MGM Grand squeezes a higher profit from lower revenues

John Wilen

Thursday, Oct. 29, 1998 | 10:51 a.m.

MGM Grand Inc. today reported higher profits on lower revenues in the quarter ending Sept. 30, but also noted cash flows declined by $17.2 million from the same quarter one year ago.

The Las Vegas-based casino operator said third quarter profits increased to $17.1 million, or 31 cents per share, from $14.5 million, or 25 cents per share, in the year-ago quarter.

Revenues declined year-to-year, from $223.5 million in the third quarter of 1997 to $210.8 million in this year's quarter. Earnings before interest, taxes depreciation and amortization (EBITDA), or cash flow, dropped from $72.7 million in the 1997 quarter to $55.5 million.

The company attributed its results to higher non-operating expenses, including higher marketing expenses, table game hold percentages at the MGM Grand Las Vegas that were lower than an above-average hold percentage during the 1997 third quarter, and lower results from the company's 50 percent interest in the New York-New York hotel-casino.

MGM Grand is expanding and renovating its flagship Las Vegas resort and is preparing to launch a new ad campaign for the property.

In a conference call with investors, Jim Murren, MGM's chief financial officer, noted the Las Vegas properties managed to post increased profits and strong results despite an increasingly competitive environment.

"In light of current economic conditions in Las Vegas, these volumes ... represent a very strong customer response," Murren said.

Room and casino capacity has been increasing in Las Vegas at the same time visitor volumes are stagnant.

At the MGM Grand Las Vegas, occupancy rates fell year-to-year, from 99 percent to 97.8 percent. But average daily rates increased from $90 to $94, and revenues per available room increased from $89 to $92.

Cash flows at the MGM Grand fell from $56.5 million last year to $40.9 million. Lower table game hold percentages accounted for $14.7 million in lower cash flows at the resort, said Murren.

Much of the decrease in table game hold was due to decreased baccarat hold. J. Terrence Lanni, MGM's chairman and chief executive officer, said the Asian economic crisis has affected the way many Asian high rollers play baccarat.

However, Lanni said the company is beginning to see signs of recovery from hard-hit areas like Malaysia, and noted that activity from Taiwan, Singapore and Hong Kong remains strong.

"We feel strongly about that area that it will be coming back," said Lanni.

Declines in Asian win have been partially offset by increases in win from European and Middle Eastern patrons, executives said.

At New York-New York, occupancy fell from 98.3 percent in the third quarter of 1997 to 97.7 percent this year. Average daily room rates fell from $87 to $80, and revenues per available room fell from $86 to $78.

Murren attributed the New York-New York declines to a sophomore slump at the resort.

"The (New York-New York) decrease is due, obviously, to last year's honeymoon year," said Murren.

MGM's Australian casino posted an 18.8 percent increase in cash flows, from $3.2 million last year to $3.8 million in the third quarter, despite revenue declines.

"We've got to be the only casino in Australia doing well these days," said Murren.

MGM's South African operations contributed $970,000 to cash flows and $1.3 million to revenues in the quarter. The three casinos were not operating one year ago.

MGM executives continued to predict a summer 1999 opening for a temporary Detroit casino, though Alex Yemenidjian, the company's president and chief operating officer, noted that anything can happen.

"If everything goes well, it's summer, 1999. And nothing ever goes well in Detroit," said Yemenidjian.

Murren noted that Casino Windsor, the only casino currently operating in the Detroit area, will generate about $650 million in revenues in its first year of operations. When the Canadian resort moved from a temporary to permanent facility, its capacity was immediately absorbed, said Murren.

"That reinforces our belief that Detroit is a great gaming market," said Murren.

The executives did not give a hard start date for the company's planned Atlantic City casino. At an investment conference last week, Murren said the Atlantic City MGM may not open for five years.

During the conference call, the MGM executives deftly deflected questions about potential acquisitions, including repeated inquiries about rumors MGM recently made a bid to buy out Primadonna Resort's half interest in New York-New York.

"We're rumored every day to be acquiring every company that can be acquired," said Lanni. "I think there are lots of opportunities, and we have a balance sheet that hopefully will allow us to complete one of them. ... But there's nothing to announce at this time."