Melco Resorts & Entertainment Ltd (MLCO) 2010 Q3 法說會逐字稿

Good morning and thank you for participating in the third quarter 2010 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 Geoffrey Davis, Deputy Chief Financial Officer and Treasurer of Melco Crown Entertainment Limited. Please go ahead.

Thanks, operator. Good morning and thank you for joining us today for our third quarter 2010 earnings call. On the call with me today are Lawrence Ho, Ted Chan and Nick Naples.

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. Our actual results could differ from our anticipated results.

I'll now turn the call over to Lawrence, our Co-Chairman and CEO.

Thank you, Geoff. Hello, everyone. We're pleased to report strong third quarter results that deliver a number of operating milestones for our company, including record consolidated net revenue of approximately $730 million and record adjusted EBITDA of $136 million.

Our operating team has begun to gel, and we believe we have turned the corner in being able to more consistently deliver solid quarterly results. At the same time, Macau is firing on all cylinders, and we are fully participating in this growth. In fact, we are taking share.

On a sequential basis, third quarter market-wide gross gaming revenue from mass table games increased approximately 5.5% and our combined mass market table games revenue increased 7%. In the VIP segment, the market increased 5% sequentially in the third quarter, while our VIP gross revenue increased 29%.

Our mass market business continues to benefit from a number of initiatives that we've implemented at City of Dreams and Altira, while our already robust VIP business benefited from the opening of three new junket rooms at City of Dreams. There are still good quality junkets in Macau who continue to ask for space at City of Dreams, and we are looking for ways to accommodate them, ideally before Chinese New Year.

As you may have already seen, we opened the House of Dancing Water in September and it has been met with great reviews and sold-out performances. The show is currently sold out through the end of this month. In addition to driving incremental visitation to the property, the show is also meaningfully improving the brand awareness of City of Dreams, especially in Mainland China.

While our third quarter results have set new records, they also represent a longer term trend of sequential improvement in our business since the opening of City of Dreams last year. Our mass market drop per day at City of Dreams, one of our critical KPIs, increased from MOP34 million in the third quarter of 2009 to MOP46 million in the third quarter of this year, representing 35% year-on-year growth. As compared to the second quarter of 2010, we delivered a sequential improvement of 7% on this measure. Including Altira, our mass market drop per day increased 11% sequentially.

Similarly, our mass table games hold percentage has increased from the mid teens when City of Dreams first opened to over 21% in the third quarter of 2010. As we've said in the past, the improvement in our mass market hold percentage is tangible, sustainable and reflects operational improvements in our business. The improvement indicates to us that we are providing a better experience to our customers, and they are staying longer at our tables as a result. We believe our mass market hold percentage at City of Dreams will remain between 20% and 22% going forward, with the bulk of our mass market gains coming mainly from increased volume.

Looking forward, we expect our growth at City of Dreams to come from a combination of the introduction of new amenities over the next few quarters and from tactical initiatives designed and implemented by the new management team. These include leveraging the House of Dancing Water in our marketing campaigns and broadening our geographic reach into China, as well as into the Asia Pacific region.

We're also improving our relationships with tour group operators and bussing companies in China that would help us drive more traffic through the property at attractive customer acquisition costs.

Additionally, our database of customers continues to grow, which allows us to better penetrate the more profitable mass market. We're currently at approximately 450,000 members in our database, and we expect to hit 0.5 million members by the end of this year. Our growing database allows us to better identify our most desirable customers and design more effective promotional offerings for them.

Our organizational restructuring that we announced on our last earnings call was implemented on September 1st, and it is already contributing to our operating performance and ability to compete in a challenging and dynamic market. This new structure will allow us to leverage the strength of our portfolio more effectively, and it is also expected to drive revenue through cross-selling opportunities between Altira and City of Dreams. Ted and Nick are with us today and can provide additional color on this call later on.

More broadly, we continue to believe that the more high-quality supply of integrated resource in Cotai will be good for the market and even better for Cotai. We believe the current, less explosive, pace of supply growth is beneficial to the overall market, as it allows for sustainable growth and more rational absorption of incremental supply. It also puts less stress on the local labor force and on Macau's infrastructure.

We believe that the Macau government has created a framework for solid growth going forward, and we are optimistic that our engine for growth, the Chinese economy, is on track to continue to deliver world-leading growth in our primary feeder market.

So I'll pass to Geoff.

Thanks, Lawrence. We reported approximately $136 million of adjusted EBITDA in the third quarter of 2010 on $727 million of net revenue, yielding a consolidated EBITDA margin of close to 19%. This compares to an EBITDA margin of 13% in the second quarter of 2010 and 11% year ago. Given our success in the VIP business, which has structurally lower margins, we are pleased with these results, but will continue to identify areas where we can improve our run rate margins going forward.

As we expand our mass market business, our overall mix will shift favorably and provide a more balanced contribution from mass and VIP, with the added benefit of improved earnings visibility and reduced earnings volatility.

Looking forward, we expect to continue to participate in the growth of the rolling chip market in Macau, while maintaining our disciplined approach to junket pricing and avoiding unsustainable commission schemes. In the mass market, we believe that our trajectory of volume growth will continue in the foreseeable future.

More specifically, the fourth quarter is off to a good start with the business generating record monthly levels of consolidated rolling chip volume, mass table drop and mass win in the month of October. Standalone, City of Dreams is also hitting new records on each of these operating metrics.

From a balance sheet perspective, our first financial covenant test commences with our 4Q results, and we remain comfortable with our ability to meet these tests. As a reminder, our maximum leverage ratio is 4.5 times our senior bank debt, excluding the senior notes or approximately $1.1 billion, and our interest coverage covenant is 2.5 times.

As we normally do, I'll give you some guidance on non-operating line items for the fourth quarter of 2010. Depreciation and amortization cost is expected to be approximately $84 million, which reflects a full quarter of depreciation from the House of Dancing Water. Net interest expense in the fourth quarter is expected to be approximately $29 million. We do not expect any pre-opening expense or capitalized interest in the fourth quarter.

With that, let's go to Q&A. Operator, back to you.

(Operator Instructions)

Operator, we're ready to commence Q&A session, please.

(Operator Instructions) And your first question is from the line of Larry Klatzkin with Chapdelaine. Please go ahead.

It's Chapdelaine. Hey guys, congratulations on great earnings. Can you hear me? Hello. Can you guys hear me?

Operator, I don't think it's connected in.

Just one moment.

Operator. Hello.

Just one moment. Please standby ladies and gentlemen. You have a question from the line of Larry Klatzkin with Chapdelaine. Please go ahead.

Hey guys, congratulations on good earnings.

Hey Larry.

How are you doing? Now you guys are on the line, but congratulations.

Okay. By the way, it's Lawrence, did you hear our prepared statements earlier on because we had some technical difficulties?

You guys are on now.

But were we on earlier on?

No, you -- we heard your introduction until you said bring on the Q&A and then you guys went dead.

Okay, all right --

So you didn't miss -- we didn't miss anything you guys said, we just missed the -- we just sat here in silence after you started the Q&A. Well, anyway congratulations.

Anyway, go ahead.

Congratulations --

Thank you.

-- for the good earnings. Had a couple of questions. One, can you talk about upcoming Macau infrastructure improvements like the light rail and other things that you think might help drive the market?

Yes. Larry, it's Lawrence. I think we've been saying for some time that infrastructure is a key issue for us. And I think ever since the new Macau government, the new administration, took over about a year ago, a lot of those stalled projects have been -- are back on track.

So I think the ferry terminal is still targeting a 2012, early-2013 opening. I think the temporary ferry terminal in the Pac On or Cotai area is already being used by LVS and also Macau Dragon. So, honestly, we can't wait until that happens because then the main ferry terminal moves over to the Cotai side and will further drive the center of gravity into Cotai, as we had predicted.

The light rail project, I think the government is going to tender for it. I think what we know of it is what we read in the newspaper. There have been some delays, but I think at least for the first time in the last three or four years, there seems like there is something actually moving. So I think, again, if it gets done by 2013, 2014, that will be great timing for us and all the operators on Cotai.

So -- and of course there are other road works and road improvement work that the government are working on. So I think, overall, compared to 12 months ago or 18 months ago there is certainly a lot more positive things happening on the infrastructure part.

All right. Have you guys felt Singapore at all because those casinos are definitely making a lot of money. But it seems like Macau has not felt it, is that the case?

No, I don't think -- Macau is now close to 60% year on year right now. And as we predicted, I think Singapore took some of the Southeast Asian VIP business because from a geographical and traveling standpoint it's just a lot easier and a lot closer to go there. But I think with the amount of quality resorts and hotel in Macau right now, Macau has its own appeal. So I think at 60% year-on-year growth there has been very little impact.

All right, excellent. And then as far as an additional project in Macau, I know you've kind of cancelled that other one. You still have plans or something you want to do, or would you still consider something outside of Macau if something opens up like Japan or Taiwan or something else?

Yes, Larry, our focus, we've done a lot better on a quarter-on-quarter basis and our focus for the next 12 months is really still on making sure our portfolio of assets that we've built, and they're almost all fully built now with the opening of the House of Dancing Water, are firing on all cylinders. So that's our focus in the next 12 months, to improve operating leverage and finding more efficiency and improving shareholder value.

But having said that, at the same time, we still have a management contract for the Macau Studio City project, it has been stalled, but I think there -- we're looking at that to see if there is anything that can be done. And beyond Macau -- we're still very interested in Macau, in further development of it over the medium to longer term.

And beyond Macau, in some of the major jurisdictions like Japan and Taiwan we have quietly done some -- done quite a few study trips and some lobbying work. So we will continue to keep an eye on those markets as well.

Okay. And Macau Studio City, you're still going to manage that if it gets open?

Yes, our management contract still stands, and based on our understanding and based on the Macau government's statement three years ago, that was the very last management contract ever approved. So I think it still stands.

All right, well, thanks guys. Congratulations.

All right, thanks Larry.

David Bain from Sterne, Agee. Please proceed.

Okay. Thank you. You guys mentioned in the introduction that you may open more VIP facilities by February of next year at City of Dreams. Can you give us an idea of what kind of configuration changes may be needed? And potentially, could we get a sense of the role potential from some of the VIP operators that are waiting in line to work there?

Ted, our Co-COO of Gaming is here. So maybe I'll let -- I'm going to let Ted to elaborate.

Okay. Okay, thanks Lawrence.

Yes, we -- well, at the moment we have some expansion plans on the second floor on the City of Dreams, and the expansion plan was -- we have a lot of interest from the local junkets at the moment and we're looking into the quality of junkets. And the expansion area will be around 20 tables that (technical difficulty), and hopefully, we will be bringing two to three junket operators in before the Chinese New Year. That's the plan.

Okay. And then Altira margins of 15% plus hold on the lower end of the range, can you give us a sense outside of the new commission cap what could have possibly impacted margins there or is that pretty much a function of the cap and we should run rate that forward so to speak?

Other than the hold I don't think there is anything unusual there, Dave.

Okay. Okay, and then your unused land adjacent to City of Dreams, I mean are we going to wait and see what the government decides on the Four Seasons, potential sales of apartment hotels, or is this something that you've already concluded what to do with?

Yes, yes, Dave, it's Lawrence.

Lawrence.

For the last few years we've been pretty conservative and cautious on apartment sales. And so at the end of the day we will listen to what the government -- Macau government will allow us or want us to do.

So we plan for an apartment hotel and we also have another design that's just a pure hotel. And from the pure hotel basis, I think, given where the political landscape and also some of the commentary out of the general Macau citizens are right now, I think more likely than not it is probably going to be a hotel tower.

And we've ramped up our hotel occupancy quite nicely because we added over 50% additional rooms when we opened Grand Hyatt at the beginning of the year. So I think, once that ramp up further and their ADR keeps moving up. And also, most importantly, its contribution to gaming improved.

I think at that point in time we will make a decision on whether we go ahead with the additional tower. And whether it's going to be a hotel tower, an apartment hotel tower, will really depend on the Macau government.

Okay. And I guess final one would be on the hold and if you guys can give us your sense as to what the impact was in EBITDA if possible, trying to figure it out here.

Sure, Dave. At the midpoint of our range, 2.85%, our normalized EBITDA, consolidated EBITDA is just north of $100 million.

Okay. And then that includes Altira being at the midpoint as well?

Yes, that's across the board.

Okay. Okay, great. Thanks guys, congratulations.

Your next question comes from the line of Cameron McKnight of Buckingham. Please go ahead.

Just on the City of Dreams, are you able to quantify the financial impact of the House of Dancing Water in September? I know you guys have previously said that you had expected that to be at least breakeven?

At this point, given that it was just still early days for House of Dancing Water and given that the opening coincided with Golden Week in October is we're still parsing through some of the data, but we're still comfortable that the daily cost of the show is somewhere moderately north of $100,000 a day.

Okay, sure. And free cash flow in the quarter, I estimate at about $100 mil. Is that about right?

Yes, that's about right.

Okay, sure. And then, finally, any update on the CFO search?

Cameron, it's Lawrence. We've appointed a reputable recruitment firm. So I think we've established a board committee to do that. So we are still looking into it. I think given the stage of the development of our Company, I think we have a great team in place right now. And we want to make sure that we find the absolute best candidate possible.

Okay, thanks. And then, finally, Lawrence, what are your thoughts on the competitive landscape on Cotai as we get into next year with Galaxy opening and then sites five and six?

Well, again we've been of the view that the Macau market is one that is supply driven. So I think when there are more rooms in Cotai that will further again move the mix of the gaming into the Cotai area, and it will be good for us because with what we've done from an entertainment standpoint, our proposition has always been entertainment focused.

So I think when site five and six and Galaxy opens up, that will certainly appeal to their visitors and will certainly draw some traffic into our property. At the end of the day, we are quite excited about those openings. And given that Galaxy is probably opening in late first quarter or early second quarter and sites five and six, Q4 or Q1, I think there is ample time for us to continue to build up our database and also can let us additional time to get our hooks into our customers.

And as you can see, from a quarter-on-quarter basis, both from a database standpoint and also on a mass and slot turnover and drop standpoint, we are improving on those bases. So we are quite excited about the development.

Right, thank you.

Your next question comes from the line of Carlo Santarelli with Wells Fargo. Please go ahead.

Hey, guys, nice quarter. You guys hear me okay?

Yes, yes, Carlo, go ahead.

Okay. I was just wondering, if I look at your City of Dreams and some of your VIP and direct mix, it looks as if you are doing a little bit more on the junket side than you were on the direct side. If we look at it sequentially, are there any fundamental changes that you guys are doing there, working more with the junkets, kind of less with direct credit extension to some of your direct players? Thanks.

This is Ted. Well, the premium direct volume in COD, we are at the range of 20% overall over the last quarter. So we are not attempting to change that direction at the moment. And in terms of quality of -- in terms of the quality of the credit, we are not changing the quality over the last two quarters. Bear in mind, starting from the fourth quarter, October, we do set very, very high record height for both premium direct and junket business volume.

Your next question comes from the line of [Sohail Sharashbi with Proxvia]. Please go ahead.

Hi. Could you talk about the junket situation in Macau if you -- listening to one of your competitor's previous earnings call, were talking about operators, including yourself, letting out capacity to junkets, 3%. Do you have any comment on that, and how the junket environment showed change in last two quarters? Thank you.

I'm sorry, I think the line is -- was breaking up. Could you just summarize your question again, please?

Sure. I just had a question about the junket environment. If -- I was on the last call with one of your competitors and they were talking about the junket environment heating up and competitors letting out capacity for 3%, and I was wondering if that was true and what extent the junket environment has heated up in the last few quarters.

Well, I think -- it's Lawrence here. I think the junket market has always been quite active in Macau. But I think the important thing from the Melco Crown Entertainment angle has been our disciplined approach to finding new junkets, and even more importantly on credit support and also on pricing. So we have stuck very firm on our pricing since over a year ago, and also on credit support as well.

So I think if you look at some of our receivables, it's actually on the -- it's on the -- on the down, it's going down. So while the market is always active and we hear that we have certain competitors that are effectively offering everything in terms of both pricing and also credit support to the junkets, we've remained disciplined and we continue to honor the Cotai pact that we have with our neighbor, Sands China. So I think all in all, yes, the market is always active and is very dynamic, but I think that disciplined approach, which is our approach, is the right way to go.

Your next question is from the line of Bill Lerner with Union Gaming Group. Please go ahead.

Thank you. Hey, guys, couple of questions. Mix of -- what's mix of commissions these days, guys, generally speaking, between win rate and rolling chip? And then a couple of other follow-ups.

This is Ted. Currently, in COD, we are approximately 50% being turnover basis and 50% revenue share.. It's a very healthy level. In terms of Altira, majority of the junkets are on the turnover basis. We do think that the we provide flexibility for the junkets to choose both conditions. And some of the junket operatos can take more volatility which -- whereby the other may not. So I believe this is a very good flexibility to provide.

Okay, that's helpful. And then maybe this is for Ted also then. Your mass market theoretical range for Altira and City of Dreams is about 500 basis points, there's a spread of about 500 basis points. What's structurally different? Is it just mix of games, guys, or is it a function of the consumer or the type of consumer at each place?

Predominantly, it's due to the mix of products whereby in Altira most of the game types are traditional baccarat (technical difficulty) whereby in theory they have a larger portion of high yield game types in there. So I think that's really the reason behind the 5 basis -- 500 basis points -- 500 basis point difference.

Thanks. And then the last one Geoff, if I can, just to clarify the adjusted -- the hold calc that you gave at a $100 million, are you talking about consolidated EBITDA, are you talking about City of Dreams, because it didn't tie, I just wanted to be sure.

Consolidated total company EBITDA.

Total company EBITDA after corporate, net EBITDA.

Yes.

Thank you, sir. See you guys.

Operator.

(Operator Instructions) And your next question is from the line of Joe First with JPMorgan. Please go ahead.

Hello all. Most of my questions have been asked and answered. I just want to clarify a couple of comments here. Ted, I believe you said in the third quarter City of Dreams direct with 20% of the roll. Can you just confirm that?

It is approximately 20% of the total roll in COD, yes.

Great. And then what's the mix between VIP and mass tables at the end of the third quarter, at City of Dreams?

There are about 165 VIP tables and 240 mass tables at City of Dreams.

Thank you.

Thanks, Joe.

And your next question is from the line of Gary Ngan with UBS. Please go ahead.

Hi everyone. Good evening everyone. Sorry, the line was breaking up just now. I want to confirm with you the proportion of rolling and -- rolling-based commission versus revenue-sharing based commission. Is that 50% at COD? And what's the percentage [this year]?

(Multiple speakers) the -- in COD, the revenue share and turnover basis ratio is 50/50.

And -- sorry, what about at Altira?

Altira, majority of the junkets opt for turnover basis.

Turnover basis --

(Technical difficulty).

I see. And am I correct to assume that there is actually a little bit of direct VIP at Altira as of last quarter or it still all junket based?

Basically, they are the same. We're looking for opportunity for it -- some more new junket operator on the fourth quarter based on (technical difficulty) of the new junket operator and the level. So, yes, from Q3 and Q2, they are basically the same junket operator.

No, but Gary, I think also as well, with the new organizational structure and reorganization we want to cross-market both Altira and City of Dreams, both on a mass basis and also on a VIP basis as well. So I think we will try to move some of the success we've had. We've been one of the most successful operators in the premium direct business on the VIP end in Macau at City of Dreams. So we have been -- we've continued to drive some businesses to Altira. And I think, going forward, we will look to continue to do that.

I see, thank you very much. That's very helpful.

Thank you.

(Operator Instructions) You have a follow-up question from the line of David Bain with Sterne, Agee. Please go ahead.

I know this was asked, and in some ways it may be competitive and sensitive to that. But Japan -- would you guys be looking at more of the regional locations? And can you give us an idea of some of the legwork that's been done? And then also Kinmen Island, if there's any kind granular update in terms of timeline or milestones we should be looking for? And again, we know that the focus is more on the improvements within Macau. I'm just trying to get an idea of some of the other opportunities.

Yes, David, it's Lawrence. Again, I think we've done some work in both Japan and Taiwan. I think the Kinmen visit that I went on was actually reported publicly about a year or so ago. So at the same time we are waiting on the government to open up those markets. And again, we remain very interested in it.

So regards to regional locations or city locations in Japan, to be honest, I think given how competitive the environment is right now in the global gaming state and will be when those jurisdictions open up, now, I think we will keep that -- we'll keep that card to ourselves for now.

Okay.

But I certainly think whether it's city or regional in Japan, that market is just so gigantic that everybody will win ultimately if they can get a piece of the Japanese market.

And in terms of Taiwan, I think there are some government elections going on soon. And I think we'll wait to see where they want to take the opening.

Okay. And then just a follow up on Kinmen then, is there a referendum date yet? And it's our understanding -- have some officials visited Macau recently, perhaps at your invitation? Just trying to get an idea of how timeline, how much focus we should really be pouring into it right now?

Well, I think -- again, I think there is a overall Taiwanese election at the -- in the central government level. So I think if anything happens it would be after -- at the island level, the provincial level it's going to happen after that. So for now there's really no official timing for the referendum although we've heard some whispers here and there. And in terms of -- what was your -- sorry, what was your second --

I was just wondering if some of those officials had visited Macau recently to -- just to investigate or relationship build?

Well, again, Macau is by far and away the largest gaming market in the whole world now. I think three and half times the size of Las Vegas. I think there are constantly people doing study trips, whether it's Taiwan or any where that has gaming in it. So it's actually pretty frequent that people do visit Macau.

Okay. All right, thank you very much.

All right, thanks a lot, David.

There are no other questions in queue. I'd like to turn the call back to Geoffrey Davis for closing remarks.

Thank you all for participating in the call. We look forward to coming back to you in about three months time with our 4Q results.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation and have a great day.