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MGM Resorts International (NYSE:MGM)

Q2 2012 Earnings Call

August 7, 2012 11:00 AM ET

Executives

Dan D’Arrigo – EVP and CFO

Jim Murren – Chairman, President and CEO

Bobby Baldwin – Chief Design and Construction Officer; President and CEO, CityCenter

Grant Bowie – CEO, MGM China Holdings Limited

Corey Sanders – COO

Sarah Rogers – Director, IR

Analysts

Felicia Hendrix – Barclays Capital

Joe Greff – JPMorgan

Harry Curtis – Nomura

Mark Strawn – Morgan Stanley

Cameron McKnight – Wells Fargo

Robin Farley – UBS

Carlo Santarelli – Deutsche Bank

Jon Oh – CLSA

Dennis Forst – KeyBanc

Shaun Kelley – Bank of America

Susan Berliner – JPMorgan

Operator

Good morning, and welcome to the MGM Resorts International Second Quarter 2012 Earnings Conference Call. Joining the call from the company today are Jim Murren, Chairman and Chief Executive Officer; Bobby Baldwin, Chief Design and Construction Officer of MGM Resorts International and President and CEO of CityCenter; Dan D’Arrigo, Executive Vice President, Chief Financial Officer and Treasurer; Grant Bowie, Chief Executive Officer of MGM China Holdings Limited. Participants are in a listen-only mode. After the company’s remarks, there will be a question-and-answer session.

Now, I would like to turn the call over to Mr. Dan D’Arrigo.

Dan D’Arrigo

Thank you, Mackenzie, and good morning everyone and welcome to our second quarter earnings call. This call is being broadcast live on the Internet at www.mgmresorts.com, and a replay of the call will be available later on today on our website. This morning, we’ve furnished our press release on Form 8-K with the SEC as well.

Before turning it over to Jim, on this call, we will make forward-looking statements under the Safe Harbor provisions of the federal securities laws. Actual results might differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in these forward-looking statements is contained in today’s press release and in our periodic filings with the SEC, including our most recent Form 10-K.

During the call, we will also discuss non-GAAP financial measures in talking about the company’s performance. You can find the reconciliation of these measures to GAAP financial measures in our press release, which is available on our website. Finally, please note that the presentation is being recorded.

And with that, I’ll now turn it over to Jim.

Jim Murren

Well, thanks Dan, and good morning, everyone. This morning we’ve reported solid second quarter results led by wholly-owned domestic resorts’ adjusted property EBITDA growth of 4% and record EBITDA for both CityCenter and Macau. These results were achieved despite the economic headwinds all companies are facing in these volatile times.

Our operating teams remained quite focused on maximizing our revenue and keeping costs in check to drive cash flows throughout our portfolio properties. And at the same time, we continue to reinvest in our properties for the future and constantly introduce new and exciting offerings for the guests. During the second quarter, we observed a pocket of softness in the U.S. consumer beginning in mid-May. This was reflected in spend particularly in domestic table games, entertainment and in retail.

We also experienced slower than anticipated in the year, for the year convention bookings during that brief period. And based on these current trends, we expect RevPAR in the third quarter will be slightly down. But despite these headwinds, we were able to grow our EBITDA, our RevPAR and our market share during the second quarter.

The softness we experienced during the second quarter for convention bookings in the year, for the year has not impacted long-term bookings. In fact looking out into 2013, we’re encouraged to see convention bookings, the pace being up year-over-year and although it’s still early, 2014 pace is even stronger. We’ve also fortunately recently seen a pickup in U.S. consumer trends at our wholly-owned properties.

We remain focused on driving market share and profitability in a variety of non-capital intensive opportunities; for example, M life. Our success here overall is evident in the fact that we’ve grown our market share to-date in table games and in slots, and we continue to outperform the market in terms of ADR and occupancy. We also grew our EBITDA at our regional properties year-over-year, despite an increasingly competitive environment there and some tough trends in the U.S. regional gaming markets. And we believe this is due to our M life customer loyalty program as being working.

We’ve been actively cross-marketing our Las Vegas resorts to our regional customers and this program has done very well with approximately 20,000 room nights booked through this campaign since its inception in April. And our marketing alliances are successful in building loyalty. Ameristar has been a great partner so far and we look forward to continuing to grow our network.

Yesterday, we announced a partnership with the Morgans Hotel Group. Through this partnership, Morgans will transform what is now THEhotel at Mandalay Bay into the Delano Las Vegas. We will begin remodeling the rooms of THEhotel in mid-2013. And through the Light Group, a subsidiary of Morgans, we will be introducing three new restaurants and a cutting-edge new nightclub, injecting some fresh energy into Mandalay Bay.

We continue to be very focused on customer acquisition and expanding our reach into social media. And we have partnered with Playstudios to create and launch myVEGAS. myVEGAS is a social gaming app that recreates the Las Vegas trip experience and exclusively features our brands. It represents our collective thinking about how to leverage our brands and social channels to further engage our customers. It’s a unique and fresh take on social gambling and it’s a very cost-effective vehicle to acquire customers.

And of course, we’re looking to expand our brands and operating expertise into some key strategic regions. As I’m sure you’ve seen in the headlines, we are actively pursuing growth opportunities in some gateway cities including Toronto, regions such as Western Mass., Maryland and of course Cotai through MGM China. We believe we’re well-positioned in these markets and believe that there’s not only great opportunities on a standalone basis, but also offer an opportunity to expand our network into Las Vegas through M life.

We’re weathering this economic environment well. We’re proud of our position here in Las Vegas and how we’re doing and in the hospitality industry in general and we see many opportunities to grow our company.

And with that, I’d like to turn it back over to Dan to talk about our operating results and financial position.

Dan D’Arrigo

Thank you, Jim. As Jim mentioned previously, our wholly-owned domestic resorts adjusted property EBITDA grew by 4% in the second quarter, despite the fact that our hold was down year-over-year. Our hold percentage during the second quarter was 17.7% compared to 18.2% in the prior year. Also you recall that Tunica was closed due to the flooding last year and reported a loss in the prior-year quarter of approximately $2 million and this year reported EBITDA of approximately $11 million.

We grew our wholly-owned domestic hotel revenues by approximately 3% year-over-year despite the MGM Grand having approximately 67,000 rooms out of service for its ongoing room remodel program in the quarter, pretty impactful to the Grand and a little bit more I would say of a disruption to the Grand than we had originally anticipated there.

Moving over to our balance sheet, we currently have $855 million in available capacity under our revolver and over $700 million in excess cash, totaling just over $1.5 billion in liquidity excluding MGM China. We believe we will soon have the opportunity to refinance some of our secured debt at progressively lower rates, which will also enhance our free cash flow going forward.

Just last week, we launched to the marketplace a refinancing in Macau. The proposed $1.5 billion five-year credit facility will be a combination of term loan and revolver. We’ve received strong initial support from our lenders and look forward to showing you all of the details of that transaction upon its completion. As you’re aware, we continue to be debt-free in Macau on a net basis. So this financing will provide MGM China the financial flexibility to carry out its development plans in Cotai.

Our second quarter capital expenditures were $102 million including $18 million at MGM China. We continue to expect our CapEx for the full year to be approximately $350 million. Our MGM Grand room remodel continues to progress with approximately 3,300 rooms completed. The project is on schedule for a September completion date. In the fall, we will begin the remodel of the Bellagio Spa Tower rooms, which will cost us approximately $40 million and is included in our full-year capital budget. The room remodel will begin here in August and be completed right before the holidays later on this year.

Just to give you some guidance in terms of the third quarter, our stock compensation expense is estimated to be approximately $9 million to $10 million. Depreciation expense in the quarter is estimated to be approximately $230 million to $235 million. Our interest expense in the second quarter was $277 million including approximately $6 million from MGM China and $17 million in amortization expense. We estimate that our gross interest expense for the third quarter will be roughly in line with the second quarter.

With that, I’d like to turn it over to Bobby Baldwin to talk about CityCenter.

Bobby Baldwin

Thank you, Dan, and good morning, everyone or good afternoon. We’re excited to report that ARIA, Vdara, and Crystals each reported record EBITDA in the quarter as well as overall CityCenter resort operations achieving record EBITDA of $71 million in the second quarter of this year.

ARIA’s second quarter record EBITDA of $56 million was a 5.4% increase from the second quarter last year. The year-over-year EBITDA growth is impressive given ARIA held 24% in the current year’s quarter compared to 29.2% in the prior year in table games. ARIA’s growth despite having held a lower year-over-year rate is indicative of the growing core customers at ARIA.

ARIA achieved a significant milestone in the quarter with occupancy of 92.7%, the highest level to-date, and the first time occupancy exceeded 90% for an entire quarter. June occupancy in particular was the highest since opening and marked the fourth consecutive month above 90%. ARIA also realized its highest quarterly RevPAR to-date of $187. It is noteworthy that the growth in the hotel is occurring in more profitable cash businesses as we continue to perfect the market mix at ARIA.

In the casino, we are pleased to report that second quarter table game drop remained strong. Slot revenue also increased indefinitely by 12% compared to the second quarter last year and poker revenues were a record level for the quarter.

Tickets have gone on sale for Zarkana, which is set to open on November 1st. This is our new show. Early ticket sales and interest in the show have been extremely encouraging and indicate that this will be a valuable addition to ARIA resort.

In addition to Zarkana, there are several other important changes occurring throughout ARIA. On August 1, Tetsu, a teppanyaki grill opened adjacent to barMASA and next month Javier’s, a high-end Mexican restaurant located off the casino floor will commence operations.

We’re excited about these two new venues and feel that they will better align our offerings with the expectations of our guests and further enhance the experience at ARIA. We’ve also broken ground on our Las Vegas Boulevard marquee sign for ARIA. This marquee will feature the largest digital screen on the strip and increase our visibility and drive foot traffic to all of CityCenter.

Vdara also reported EBITDA of $7 million, up 22.6% from last year. Vdara continues to show increases year-over-year with revenues up almost 17% and occupied rooms up 16.7%.

At Crystals, second quarter 2012 EBITDA, the highest ever recorded, was $8.3 million versus $5.7 million last year. The increase is the result of higher rent revenue for percentage rent tenants and rent for new store openings. Operating expenses also decreased slightly.

One new tenant open at Crystals, Eres, a member of the Chanel brand featuring swimwear and lingerie opened April 18, a Pinkberry frozen yogurt concept will open August 2012 on The Strip in front of the Mandarin Oriental. As of June 30, Crystals was 87% leased and we’re working diligently to lease out the remaining spaces.

That concludes my report. I’ll turn it over to you, Grant Bowie.

Grant Bowie

Thanks, Bobby. MGM China had a solid second quarter. Net revenues were $709 million. This was up 6% year-on-year. Adjusted property EBITDA reached $187 million which is a net of 12 of branding fees. Before the branding fees, adjusted property EBITDA was $199 million, an increase of 14% year-over-year and a record high for the property.

The EBITDA margin before branding fees improved to 28.3% from 26.1% last year due mainly to a higher hold percentage on our VIP business, but also from continued improvement of our main floor contribution and the ongoing impact of our efficiency initiatives. Across our key revenue segments, we are seeing continued strong growth in the main floor table games, slots, and our in-house VIP while in the junket segment, as most know, we’re seeing some slowing in its growth.

Overall win for the VIP segment was down 2% year-over-year despite our new in-house VIP space improving at a steady pace throughout the quarter. In fact, we had our best in-house VIP quarter ever during this period with rolling chip increasing 17% year-on-year.

On the main floor, table win was 17% year-over-year, an increase of 220 basis point improvement in our margins due to our table yield, key performance indicator-based efficiency decisions and table spread efforts. While the competition in this segment is heating up particularly in Cotai, we are looking to enhance our product offerings by introducing some new games to our players in the near future.

Our slot win increased 48% year-on-year. We credit this with our consistent and determined execution of our strategy which has allowed us to attract and retain top-tier customers. These customers continue to respond strongly to our slot product and service offerings particularly in the high-limit gaming areas.

The key elements of our business strategies are working. For example, we mentioned in our last call that we’re working on driving visitation numbers by creating unique experiences for our guests. We opened up our butterfly exhibition in April. This exhibition has consistently attracted around 50,000 visitors a month. On an incremental basis, the exhibition increased our property visitation by 8%. In the month of June in particular, our property visitation increased 9% year-over-year, while in fact, the Macau visitation actually declined by 3.4%.

The incremental traffic lifted our cash, F&B sales during the quarter by 5% year-over-year, and certainly had a positive spillover effect on our mass gaming. To solely capitalize on the retail opportunities presented by the traffic increases, we’re contemplating expanding our retail presence at the property in the future.

On the gaming front, we are working to complete our Level Two expansion. This project will deliver a high-quality product to house over 40 VIP gaming tables. The project is expected to be completed in early fourth quarter. It is our goal to increase revenue and junket productivity by introducing new junkets and reexamining existing junket table allocation.

On the main floor, we will introduce some new products to offer to our customers. And at the same time, we’ll be focused on capital improvements next year to refresh our mass gaming experience.

On our Cotai project, we’ve made a lot of progress on getting our construction team in place as well as continuing to refine and enhance our designs. We continue to make progress with respect to our land concession process. A dialog with the Macau government has been positive and proceeding at an encouraging pace. While that process continues, we’re making every effort to hit the ground running once the land process is complete. We’re preparing our general building plan for submission shortly and we have submitted an application for our land prep work and working to have our general contractor on board in the fourth quarter.

Our Cotai project as previously advised will have approximately 500 tables, 2,500 slots, 1,600 rooms and a budget of approximately $2.5 billion. And this would be spent over a timeframe of approximately 36 months.

At the end of the second quarter, MGM China had approximate cash of $660 million, debt of $553 million and an adjusted leverage ratio of less than one or 0.84 to be precise based on trailing 12 month EBITDA.

With that, I’ll turn it back to Jim for his closing remarks. Thank you.

Jim Murren

Thanks, Grant. Well, as we said, the macroeconomic environment has been tough, but we’re very proud of our team efforts here in operating very well in these challenges. We had a solid second quarter and we believe 2012 will also be a solid year. We have a strong event calendar coming up for the balance of 2012, a lot of good concerts over at the MGM and Mandalay Event Center.

And looking ahead into 2013, all of our room product at MGM Grand at Bellagio will be fully refreshed and we know that that leads to higher ADR and better customer mix. We’re going to have new entertainment and dining options throughout the portfolio including a massive new food and beverage and entertainment venue, Hakkasan over at MGM Grand, new Cirque du Soleil shows at ARIA and at Mandalay Bay and we’re welcoming back Blue Man Group to Monte Carlo.

We remain positive about the future of Las Vegas as visitation continues to grow and we expect the new international terminal at McCarran which just opened in late June will help drive future growth and that builds on the momentum we’re seeing from our European visitors. And the good news is there’s no new supply coming to Las Vegas anytime soon.

Macau remains extremely exciting as a marketplace. We expect the infrastructure additions over the coming years will continue to drive visitation and visitors to MGM Macau and our Cotai resort to come.

I believe MGM is in the strongest financial position than at any point over the past three years and that our operating trends are improving. We continue to drive profitability both by managing our costs and FTEs and also by growing our revenues through M life, regional and global expansion opportunities and expanding our brand and customer reach via social media.

And with that operator, I’d like to move over to the Q&A section of our call. Mackenzie?

Question-and-Answer Session

Operator

(Operator Instructions) And the first question comes from Felicia Hendrix from Barclays Capital.

Felicia Hendrix – Barclays Capital

Hi, good morning, guys.

Jim Murren

Good morning, Felicia.

Felicia Hendrix – Barclays Capital

Hi. Jim, just wanted to touch on the pocket of softness that you talked about. Obviously not a big surprise for everybody. But just as we look towards the second half of the year, it sounds like we should all assume that that persists. Is that how you think we should look at that?

Jim Murren

Well, maybe I’ll take it and then we can turn over. We’ve already seen an improvement in customer trends here in the third quarter. So we did see a pocket. I think it was but about a five-week period of time, would you say?

Dan D’Arrigo

Yeah, that’s correct. We saw kind of starting in mid-May and kind of ended late in June where we saw kind of pace slow down, the market reacted and since that point in time, we’ve seen on a forward booking trend standpoint, we’ve seen the pace pick back up and we’re starting to get that pricing power later on in the year. So, it’s picked back up and that’s why we kind of look at it as a little bit of a blip on the radar screen right now.

Jim Murren

But it did affect our bookings for the third quarter, which is reflected in what we talked about being RevPAR down slightly in the third quarter. In the year, for the year has been affected by that booking weakness that we saw in May and June. We think also people are kind of hanging out before the election and taking a breather on conventions a little bit before the national election. But, as I said earlier, that has not had any impact on our longer-term bookings.

Felicia Hendrix – Barclays Capital

Okay, because – thank you for that answer because it kind of feeds into a follow-up there. So if we think about maybe your RevPAR outlook for the second half based on what you said prior, I was thinking maybe low-single digits, but maybe that view is different based on what you said? And then also I was wondering how the current in the year, for the year trends foreshadow your future convention bookings?

Jim Murren

Hi, let me take that a little bit, and then anyone, Corey or Dan jump in. We gave RevPAR guidance as we typically do in the second quarter and we beat that in the second quarter, the one we just reported. Third quarter being down slightly, I’m sure sounds a lot better than a lot of the room rate surveys. The room rate surveys that we see from you and your brethren are down, really kind of double-digits, and the reason why we’re not down that much is we’ve seen a good pick-up in the retail business, leisure business in particular. So, that’s why RevPAR is probably a more moderate decline than you would have guessed.

Going into the fourth quarter, we just don’t have a view yet on what the fourth quarter RevPAR’s going to be, except for the fact that as I said earlier, consumer trends are starting to pick-up. The convention business in the third quarter of last year, in terms of mix, I think was an all-time record in terms of mix. So, we’re going to be down in the convention business in the third quarter in terms of the mix relative to our total room count. But again, that’s against an all-time record last year. And as I said, we – our pace was up for 2013. Anyone want to add anything to that or...?

Felicia Hendrix – Barclays Capital

Okay. I think I got it. Thank you.

Jim Murren

Thank you.

Operator

Your next question comes from Joe Greff from JPMorgan.

Joe Greff – JPMorgan

Good morning, everybody. When you look at the trends on the Strip in May, June and July, is there a big difference between the consumer at the high-end versus the consumer at the core properties in terms of spend?

Jim Murren

Want to take that, Corey or...?

Corey Sanders

Yeah, I think at the high end at our Bellagio and our higher end properties, we’ve seen spend actually increase pretty decently, mid-single digits, and at the core properties is probably where we’ve seen a little bit of the reduction in spend from the core customer.

Jim Murren

Just adding to that, Corey, RevPAR in the luxury properties was up more in the second quarter than at the non-luxury properties. And the – that’s RevPAR, but if you look at total revenue per occupied room, again doing better on the luxury side if you adjust for the hold that we had. Mirage held single-digits in the quarter. So that doesn’t help much, but if you take out that – strip out some of the hold impacts, the revenue per occupied room looks pretty good. Our entertainment, retail on the luxury side was up year-over-year.

Joe Greff – JPMorgan

Great, and you would say that’s consistent with what you’ve seen in July, relative to what you’ve seen in the second quarter?

Jim Murren

That’s correct.

Joe Greff – JPMorgan

Okay. And then you touched on this a little bit, the room renovation disruption at the MGM Grand, is there any way to quantify that on an EBITDA basis? I’m presuming there’s also some low hold there as well. If you can maybe help us understand how that property did between hold and the room renovation disruption on the EBITDA side, that would be helpful? And that’s all from me. Thanks.

Dan D’Arrigo

Yeah, Joe, they were – the Grand was probably the largest culprit in terms of the hold impact for the quarter. I think combined with the room disruption, you’re probably looking at low to mid-teens kind of EBITDA impact overall between those two factors. So, you’re kind of in that $13 million to $15 million range between hold impact and disruption from the room remodel program.

Jim Murren

I have to caveat by saying I hate using room remodels as an excuse. I hated it when I was an analyst, I hate it now. But a couple of things about the Grand, to defend the Grand because it actually – they did a great job over there. A couple of things we pulled out. The second quarter was the second highest RevPAR in the history of the property, the property opened back in 1993.

It had the second highest RevPAR since 2005. The Food and Beverage revenue was in the top 10 for a quarter in the history of the property, again open for quite a while. Wet Republic had its best quarter ever. It’s the third highest second quarter in terms of entertainment. I mean there’s a lot – I mean I don’t know how many you want of these. Convention room nights were up 34% in the quarter. Slot handle was up. National cable game drop was up.

So, there’s no doubt it hurts, but it’s not an excuse to shift an explanation with I guess what’s going on there, and it’s done next month. And we know based on the rooms that have been brought back on to service, we’re getting nice increases in ADR and the mix is starting to pick up and we’ll have all of that for the fourth quarter and certainly for all of next year.

Corey Sanders

And the convention groups love the product. So, future bookings look really good on the convention side of the Grand.

Operator

Your next question comes from the line of Harry Curtis from Nomura.

Harry Curtis – Nomura

Hey. Corey, just following up on that last comment of yours. When we look into the 2013 bookings, it sounds – can you give us a little bit more meat on that bone in terms of the convention bookings relative to the amount that you really want on the books at MGM and Mandalay Bay and ARIA and Bellagio, the ones that really drive the train? Thanks.

Corey Sanders

Yeah, Harry, the numbers actually look pretty good there. We’re seeing double-digit increases in the rooms on the books there. And everything’s positive from that perspective both at Bellagio and MGM. Mandalay Bay is always the tough one, because there’s so many rooms always on the books, but they’re getting up there and their pace should be where we’d like to see them. We’re pretty comfortable where we are with rooms on the books at this time of year for what we’re expecting for next year, which we expect a growth in the convention market and convention mix for the company.

Harry Curtis – Nomura

So at this point in the year, are you about 50%, 60%, 70% of where you want to be for next year?

Corey Sanders

We’re north of that.

Harry Curtis – Nomura

Okay.

Bobby Baldwin

So is CityCenter or ARIA.

Corey Sanders

We’re in a really good position. Now it’s just filling the holes in tough periods, but we’re pretty comfortable where we are right now on the convention side for next year.

Harry Curtis – Nomura

Okay.

Corey Sanders

Even more so in 2014.

Harry Curtis – Nomura

And another operating question for Jim. In 2009 and 2010, there were two years where you chopped several hundred million dollars of expenses out of your P&L. How much fat is left to cut? How much margin improvement can we see on the expense side over the next 12 months?

Jim Murren

Well, I lost about eight pounds in the past year, but – and Bill Hornbuckle found it, he said. We’re pruning. We always prune, Harry. It’s not going to be a significant amount of cost going forward, but we have a goal of trying to pull out about $50 million a year, out of our – out of our wholly-owned and corporate departments despite technology efficiencies, and we feel good about that. The major effort was back in 2008, 2009, and fortunately those days are well behind us right now.

So, I think you saw that we’re getting decent flow through at some of our properties, especially if you kind of figure out the hold on it. We’re going to – our FTEs are flat. We’re managing our expanses in other ways where we can, and we’re very, very focused on driving free cash. So, as we drive some revenue, we’re committed to bringing as much of that to the bottom line as possible. And by building up some market share as we are and improving our customer mix which does lead to higher margins, we think that there’s a good chance for that.

Harry Curtis – Nomura

Okay, very good. Thank you.

Operator

Your next question comes from Mark Strawn from Morgan Stanley.

Mark Strawn – Morgan Stanley

. Just one quick question on the Group side. You gave some good detail there on the room counts, but could you give some color on rates and how they’re trending going forward, and if you’ve seen any push back recently on any rate increases that perhaps were built into forward contracts?

Corey Sanders

Yeah, forward contracts were given price increases on all of them. We see rates going up. Our biggest challenge is having the leisure and FIT rates keep up with the convention rates which is not a bad challenge to have. But everything’s looking positive on the rate increases.

Mark Strawn – Morgan Stanley

Is there any way to give a range on that at all? Is it more low to mid singles for the group side or is it...

Corey Sanders

It’s hard to say because of comparing apples-to-apples and who’s in what space at what time. I mean, I would suspect, we’re going to see mid single-digit increases.

Mark Strawn – Morgan Stanley

Great. Thank you very much.

Operator

(Operator Instructions) Your next question comes from Cameron McKnight from Wells Fargo.

Cameron McKnight – Wells Fargo

Good morning. Thanks. Jim, a question or perhaps for Corey as well. It looks like visitation growth for the Strip was basically flat in April and May. How are you guys thinking about that as we look forward?

Jim Murren

Well, you’re right. We don’t have the June numbers out yet to my knowledge, right? What’s that?

Sarah Rogers

Terminal 3 opening...

Jim Murren

Yeah. So Sarah’s mentioning that what will be a little shot of adrenaline for Las Vegas with Terminal 3 opening up in June. That certainly helps us because we cater to an international customer. Particularly our European business does really well in the summer and continues to do well this summer. So I think that that will have a positive impact on visitation.

We don’t have the numbers out yet, but that’s our guess. We do believe – which is remarkable given where we were a few years ago – but we believe we’re going to have an all-time record in terms of visitors to Las Vegas this year in 2012, north of 40 million people. And we’re capturing more than our fair share of those visitors. And so I guess that you’ll see a pick-up because of Terminal 3 and we have a lot of events coming up into the fourth quarter city-wide, not just for our company. So, we think the trends will be moderately up year-over-year for the balance of the year on visitors.

Cameron McKnight – Wells Fargo

Okay, great. Thanks. And then a follow-up for Grant. Grant, when you speak to your customers in China, what are you hearing from them at the moment?

Grant Bowie

Well, I think we’re in an interesting time at this part of the world with obviously the transition about to take place. People actually are still – certainly have money. There’s no question about it, but there’s no question that people are just being a little more careful which we think is just a short-term phenomenon.

Cameron McKnight – Wells Fargo

Great, thanks very much.

Grant Bowie

Okay.

Operator

Your next question comes from Robin Farley from UBS.

Robin Farley – UBS

Great, thanks. I wonder if you can give a little bit of color on the dividend, tax agreement with Macau in the quarter and just what it now would allow you to do with dividends going forward in terms of tax wise that it didn’t before? And then I have another question on the quarter.

Dan D’Arrigo

Robin, that agreement is pretty consistent with what the other operators in the market. It’s basically an annual fee in lieu of the dividend tax. That agreement covers us through the year ended 2011 and any dividends payable through the year ended 2011 and we’ve submitted an extension request to that agreement that’s pending with the government currently.

So, it’s roughly about, Grant, correct if I’m wrong, about a $3 million, $4 million payment in the quarter that covered all the previous years and the extension right now is pending approval with the Macau authorities.

Robin Farley – UBS

Okay, great. And then I think in your introductory comments you mentioned that during the second quarter, I think you said there were more rooms out of service than maybe you’d expected just with the renovations at the Grand. I wonder if you could – can quantify just given what percent of rooms are out of service for the quarter, how much that helped the reported RevPAR, the year-over-year percent change, if you could give sort of a rough quantification?

Corey Sanders

Yes, so the rooms out of order were what we were expecting. I don’t think it has much of an impact at all when you’re running mid-90%s occupied. It doesn’t change a lot on your denominator. In a traditional hotel company, you take 10% out, it will have an impact, but for our high occupancies, it’s hard to say. We’ve lost a lot of money on the weekends when we’re selling out. So, we’ve looked at it many different times. I just – I don’t think it’s had an impact at all on it.

Robin Farley – UBS

Okay. Did you – can you quantify what percent of rooms out of service in the quarter?

Jim Murren

It’s only one – it’s a small number because if you take the – you mean, Robin, relative to our whole portfolio or relative to MGM Grand?

Robin Farley – UBS

Oh no, just like – in other words if it was 1% of your whole portfolio out of service, just, since we’re putting that in relationship to the percent change in RevPAR year-over-year, I know it’s going to be a small number, but I’m just wondering how much of that 5%?

Corey Sanders

Keep in mind also we’re taking our – we’re taking our high end rooms out of service and replacing and filling more rooms at our lower end, which is going to have a negative impact on the company RevPAR.

Dan D’Arrigo

So, overall Robin, we had about in the quarter for Q2, we had about 63,000 rooms out of service, which was a little over 2% of rooms out of service year-over-year.

Robin Farley – UBS

Okay, great. Thank you. I don’t know if I could ask one more about your Cotai approval. I know you’ve talked about some of the things you’re doing in preparation with your team on the ground. Do you still – are you still expecting sort of imminently to get the terms of the land agreement from the government? I don’t know if you have any more of a clear timeframe on that?

Jim Murren

Well, I’ll turn it over to Grant, but after our last call, we did – shortly after, I think it’s within a week, we passed a very important hurdle and it’s a multi-step – Grant, how many stages are there like 16, 17, 18 stages? I lose track.

Grant Bowie

A lot.

Jim Murren

Yeah, it’s like a steeplechase, but we did have a good milestone after that. We’ve had a few cents, but it’s moved at a pace. Grant, if you want to add anything to it?

Grant Bowie

I think the key issue is that I think we’ve pretty well provided the government everything we need and I just want to reiterate that the timeframe of actually execution. Yes, the land concession is critical, but the next phase which is getting the building built is just as time-consuming and that’s what we’ve been taking this opportunity to get ourselves ahead of that curve. And we’re pretty excited and the team’s doing a great job on that. So, I think we always need to keep remembering, because I think we’ve all become somewhat obsessed about the – it’s only about the land. That’s really only the beginning of the process and we’re trying to parallel some of this work, and I think we’re doing a pretty good job of that.

Robin Farley – UBS

Okay. Thank you.

Operator

Your next question comes from Carlo Santarelli from Deutsche Bank.

Carlo Santarelli – Deutsche Bank

Hey, good morning, everyone. Could you guys talk a little bit about during that soft period that you’ve experienced in the 2Q, if there was an aggressive competitive response maybe from anyone on The Strip or could you kind of quantify how you’re seeing the competitive environment going into the back half of this year?

Corey Sanders

Yeah, this is Corey. During that period, there was a competitive environment. We try to maintain our practices in what we would do and so we don’t really participate in a lot of that. I would say now what we’re seeing is it’s probably lightened up and it’s probably back to a normal level. There are some people out there that are probably a little more competitive than others, but from our perspective, we’re back to a normal yielding process.

Carlo Santarelli – Deutsche Bank

Great. And when you guys talk about down slightly on the RevPAR metric in the third quarter, should we expect to see most of that on the occupancy side and maybe be able to hold some rates or would you look at that the other way? Thanks.

Corey Sanders

Yeah Carlo, that will probably be a combination. I think when you look at last year’s third quarter with a higher mix in convention, we ran pretty high occupancies in the third quarter. So I think it’ll be a little bit of a combination of both in the quarter.

Carlo Santarelli – Deutsche Bank

Great. Thanks guys.

Jim Murren

And from our perspective, I mean we can make our RevPAR go up by just having our rates higher. We maximize EBITDA and we’re going to maximize occupancy at the highest rate we could get. And therefore that’s the result we’re going to see in the third quarter. We prefer to have as much cash flow in our buildings as possible.

Carlo Santarelli – Deutsche Bank

Understood. Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Jon Oh from CLSA.

Jon Oh – CLSA

Hi. Thanks and morning. I have two questions. I’ll start off with, if you could give us some trends or any color on the high-end Chinese baccarat segment in Vegas?

Corey Sanders

Well, it’s been consistently up. I would say in the second quarter for the MGM Resorts companies including ARIA, we had the largest drop and we didn’t hold as well, but we have the largest drop that we’ve seen in the history of the company in the second quarter on the international side.

Jon Oh – CLSA

And just a follow-up for – maybe for Dan. Could you give us some insights into your receivables exposure in Macau? What’s the outstanding amount of receivables that you have right now? How much have you provided for and also some sense on the aging of the accounts that would be useful to us? Thank you.

Dan D’Arrigo

Well, maybe I’ll turn that over to Grant, but we feel pretty comfortable with where we’re at in terms of our allowances and where the receivables are. Grant, do you have the details in front of you?

Grant Bowie

I do. So as of the June 30 balance, the balance was in Hong Kong dollars this is, because I’m looking at the Hong Kong dollar accounts, so forgive me. So it’s HK$809 million. That’s about – less than $100 million U.S. and we’ve reserved about $200 million against that. We’re actually pretty conservative with that reserving strategy. And so, I think we’re – in a net position, we’re in pretty good shape. We’re slightly ahead of where we were last year, but really nothing significant. It’s less than 10% ahead of where we were in terms of total receivables outstanding.

Jon Oh – CLSA

And Grant, if I can just ask you a little more details on that, based on the HK$809 million receivables, could you give us some indication as to how much of that is advance commission to junkets versus your direct VIP program?

Grant Bowie

The advances to the junkets is about – let me just check that. It represents about 60% of that, 70%.

Jon Oh – CLSA

Okay. Thank you.

Grant Bowie

Okay. And on that basis just when you talk about junkets, we liquidate that amount every month. So that gets cleared every month, so that rolls.

Operator

Your next question comes from Dennis Forst from KeyBanc.

Dennis Forst – KeyBanc

Yeah, good morning, everybody. I wanted to ask Grant a question about the table games in China. I think your first comments were how there’s strength in the mass tables and your direct roll was up, then you talked about a Level 2 expansion, actually adding more VIP tables which kind of contradicts where the strength’s been and where everybody’s going towards the mass. Can you just flesh that out for me, Grant?

Grant Bowie

Well, I think it’s important that we actually build on a portfolio. So when I say we’re building out Level 2, that’s not at the exclusion of the mass market. We continue in the main floor to actually upgrade all the time. What we’re doing on Level 2 and I think we’ve discussed it for sometime is that the – we really need to maximize our productivity and our availability to bring in multiple operators into the environment.

And so what we’re now starting to see is that we have the large junket operators, what we’re now wanting to position ourselves for is to be able to add greater number of high quality what euphemistically might be called a Tier 2 operator, which is slightly smaller. And so what we’re really doing is reorganizing the real estate, making sure we have the right tables and the right configurations in the right places such that we can have the maximum number of independent operators providing us the greatest depth. And as we all know generating the maximum volume, we can to get that – to get as much of the volatility out as we can.

Dennis Forst – KeyBanc

So the...?

Grant Bowie

So, even though the market – even though the growth rates are slowing and what we still have to do is make sure that in this competitive marketplace, we provide the most attractive, the best facilities we can to get more than our share of that pie.

Dennis Forst – KeyBanc

Okay, and if you used every table you had available, would it – what number would it be? I think you’re at 426 right now. Is that the most you can use?

Grant Bowie

We got 427. The 426 simply identifies that 426 units have operated at some time during the period. We still in terms of yield and managing and spreading the tables, have the capacity to reconfigure and that’s what I mean about building different space configurations.

So making sure that we don’t waste any tables that are not performing at their floor average. And so taking tables out of say a six-table configuration moving it into say combinations of double table private rooms, single table private rooms. So we still got some room to go in terms of getting more value out of the 427 tables that we have.

Dennis Forst – KeyBanc

Okay, terrific. Thanks a lot.

Operator

Your next question comes from Shaun Kelley from Bank of America.

Shaun Kelley – Bank of America

, good morning. I just wanted to go back to the group business in Vegas, real quickly. So, I think in the past you’ve talked about, for last year, roughly 15% of your business was group and convention mix and then I think this year, the target was to probably be more like 15.5%. So the question is, with some of the more kind of in the quarter, for the quarter softness, is that – kind of is that 15.5% still the target for this year or do you think that number’s a little lower? And then what do you think that number is for next year?

Dan D’Arrigo

Well, I think Shaun – this is Dan. We did just about, just inside of 15% mix last year. I think exactly we were at like 14.7%, and we’re hoping to do a little bit better than that this year around the 15% level. I think right now, based on the in the year, for the year, we’re kind of pacing around 14% to 15%. By no means are we giving up. The team’s working hard to continue to build in that, in the year, for the year. So, I think right now, we’re continuing to pace at about a 14% to 15% level.

Bobby Baldwin

And we’re replacing that business, we’re replacing that with leisure business. So, we’re able to fill the rooms but with other channels.

Shaun Kelley – Bank of America

Okay. That’s helpful. And then I guess, the second question was just going back to the kind of the softness that you saw. As we dig down there, did you see a little bit more on – just trying to kind of understand, did you see it a little bit more on the gaming side or on some of the non-gaming spend, because I think, Jim, you mentioned that the, outside the room spending, entertainment, and some of that stuff was actually still up. So was it actually that you saw that core mid-tier customer just gambling a little less? Just trying to kind of understand the customer behavior a little bit.

Jim Murren

Yeah, gambling was a little bit, not – it was very little, very little impact. Entertainment was impacted. Retail was impacted at the core properties. And really what wasn’t impacted were the nightclubs and day clubs which had record revenue numbers.

Shaun Kelley – Bank of America

Okay. And my last question would just be for Grant. Grant, the EBITDA margins in Macau were exceptional this quarter and I’m just trying to think through, as we – kind of the hold normalization will be a piece of it, but trying to kind of understand – I mean you guys probably benefited from mass market kind of mix shift. So just kind of your thoughts on the sustainability of that margin going forward as you kind of ramp up the direct – your direct business and the mass business would be helpful?

Grant Bowie

I don’t think we’ve really changed our proposition. We’re still saying mid to upper 20%s. I think this period was probably a pretty good indicator of sort of the upper quartile, but I still say that it’s in that mid to upper 20%s. So, I think I’m still really comfortable. And the more – you correctly say the more we can get the main flow of mass market mix working for us, certainly the bigger advantage it has for us.

Shaun Kelley – Bank of America

Okay. Thank you very much.

Dan D’Arrigo

And Mackenzie, we’re coming on the top of the hour. So, we’ll take one more question from the group.

Operator

And your last question comes from Susan Berliner from JPMorgan.

Susan Berliner – JPMorgan

Hi, good morning. I had two questions. One was I was wondering if you could talk about the managed and other because it showed a nice pick-up there, and I was wondering how we should think about that going forward?

Dan D’Arrigo

I think when you look at it there, Sue, I mean on the cash flow side, it obviously benefited from a full quarter of our share of the IPC out of Macau and that was offset a little bit by some expenses there. So most of the increase was a result of the full quarter of our share of the IPC out of Macau.

Susan Berliner – JPMorgan

Okay, great. And Dan, just I guess going forward with regards to – I know you’re looking to refinance some expensive debt, use of free cash flow to pay down debt. How should we think about, I guess, for modeling purposes going forward the Macau dividends as well as what’s remaining in the Borgata account?

Dan D’Arrigo

Well, I think as it relates to the Borgata account, we get and do have the ability to use some of those funds for debt repayment and debt service and we’ve done that. I think that accounts – it’s around $160-ish million today in that trust account and that will run its course over the agreement we have there.

As far as dividends out of Macau, that’ll be something the board will sit down and contemplate from time to time much like it did earlier this year and will obviously factor in not only the performance where the balance sheet is and the cash position of Macau, but also going forward where we’re at in our Cotai development and other growth opportunities.

And I think as you look out and look at the facility we’re putting together, the cash flow potential of MGM Macau, I think there’ll be a variety of opportunities for that port to consider going forward and that will include the opportunity to continue to return cash to shareholders. So that’ll be something that that board will consider from time to time, but the opportunity will be there.

Susan Berliner – JPMorgan

Great. Thank you.

Dan D’Arrigo

Thank you everyone for joining and we’ll be around all day for any follow-up questions.

Operator

This does conclude today’s conference call. You may now disconnect.

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