Melco Resorts & Entertainment Ltd (MLCO) 2009 Q3 法說會逐字稿

Good morning and thank you for participating in the third quarter 2009 earnings conference call of Melco Crown Entertainment Limited. At this time all participants are in a 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.

Thank you and good morning, especially to those of you joining us from G3 in Las Vegas; I know it's very early.

I'm here in Hong Kong with Lawrence and Ted; Constance and Greg have joined us via a conference call link up. Before we get started please note that today's discussion may contain forward-looking statements made under the Safe Harbor provision of Federal Securities laws and actual results could differ from anticipated results.

I'll provide my normal commentary prior to opening up the call for questions but would now like to turn the call over to Lawrence.

Thank you, Simon.

I've been extremely pleased with the smooth opening of City of Dreams. Over 6,000 colleagues at our property have performed remarkably well under challenging circumstances and have delivered a world-class experience to our customers from the day we opened.

Approximately six million people have visited us since opening.

Our rolling chip or VIP business has met our expectations in the first full quarter of operations at City of Dreams.

Some of our competitors like to question our success in VIP, claiming that we overpaid for this business. Let me deliver an unqualified message to those listening in. We have held commission rates at City of Dreams at the proposed cap rate since opening. We have built our share up to roughly 10% of the total market, and this has been done with no noticeable cannibalization to our VIP business at Altira. Truth is, we are doing great in the rolling chip segment and this is down to our people, our relationships and our properties.

Our premium direct VIP business has also been strong. We estimate that the contribution to our overall VIP business from premium direct players at City of Dreams is as high as any other property in Macau. This is a business that is marketed and delivered to customers on a one-on-one basis and I believe that we deliver this type of game experience, as well as, if not better than, anybody in Macau.

I'm delighted that Altira is one of only two properties in Macau to have been awarded five star status, for both its hotel and spa for 2010. [The award] was formerly known as the Mobil ratings.

This award recognizes Altira as the bench market quality property in Macau. Only those who have been lucky enough to stay at Altira appreciate just how good it is. We will continue to invest in raising the bar in Macau across all our properties, confident that full recognition will follow quickly in the results that we will be able to deliver to our shareholders.

The area where we have some heavy lifting to do to drive growth and improvement is in the grind mass-market business at City of Dreams. Although our growth trend in this segment continues to improve, we have not gotten close to our full potential yet.

We are not going to provide our detailed marketing play-book in this area, but we have a clear plan of attack to boost awareness of the mass gaming experience at City of Dreams, which will drive visitation, length of stay, and, of course, profitability.

Greg, do you want to comment?

Yes, thanks Lawrence.

We certainly remain confident that our mass-market business will continue to ramp up over the coming 12 months. This process will particularly benefit from the ongoing build up of critical mass in our customer database, as we further use this data to drive loyalty and repeat visitation. Visitation and play levels will benefit significantly from the opening of additional amenities at City of Dreams over the next six months.

Our retail is going to expand over twofold in size. We're putting the finishing touches on a nightclub proposal at City of Dreams that will deliver a stunning product to Macau, unparalleled in the market.

Five or six other fantastic amenities are in the remainder of the phase two development pipeline and the Dragone show will open towards the middle of next year.

We're certainly confident that the show is bigger and better than anything which has been produced anywhere in the world in recent times.

One component of our mass-market build strategy was the recent opening of the Grand Hyatt. This is certainly a positive, or there is certainly a positive correlation between room inventory and mass drop. As we've explained previously, there was a phased delivery of the Grand Hyatt's guest rooms; we're currently at about 400 rooms available for sale or for casino customers, as of today. We expect to have the full complement of rooms in service by the end of this month.

The Grand Hyatt also brings additional amenities to City of Dreams, including outstanding restaurants, dedicated roof deck swimming pool and spa area, as well as significant meeting room and ballroom infrastructure that will further support our entertainment capability and visitation build.

Certainly, we're too early to determine the impact of the Grand Hyatt on our mass-market performance, but we remain confident that it will drive play levels and profitability at the property.

Back to you Lawrence.

Thanks Greg. From a macro economic perspective, Macau continues to strengthen and, as predicted, the second half of this year will be meaningfully better than the first half. We believe we'll end up with 2009 being 5% to 10% ahead of 2008 in GGR terms and we expect next year to deliver a top line growth of around 20% with limited additions in new supply.

This mix of conditions will provide an attractive opportunity for all of the operators in Macau to drive their business and improve profitability.

I will now hand the call back to Simon for some final comments and then the Q&A.

Thanks Lawrence. As we've said on previous calls, our balance sheet is strong. In fact, one of the best in the gaming business. As of the end of the third quarter 2009, we had approximately $685 million in cash.

Construction of City of Dreams is essentially complete with the recent opening of Grand Hyatt Macau. We expect to outflow approximately $115 million in closing out final accounts on the site during the course of the fourth quarter of this year.

Now, as I normally do, I'll give you some guidance on non-operating line items for the fourth quarter.

Depreciation and amortization is expected to be approximately $75 million. Net interest expense is expected to be approximately $20 million and pre-opening expenses are likely to be negligible.

I'll wrap up my remarks with a comment on the timing of our third quarter earnings release.

We don't agree with it, but we're aware that more than a few commentators have demonstrated some concern about the timing of this release. I'd like to point out that our timing in releasing this set of results is completely consistent with how we've announced quarterly results since we became a public company back in December 2006. That said, and in order to avoid any future confusion, we will accelerate the timing of our quarterly reporting dates going forward. And so with that, let's get on to the Q&A. Operator, over to you.

(Operator Instructions).

Your first question comes from the line of David Bain.

Great. Thank you. Guys, in October we saw a little bit of a market share movement downward, [it's been related pretty much to low hold] and we're hoping that you can give us a sense on November trends.

Yes, sure David. Hi, it's Simon Dewhurst.

Hi.

Our market share, as it was reported in October, was down from the run rate that we'd seen through the course of the third quarter. It was -- due to two things I think.

The first, of course, is the point that you just made that we had lower hold on the rolling chip side across both properties in the month of October, as compared with the previous quarter, the one that we're reporting on. And also, October, remember, is a month that is distorted, particularly in the first week, the holiday week, towards the mass segment.

Right.

We had very, very strong market share, above our blended market share on the rolling chip side, driven by the influence of Altira and its mix of business, as compared with the mass side. And so any month that is strong because of holiday periods, you're going to see that distortion downwards.

Into November, the volumes that we're seeing in our property, which is really more important than hold adjusted revenue, the volumes in the properties, both properties, continue to build on what we saw in October. We're probably looking like we're seeing better volume in November against October and that's against the background of a market that looks like it's grown north of 50% over the course of the first two weeks of November.

Oh, okay. That's great.

Are you still excited by the new Chief Executive in Macau coming in in December? I mean do you expect any near term or intermediate term benefits from his leadership? We discussed it recently on the last call, but since then there's been some movement in the market and maybe some confusion in the markets, so maybe if you could speak to that a little bit, as regards the visas?

David, morning to you.

Hi Lawrence.

Hi. No, we continue to be very enthusiastic about the new Chief Executive taking office in approximately one month's time. I think, so far -- I think our view hasn't changed and I think there hasn't been any major issues within Macau.

I know some of the infrastructure projects, there has been definitely a lot more talk about the infrastructure projects being resumed and, potentially, being picked up at a much quicker pace.

So, you know, I think again with the new Chief Executive and a new administration, it's really a clean slate for all of those people to really take Macau to the next level. So we remain very encouraged.

Okay, great. And just a final one. With regard to your database of City of Dreams. Are you guys -- can you give us any data points, the kind of quantitative measures that we can look to in terms of future direct marketing that could take place?

I think Greg can probably jump in, but I think over the last few months we have definitely built up our database in terms of the mass business. So, Greg, could you?

Sure. Just following on from Simon's earlier comment as well, the October trends, particularly on the mass side of the business, were very pleasing, in fact the highest run-rate GGR across both mass divisions in October. And we saw that momentum into November as well, and that's being maintained. So positive indications coming through there.

Look, we've pushed well through 100,000 in terms of our database with ongoing acquisition occurring. It's an important milestone for us in growing fairly quickly. A large part of what we can do in terms of repeat visitation and player stimulation is related to the ability to communicate with those players.

So really starting from a base zero, we've built a strong database, and in fact, over fairly recent times, have been actively working that database. So it's quite positive, building quickly. Now we have a solid foundation, it's an area we really want to focus on, moving forward.

Okay great. Thanks guys.

Thanks David.

Your next question comes from the line of Cameron McKnight with Buckingham.

Good morning. Simon, could you walk us through the covenant on your Macau credit facility, when that kicks in and what the test is?

Well I'm assuming that you're referring to one of the covenants, which is the leverage covenant. Am I right?

Yes.

The leverage covenant bites in the fourth quarter of next year, so it's approximately 12 months away from us at the moment.

We are required to be under 4.5 times by the time we reach the fourth quarter of next year. We've got about $1.7 billion drawn on our facilities; we won't be drawing any more of the capacity that is there. And we've already banked about $300 million in our balance sheet off the back of a couple of equity placements that we did earlier this year that will be used at some point during the earlier part of next year to effect an accelerated repayment of those facilities.

So if you look at the facilities, we've got about a $1.4 billion number absent any application of the positive cash flows that we've got from our operations, and we need to be coming through at 4.5 times or below. Does that help?

Yes, thanks.

Your next question comes from the line of [Dominic Noel Johnson] with Citi.

Hi guys. Just a couple of questions please. Firstly on the mass side, at City of Dreams, if you -- could you possibly tell me if you normalized hold to say 18% on the mass side, what EBITDA would that have come out at?

That's not a sum that we've actually done. We don't go through the process of normalizing hold. On the mass side, remember of course that hold is not really a function of luck, it's a function of the length of play at the table. So your hold is what your hold is by reference to how you perform.

We're holding at just below 16% at City of Dreams through the third quarter. We've always argued that we will see a gradual movement upwards in the hold rate that we see on the mass side as we bring additional room inventory into that property, specifically with regard to the Grand Hyatt.

And we would certainly expect to see our hold move from 16% up towards 18%, and the properties that are performing at the most efficient level in Macau are indicating that you can hold up to 20%, 21% on the mass side. So that's obviously a future target for us.

But obviously you know, Lawrence here, the incremental holds that we get from that is significant, once you go beyond that rate.

Absolutely. Maybe then instead, could you comment on where do you think mass drop could get to when you implement the measures that you've talked about?

Again, I hope you appreciate we're not going to provide any forecast in terms of the volumes that we expect to see in any segment of the business, not least of which because do one segment and it's not really a complete picture. But we've seen an improvement in the volume of drop that we have at City of Dreams of more than 35%, nearly 40%, if you look across the five months that we've been open as a property.

And we are continually adding, as Greg made reference to in his prepared comments, we're continually adding to the amenity suite that is there at City of Dreams. And we're very confident that we'll be able to continue to push forward in terms of seeing good solid growth in those drop numbers, and in the hold that's attached to it, as we work out into future quarters.

Okay great. Thanks Simon. Maybe the last question, just to Lawrence. The 20% top line growth that you mentioned, maybe you could just talk about that a little bit more in terms of detail. And what I refer to in particular is, are you concerned at all that that would be too fast a growth for the Macau government next year?

Well I think if you look at the growth, even in the second half of this year, obviously the first six months was difficult for the whole -- the first six months of 2009 has been difficult for the whole global financial community. But as you can see in the last few months it has turned around very, very quickly.

So I think given that next year is going to be a full year, and we certainly hope -- and we don't anticipate that there's going to be another global financial crisis next year. And the fact that with the new administration, and China really firing on all cylinders, I think around 20% growth is well within reach.

I think other than this year, the past few years in Macau has experienced over 30% CAGR growth. So I think 20% by -- around 20% is by no means non-achievable.

Thanks Lawrence. It was more just in relation to, some of the other operators have been talking about managed growth in Macau coming through, and that would be somewhere in the region of China GDP plus 300 to 500 basis points. That would be more comfort [for the Chief Executive]. Has that been a slight change in tone?

No, I think if you look at -- obviously that would make it 15% as China's GDP growth is about 10% every year. But I think 15% to 25% is within a comfortable range. And again I think in terms of Chinese policies, China has demonstrated its strength in terms of how it can really operate its economy, and so I think they take a long view, a very long-term view with regard to their policies. They're not going to change their policies every few months just because the growth is speeding up too much, or slowing down too much either.

Okay, fantastic. Many thanks.

Our next question comes from the line of Justin [Rock] with Goldman Sachs.

Hello.

Hi Justin, go ahead.

Hi, thanks for taking the question. I've a few questions about the COD. Number one is, do we expect any more CapEx related to COD regarding a new theater [wide] expansion or other things that we should be aware of?

Thank you for raising the question. Let's just run through it quickly. So we've got, at the end of the third quarter we have accrued CapEx liabilities of a little more than $150 million. We will cash settle approximately $115 million during the course of this fourth quarter, and the remaining $40 million are really retention payments that apply to the warranty periods on the various construction contracts and they won't get settled until the early part of the second half of next year in the main.

As we then look forward into 2010, there's about another $40 million of CapEx that is primarily associated with the final fit-out of the Dragone Theater. That equipment will arrive in Macau in early 2010 and so we'll pick up and be settling that cost during the course of the first half.

We've then put in place a program of additional CapEx expenditure that runs through 2010, which goes above and beyond the original scope, budgeted scope of City of Dreams that captures some of the new initiatives and some of the new amenities that we are looking to bring into the property over the course of the next six months. And that would be roughly in the order of $40 million to $50 million, which is basically an application of what you would normally expect in the first full year of maintenance CapEx. But because we're under warranty periods, we'll push it into new developments, new amenity development.

Thanks. [Could you] remind us on your split now between the VIP and mass tables in COD, and also the actual win-rate that you have for this quarter?

Greg, do you want to talk about the tables?

Yes, sure Lawrence. The current split of VIP, mass tables. We have 135 VIP tables and 315 mass tables operating at the moment. Simon, I'll hand back to you just to confirm the win-rate percentages as indicated for the quarter.

Yes, Ted, why don't you just quickly run through the Altira table-mix?

Altira is running 250 tables altogether, and we have 210 tables for VIP and more than [38] tables for mass.

Okay, thanks Ted. So in terms of the win-rate, I think that we've published that the blended hold rate on the VIP side, across both properties for the third quarter, was in our expected range of 2.7% to 3%. At City of Dreams we were slightly above 3% for the quarter, and at Altira, we were just below 2.7%. I hope that helps.

All right. Okay, my last question is, I'm sure the opening of Grand Hyatt will have a positive impact on the mass drop of COD. Do you mind to give us some more color on what's happening after the opening in October and November, how the mass drop has been performing? Thanks.

Sure, it's Greg here again. The things I mentioned in the statement earlier, probably a bit early to call in terms of direct impact on mass drop at this stage. Certainly a very positive customer reaction to the property, which is very, very pleasing for us, that's both across the retail and gaming segments.

So, today, we have about approximately 400 rooms available, the full range of inventory will be progressively handed over, over the course of the next four to six weeks, realistically. So I think across that time frame, and as we start providing greater utilization and occupancy across both gaming sector and retail, we'll get a far greater sense of the impact on the mass component of the business.

Another general positive is that the opening of the Hyatt is down the eastern end of the property as well, which is at the opposite end to our two existing hotel operations. So it has an impact where it's also positively impacting what's happening from the gaming floor down the eastern end as well, which is driving some more critical mass to those spaces.

Thank you.

Thank you.

Our next question comes from the line of [Harold Carliss], with CT Associates.

Sir, your line is open. If you muted your line, please unmute.

Mr. Harold Carliss, your line is open. Please unmute.

Can we go on to [Gary Pingay], please?

(Operator Instructions)

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

Hi, guys. Can you hear me?

Yes, I can, Gary. Carry on.

Excellent, thanks Simon. Can I just ask a couple of questions?

Firstly, if I look at the announcement that you guys made on August 3, with regards to how City of Dreams was ramping up in the month of July, I think that the comment that was made was that in the mass market segment, you'd seen table game drop in July of $132 million.

So if I look at the number you're talking about now for the third quarter, which is effectively $390 million, it basically looks like in the months of August and September, the mass market drop basically stagnated, yet the market actually grew quite significantly.

Admittedly, you're saying that you're going to get the room product and stuff in place, but none of the other operators have seen significant addition to their room product, but have captured a significant chunk of that growth.

So, I guess my question is how do you measure out that disparity and what do you have in mind to close out that gap and capture some of that growth that you haven't been able to get over August and September? That's the first question.

The second question is with regards to Altira, and particularly the AMAX side of things. So admitting -- rather, understanding that the hold rate was below 2.7%, I was just wondering what's happened to the agreement with AMAX, which was discussed, I think, in 2008, where if the hold rate fell below a certain amount, they would be compensating you back to adjust the hold rate back up to 2.85%? Just want some clarification on those two points.

Greg, do you want to take the first question?

Sure. Hi, Gary. Look I think, without having that release in front of me, yes, we've seen some trend patterns across the volumes in mass drop across that period, but certainly of more recent times, over the last eight weeks, eight to 10 weeks, particularly related to some activation and work in our direct promotional area and loyalty database marketing, we have seen some positive trends in both volume and, of course win rate, coming through from a mass perspective.

Look, I think, realistically, the areas I'd highlight would be building that loyalty database, working it effectively. I think across the first period of operation at City of Dreams, we did have a limited room supply available to us, and I think from an integrated resort perspective, it's important to have room availability and try to get that domiciled business there.

Grand Tower's principally dedicated to VIP business, which has left us with the Hard Rock, our product for that time. So I think the acquisition and addition of Hyatt to that blend has already seen some positive steps forward, and I think that will continue.

Certainly the physical product and layout work we've done on the floor is continuing to be received very, very positively, so I think that there's that direct tactical layer, and on top of that is a range of other amenity areas, which we've spoken about before, which adds some more destinational value to City of Dreams, which will progressively come on line over the next six to eight months.

So I think the combination of direct and indirect marketing, as well as some of the amenity additions, will keep that growth occurring. As I said, we'll come off a very good October in terms of GGR from our perspective on mass, and that's continued into November.

Simon, I'll hand back to you to discuss the AMAX response.

Thanks, Greg. I just -- just to make sure that stagnation isn't a word that people are left with, from the question that you've just been answering. Let's just remind ourselves, as well, that the volumes that we've seen on the mass side from September through October, and then October into November, have also been showing growth. So, it's not stagnant at the current time.

As far as Altira is concerned, and the deal with AMAX, the arrangement that with have in place with AMAX relates specifically to one program. There are many, many programs that operate at Altira, there are -- there's the commission based program that's under the AMAX umbrella. There is the revenue share program that again is under the AMAX umbrella, then we have some direct play and we have some junket play that is outside of that.

So, when we report hold rates, of course, we're looking at blended rates. Within the specific program that we have with [AMAR] where there is a hold rate share mechanism in place, something we talked about quite a while ago now, we're basically neutral at the moment. So, since the [light] to date of the opening up of that program, we are holding in the band where there is neutral exchange between us and AMAR in terms of shares one way or the other. Gary?

Okay, great. Thanks, Simon. And just one final question, as well. Wondering whether you could give some clarity on the cost base that COD and Altira are operating at?

Yes, sure. I spoke to this in the conference call the last time round, then I discussed a Company-wide, an MPEL-wide cost structure of approximately $1.3 million a day, and that obviously includes City of Dreams, Altira, Mocha, and our centralized and corporate costs.

With the addition of the Hyatt property and its staff during the course of the last few weeks, that amount has increased by approximately $75,000 a day, so we're up to a little bit shy of $1.4 million per day, under the current cost structure, Gary.

All right. Thanks very much, Simon.

(Operator Instructions)

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

Hi, good morning guys. This is Karen here.

Hi, Karen.

Hi, two questions. Number one, your competitors have talked about, in the conference call, the direct VIP percentages. Can you tell us about your percentages at COD?

And second question is that a lot of clients here now understand that sites five and six are likely to open for [restart] of construction, so we just want to hear your views on how your neighbors re-launch of the construction will impact you in the longer-term. Thanks.

Karen, it's Lawrence. Yes, I think our direct -- premium direct VIP businesses at City of Dreams is in excess of 15% of our --

17%, life to date.

Yes, about 17% of our total VIP business is City of Dreams, so we're extremely pleased with that. And, I think, again, as we said earlier on, that's really attributable to the fact that, based on our relationships, the people coming here and the fact that they absolutely love the product. So both the design, architecture of the property, and also the services of it.

In terms of sites five and six, or other properties on Kotai, we have always held the view that Macau is still a supply driven market, and in order for Kotai to build further critical mass, we would be delighted to see our competitors to finally finish their building, because once we have more rooms on Kotai, then it should be even more meaningful as a force to draw traffic into the area.

Now, of course, if the infrastructure from the [Pakon] ferry terminal can finish quicker, the light rail transit can finish quicker, that would be even better. But I think as a property, in terms of City of Dreams, our proposition and our positioning is fantastic. We're focused on entertainment and excitement.

So, with the additional rooms, I'm sure people will want to come to City of Dreams to see our attractions and also to visit our overall property. So we are really looking forward to the day that Kotai really gets built out and can enjoy more critical mass.

Okay, lovely. Thank you.

Thanks, Karen.

(Operator Instructions)

Okay, let's close it off there then, please.

I'd just like to thank everybody for listening in on the conference call for this quarter end, and we look forward to reporting back to everybody in about three months' time. Thanks.

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