominium profits.

Additionally our CityCenter residential costs are now being recorded against this line in the current year period versus the last year period where it was part of our EBITDA and broken out separately. These negative impacts were partially offset by the income we picked up related to the full first quarter operations of MGM Grand Macau. Also our pre-opening expenses were slightly lower during the quarter given the completion of our Detroit and Macau properties in the fourth quarter of last year.

Our property EBITDA margin was 31% in the quarter and still pretty solid EBITDA margin despite what's going on around us in the broader economy. Our net interest expense for the quarter was approximately $150 million. This is significantly lower than our interest expense in 2007 of $184 million as we had overall lower debt balances this year during the first quarter as a result of the CityCenter joint venture transaction and the private placement of shares to Dubai World in the fourth quarter of '07 as well as the benefits of the lower interest rate environment related to our floating rate debt.

These reductions were partially offset by increased borrowings related to our share repurchases during the first quarter of 2008, our gross interest expense in the first quarter of 2008 was roughly $189 million with capitalized interest of roughly $39 million in the quarter for net interest expense of about $150 million. Right now I'd like to turn the call over to Jim Murren for more detailed discussions on our operations.

James Murren

Thank you, Dan. First I'll talk about the non-gaming results and then get into gaming. On the room side our revenue was down $30 million or 6% in the quarter but it excludes Monte Carlo, rooms revenue was actually down only 3% year-over-year on the strip. As noted our RevPAR, was down 4% in the quarter. Our average rate was $155 in the quarter versus $169 in the prior year.

Occupancy rate on the strip resorts was 93% in the quarter. We started out much weaker than that in January. Our January occupancy was actually 88.5% but we improved throughout the first quarter. We are 94.6% in February, for example, 97.3% in March and those trends improved and continued into the second quarter. We expect that RevPAR will be down again in the second quarter but less so than in the first quarter. May is looking like a pretty solid month for us.

On the conference business we noted in the last call that our conference business had softened in the first quarter. It was actually down 10% in Q1. The attrition rates were very high in January. They are 18% company-wide but they were 16% in February, 13% in March, the attrition rates continued to improve as we move into the second quarter. It looks as though the second quarter on the convention and conference side will be much better than the first quarter. It might be down in the single digits at most. We obviously also had less rooms available in the first quarter primarily related to the Monte Carlo fire and we will have more rooms on the books going into the second half of the year, we get more rooms back in line as a result of room remodels that will be completed [inaudible].

Our revenue per occupied room or RevPAR was actually flat in the quarter and we've been able to drive good gaming revenue which I'll talk about in a minute especially in the high-end. On the gaming side, table game volume decreased 5%. The high-end actually held up well. We talked about having a soft Chinese new year as I think everyone did in town but we actually picked up a bit in March and here in April and on the high-end and we are encouraged, we have a tournament going on right now as does our friend down the street. It looks like the activity is better this year for that event than it was last year.

Our whole percentage within the normal range in both quarters, both this year and last year, a little bit higher this year than last year but within that range that we've articulated in the past. Our slot volume was down 1% in the quarter. I think that's better than what most people had expected. We've actually had increases in slots [buying] at several problems including Bellagio, Mandalay Bay, Mirage, if you exclude Monte Carlo at slot revenue in Las Vegas Strip resort it was actually flat with a year ago.

Our mid-market slot business has been soft. It was a challenge throughout the year and remains so and we've suffered a bit as well particularly down at Beau Rivage. We have been driving business through our ever increasingly beautiful properties through our loyalty marketing programs, better casino analytics marketing programs, cross marketing our shows, centralizing our call center, yielding our rooms more effectively as a company and putting technology into place to better rate our customers for, for example, our table touch system which went into the MGM already, going into Mandalay now and three more properties will be done by the end of the year.

We've been upgrading our Internet channels, our web sites on the hotel side. Actually 17% of our occupied rooms were booked through branded web sites in the first quarter. That's up from 13% a year ago. And we are not emphasizing promotional activity to fill our rooms. We've actually been driving better occupancy through a mix shift as we lost some convention business we picked it up on the F.I.T. side.13 1:19 As Terry mentioned there's no doubt that we are in a tough economic environment. We continue to react to that. We are focused on areas where we can drive revenues and more efficiently improve our cost structure throughout the whole organization. On the revenue side many of these efforts are already underway. We've implemented them several quarters ago and they are starting to hit their stride right now. We have a rooms committee that allows us to adjust to the market more rapidly and we've been able to yield our rooms more cohesively and more efficiently as a result of that.

Our gaming we've been able to mitigate some of the softness in the economy through more strategically placing events both in our arenas but also in our marketing events. This is a good example of it right now where we have a very strong high-end tournament going on as we speak. We are also very focused on leveraging our database and it has been something that we've been remiss to a degree in the past. We are focusing on it more now and I think you'll see better productivity in our profit results because of that.

On the cost side as I mentioned technology is helping us. Our table rating system at the MGM we are putting it throughout the properties, that's going to improve our access to our customer actually improved customer service and actually improved margins, we believe. We have also done some of the back of the house areas where you wouldn't see but it's important to our cost structure where we are automating a variety of systems in the back of the house in order to get to our employees more quickly through, for example, an automated uniform dispensing system and be more efficient before we get to the customer.

And obviously we've been monitoring our staffing. Really we do this on an ongoing nature. Our FTEs are down. They are down about 4% year-over-year and we've challenged our entire company property president's and corporate departments to look at how we do our business and in fact we've made many changes to how we operate our business more efficiently without we believe impacting customer service whatsoever or compromising our market assets.

Based on that review and efforts that we have underway we've already identified opportunities to save over $75 million a year in efficiencies with more to come. We as a company continue to be positioned we believe very strongly in this market. We've been here before in tough economic times. We have positioned ourselves to be the market leader, to operate more efficiently and effective until a tough environment that we are in. We are making solid profits right now and when the time comes when the economy does pick up, which it will obviously eventually we'll be in a position to again as we are right now outperform our peers in terms of profitability. With that I will turn it over to Bobby Baldwin for his remarks.

Bobby Baldwin

Thank you, Jim. Good morning. As part of my comments I want to talk just a moment about Monte Carlo and its situation as you know we had a roof top fire that occurred in January 25, and this fire caused the complete closure for three weeks of the Monte Carlo facility. We reopened February 15 and since the reopening we've gradually added back more and more and more room inventory, as those rooms became available for occupancy.

For the first quarter we lost 96,000 of room nights to rooms that were out of service and obviously that impacted our results. Beginning on the 15th of April, we'll have about 265 rooms out of service and then in mid-May we'll go down to 162 rooms that remain out of service, mostly suites in the top floor and they'll be out of service throughout the remainder of this year. We expect a total insurance claim as it results to this incident to be $85 million, about $49 million of business interruption and about $36 million in actual property damage.

As relates to CityCenter, CityCenter we've been working of course on the overall cost of CityCenter as we work through our maximum price contracts with Perini Building Company. All the GMPs will be finalized by the ends of the third quarter and as relates to the overall cost of CityCenter it's consistent with what has been reported in the most recent Form 10-K. Total project costs are expected to be between $8.1 billion and $8.4 billion, excluding preopening expenses of about $200 million.

As relates to the construction update, a few highlights: the central plant which is important to us oddly enough all of the customers never see it we can't do anything without it. We've actually fired up the central plant and we are beginning to provide cooling and in some cases heating to the various buildings on the CityCenter campus as we install interiors. This is very important to climate control.

The hotel casino, the [Belle] hotel casino will top out this year in August. The concrete structure is complete up to level 52. Structural steel is complete in the hotels casinos west podium and about 90% complete in the east podium. The showroom for the Cirque du Soleil Elvis show, all the structural steel is erected and the exterior enclosure has begun.

The Vdara tower right across the street is expected to top off in May which is three months earlier than the original schedule. The Mandarin tower is expected to top off in September. And the two Veer towers, the concrete structure for the Veer towers west and east is complete between, through level 17 and level 10 respectively. The retail center Crystals, all of its structural steel is up and we are beginning to frame some of the interior spaces and those spaces will be made available to our first group of tenants for their fit outs beginning in February.

The Harmon hotel and its associated residences, its structural concrete decks have been placed through level 10. The podium structural steel there is scheduled for completion in July. The automatic people mover system, the tram system that goes from Bellagio has midpoint stop at CityCenter and a third stop at Monte Carlo. This guide way will be completed entirely by July 2008. The cars are in fabrication currently in Switzerland and the two stations at Bellagio and Monte Carlo are currently under construction.

There are 13 large tower cranes on the site and approximately 6,100 workers currently. This peaks at midsummer at about 7,500 workers. On the residential front at CityCenter, CityCenter residential has now launched all four residential products, each branded, positioned and designed to cater to the distinct buying group and each receiving overwhelming market acceptance. With 1,365 units sold to-date we've generated $1.7 billion in sales. This equates to a project to-date, sales price of about $1,264 per square foot.

CityCenter's sales pace and pricing is attributed to CityCenter's urban design and architecture. The quality of its interior layouts the array of services and amenities offered and, of course, the center strip location. Buyers are also encouraged by the construction progress and appreciate our planned on time delivery for November of next year.

We are increasing our hotel marketing effectiveness for CityCenter with two new galleries to help promote the CityCenter residential products. The CityCenter residential gallery at MGM Grand opened February 1 and the CityCenter residential gallery at the hotel at Mandalay opened April 2.

We have also engaged in [KEO], a subsidiary of Dubai World and Dubai's leading developer, marketer and seller of luxury residential real estate in the UAE to introduce CityCenter's residential products to the region in the eastern hemisphere. This new sales partnership provides CityCenter a new distinct pool of customers in that region.

As you know, all sales contracts are accompanied by a 10% nonrefundable deposit with an additional 10% deposit due six months after signing and to-date we have had zero contract cancellations. And that concludes my report on CityCenter and I'll turn it back to Dan.

Dan D'Arrigo

Thank you, Bobby. Just a couple of final comments and a little bit of guidance to help you with your financial models for the second quarter and we'll open up for questions. For the first quarter, we invested approximately $236 million in capital expenditures. The details are outlined in our earnings release but this is pretty consistent with our overall yearly guidance of approximately $1 billion that we had previously provided.

Regards to our capital position for the quarter, we borrowed approximately $1.6 billion in net debt in the quarter. Most of this attributable to our share repurchase in the quarter. Remember we completed a joint tender offer with Dubai World at a cost of about $680 million for our share of 8.5 million shares. In addition, we repurchased an additional 7 million shares in the open market during the quarter at a total cost of $427 million.

We have roughly about 2.6 million shares remaining under our existing share buyback program. As relates to our balance sheet in February, we repaid $180 million of senior notes using our availability under our credit facility and had minimal debt maturities over the next 12 months.

At quarter end, we have approximately $1.9 billion available under our bank credit facility with roughly a 60% of our debt being fixed and 40% of our outstanding debt being floating as of the ends of the quarter. We are currently in the marketplace talking to our lead group of banks with regards to securing financing for CityCenter. We recently held a bank meeting in Dubai with our partners there and these leading institutions which was extremely well attended. The feedback has been very positive from this initial group of banks and we look forward to progressing this financing here in the second quarter.

The project is progressing quite well, as Bobby pointed out and given the sponsorship in the progress we are making on the construction front and on the residential sales program this is coming together quite nicely right now for us and our partners, Dubai World.

Our balance sheet is quite strong. As of the end of March with ample bank capacity which affords us the ability to continue to significantly invest in our properties and plant the seeds for growth while at the same time providing us with the ability to be more opportunistic in how we access capital in these more difficult times.

Our current RevPAR forecast for the second quarter shows a low single-digit percentage decrease compared to the prior year second quarter, maybe a touch better than what we saw in the first quarter, some specific guidance to help with your modeling in the second quarter.

Our estimated total stock compensation expense is approximately $11 million in the quarter. Corporate expense in the high 30s, low $40 million range inclusive of about $4 million of stock compensation expense. Pre-opening expenses should be pretty consistent with the first quarter, primarily related to our share of pre-opening expenses for CityCenter.

Our net interest expense will be consistent with the first quarter on a net basis of around $150 million. And our depreciation expense will be in the $190 million to $200 million range with an effective income tax rate of approximately 36% in the second quarter.

At this time I think we have roughly about 25 or 30 minutes left in our allotted hour time frame. I would like to turn it back over to Tina to open it up for questions and answers.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Larry Klatzkin with Jefferies & Co.

Larry Klatzkin - Jefferies

Hey Guys.

Terry Lanni

Hi Larry.

Larry Klatzkin - Jefferies

Good cost cutting. A couple of questions is as far as the extra 14 acres in AC are you guys still working on partners for that, is that something we could see in the future next quarter or two?

Terry Lanni

I can answer that. This is Terry Lanni, Larry. The issue of the 14 acres is that it is still in litigation. The oral arguments were heard, what, fellows, about two weeks ago and we would expect some ruling within the next month, that's an appeal from an original victory that we had in the original court and we are really not doing anything with that property until that matter is resolved and when it is resolved we would continue our conversation which actually have taken place with some other people in early periods.

Larry Klatzkin - Jefferies

All right. And then as far as international hotel business goes what is going on in the Dubai project and in China, any outlook into that?

Terry Lanni

Actually we have our people right now like Gamal Aziz. President of Hospitality is in Dubai and Abu Dhabi. We mentioned earlier in our comments that Abu Dhabi, it is a $3 billion first phase of the significant project on waterfront there, which has three hotel products, 10,000 seat arena, half million square feet of convention, half million square feet of retail and that we would expect to have finalized with an architect shortly and begin construction there, again that's no investment on our part, by the end of summer, probably before Labor Day we would expect construction to begin.

But again, project, $3 billion, no investment on our part. In China we are continuing our project. We have the second ring road in the Dallas temple project. That is beginning construction moving along. We have other products that we are looking at right now and we will be discussing with our board shortly in that particular marketplace.

We are in Dubai and looking at different opportunities in the future there for a major hotel product, again, not owned by us, designed development and managed. So it continues to move and we think it is going to be a very fruitful relationship. There are other parts of the world we are looking at, other parts of the Middle East and outside the United Arab Emirates as well as in Singapore and in other cities in China.

Larry Klatzkin - Jefferies

Excellent. Okay. As far as the Macau law changes, do you see that as a positive what they said?

Terry Lanni

I do not think they are law changes. I think it is basically just a change in the interpretation of what can be done. As you know in the original issuance of concessions and original subsequent sub-concessions you had the ability to reopen with additional concessions that could have been considered in 2009. The Chief Executive in the last couple of weeks has indicated that that is not going to happen. There's going to be a pause in that particular regard.

So I think it is positive. I think the other concessionaires and sub- concessionaires have made similar statement. Right now it is our interpretation, because these comments were made in response to a question of the Chief Executive in his legislative conference in, which he met with legislators, which he indicated these factors, but we believe we have each of our items in the pipeline sufficiently in the pipeline the way we understand it. We will get further clarification when Gary Jacobs and I are in Macao at the very early part of June with expect to meet with the Chief Executive and get further clarification. But on balance I think those of us with concessions and sub concessions are quite pleased.

Larry Klatzkin - Jefferies

All right. And the last question, Dan, really for you, for you in Dubai funding CityCenter until you have a bank loan it is about 100 million a month each?

Dan D'Arrigo

That is roughly about right. And I think for the full year CityCenter, for the full 2008 CityCenter was looking at about $2.5 billion of total construction cost for this year. But like I said, we are in the market talking to our lead bank's right now and the initial response has been pretty positive.

Larry Klatzkin - Jefferies

All right. As far as gaming revenues in the second quarter you gave room and such for second quarter but how is the gaming revenue look for April and May?

Jim Murren

Well, we do not give them out month to month but I did say, Larry, that we are pleased with what's going on right now in the high-end and on balance it looks like the second quarter is a lot like the first on the year-over-year basis.

Larry Klatzkin - Jefferies

All right. Thank you, guys.

Teri Lanni

Thanks, Larry.

Operator

Your next question comes from the line of Felicia Hendrix with Lehman Brothers.

Felicia Hendrix - Lehman Brothers

Hi, good morning, guys. Jim, you were talking about how the convention outlook is looking in the second quarter. I was wondering if you could give us your outlook on the third and fourth quarter.

Jim Murren

Sure. It is getting a little harder to project out quarters because we have gotten a lot of convention that have been either cancelled very soon before they were actually going to occur or actually been booked in very short periods of time. So we are usually a little bit better on this but I will give you a sense of it. It looks like as I said the second quarter looks like it is going to be better than the first. And then it is kind of a tale of which property you're talking about. Bellagio looks like it is going to have a very solid year all year long on the conference convention side. Mandalay Bay is doing better every month.

MGM Grand will be down particularly in the third quarter where they had some big business in the third quarter '07, which will not be able to recover from that. And Mirage will be down as well. And those are our major properties as relates to it. So on balance I would say the first quarter is what it is. Second quarter will be better. It is unclear exactly how the second half will turn out except directionally Bellagio and Mandalay should do well.

MGM Grand looks like it will be weak versus a year ago in the third quarter. And Mirage looks softer as well in the second half versus the last year quarter.

Felicia Hendrix - Lehman Brothers

Okay. And then just moving on to CityCenter, Bobby, you said that there were zero cancellations on the departs, but I was wondering if you can give us has there been any defaults, what the default statistics have been?

Bobby Baldwin

No, there have been no defaults at CityCenter.

Felicia Hendrix - Lehman Brothers

Okay, great. And then as of March you gave an update I guess of the condos, 52% have been sold and the hotel condos, 42%. Can you bring us very up to date on that as of now?

Bobby Baldwin

I can not. As you know, the market has slowed down dramatically. It began to slow in December and for the first quarter we sold, how many units here?

Jim Murren

First quarter we sold --

Bobby Baldwin

For the first quarter we sold $57 million worth of product or 56 units. And in April we sold $16 million, or $14 million. So the market has slowed down dramatically. The good news kind of bad news is that best we can tell based on our analysis we represented about 93% of the total Las Vegas sales for high rise condominium or condominium hotel products here. So the market is quiet although City Center still enjoys a great deal of success, it is quiet.

Felicia Hendrix - Lehman Brothers

Okay. Are you seeing any kind of, I'm wondering if there is going to be a lag effect from the sales efforts you started in Dubai, have you seen any of that hitting your books yet?

Bobby Baldwin

We are going to, we are in the process of setting up a sales center over there as I mentioned and we are actually going to kick off a sales program in August. And our hope is to sell 100 units in our first launch over there and we are excited about that.

Felicia Hendrix - Lehman Brothers

Okay, great. With CityCenter, I am wondering if you can give us any sense of timing? Dan, you were pretty positive on your conversations you're having with the banks but I was wondering if you could give us any sense of timing when this might all get wrapped up. I am wondering with the funding that you and Dubai World are putting into the JV now off your own balance sheet, do you get that repaid to you once the financing is complete at the JV level?

Dan D'Arrigo

Well, as far as it relates to timing, Felicia we are looking at a time line of wrapping this up by this summer, by the end of the second quarter here and as it relates to the funding we are making right now, we will see how that negotiation goes with the banks. We may get some of those funds back. We might leave it in for more equity and drive better pricing in terms of the bank deal.

Felicia Hendrix - Lehman Brothers

Okay. Just one last question. I am sorry, do you have more to add to your previous answer?

Dan D'Arrigo

I'm sorry, Felicia, Jim, I was going to add couple of things but we were over there, Dan and I were both over there. The response was very strong. And I'm sure, I'm pretty sure that by the time we report the next quarter we will be able to tell you all about the deal itself, $3.5 billion deal. It won't be a matter in our view of getting the deal done. It will be a matter of pricing. And the pricing obviously will be wide what it would have been say six months ago but those of you who were around like we were when we did the Borgata deal for example back in ‘99 I guess then, the pricing will be inside of that and, of course, LIBOR is lower as an absolute number.

So we are going to get a very solid deal done. It will be at I think very reasonable pricing. The demand is quite high. Not only because MGM has good credit but frankly at lot of our banks are welcoming the opportunity to develop a relationship with our partner Dubai World. And so it is a matter of differentiating ourselves a little bit which I think we are doing then will be completed the next couple of months.

Felicia Hendrix - Lehman Brothers

Okay, great. And then just final question, on the fourth quarter had you given us the expectations that all the GMP contracts would be signed by this quarter so I was just wondering what has changed there?

Bobby?

Bobby Baldwin

We have one outstanding item. Actually we have eight GMPs and we have actually received seven of them, one we are going to receive the pricing for GMP eight which is the podium for the casino hotel, one of the most complicated pieces of business at CityCenter. So that particular eighth GMP is, its due date is June 30 and it is going to take us about two months to work through all the detail.

So we actually get it at the end of the second quarter but we are not going to execute it probably until the third quarter. And that's the eighth GMP. Most all other GMPs will be or will be executed in the second quarter but not the east and west podium of the Belle casino hotel. That particular piece of business is currently priced, just that one component, at $1.270 billion has many thousands of pages of details associated with us so that one is taking longer to work through.

Felicia Hendrix - Lehman Brothers

Got it. Okay. Thanks a lot for your time.

Bobby Baldwin

Thank you.

Operator

Your next question comes from the line of Bill Lerner with Deutsche Bank.

Bill Lerner - Deutsche Bank

Thanks, hi, guys. Two questions one, Jim, you mentioned you've identified about $75 million in I think cost saves. Could you just either color that in a little bit or give us a sense of the time frame and then I have a follow up, thanks.

Jim Murren

Sure, Bill. Obviously, payroll reduction was one component of it and not the just head lines. We were obviously sorry that we have to do that. But that really was not even the majority component of the cost that we have been able to pull out of the existing expense structure.

As I said earlier we really challenged everybody corporate and property wide to go through all of their P&L to look for ways in improving our cost structure, really changing the way we are doing business. We have a variety of energy projects, for example underway which will save tens of millions of dollars on an annualized basis and that's a great effort that's been done at the corporate level but also at the property level.

We have dramatically reduced our consulting relationships and our travel and advertising expenses. We have reduced our inventory supply and inventories in general where they have been sitting in warehouses. We have improved our ability from an HR perspective to touch the customers more directly and reduce the layers of supervision and management in order to do that.

We have been a little bit smarter on our special events and our casino comping and drilled into those type of expenses both on tee needs but also on our casino comps and that's why will you see our profitability and our margins actually holding up pretty well. And these experiences will drill into throughout 2008 and into 2009.

So the number that we talk about is a large but growing number and it really reflects a change in how we are doing business to become more efficient. Payroll is obviously a component of it. There is not a company in our industry that has not laid off people regardless what have they say. And the issue is getting your payroll and your volumes to align with one another. And also the issue is getting to be smarter about how you manage your business without affecting customer service which we have never done and will not do and the results are obvious.

No one made more money in the first quarter than Bellagio. We also had number three and number four in the first quarter. So the customers respond to our properties, we continue reinvest in them and I think what you will fine also as we spend our capital you will see us spend capital with very high emphasis on in current and long-term returns on investment and there is a lot of scrutiny as relates to that and again no one is spending more money than we are. I think Dan mentioned, we are spending about $1 billion this year. We are investing in our properties a lot here, expanding them.

We opened a new theater at Luxor, for example, in September with Cirque du Soleil, Criss Angel. Several new venues up and down the strip, we are remodeling rooms at a more rapid pace than our competitors, that generates better ADR and better volumes and better revenue in general. It is a combination of some revenue initiatives and also some cost savings which we actually began last September have been more emphasizing since January and frankly we will continue to do on a going forward basis because we think that we can continue to improve our efficiencies.

Bill Lerner - Deutsche Bank

That is helpful. Thanks Jim. And then I just had a follow up. It strikes me that you guys get very little credit for this big pipeline of JV type deals where you are not using your own capital, you are contributing land or using your brand or management or construction expertise and maybe that's measured in hundreds of millions of dollars of cash flow going forward.

How do you monetize that when you think about other fee businesses in lodging in the past that have traded at relatively big multiples? Is that how you're thinking about it?

Terry Lanni

Well, clearly that is a factor. When we sat down and worked with our board in determining that it seemed to us that we had great brands and the ability with the contacts that we had, our joint ventures with Mubadala frankly in Abu Dhabi and Dubai World encouraged us to do that and we do think that there's significant cash flows there and I know that Jim, when he was Chief Financial Officer, we used to always be very frustrated that the multiples with pure hotel companies enjoyed as compared to the gaming companies and at some point if that grows to a sufficient level, if that continued to be the factor we could certainly split the companies.

Jim Murren

I would add that of course we had a record first quarter in '07 and if you strip out Monte Carlo as we said earlier our cash flows were only down 10%. As Terry said internally here we are still making a considerable amount of money on an annualized basis or in the quarter.

The key for us is with the balance sheet that we have and the way we want to reinvest our business how we build our build on that growth. We are capital intensive business and we think we can outthink our competitors in that area. We have in the past and our cash flows and our existing casino resorts we believe will continue to increase over a period of many years.

However, I layered on top of that is the growth of MGM Mirage hospitality, which starts out with zero and growing into we think over time a very large company, which will not be capital intensive generating a significant amount of development in fee income on a going forward basis and that of course is the type of income that gets the higher multiple in the marketplace.

It is complementary to what we are doing. It is not distracting to what we are doing. And we think it will overall accelerate our growth and improve and diversify our earnings. And I would agree with you, I do not think we get and maybe we should not yet but we do not get a significant amount of emphasis on that business because it is currently small.

Bill Lerner - Deutsche Bank

Thanks, guys.

Operator

Your next question comes from the line of Celeste Brown with Morgan Stanley.

Celeste Brown - Morgan Stanley

Good morning. What were the CityCenter JV costs in that JV line for the quarter?

Dan D'Arrigo

The expenses?

Celeste Brown - Morgan Stanley

Yes.

Dan D'Arrigo

Our share, roughly about $3 million to $4 million.

Celeste Brown - Morgan Stanley

Can we expect a similar level throughout the year or should that ramp as you get closer?

Dan D'Arrigo

It will ramp slightly this year and then it will be more, it will be higher level as we build out into next year closer to opening. So it will ramp off of these levels not too much this year but before next year.

Celeste Brown - Morgan Stanley

Okay. And then Jim, as you think about your two newer properties MGM Macau and Detroit without sort of speculating as to where the revenues go in this environment, where do you think, what kind of upside could there be on EBITDA if you were operating them at the efficiency level you could expect maybe in a couple of quarters?

Jim Murren

Well, I will make a general comment and maybe one specific on Detroit and I will bounce it over to Terry on Macau, maybe. But clearly you've been around awhile and you know that when we open up a property we open it up with over staffing our properties and spending a considerable amount of money on pre-opening as we position a property. We went into Detroit from an interim facility with limited food and beverage, no entertainment, no hotel, no convention business, and really a gaming operation; to a full scale integrated resort. And spent a lot of money making the right impression and that clearly has happened.

You can see our market share has grown substantially on the gaming side but more importantly we believe the feedback in the customer reaction and response to the nongaming side at Detroit has been very high. We have been ever since we opened working to improve the efficiencies. That property will make considerably more money than it is right now as we finish that program. It will take about all year.

On top of that of course the economy is very tough in the Midwest and tough in Michigan and tough in Detroit. You have to take that into account when you think about what we will make there. What we can control, which is to drive more business through the properties through our marketing efforts and to improve efficiencies you should expect Detroit to make more money sequentially throughout '08 as we do what we do whenever we open a property and improve the margins. I guess a similar story being Macau, Terry, but I will turn it over to you.

Terry Lanni

Great. In Macau if you take a look at the parameters there, we are roughly about 9% of the capacity represented in MGM Grand Macau property and frankly since opening we are running about just under 8% of market share. So we are below our capacity in market share. But, one, we have an absolutely fabulous facility there. It is getting rave reviews from people.

Number two, if you really look at it there is three components to the business in Macau. And the first component is the area of VIP rooms. A significant part of it, lower margins obviously because of the partners that you have there. We are exceeding our expectations there and we consistently have done that.

The other two components are the mass market and the area of slot machines. Frankly, we erred in this because we were very fixated in getting that building open. We were having difficulties with subcontractors because everyone else was trying to get buildings finished and we put a lot of focus on that.

The assumptions erroneously from us were the determination because MGM is a known name because of our former sister company, the studios that people would flock there in the mass market and the slot area. Well, those people come from the four coastal provinces of China, 90% of the business by most estimates there and frankly those people may recognize the studio but they didn't recognize the fact that there was an MGM Grand hotel casino if will you in Macau.

So we need to be much more aggressive and we developed and are beginning to develop programs to deal with that mass market where we are underperforming and the slots were underperforming and we have seen some movement there, a positive movement in that regard.

You are able to advertise nongaming aspects in a judicious matter in the People's Republic of China, that's something we had failed to do and it is something we are now addressing. So I believe we have a great facility, great people there and the ability and the to bring more customers in and we need to address those two areas of mass market and slots.

Celeste Brown - Morgan Stanley

Terry, how do you think about the commission pressures in that market? Do you feel like the property is at an appropriate level or do you think you need to be paying more?

Terry Lanni

Well, we have adjusted that as of May 1 and I'm not going to give all the details on it. Let our competitors find out on their own as to how that works but we have adjusted that to deal with the marketplace as I said even without that adjustment we were getting a more than our fair share of that business and we expect even to grow that business further. The real issue though is that you really want to get as much business as you can in the mass market in slots because that's where the margins are.

When you have partners sharing in the other it is an important part of the business but I think sincerely we really have to grow the other two parts of the business. What we are doing in the room operations we are doing quite well and I think as I am convinced that we are doing that well and continue to improve on it but I want to see the other two parts of the business grow so that we can really get the high margin returns that we should get.

Dan D'Arrigo

I think of that Terry, on that business, of course, we have known these junket operators for a long, long time. I think we have the best in the marketplace and we did adjust the structure as Terry said on May 1. We are clearly not leaving the market. We are anywhere but the most aggressive in that area. So we are leading with the relationship that we have with these operators and more importantly the facility and its location and not on price.

Celeste Brown - Morgan Stanley

Thank you.

Operator

Ladies and gentlemen, we have reached the allotted time for question and answer session. I would now like to turn the call back over to Mr. D'Arrigo for closing remarks.

Dan D'Arrigo

Well thank you, Tina, and thanks everyone for joining us. If there is any follow up questions please feel free to call my office and we will be around all day. Thank you very much.

Operator

Thank you. This concludes today's conference. You may now disconnect.

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Source: MGM Mirage Q1 2008 Earnings Call Transcript
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