Melco Resorts & Entertainment Ltd (MLCO) 2007 Q4 法說會逐字稿

Good morning, and thank you for participating in the fourth quarter 2007 earnings conference call of Melco PBL Entertainment Macau Limited.

At this time all participants are in a listen-only mode. After this call we will conduct a question-and-answer session. Today's conference is being recorded.

I would now like to turn the call over to Mr. Simon Dewhurst, Executive Vice President, Chief Financial Officer of Melco PBL Entertainment.

Good morning, and thank you for joining us today for our fourth quarter earnings call. On the call with me this morning Lawrence Ho, Garry Saunders, Stephanie Cheung, Greg Hawkins, Constance Hsu, and Geoffrey Davis.

Please note that today's discussion may contain forward-looking statements made under the safe harbor provision of federal securities laws. Please see today's press release under the section "safe harbor statement" for a discussion of risks that may affect our results.

In addition, we may discuss adjusted EBITDA, adjusted net income, adjusted EPS, and adjusted property EBITDA, which are all non-GAAP measures. The definition and reconciliation of each of these measures to the most comparable GAAP financial measures are included in the press release. Please note that this presentation today is being recorded.

We won't spend lot of time reiterating the details of our quarterly results on the call, so after some brief comments from our Chief Operating Officer, Garry Saunders, we'll open the call up for questions and answers. Garry?

Thank you, Simon. As we mentioned on our last call, the fourth quarter was expected to be a transitional period as we reconfigured Crown Macau to accommodate additional rolling chip capacity with a commensurate reduction in mass market tables and gaming machines.

We accomplished our goal of completing the physical reconfiguration of the gaming space at Crown Macau during the fourth quarter, realigning the property with its core strength, which is the dedicated rolling chip table games market.

This reconfiguration resulted in an extensive amount of property renovations and was literally the second pre-opening exercise for the property in 2007.

The complete program of gaming floor reconfiguration spanned 12 weeks and included significant capital works across three levels of the casino. During most of this period potential gaming capacity was reduced by approximately 40%, and access to our casino food and beverage outlets was restricted. Thus we were forced to operate the property in less than optimal condition. As well as the physical property reconfiguration we recruited an additional 350 table gaming staff to cater for the anticipated growth.

We successfully launched the operations of AMA at Crown Macau on schedule on December the 15th. By any measure, they hit the ground running, and we view AMA's immediate success in capturing significant market share as resounding validation of our strategy.

Operationally, the launch was smooth and we look forward to working with Ted Chan, the CEO of A-Max and his team to drive further improvements for our market share over the coming months. We will also continue to fine-tune our margins and efficiencies at the property as well as assess various viable options to increase gaming capacity.

January was the first full month of operations at Crown Macau under this business model, and initial results are very encouraging. As many of you already know, AMA's rolling chip turnover was at a monthly run rate of approximately Hong Kong 30 billion in December last year. This increased to Hong Kong 40 billion in January.

Our total table games market share was 16% in January, and in the same period our total market share in the VIP segment registered a market-leading 21% based on gross gaming revenue. Year-to-date, we believe that Crown Macau generated the highest rolling chip turnover of any single property in Macau. We estimate our total February table games market share to be approximately 18% month-to-date.

Furthermore, we believe we have the potential for further improvement in gaming volume over the coming months. On a per unit basis, our sequential performance from third quarter '07 to fourth quarter '07, has been impressive. Specifically, our win per machine per day increased from $85 in the third quarter to $145 in the fourth quarter and our win per table per day increased roughly from $6,500 to over $14,000 over the same period.

Due to the relatively small contribution to Crown Macau's overall results we believe that our mass market offering today provides a significantly improved and more compelling and exciting gaming environment as a consequence of our recent efforts to optimize mass market capacity at the property.

Year-to-date in 2008, our win per gaming machine per day and win per table per day metrics have further improved to approximately $165 and $29,000 respectively. I'm pleased to report that our business operating levels have been solid through Chinese New Year, and we have not experienced any noticeable impact on inbound visitation as a result of the recent and devastating snowstorms in central and southern provinces of Mainland China.

Rolling chip table games' hold percentage was roughly 3% in January and remains above 3% thus far in February, in excess of our 2.7% targeted hold. Life-to-date hold percentage at Crown Macau is approximately 2.7%. We expect to see significant increase in roll volumes since AMA commenced its operations at Crown Macau will have the impact of reducing the volatility in hold percentage between reporting periods.

On City of Dreams, good progress has been achieved during the past few months, and we expect to top out the first tower by the end of the current quarter. As the project transitions from using initial cost estimates to securing hard pricing quotes for individual contractor packages, we determine a much more accurate picture of completion costs for the project as a whole.

We have currently priced with [hard data] approximately 51% of the total City of Dreams project and roughly 71% specifically of the project's phase one components. Current information indicates that the construction program is intact and that the total cost will be within a 5% sensitivity range to our overall budget. We will continue to monitor and assess this as further detailed pricing information becomes available.

Now, I will turn the call back to Simon.

Thanks, Garry. Crown Macau experienced low hold of 2.4% in the fourth quarter, below our 2.7% targeted hold. We believe low hold negatively impacted adjusted EBITDA at Crown Macau by approximately $10 million in the quarter under review.

Though we are maintaining our policy of not providing forward earnings guidance, we thought it might be helpful for us to provide some forward-looking color on non-operating line items expected in our income statement in the first quarter of 2008.

Depreciation and amortization cost of $33 million in the fourth quarter of 2007 provides a good indication of our run rate going forward. This amount includes the [$14] million monthly amortization of our sub concession.

Net interest income in the first quarter of 2008 is expected to be in the range of $3 to $4 million. This assumes that we will be able to fully capitalize interest expense related to the ongoing development of City of Dreams. Pre-opening expense in Q1 2008 is projected to be roughly $4 to $5 million entirely associated with City of Dreams.

And finally, capital expenditure in Q1 '08, which includes capitalized interest, is expected to be in the range of $180 to $220 million.

Operator, we're now ready to open the call for questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Larry Klatzkin of Jefferies. Please proceed.

One, corporate expense seemed to double from third to fourth quarter. Could you guys just talk about that and what we should be thinking about going forward?

Yes, Larry, hi. It's Simon.

Hi, Simon.

We had some one off corporate expenses in the fourth quarter specifically tied into the financing activities that occurred during that period. I would imagine that a forward-looking run rate on overall corporate expense in the first quarter will be somewhere between those two points.

All right. Okay. So you're saying they are really one time, why didn't you break them out and tell us what they were. You there?

Larry, I -- this is Simon. I didn't hear your final --

I said if they are one-time items could you give us some details on them?

Larry, they are specifically costs directly related to the placement that we did last year. We're not going to break them [technical difficulty].

All right. As far as capitalized interest in the fourth quarter can you give us that number?

Yes, we capitalized $9.7 million of interest in the fourth quarter, Larry.

Mocha slots margin you said is because of the change in expense and the way the market is operating margin was down to 22%. I guess that's implying that we should expect that the -- similar margins going forward.

I think that that would be right Larry, yes.

Okay. A-Max at this point, how -- I know your hold was pretty good in 2008. How is theirs looking, was it -- it's similar I assume.

Yes. I mean, basically the rolling hold that we talked about was a blend of all of our hold percentage across all of our operators.

And they are still the bulk of your -- okay, okay, good, good, good. And then there is a -- I mean LVS just swapped its -- the risk on hold by doing -- switching to 60/40. I have heard rumors you guys are going to do the same. Is there -- is that something you guys are looking at to kind of lock the whole deal with -- at least with A-Max or you are going to keep with a percent commission.

We - Larry, we currently, actually, have a 60/40 operations at the property and certainly we'd look at exploring that to increase that.

All right but A-Max is not 60/40, is that correct?

That is correct.

Okay, so that would be the one you would switch, okay. But at this point you are not -- we should just assume you continue as usual.

Currently the AMA program is a commission on roll basis, we're giving consideration to the models which will effectively optimize our earnings moving forward. So we won't be making any further comment on that at this stage, but obviously, we will keep an eye on what is happening in the market. And make sure our models reflect best practices.

Okay, and then the last question as far -- well two things, Mocha slots, as far as the number of units on average for the quarter?

About 1100 --

1100 for the fourth quarter?

Yes --

Okay, what is that?

I mean the weighted average number for the fourth quarter of 2007.

Right, perfect. All right, and then on serviced apartments what are the -- what are you guys seeing [wall-wise] and LVS made some comments what could you say about the prospect of selling serviced apartments?

Well, we're still moving ahead with the design and various aspects of this, we are working with our attorneys and consultants, Larry, on the appropriate structure that we would use to monetize these assets would probably result in a right-to-use arrangement that would comply with the land use criteria in Cotai but we are still moving ahead.

All right, great. Thank you, guys.

Our next question comes from Cameron McKnight from JPMorgan, please proceed.

Good evening guys, just wondering if you could talk us through the math on your calculation of normalized EBITDA?

Yes, Cameron, it's Simon here. You -- it is a little bit more complicated than just going straight forward from 2.4% hold that we added in the quarter, through to 2.7% because we also have in the property a 60/40 junket operator. So it depends how well they held, do they share their piece of the pain for the quarter --

Yes.

-- for the fourth quarter. So if you assume that we are on just the basic -- we are just [inaudible] across the property, you'd come up with a normalized EBITDA of around about 15 million. But because the 60/40 junket operator held below theoretical, they have carried some of that pain, so the theoretical adjustment drops down to 10 million.

You have no worries. And can you comment on financing for the remainder of City of Dreams and Trinity and what you are seeing in debt markets for the moment?

In terms of financing for City of Dreams obviously, you can see from the balance sheet condition at the end of last year, we sit on cash of approximately $1.1 billion. We've got $1.25 billion as yet un-drawn on our facility, subject to us continuing to meet the [CTs] on that debt, which we would anticipate we will do. We will be able to fully finance all of our development at City of Dreams through the financing that is available to us today, Cameron.

Yes.

With regards to us developing forwards with the Trinity project that project is partially financed with monies that we have on hand today, and we will continue when we decide to move forward from where we're at this current stage on that project. We will ascertain as to how we can bring some debt financing into that group outside the 1.75 billion debt financing asset group.

Okay, great. Thanks very much.

Our next session comes from Robin Farley from UBS. Please proceed.

Thanks. I have a question on Venetian Macau having raised the commission levels as of February 1st. Do you see that putting more upward pressure on commission levels in the market? I guess the question is really if you have seen that effect, market share already?

Upward, the structure that they put in place is similar to what is already existing in town with a couple of other operators. So at this point we don't believe that there is any particular impact.

Yes, Robin it's Lawrence here, the 60/40 scheme has been a scheme that [HAM] has run for literally over 20 years. So there is really nothing new. It is effectively, for the more risk loving junket who would like to share the upside of the win over theoretical hold --

So --

So it is nothing that is new to Macau.

All right, I realize the structure of 60/40 is not new to Macau and I realize how it affects the sharing of risk with junkets. The question was really about the idea that if this large operator in the marketplace has now adopted a structure that everyone else was using in the marketplace it still would suggest that other properties, commission levels will adjust to that. In other words the change in the Venetian Macau whether or not everyone else is doing it is now affecting market share shift from what you have seen. In other words does their matching levels in the market affect market share from what you have seen so far?

Robin, this is Simon. As Garry has already mentioned our market share grew in February over January from 16% to 18%.

Yes, I saw that. I'm just wandering if overall the market -- are you seeing that as well, in other words your hold would affect your market share to some degree in terms of revenue, so I'm talking about sort of overall competition in the market and shift in the market in general.

I don't think we can really comment about the shift among the other operators but if you look the market is continuing to just experience explosive growth and so at this point I'm not sure exactly how it will sort out with the individual operators. In our case it has not affected us.

Okay, and then just lastly the market share increase you talked about in January, February. You also mentioned your hold was above theoretical hold. So just to clarify, is the market share you were talking about, was that adjusted for hold, in other words would normalized hold give you that market share or no?

No, that is based upon actual win numbers.

Can you give us what you market share is on a hold adjusted basis?

Well, that would require for you to also hold adjust all of the other operators in the marketplace.

Sure, but just in terms of your progression in January, February, would you -- do you have any context you could put that in? I'm just trying to square the comments about change of the market share increasing and all that and what part of that is for hold and what part of that is from the competitive dynamics?

I think the best guidance we could give on that would be the volume growth from January to February. So, volume being the key metric used with [safe style] so we have A-Max has above -- they have made some announcements with regards to the volumes they have done across January to February, which is reflected in their property as well. So I think purely on a volume basis we've had significant growth across those two markets.

Okay, although I guess with the Chinese New Year as well -- you are just talking about sequentially February being up from January?

Yes, I think if you factor Chinese New Year into February on a seasonal basis, that will always give you an uplift as well, without emphasizing a point too much I think by observation and by performance on either side is that Chinese New Year period as well I think our volumes are continuing to show upward growth.

Okay, thank you.

Our next question comes from Grant Chum from UBS. Please proceed.

Hi, good evening. Yes, I just want to clarify -- I mean from the information that A-Max is giving at 40 billion of rolling chips that you will still be paying them only 1.3% of that rolling chip as opposed to the maximum, can you confirm that is the case. And also I am just curious, I mean if there really -- is that actually financially better for you to be -- for them to roll only 44 billion as opposed to 46 billion? I'm just trying to understand how the sliding scale works because it seems with 40 billion, if you pay 1.3%, your hold is going to be over 3%, I mean this quarter looks like going to be like a massive quarter in terms of EBITDA, I am just trying to understand the dynamics between the hold and the starting scale of the commission you have to pay to AMA.

I think as A-Max presented publicly previously about scales of having a base commission of 1.2 on roll, the property structure plus bonus components is what we are enforcing within the property so a 1.3% range for anything below 45 is what we would expect to pay.

Right, right. And Greg on the -- on your own -- on the non AMA rolling chip, do we assume that this part of the business continues to decline because I guess you guys were sort of doing more into some 12 to 15 billion in Q4 a month and now you have slowed down to maybe 10 billion, should we assume that continues to erode or does this stabilize at around the 10 billion level?

Yes, Grant, we indicated previously we expected some dilution in that area. I think the key from our point of view is we are really looking at optimization on a per table basis across the property. Across a blend of seven existing fixed junket operators that we have at Crown Macau. The target to all those is to optimize performance per table so if that is coming from one and for example it maybe AMA, we will make sure that we are optimizing the number of tables that they have access to. So I think by nature of that continual review of what is happening across the property we can expect some dilution. At the same time having multiple operators on the side is particularly important for us as we will lead into [some of our] City of Dreams planning strategy as well. And in turn for the table demand across the property that has been particularly high over the Chinese New Year period, which is -- is a good problem to have I guess. We are looking at a number of options for us to expand gaming units numbers as well to cater for increased premium junket player across the property.

Right, okay. And just lastly, I mean Greg on the mass volumes, you didn't see any noticeable impact I guess from -- in early February from the snowstorms, I mean your mass volumes were pretty much as you were expecting?

Pretty much, Grant, what we have mentioned previously is within the mass effect of being compressed in the property on the two labels. We've really particularly try to focus on the premium end of the mass as well with a range of programs. So by nature of that the transportation mechanism is in promotional aspects. We are a bit more specific as applies to the general inbound busing strategies. So I think as a consequence to that we didn't see any negative impact resulting from the issues in southern China.

Okay, thanks very much.

Our next question comes from Celeste Brown from Morgan Stanley. Please proceed.

First just in terms of accessing hotel rooms outside of the Crown, have you reached a level where at any time you have needed to use those rooms or are you still using rooms within the Crown? And then my second question relates to City of Dreams and what -- in terms of watching the Venetian and what it has been successful with or not successful with, how does that change your view of what you're offering is at City of Dreams and do you need to tweak that at all. Thanks.

Yes, Robin, it's Lawrence here. I think so far A-Max has been using the room inventory at Crown Macau. So it really hasn't happened to the Regency or the new [Centria] for the lower growing type of VIP segment. So I'm sure there is a little bit more room over there for growth there. In terms of City of Dreams, I think the Venetian has attracted over 10 million people in less than six months. So, we think we are well positioned to be across the street from them to take a significant portion of the premium mass business. And also throughout this A-Max experience we have learned that there is a revolutionary process going on in the VIP market and we will try to take some of that over to City of Dreams. So, so far we have been -- we are fortunate that the design and construction process has gone smoothly, and I think some of the ideas and visions we had in the past few years are spot on.

Thank you.

(OPERATOR INSTRUCTIONS) Our next question comes from Larry Klatzkin from Jeffries. Please proceed.

Hi guys. A clarification. I understood that LVS did not increase the commissions when they switched over how they did it, they just changed their methodology from a percent to 60/40 or 60 -- 40/40/20. And that they didn't increase commission rates and that there is not a competitive commission rate increase going on in the market. Am I mistaken?

Larry, it is Lawrence Ho here, you are not mistaken.

Because there is -- there has been no increase in rates and people aren't competing on increased rates with other junket operators.

No.

All right, just wanted to check on that. Thanks, guys, that's all I had.

(OPERATOR INSTRUCTIONS) At this time there are no further questions. I would like to turn the call over to management for closing remarks.

Operator, it looks like we have a couple of more calls -- callers trying to ask questions.

Our next question comes from Robin Farley from UBS.

I was just trying to clarify, wouldn't the 60/40 commissions would in fact be an increase above 1.1 commission level like a minimum it would be 1.2 and could go to 1.3 and above if hold is above that so wouldn't that be an effective increase in commission levels?

I think if you looked at the Venetian position it might well be. But that is not really for us to comment on. From a broader market perspective the 60/40 model is one that has been operating across the region, as Lawrence referred to, for a long time. So we don't see that as an effective increase in rates across the sector, but from a LVS point of view, you would need to pose that question to them.

Sure, no Garry, I just wanted to clarify that from that property level, whether there is an increase in commission levels. Okay, I just wanted to clarify that. Thanks.

And, you are right on that, Robin, in as much that it depends where you put the point as far as where theoretical sits in the marketplace. And our position on that has been that theoretical sits at 2.7% and obviously if you move that needle up to 3% then you are absolutely right in what you are saying.

Our next question comes from [Garry Peach from Maguire]. Please proceed.

Hi guys, thanks very much for your time today. I have two questions. The first one was with regard to your commission rate that you paid out in the fourth quarter. I understand it was a bit blended across the revenue shares, as well as the turnover based commission. Can you give us any indication on what that blended commission rate would have been? That is the first question.

The second question is, within your accounting format, what proportion of that commission rate is sort of recognized or netted off against revenue as opposed to recognized into your cost base? And the reason I'm asking that is I'm just trying to work out the cost base for Crown in the fourth quarter.

Greg, do you want to take the first part of that question and I will take the second.

I think we haven't given specific guidance on our blended rate across the board, but it is fair to say that there will be a greater component on a commission based model as opposed to the revenue share model particularly based on the activation of AMA in the second half of December. So, Simon, I will hand over to you to address the second part of the question.

Yes, we take -- in terms of -- Garry, you're referring to the fact that commissions are split so that that portion of the commission which is effectively a player rebate on the U.S. GAAP is taken as a deduction against revenue and that portion of the commission which is effectively a marketing expense a piece that is paid to the junket operator is reported as a cost in the operating cost line. And in terms of taking our commission costs for the fourth quarter the split out between those two parts is approximately 70/30. So about 70% of our commissions comes off the top, and about 30% is recorded as a cost.

Okay, because that's in fact the assumption I have been running in. Perhaps I -- some things, but I can't quite tie back the cost base, Simon. Maybe it's a question I'll take offline with you tomorrow if that's okay.

Sure. No problem.

Thanks very much guys.

Thank you.

At this time there are no further questions. I would like to turn the call back over to Simon Dewhurst.

Okay. Thanks very much. I appreciate everybody's input and participation in this morning's call, and we look forward to speaking to you all again at the end of our next quarter. Thanks.

Thank you for participating in today's conference. This concludes the presentation. You may now disconnect. Have a great day. Thank you.