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Rod Smith

Big Six Endure Stagnant Cash Flow

12 January 2004

LAS VEGAS -- Major Las Vegas gaming operators, faced with wage increases, higher taxes and the war in Iraq, finished 2003 with cash flow virtually unchanged from the year before.

"Generally, the first quarter was the toughest of the four quarters because of the anticipation of the war in Iraq. (The gaming companies) tended to play catch-up over the balance of 2003," said Brian Gordon, spokesman for Applied Analysis, a Las Vegas-based financial consulting firm.

Overall, combined cash flow increased to $4.6 billion in 2003 from $4.5 billion in 2002 for Boyd Gaming Corp., Harrah's Entertainment, Mandalay Resort Group, MGM Mirage, Station Casinos and Park Place Entertainment Corp., which is now Caesars Entertainment.

Cash flow, a key measure of profitability for the gaming industry, is generally defined as earnings before interest taxes, depreciation and amortization.

Rising costs crimped the industry's performance despite surging revenues and a broad economic recovery in 2003, analysts said Friday.

Deutsche Bank analyst Marc Falcone said cost pressures came from wage increases in Nevada and higher taxes on casino companies, especially in the Midwest.

Culinary union members approved new, five-year contracts with the Strip's major casino operators in June 2002 that meant average wage increases of 4.5 percent went into effect July 1.

Also in midyear, Illinois increased its top incremental gaming tax rate to 70 percent from 50 percent, which was followed by smaller tax increases in other states.

Falcone said the gaming companies were also hit by the effects of hostilities in the Middle East, tepid room rates in the spring and tough conditions during the war when business and leisure travel slumped.

Cash flow fizzled in 2003 despite a 35 percent increase in combined revenues to $17.5 billion from $13 billion in 2002.

Gordon said top-line revenue growth came mainly from services other than gambling.

"Increased hotel rates, added convention facilities (at Mandalay Convention Center and the Sands Expo and Convention Center) and other revenues like retail sales and amenities explain the bulk of the increases," he said.

Falcone said surging demand after the war drove revenues upward in the year's latter half, although part of the improvement was attributable to the weak performance the companies posted during the second half of 2002.

Performance was strongest in the fourth quarter of 2003, with combined cash flow increasing to $1 billion, up 6 percent from $968 million in the 2002 fourth quarter.

Deutsche Bank analyst Andrew Zarnett said 2004 promises to be a better year.

"They'll see the continued increase in leisure travel to Las Vegas, and it'll be coupled with the accelerated growth of business travel, which has been relatively dormant over the past two years," he said.

Gordon said projections point to continued strong growth in revenues and cash flow.

"We're expecting something more than 36 million visitors to come in, which bodes well for all the major operators, combined with increasing productivity which is keeping efficiencies (achieved following the terrorist attacks Sept. 11, 2001,) in place," Gordon said.

But Falcone cautioned, while the first half of 2004 is looking strong, the second half is a harder call with tough comparisons with 2003.