Melco Resorts & Entertainment Ltd (MLCO) 2008 Q4 法說會逐字稿

Good morning and thank you for participating in the fourth quarter 2008 earnings conference call of Melco Crown Entertainment Limited. At this time all participants are in listen-only mode. After the 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 Simon Dewhurst, Executive Vice President and Chief Financial Officer of Melco Crown Entertainment Limited.

Good morning and thank you for joining us today for our fourth quarter 2008 earnings call. Please accept my apologies for the slight delay. We wanted to ensure that you had time to read the results press release, which was a little delayed crossing the wire. On the call with me tonight are Lawrence Ho, Ted Chan, Greg Hawkins and Constance Hsu.

Please note that today's discussion may contain forward-looking statements made under the Safe Harbor provision of US federal securities laws. I would also like to caution you that the Company's actual results could differ materially from the anticipated results in those forward-looking statements. For further clarification, please read the full disclosure in our press release.

For the fourth quarter we reported net revenue of $253.5m and adjusted EBITDA of $22.4m. This compares with net revenue of $179.7m and adjusted EBITDA deficit of $1.6m in the corresponding fourth quarter of 2007. From a sequential third quarter to fourth quarter 2008 perspective we experienced a 27% decline in rolling chip volume from $14.2b to $10.3b.

Fourth quarter 2008 adjusted EBITDA performance was positively impacted by a number of factors. Table luck was slightly in our favor at 2.89% in the quarter, as compared to our targeted hold rate of 2.85%. And the mix of holds between the various programs of our rolling chip business also worked to our benefit during the quarter under review.

On the cost side our commission agreements are designed to tolerate lower rolling volume. Lower rolling chip volumes resulted in a ratcheting down of commission costs by approximately 50 basis points, as compared with the previous quarter. Further, we have previously announced an operational cost savings program of $25m per annum at Crown Macau. We benefited from one month of this program in the fourth quarter of 2008 as it became effective at the start of December.

We will keep our remarks about the quarterly results to a minimum and instead use this time to revisit a few items we discussed last quarter and to discuss some additional key issues. In summary these include, one, a review of our balance sheet; two, the benefits of the outsourced provision of working capital at Crown Macau; and three, our view on the potential to monetize assets.

First, our balance sheet remains strong and City of Dreams is fully financed. We have no near term debt maturities with our $250m revolver maturing in 2012 and our $1.5b term loan fully maturing in 2014. As of the end of the fourth quarter of 2008 our book value was roughly $5.45 per ADS. As of yesterday's closing price we were trading at a discount of nearly 56% to book. Our cash position as of the end of the fourth quarter 2008 was more than $825m excluding our cage cash.

We also had available a further $320m of funds undrawn under our project loan facility. Since the end of 2008 we have drawn an additional $270m on these facilities and we do not expect to make any further draw-downs going forward. We expect to spend in real cash terms approximately $620m on construction and pre-opening preparations at City of Dreams in the time between the start of this current first quarter 2009 and the initial opening of City of Dreams.

We fully expect that City of Dreams will be immediately cash generative. The first operating covenant tests under our debt facilities do not apply until a full 12 months after the opening of Grand Hyatt Twin Towers at City of Dreams, projected by the end of the third quarter of this year. This gives us ample time to ramp up operations at City of Dreams and normalize margins. The opening of City of Dreams remains on target for early June. The budget for City of Dreams is unchanged from our previous update and works packages are almost completely let out to contractors. There remains little room for cost surprises.

Now I'd like to return briefly to our decision taken more than a year ago to outsource the provision of working capital to junket operators at Crown Macau through the arrangement we have with AMA. Crown Macau's business volumes will continue to be directly correlated to the underlying health of the rolling chip market in Macau, which is a direct function of one, the aggregate amount of credit being made available to players and two, the time taken to rotate this working capital from lending it, to collecting it, to lending it again.

Many of you will recall that AMA raised its own working capital, which it uses to supplement the working capital of the junket operating under the AMA umbrella at Crown Macau. As a result, AMA meaningfully increases the capital available to junkets working at Crown Macau and AMA assumes the credit risk with these junket operators. Consequently, Crown Macau does not have substantial direct credit risk in this segment of its business and it has not taken significant bad debt reserves in 2008.

Despite our heavy focus on this credit-driven segment of the market we do not anticipate meaningful provision for bad debts going forward. This was an important factor in our consideration of an acceptable commission cost structure with AMA and we believe that today this compares favorably with the recent provisions for bad credit decisions taken by some of our competitors in Macau.

I would like to raise again the potential for asset monetization at City of Dreams. We're closely watching as one of our competitors makes progress in agreeing an accepted structure for monetizing apartment hotel units in Cotai and tests the market for pricing. Although the regulatory environment for asset monetization is coming into focus, it is still too soon for us to make a formal decision to move forward with the construction of our apartment hotel tower at City of Dreams. Further, given the limited number of buyers in the market and the recent freefall in residential real estate prices in Macau, we do not believe current market conditions are favorable.

We do not need to raise additional capital to complete the funding for our current and committed construction pipeline and liquidity concerns are not forcing us to pursue the immediate sale of non-core assets. We believe that non-core asset sales make sense from the long-term perspective of delivering superior returns to shareholders but we will remain opportunistic with the timing of any transaction.

Now I'd like to turn the call over to Lawrence.

Thanks, Simon. First I want to reiterate my confidence in MPEL and in Macau as the most dynamic gaming market in the world. Though the market is currently being impacted by various external factors, our outlook for Macau remains robust. We are confident that this is just the early innings in terms of the profitable development of the market.

City of Dreams is our flagship property and represents nearly five years of planning and over two-thirds of our invested capital in Macau. The property has a very unique design and I have no doubt that it will raise the bar for premium mass market customers and real VIP rolling chip players.

The opening of City of Dreams will mark a significant transition in our Company's history as we move from a Company largely focused on development to one almost exclusively focused on delivering superior operating results. We are an Asian Company catering to Asian customers. We are finely attuned to the dynamic tastes of an increasingly demanding audience of Asian customers. City of Dreams will be the benchmark of our capacity to identify and cater to the premium Asian customer and the opening of City of Dreams marks the end of a long development journey for us.

I'm confident that we are about to emerge as the gaming company in Asia most capable of recognizing and satisfying the demands of a constantly evolving Asian marketplace. The goal of sustainable development in Macau is shared by all gaming operators, the Macau government and the people of Macau. To this end we are committed to be at the forefront of providing education and training opportunities for local Macau people. Through a proprietary training campus and various other efforts we are proud to invest in those of our staff who are willing and able to invest in themselves through rigorous training and education.

The opening of City of Dreams will provide the capstone to our segmented development strategy with purpose-built assets designed to target specific demographic groups in an increasingly segmented gaming market in Macau. Mocha has successfully proven the existence of a robust market looking for a more casual gaming environment, while Crown Macau is the only casino designed from the ground up to meet the needs of its core Asian junket customers. City of Dreams will expand MPEL's presence into the emerging multi-night stay market with a focus on the premium end of both the mass market and the true VIP customer from throughout the region.

Additionally, we have sought to capitalize on uncertain labor market conditions of Macau to enhance our operating team. Over the last few months we have added some key individuals to our team who bring years of gaming experience in Macau and in the region. They have hit the ground running and will allow us to broaden the scope of our marketing efforts across all properties.

I continue to believe that high quality supply will drive demand and broaden the scope of the market as more people are drawn to Macau to experience world class and unique forms of entertainment, as well as some of the best gaming facilities in the world. The long-term health of the market will be enhanced by the full buildup of Cotai and the critical mass of a group of integrated resorts will be greater than the sum of their parts.

In the short term, however, we believe the slowdown in the pace of supply growth in Macau will serve as a significant advantage for City of Dreams. A reduction in the short term rate of growth in [real] supply in Macau will allow the city's infrastructure to catch up with visitor growth. Additionally, our hiring efforts are expected to be enhanced as City of Dreams will be the only major new employer this year. We are able to be more selective in our hiring practices than we had previously anticipated.

The slowdown in supply growth taken together with the critical nature of some of our competitors' loan covenant checks will provide some insulation against the risk of a significant increase in promotional spending at other resort properties, particularly in the mass market segment.

These are factors in play in Macau that are out of our control such as the health of the global economy and the availability of credit and there are also factors that are under our control. It is our job to manage our business and focus on the factors that we can control to optimize the cash flow that we can generate from our investments.

We will continue to align our cost structure to match the reality of demand levels in the market without sacrificing the entertainment proposition that will drive the long-term success of the market and our properties. To this end we are pleased to have successfully implemented the first $25m in annual cost savings identified at Crown Macau and will remain diligent in identifying additional overhead reductions going forward.

In addition to our confidence in the long term outlook for Macau, there are a number of factors that give us reason to be optimistic in the near term. These include the recent agreement between the governments of Hong Kong, Macau and the Guangdong Province to improve cooperation in the market, specifically as it relates to travel regulation.

Additionally, the six gaming concessionaires recently met to discuss a number of issues related to the health of the broader market in Macau and we believe these discussions will lead to improved cooperation, as well as lead to tangible benefits including a limit on junket commissions at 1.25%. Crown Macau with its business skewed almost entirely to rolling chip play will benefit materially from the proposed commission cap and we actively disagree with the views of some who postulate that the introduction of a cap will signal another [leg down] in overall rolling chip gaming volumes in the market.

I will now turn the call back over to Simon.

Thanks, Lawrence. To help those of you who are building financial models, we'll give you some color on non-operating line items for the first quarter of 2009. Depreciation and amortization costs of approximately $28m in the fourth quarter included some non-recurring credits that took us down from what has been a fairly consistent run rate. Depreciation and amortization in the first quarter of 2009 is expected to be back on the prior run rate in the $30m to $32m ballpark.

Similarly, fourth quarter corporate costs of approximately $10m was inflated by certain onetime items. We anticipate corporate expenses in the $8m to $9m range in the current quarter. Net interest income in the first quarter of 2009 is expected to be approximately $1m and pre-opening expense is projected to be roughly $40m, entirely associated with City of Dreams. The first quarter 2009 capital expenditure is expected to be in the range of $390m to $420m.

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

(Operator Instructions). We will pause for a moment to compile a list of questions. Your first question comes from the line of Larry Klatzkin of Jefferies.

Hey, guys. Actually I like where you're at right now. A couple of questions are as far as these savings for 2009, how much of the $25m did we see in the fourth quarter? So how much is left to be seen in 2009?

Larry, this is Simon. The savings were pretty much immediate once we kicked in into the start of December of last year. It relates to our key cost structure, which is principally labor related. You will have picked up in the press, I'm sure, on the time off in lieu of pay scheme that we were the first to introduce into the market during the fourth quarter of last year. And so it's pretty stable as we project that out through the course of the year in terms of bringing our cost structure down. Therefore, one month of $25m, you probably saw $2m, $2.5m worth of benefit in the fourth quarter.

All right, perfect. As far as a full year CapEx, I know you're not giving guidance further out but just for the CapEx number?

Well, I've already guided that through the start of June the CapEx will be about $620m and then there afterwards between June and the end of the year I would anticipate that there will be a further couple of hundred million US dollars as we complete the construction of the Grand Hyatt Towers and we also continue to pay and settle final accounts in relation to the main construction program.

Okay. And then I know there's some talk about the ferry situation and I can't believe that no matter what happens they'll allow the ferries to Cotai or to the main island to shut down. Lawrence, could you just talk about what's going on with that?

Well, I think, Larry, first of all, I know that the LVS ferry situation is stuck in a court case so I don't think it's appropriate for us to comment on it on this platform. But in terms of getting enough visitors into Cotai and into Macau we're not too worried because at the end of the day I think visitors arriving in Cotai in the new ferry terminal is only about 10% and there's plenty of capacity on the old ferry service. And I think in the very worst case if one ferry operator gets shut down I'm sure somebody will take that spot and take the time slot and the berths allocated to it at Cotai. So we're not too worried on that front.

All right. I just thought all three were given out the same way, so it's a concern for all of them, but okay. As far as regulation in Macau is going, the visa restrictions I hear are lifting in time for your opening and you were saying about the commission caps. Could you just talk about what you see happening in the market with regulation and work with the government?

Well, Larry, I think even in January I had come out and said that I believe that the worst days of Macau were probably behind us in December. And I think so far if you look at stats in January sequentially, January has been up on December and so far for us at least February is up on January again in terms of rolling chip volume. So we're pretty pleased.

And I think you combine that with the fact that Hong Kong, Macau and the Guangdong Province government will be jointly propositioning the central government to open up the whole region as one regional destination, that's extremely good news for Macau because I think a lot of people misinterpret what that is. That's not a relaxation of restriction because that's even better than that.

In the good old days the maximum amount of time somebody from Guangdong or Shenzhen can come to Macau or Hong Kong was once every seven to ten days. What they're proposing now is multiple visas. In other words, people can come every day if they absolutely wanted to. So this is actually much better than just a relaxation of certain restrictions. Now when does this get put into place?

We certainly hope that it's in time for City of Dreams, because it's going to make a world of difference for our mass market, because if you look at the Guangdong Province, you're talking about 100m people there. So we're excited by that and whatever -- I think it's in the best interests of all the concessionaires to encourage the government to push this through, so we'll do whatever we can.

And just, Lawrence, I've just seen the January visitation numbers into Macau and January 2009 was up 1, 1 and a bit percent as against January 2008, so the stimulus is on top of a visitation status there that still continues to basically be flat year-on-year.

So though we're still seeing a revenue drop in January but you're saying we've maybe seen the bottom at this point and maybe a turn?

Well, you've seen a revenue drop in January versus January 2008 because you've seen a slight deflation in what was a credit-fueled bubble back at the start of last year, Larry.

Good point, good point. All right, well good, great guys. Thanks.

Thanks, Larry.

Thank you.

Your next question comes from the line of Karen Tang of Deutsche Bank.

Hello there, this is Karen here. Number one, we're very happy to see that you're sticking to your June opening date for City of Dreams. With regards to this project, I have a three-part question. On the mass market side, can you share with us what's going to drive the mass market coming to you? Do you have any buzzing program in place or talking?

And then secondly on the VIP side, have you started or signed any of the junkets? Will A-MAX be a big part of City of Dreams? And finally on the cost side, can you help us understand better with labor costs coming down in Macau, what should we be expecting on the say, per head of labor costs? Thanks.

Yes, I think to answer the first part of your question, looking at the mass side of the business, and I won't go into too much detail. As you appreciate, we're in a fairly sensitive position relative to our pre-opening but we've been looking at the main drivers covering areas of brand positioning in the market and building a strong base of inbound transportation for visitors to Macau, amongst a range of other areas which would generally reflect the type of products that we have. So segmenting the business and making sure the environments that we're designing really cater for the components of the business that we can think can add significant value across the mass segment.

From a VIP point of view, we've stated previously that the general strategy would be to try and diversify as much as possible to make sure that we're adding incremental to the base of VIP play across both Crown Macau as well as City of Dreams.

One of the key focuses at City of Dreams also will be to really push aggressively into the direct VIP area, and to that extent, making sure again we're designing and building environments which will really cater for the top-end of that direct market, which of course can have a higher margin flowing through for us, and ensuring that the service and other amenities are aligned with that push into that area. At the same time also building a sales and marketing force in our VIP area under the MPEL banner which we think will really aid with the growth in that segment.

From a labor point of view, we are recruiting at an interesting time, so we're outside the historical inflationary cycle which we've seen previously, so it's given us the opportunity to look quite aggressively at both pay-rate structures in the markets but also the flexibility of how we can contract our personnel moving forward. So we think all of that will have a positive impact on operating margins at City of Dream.

And further to that, I think we've had a very, very strong response overall to our recruitment campaign to date. So as we've looked at market conditions, we've been able to scale both what we think is the appropriate FTE position to give Dreams at opening, but also make sure that we're addressing and capitalizing both on the position that MPEL has in the market as an employer because we do offer a myriad of development opportunities across the three operating business units.

Also looking, as I mentioned, at flexibility in some of the contracts we can offer to really go hand in hand with some of the lifestyle opportunities that we can present for staff as they're looking at joining our company. And at the same time, one of the key drivers as we are looking at some of the demand is really City of Dreams being a venue where there's multiple international brands represented across the property. So this is a real positive from a market point of view in terms of the demand for our recruitment base.

Very interesting, thank you.

Your next question comes from the line of Carlo Santarelli of JPMorgan.

Hey, guys, thanks. I was just wondering if you could expand a little bit on maybe some of your plans for City of Dreams and how those plans have shifted in recent months given trends that you've seen changing in the market between mass and VIP and if you're pretty firm with the way that you want to position the property at this point or if you see some further room for tweaking?

Yes, I think there are probably a couple of ways we're generally looking at it. One is obviously from the OpEx side of the business, so as we're looking at the demand conditions in the market, we're clearly focusing very strongly on how we approach the operating structure of the business to give us as much flexibility and ultimately the ability to scale that OpEx side, reflected in what we can do with our employment contracts particularly.

We've got what we think is the right mix of both mass and VIP tables across the property reflected in the environments that we have designed, so as I mentioned previously, we're comfortable with that split. I think from a VIP point of view, we're getting quite a bit of interest from new junket operators who don't have a representation within MPEL at this stage, so that's positive.

At the same time, I refer to the fact that we really want to push very aggressively to build a direct VIP business base which has a very positive margin impact to the business at the same time. So some of our broad-based strategies for the mass area remain as is. We're principally looking at the scaling operational cost aspect of the business.

Okay, great, and I'm sorry if I missed it earlier. Did you guys break out specifically what your split of table games would be?

Yes, I think we previously advised we'll be opening with probably around 550 gaming tables, of which approximately 140 of those would be VIP at this stage, obviously with some flexibility to change those numbers as we monitor the market closely.

Great, thank you very much.

Thanks.

Your next question comes from the line of Ryan Lee of Goldman Sachs.

Hi, Lawrence and Simon. I've got a few questions, mainly on City of Dreams. The first is that just we know that at a time when Amax and MPEL, actually entered into an agreement. Actually, AMA went out and raised the capital in the market by doing a share offering but then under this kind of market, we wouldn't expect something similar to be able to happen in this market. So if City of Dreams is going to enter like a junket operating agreement with Amax again, would City of Dreams consider helping Amax to raise capital for its VIP (inaudible) business?

Yes, hi Ryan, this is Simon. It was quite difficult to hear your question but I think that you are asking whether we would consider entering into an agreement similar to the one that we entered into with AMA at Crown Macau, whether we would repeat the trick at City of Dreams. And I just want to repeat and re-emphasize what Greg said earlier on.

It's absolutely critical for us through 2009 to make sure that we very clearly differentiate the two products, Crown Macau, which will be soon to be re-branded, and City of Dreams, which is a collection of international brands. We must differentiate those products because otherwise we run the risk, the very real risk, that we will cannibalize the old property with the new property, and that's something that we're very conversant with, we have a clear understanding of.

So we will be looking to contain and continue to support and assist AMA, and the sub-junkets that operate with AMA, at the soon-to-be-rebranded Crown Macau, and we will be entering into a number of new junket arrangements. We're well advanced in those discussions at the moment for the City of Dreams, so as to ensure that we minimize as much as possible any cannibalization of rolling chip business from one to the other.

The other point that I would emphasize is that with Crown Macau, we have a property, as you've seen in the last couple of quarters, that is almost entirely dependent upon the rolling chip segment, whereas in fact if you look at the composition of EBITDA at any of the integrated resorts that exist in Macau today, you'll know that they are very heavily dependent upon the cash, or the mass business to drive EBITDA. That is the focus for City of Dreams. It's a segment in the market that we're not properly addressing today.

Right, thanks for that. And another question is that for the Crown Macau business, as we see Amax actually in the fourth quarter that how much they have [growth] for Crown Macau, and then so approximately $8.7b is grown by AMA and then another [$1.5b is grown by Crown Macau]. So would you actually, like with Amax during that [spell] compared with the previous quarters, would Crown Macau think of expanding the portions that you wrote by yourself?

I think maybe Ted can answer that, but I think we're constantly -- it's Lawrence here, Ryan, by the way -- I think so far AMA has performed along with the rest of the market. I think in the fourth quarter there was definitely a contraction in terms of rolling trip volume and AMA has performed more or less around the market averages.

But we're constantly monitoring performance to try to improve the yield on our property and on our real estate so maybe Ted can -- in terms of the split between AMA fixed-room -- other fixed room junket operators or any new fixed room junket operators?

Hi Ryan, it's Ted Chan here. I think over the course of the last two quarters, AMA represents about 80%, 85% of the total or rolling small (inaudible) properties and I think the rest of it would be split into the vast majority coming from the non-AMA junket operator and some portion from (inaudible) base referred by our international network.

So I think that's the current mix, and what we're trying to do at the moment is -- although the overall market has dropped a little bit compared to two quarters ago, but we will continue to increase our captured junket proportion to the market in order to settle some of the lost ground that we had for the last quarter.

And this is Simon. Lawrence gave a little bit of color looking into the first quarter earlier on. Let's repeat it to make sure that it's not missed. The January market share that we had, I think is already reported in the marketplace. It's been very stable as compared with market share that we saw throughout the whole of the fourth quarter of last year.

January sequentially was up on December in terms of rolling chip volume and whilst we don't know what the whole market looks like, certainly after 23 days of February, we are some 15% ahead of where we were in rolling chip terms at this stage in January. So Lawrence alluded to the fact that we think that we've seen the worst in terms of compression in rolling chips. I would also just stress the point that in terms of a single aggregator, AMA is still unquestionably the largest operator in Macau and we're very happy indeed to have them as our partner.

Great, just a follow-up on that, so as of now, approximately 80% to 85% of the rolling (inaudible) at Crown Macau is actually [generated] from AMA? So would you expect these to contract a bit, like in the following quarters if Crown Macau put more effort in generating the non-AMA rolling volumes?

Ryan, this is Simon. We've been very stable with a mix of around 80% to 85% of our total volumes coming through the AMA umbrella, and I don't anticipate that we will see any change to that stability as we look out for the next few quarters.

Okay, got it. And I had one final question just on (inaudible). Because I see -- I don't see the slot revenue numbers from Crown Macau (inaudible). Can you give us a number for that?

I'm sorry, I can't hear the question Ryan.

The revenue from slots, from slot machines at Crown Macau.

Yes, what's actually happened in the fourth quarter, Ryan, is effective December 1 of last year, we transferred the management of all of our slot machines that were located at Crown Macau under our Mocha operation.

So the slot machines have been aggregated together and formed our -- at the time our seventh Mocha outlet in Macau. So the fourth quarter was a bit of a mixed quarter for us because there was only actually two months' worth of slot revenues reported under the Crown division. So it doesn't make a lot of sense to break those numbers out.

Going forward, we will report those slot machines as part of our overall Mocha results, and so as you look at the win per unit per machine that we report as a metric for Mocha, you'll be able to see how those machines are performing, by reference to the rest of the network. Certainly through December and January, those machines performed at a comparable level on a win per unit per day basis for the rest of the Mocha network.

Your next question comes from the line of [Gary Naggen] of UBS.

Hi, good evening, everyone. I just want to ask a question about the [overall] Macau VIP market. Do you see the VIP rolling chip volume has seen a bottom in January and why, if so?

Well, first of all, I would point to the fact that if there was a bottom, it was in December rather than January because January was up sequentially on December.

I think that our view is that if as we look out and try and form a view around the headwinds that we face in Macau, which are not unassociated with the headwinds that pretty much every economy around the world faces right now, and try and gauge whether those issues will loosen up for the market, will become less impactful for the market through 2009, I think that our view is that yes, we should see some gradual improvement, such that we anticipate that the overall revenues that we'll see in the Macau market, for the whole market in 2009, will be in line with the revenues that we saw in 2008. So that's our best estimate of what the market looks like, looking forward, Gary.

Thank you. Just another question on CapEx. Is the CapEx guidance that you gave out all cash CapEx? And how should I think about breaking down between cash and maybe deferred CapEx last quarter that you've mentioned?

Yes, basically everything that I presented in this call is on a cash basis to help you try and understand what our cash outflows will be as against our liquidity position of the company.

I see, thanks. That's great.

(Operator Instructions). At this time, I am showing no questions in the queue. I would now like to turn the call back over to Mr. Simon Dewhurst.

Thank you very much for listening in on our conference call today. We look forward to reporting back to you in another three months' time. Thanks again for your questions, and have a good day.

Thank you for joining today's conference call. You may now disconnect. Have a great day.