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October 1, 2014

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THE ECONOMY:

MGM Mirage cuts costs, delays future projects as profit falls

Updated Wednesday, Oct. 29, 2008 | 1:12 p.m.

As expected, MGM Mirage on Wednesday said the company has shelved future resorts in response to the economic downturn, including the proposed MGM Grand resort in Atlantic City and a similarly large, multi-tower resort planned with joint venture partners at the southwest corner of Sahara Avenue and Las Vegas Boulevard.

The company also has scaled back plans to spend close to a billion dollars next year on maintenance and upgrades to its casinos, and instead will spend about $200 million -- a figure they hope will rise again in 2010.

MGM Mirage President and Chief Operating Officer Jim Murren said that was still a lot of money given that the company’s resorts are in “excellent shape” and are “the best in class in every single market.”

During a conference call to discuss a 67 percent decline in third quarter profit from last year, executives at Nevada’s largest private employer said they are taking steps that will save the company roughly $1 billion in expenses and make the company stronger and more profitable in future years.

In recent months, MGM Mirage has laid off a few hundred managers in addition to the 400-plus managers who were let go in an April announcement. The company continues to reduce its rank-and-file workforce by an undisclosed number -- an effort that began at least a year ago in response to lower business volume.

The management layoffs aren’t affecting customer service and, in many cases, involve people who are no longer needed after the company’s cost structure was permanently reduced, Murren said. Hourly and other rank and file workers are expected to be rehired once business rebounds, he said.

Officials at MGM Mirage, which owns most of the Strip’s megaresorts, offered no predictions on when the economy would turn.

By next year, the company will operate at a cost that’s at least $450 million less than it was in 2007.

MGM Mirage has reduced duplicate management jobs, consolidated formerly incompatible systems involving purchasing, payroll and benefits, reduced inventory expenses, renegotiated vendor contracts, substituted broad marketing efforts for more focused ones and eliminated small, unnecessary departments.

The company has also cut spending on consultants and travel and expects to consolidate back-office functions like casino credit and collections. It’s also saving money from adopting environmentally friendly practices.

“We don’t think we can afford to do things just because that’s the way we did them before. That’s not a model for future success,” Murren said.

The company also has identified $400 million of cost savings at CityCenter, on track to open in late 2009. Construction and labor costs have fallen on declining local and global demand, executives said.

Excluding one-time events such as the write-down of the Primm Valley Golf Club and insurance proceeds related to Hurricane Katrina, companywide EBITDA, a measure of earnings, fell 14 percent in the third quarter from a year ago. Property-level EBIDTA fell 18 percent.

That was about as bad as analysts expected, though some weren’t surprised by the decline and took small comfort in the fact that Bellagio – the company’s most luxurious resort –- reported an all-time high in hotel revenue in the third quarter.

While earnings at other Strip properties were down from 15 to 32 percent in the third quarter, Bellagio’s EBITDA rose 8 percent and revenue increased 3 percent. Occupancy was flat at 96 percent and room rates rose a percentage point.

Overall, casino revenue fell 8 percent, mainly because of a decrease in table game play on the Strip. Slots revenue fell 6 percent and room revenue declined 10 percent. Food and beverage revenue was off 3 percent and entertainment was down 4 percent.

Executives said the company’s convention bookings are up in 2009 as customers who canceled events have re-booked.

Critics have focused on unfinished financing at CityCenter, which has secured $1.8 billion of about $3 billion needed to finish the project. Executives said they have $500 million in additional bank commitments. MGM Mirage and joint venture partner Dubai World have each pledged to fund $1.9 billion for CityCenter, minus any financing received.

Executives said they were confident in raising the funds while maintaining enough cash on hand to weather the economic storm.

“The company will not allow itself to be in any financial jeopardy,” Murren said. “We have too many options available to us and too many relationships with financial partners.”

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