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Rod Smith

Major Operators: Profit Lift Slight for Big Players

8 October 2003

LAS VEGAS -- Despite the bravado about soaring room rates and surging demand for leisure travel, earnings at the major Las Vegas operators barely held their own in the just-ended third quarter, Wall Street estimates suggest.

Overall, combined net income for the Big Six operators increased to an estimated $267 million, up only $6 million from the year before, and cash flow increased to about $1.2 billion, also up just $6 million over 12 months. Cash flow is generally defined as earnings before interest taxes, depreciation and amortization.

Growth in profitability was slowed as operators relaxed 2-year-old cost controls they had installed in the wake of the Sept. 11, 2001, terrorist attacks, analysts said.

"A year ago, operators were running lean and implementing technology enhancements to reduce overall costs," said Brian Gordon, spokesman for Applied Analysis, a Las Vegas-based financial consulting company.

"While much of the costs savings are still in effect, there has been a tendency to increase human resources costs to achieve the overall increase in income," he said.

Combined revenue for the Big Six, however, climbed to $4.6 billion, suggesting a recovery is under way while operators are loosening cost controls.

"We're somewhat optimistic about anticipated visitor volumes and gaming operators performance over the next six to 12 months," Gordon said.

Total projected revenue for the big six in the third 2003 quarter was up $143 million, or 3 percent, from the third quarter a year ago.

"Basically, it was a very strong quarter, especially with the results from Caesars (Palace) and Mandalay (Bay)," Deutsche Bank analyst Andrew Zarnett said. "And we're continuing to see (revenue per available room) growth and modest increases in gaming play with the trend continuing into October."

The increased revenue, however, was attributable in large part to expansions rather than same-store growth, Gordon said.

"For example, management fees for Station (Casinos) from (the newly opened) Thunder Valley (Casino near Sacramento, Calif.,) weren't there last year and Park Place (Entertainment Corp.) had incremental revenues being thrown off for their Caesars Palace property with the Celine Dion show (which opened in March)," he said.

As operators move into the fourth quarter, analysts are optimistic.

"We may be surprised when some of the results are announced," Gordon said. "I think they're achieving strong room rates, which produce stronger incremental revenue and provide high profit margins."

In the last week of November, however, the most recent for which data are available from Fulcrum Global Partners, the average rate for midweek rooms booked three weeks or more in advance fell to $111, down 3 percent from the year before.

And the average weekend rate dropped to $176, down 22 percent, making it the first week in four months the Strip did not outperform last year, Fulcrum gaming analyst Joe Greff said.

The weak results were surprising, he said, given the strong convention calendar and very optimistic comments from operators about a Las Vegas recovery, particularly on the rooms side of the business.

Despite the apparent market softness, Greff said, the Las Vegas market is demonstrating good momentum for the next six months, particularly in leisure travel volume and convention business.

"Most operators have indicated that the Strip is doing well from a room perspective, with both occupancy and room rates well ahead of last year's levels," he said. "In some cases, it appears that gaming business is also regaining some speed."