Melco Resorts & Entertainment Ltd (MLCO) 2010 Q4 法說會逐字稿

Good morning and thank you for participating in the Fourth 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.

Morning, everyone, and thank you for joining us today for our fourth 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 will now turn the call over to Lawrence.

Well thank you, Geoff. Hello, everybody. We are pleased to report another quarter of steadily improving operating performance. Our hold-adjusted consolidated EBITDA increased in each quarter last year. And we set a new record on this measure in the fourth quarter of 2010.

Geoff will provide some additional color on our fourth quarter results, but I think the numbers speak for themselves.

We continue to make progress in ramping up our mass market business and our VIP business remained strong. We also delivered meaningful operating leverage in the fourth quarter as we expanded our gaming volumes and kept a tight lid on expenses. Our fourth quarter results represent a new record for quarterly consolidated net revenue as well as record quarterly rolling chip volume, mass table drop, and slot handle.

Now that our company has transitioned from development to operations, cost control and operational efficiency are the key areas of focus throughout the organization for 2011. And we expect to make considerable progress on these funds.

While cost control is a key focus, we also recognize the hard work of our team members and the competitive pressures in Macau for talented staff. Back in November, before any of our competitors, we raised our labor rates across the board in Macau. We did this without any instruction from the government. Rather, we did it because it was the right thing to do for our staff and the right thing to do for our business.

Our first quarter results are off to a good start. We experienced a strong Chinese New Year holiday period with visitation and gaming volumes well in excess of last year's results. Looking at historical, daily company-wide rolling chip volume, the five biggest days in the Company's history were experienced during Chinese New Year this year. Similarly, the four biggest days in company history were recorded from consolidated mass drop and slot handle this month. Only Golden Week last October has approached the play levels that we've seen this month.

The House of Dancing Water had its first full contribution to operating results in the fourth quarter and it continues to drive property visitation and overall brand awareness in our core feeder markets. The show continues to sell out and we have implemented strategies to further monetize the success of this world-class production.

The show is having its considerable impact on property visitation, hotel occupancies, restaurant covers, and gaming spend, all of which have seen positive growth, due not only to the show, but also due to implementation of more strategic selling practices.

Hotel cash rates and gaming contribution from casino lodgers have seen very positive growth as a result of our focus on optimizing the value of our hotel room inventories. In particular, the Grand Hyatt is now reaching higher occupancies with Q4 finishing at 85%, in December, surpassing 93%.

Our marketing group has generated significant results through its destinational sales strategy, building relationships with travel trade operators throughout China and the APAC region as they continued their 20 cities road show tour in the first half of 2011.

We've spoken previously about the importance of our player database. Through the end of 2010, our database grew to over 560,000 members and it continues to fuel our growth in the mass market and slot segments. As of today, we have approximately 600,000 individuals in our database and it continues to grow.

Many of you on today's call will have questions about the expected impact of opening a new property on Cotai. We continue to have a favorable outlook on additional supply as it improves the entertainment proposition of Cotai and drives the center of gravity towards this part of the city. This opening of City of Dreams was a net benefit to its neighbor across the street and we believe the introduction of another integrated resort on Cotai will benefit City of Dreams.

The powerhouse Chinese economy is our engine for growth. Wealth creation and the expansion of the middle class in China, combined with a secular shift towards more consumer spending, provide a strong backdrop for long-term, if not multigenerational growth. This, combined with the proactive stewardship by the Macau government, provides a solid framework for the orderly development and growth of the Macau gaming market.

So for this, back to Geoff.

Thanks, Lawrence. We reported US$134 million of adjusted EBITDA in the fourth quarter of 2010 on US$774 million of net revenue, yielding a consolidated EBITDA margin of approximately 17%. This compares to 4Q '09 EBITDA of US$3 million and an EBITDA margin of just 1%.

A sequential comparison of our operating results may be more useful than a year-over-year comparison, given some of the one-time challenges we faced in the fourth quarter of last year.

As compared to the third quarter of 2010, our company-wide rolling chip volume increased 12%, our mass drop increased 14%, and our slot handle increased 17% at City of Dreams. Normalized for 2.85% rolling chip hold, our consolidated EBITDA would have been approximately US$125 million, which represents a roughly 25% sequential increase from results in the third quarter of 2010. This EBITDA increase was driven by a roughly 13% sequential increase in our gaming volume, demonstrating the operating leverage inherent in our business.

Though our overall margin reflects our mix of business between VIP and mass, we are pleased to see continued progress in cost containment and operating leverage. From a balance sheet perspective, we had our first financial covenant test on our bank facility in 4Q 2010 and, as expected, we are comfortably in compliance.

As a reminder, our maximum leverage ratio is 4.5 times our senior bank debt, excluding senior notes, and our interest coverage covenant is 2.5 times. We reduced our outstanding debt balance by approximately US$107 million during the fourth quarter and we expect to continue to reduce our debt balance in 2011 through scheduled amortization payments and cash flow from operations.

As we normally do, I'll give you some guidance on non-operating line items for the first quarter of 2011. Depreciation and amortization cost is expected to be approximately US$85 million. Corporate expense is expected to come in at US$17 million to US$18 million. Net interest expense is expected to be approximately US$28 million. And we do not expect any meaningful pre-opening or capitalized interest in the first quarter of 2011.

That concludes our prepared remarks. Operator, back to you for the Q&A session, please.

Thank you. (Operator Instructions). Your first question comes from the line of [James Armstrong] with JPMorgan. Please proceed.

Hi, guys. Thanks for taking my question. We were wondering, what is the likelihood of a partial smoking ban passing in Macau?

It's Lawrence here. I think we've had some discussions with the government previously and I think Melco Crown Entertainment, together with four other operators, recently sent a letter into the government, hoping to have an urgent discussion with them. As you know, the smoking ban has been in the works for quite some time. But certainly, if a smoking ban comes into place and the implementation in a year's time, 50% of the gaming area, it would have an impact.

So since gaming revenue is such a significant contributor to Macau government budget and the overall economy of Macau, I think we're hopeful that the government will be quite sensible to hear our thoughts on that front. So we will continue to wait for a response from the government.

Great. Thanks, guys.

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

Good evening. How are you?

Hi, Cameron.

Lawrence, you spoke about some of the strong performance you've seen on particular days during Chinese New Year. Can you speak to some of the trends in the shoulder periods, i.e. those periods outside of the peak periods during February? And have you seen any update on markets -- on the progress in the market inside the first 15 days or 20 days?

Cameron, I think usually after Chinese New Year, which is 14 days after the -- 15 days after the first day of Chinese New Year, we tend to expect a much slower volumes in Macau. But I think, similar to what happened in January of this year, there wasn't much of a drop off. If anything, we were pretty surprised by how strong volumes have been, even after Chinese New Year. So typically, in a normal year, this would be a very quiet period. But we -- our floors were completely packed over the weekend. So I think, overall, demand is very strong and we're very pleased with it.

Fantastic. And there's been plenty of commentary on junket and liquidity risk and bad debts. Can you give us your perspective on some of the commentary that's out there?

Maybe for -- Cameron, for this one, maybe Ted could --

Sure.

-- help us answer.

Hi, Cameron.

Hi.

I think if you compare the current situation against the third quarter and fourth quarter, we consider the credit risk is quite minimum. And I think it's quite healthy at the current level. And if you look at the credit, we extend one dollar, they would extend it to the junket, it -- over the last couple of months, it do give us a more revenue and turnover. So that is suggesting a quite healthy productivity overall.

Okay. Great. Thank you, guys.

No, thank you.

Your next question comes from the line of David Bain with Sterne, Agee. Please proceed.

Thank you. Can you guys give us a sense of how House of Dancing Water is doing on a standalone basis? I know the foot traffic and the intangibles. Just trying to get a sense as to how it's doing on a standalone basis over.

Hey, David. Lawrence. For that one, let me hand if off to Nick Naples to give you more color.

Sure.

Hi. Good evening. The House of Dancing Water, on a standalone basis, has been performing extremely well. As you know, since it started, it's been virtually sold out every night. From a performance perspective, we're certainly seeing breakeven performance on the show as well as significant positive ripple effects throughout the business, generating other revenues.

Okay. And then, Lawrence, maybe -- heading over to Taiwan, perhaps, gaming expansion and how you guys are potentially positioned, are Kinmen, Matsu, Penghu -- are any of these things getting closer, in your view?

I think we've heard the news as well. And over the last couple of years we've done some lobbying work and site visits there. But I think, at the end of the day, the respective islands and cities do need to make a move first. But I think all in all, I don't think there's any major development since the last call. But having said that, we've kept a very close eye on it and we will continue to follow their development because we are keenly interested.

Great. Okay. And then a final one. Just maintenance CapEx, do you now have an expected number for calendar year '11?

For the full year of calendar 2011, we're expecting about US$60 million of total CapEx. The vast majority of that will be growth rather than maintenance.

Okay. Great. Thanks, guys.

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

Hey, guys. The one thing I want to ask about in the quarter was it seems to me as if at City of Dreams maybe your direct play is ramping up a little bit sequentially from the Q3. And if you wouldn't mind, just some help with some modeling as it relates to table game splits at both Altira and City of Dreams between VIP and mass. Thanks a bunch.

As far as the table game split, I can give you those, Carlo. At Altira, we had about 180 VIP tables and 30 mass tables. For City of Dreams, it was about 170 VIP and 240 mass.

Great. Thanks, Geoff.

Okay.

And then just on kind of the sequential change, maybe, that you're seeing in your direct play volumes versus your junket volumes from 3Q to 4Q.

Hey, this is Ted. In COD, the premium direct program. We, sequentially, from third quarter, fourth quarter, we grew at about 50%. And in terms of the overall representation from the premium direct -- the business represent about 15% to 20% during the fourth quarter. And basically, Altira is the junket play.

I got it. Thanks Ted. Would it be fair to say that maybe on the junket side, you guys held a little better than you did on the direct side? Is that -- could you give any color on that?

Well, I think, if you look at Altira's growth, it's in the region of 25% to 30% growth in the junket operation Altira there. And if you look at premium direct play, we are up about 50%. So in that sense, I think we are doing quite a good job in terms of Altira.

Great. Thanks a bunch, guys.

Okay.

Your next question comes from the line of Suen Ng with CLSA. Please proceed.

Hi. Congrats on a good result. I have a few questions. The first one on margins. I'm trying to understand here the potential upside. Would it be coming from your change in product mix to more mass or would it be cost cutting or more change to premium direct? The second question would be on the marketing program. You earlier mentioned that there are strategies to monetize the non-gaming element at City of Dreams. So I'd like to hear more details on that. The third thing is on the rebate to players, has that changed over the last few quarters? Thank you.

It's Lawrence here. I think, as we said earlier on, a cost focus is the strong initiative this year. So we are continuing to find more operating leverage and operational efficiency throughout the entire organization. So that is a continuous drive. And with mass market, we have ramped up the business very nicely at City of Dreams. And we'll be opening up The House of Dancing Water and a full amenity of proposition. We are -- we will continue to look to ramp up the mass business.

With regards to premium direct business, which naturally carries a higher margin, we are one of the better performing operators in Macau. I think we have consistently ranked within the top two or three positions on that front. And we have one of the better international marketing teams there. So that is, again, an area that we continue to develop and it's of strategic importance to us. With regards to the rebate, perhaps, Ted, you could give us a little more color.

Yes, I think in the last quarter or -- and currently, we stick with the commissioned cap -- low 1.25% to the junket. And also we count like religiously stick with the Cotai pact idea whereby our revenue share model in junket and COD stick with -- be the same level of our neighbor. So we didn't see any changes in terms of rebate to the market in the last couple of months.

Thank you.

Your next question comes from the line of Billy Ng with Bank of America/Merrill Lynch. Please proceed.

Hi. Hi, folks. I basically have follow-up questions on the collection issues. Just wonder, like, some of your competitors have increased their reserve on bad debt. Have you guys done the same things or do you guys think there is a need for increase of reserve for Q4 or potentially in Q1 or Q2?

We have a provisioning policy that is -- that gives us some guidelines on how to set a reserve as debts age. Each debt, on the other hand, is looked at individually by our central independent credit committee and we look at that very carefully, very closely. We haven't seen any need to change our overall provisioning policy and we'll continue to follow our existing policy. And at this point, we think we're in good shape as far as our reserve and adequately reserved in light of our business volumes.

So like if there is an increase in reserve, it's purely because of higher volume. Nothing because of anything you detect that prompt you to change.

That's correct.

Okay.

Your next question comes from the line of Pradeep Mohinani with Nomura. Please proceed.

Sure. Thanks. I've got three questions for you. The first is with regards to -- I know your businesses have done extremely well so far, as you've indicated. Do you worry about the China liquidity tightening measures that keep being announced regularly? Is that something you're thinking about at all, by any chance? That's the first question.

The second thing is with regards to your shareholder loan outstanding of about US$115 million. From prior discussions, you've indicated that you've been repaying that back. Can you confirm if that's going to be paid back in this quarter or if it's already been done? And the last question is, on the loan side markets, rumors are consistently talking about the likelihood either of a partial or full refinancing coming through. Can you confirm one way or the other way that stands?

Hi. It's Lawrence. Let me answer the first part of your question. With regards to the Chinese market tightening and some of the cooling measures being implemented in the banking system and also in the real estate sector, I think we continue -- as you know, Macau is a -- is really a play on Chinese consumerism.

And naturally, if there was a significant pullback in the Chinese economy for a prolonged period, that will affect Macau. But having said that, in the last few years, the only pullback in Macau, the only negative growth period, was during the global financial crisis. And I think what the Chinese government is doing, the Chinese government is, as usual, very engaged with regard to its economy. They are trying to cool it down to prevent any potential hard landing.

So I think, in any case, if these cooling measures are positive to prevent the economy from overheating. But in any case, I think, looking at the latest Chinese five-year plan, it is very clear that tourism promotion and also the fact that China is trying to move into a consumption-spending economy, is definitely the case. And therefore, that benefits Macau and tourism sectors in general. So all in all, we're not concerned about these tightening measures with regard to the banking system. I think it provides a solid platform for the Chinese economy if we continue to grow at a steady pace for years to come. With regard to --

Sure, as far as the shareholder loan goes, it's still outstanding. And we don't have any plans to pay it down this quarter. We're continually looking at optimizing our capital structure and being opportunistic with the markets. But in the meantime, we're enjoying our below-market pricing on our existing bank facility.

Okay. But will you be paying down the loan at least this year, as prior discussion and indication suggest? I just want to see what the thought process is on that.

Paying down the shareholder loan?

Yes.

It's an opportunity for us, but it will be part of the overall discussion of optimizing our capital structure.

Okay. And are you actively involved in that case with considering a refinancing then?

I put that in the same category as the shareholder loan, as something that gets thrown into the mix as we determine what the optimal structure is for us going forward.

Okay. Sorry, if I may just push the point. And that last question is do you feel constrained in terms of business-wise? I know your CapEx is only US$60 million this year. But for future-looking years, for future investments come 2012 or 2013, do you feel you need to start to free up or loosen up your balance sheet right now or start working on it for those type of opportunities to come down the turnpike?

I suppose it depends on the emergence of growth opportunities, should they arise. As you know, our bank facility right now is more of a project loan with fairly heavy amortization payments over the next few years. But again, we'll take that all on board and determine what the best path forward is.

Okay. Alright. Well, thank you very much.

Your next question comes from the line of [Frank Flugler] with [Brookfield Capital Partners]. Please proceed.

Good morning, Lawrence. How are you? Can you give us some color as to the debt reduction in the fourth quarter of '10? Also maybe elaborate on the one-time charges as to what they were and how the company looks from a debt perspective going forward? And I have a follow-up question after that.

Sure. Hey, how are you doing? It's Lawrence. But why don't I let Geoff answer that question?

We had about US$35 million of scheduled amortization payments on the fourth quarter and another US$70 million of incremental payments that were made through excess cash flow. As far as the one-time charge, if I'm reading you correctly from our prepared remarks, that was more for fourth quarter of 2009. And that was primarily revolving around the transition away from the junket aggregate model that we had in place previously, as well as very low hold.

Okay. And my second question is, Lawrence, maybe you can comment on the future prospects of the market in Japan and where you guys may or may not fit into that.

Yes, I think, like previous calls, Japan and Taiwan are two major jurisdictions that we've done a lot of work on in the past over the years. And our markets that we are very confident about. So we -- again, we are -- we've done a lot of work there and we continue to follow the progress. I think right now, certainly, there is more consensus within the two leading parties -- -political parties of Japan about opening up to gaming. But my view is that it's more of a 2012 and beyond story rather than something happening in 2011 imminently.

Yes. Thank you very much, guys.

Thank you.

Your next question comes from the line of Gary Ngan with UBS. Please proceed.

Good morning and good evening, everyone. Thanks for taking my question. I have -- my first question is on the Cotai pact, on VIP junket commission, so far it has been working out quite well with your neighbor. And as we all know, you guys will have a new neighbor coming on within the next few months. So have you guys engaged in discussion to invite them and to join in this pack? Has that discussion started? And if they are not joining, would you -- what's your strategy going forward?

Hi. This is Ted. Well, we start the conversation, probably, a few months back and I think the conversation is very positive. It's the couple of things that we might do together in Cotai apart from the Cotai pact in terms of rebate to the junkets as well. So I think it's very positive and we're expecting our new neighbor definitely will be very happy to join the pact.

I see. Great. Thank very much. The second question is regarding our Altira's mass market revenues. We basically doubled the revenues from first half of 2010 or, actually, for most of 2009. So I just wanted to understand what exactly is -- what is the reason behind that? Is that mostly premium mass or is that more traffic? And just in terms of your future forecast for that 30 tables do you think -- how much more upside do you think are there and are you thinking of expanding those mass table, given we are running with very good results so far?

I think it's a combination of both visitation numbers as well as our -- growing number of membership. So I think -- and the reason is quite mixed in terms of the growth story. But we did a lot of looking to the opportunity in a lot of direct marketing and also in different tier of the alignment with -- the customer, with different tiers of customer, including premium mass and mass. I would think that when our premium mass is doing a little bit better than the mass purely because we put a lot of effort in looking to opportunity going forward to -- in terms of direct marketing in that respect.

In terms of how are we going to do in the next -- how far we can do -- I think we are very positive about the new neighbors coming online this year and that will definitely move the center of gravity from the peninsula side to the Cotai side to help lock in the mass and the premium mass sector.

Yes, I think it varies -- to add onto that point, I think it's also as the result of the corporate reorganization that we did last summer, whereby we centralized a lot of the premium mass hosts and information sharing amongst the properties where we're sending players. So it's really a fact of the synergy -- synergetic effect of having the two properties and combining the overall power of them.

I see. Thank you very much. And my final question is just quickly on cost of COD, the operating costs such as labor and marketing expense. So I just wanted to get your view on how do you think about 2011 and should we think that the Q4 run rate of those costs are pretty much what we should expect in 2011 or you have plans to increase those spending?

Well, the overall plan is to reduce it and become as efficient as possible and to take advantage of as much operating leverage as possible as we drive more gaming volumes through the property. On the other hand, we will have some incremental expense associated with new amenities such as Cubic when that opens and the full impact of our labor rate increase, which took place in the middle of the fourth quarter. But net-net, we think we can keep a very tight lid on expenses and FTE increase in 2011.

Thank you very much.

Your next question comes from the line of Anil Daswani with Citigroup. Please proceed.

Hey, good evening, guys. Two quick things from me. Could you guys comment a little bit about growth opportunities in Macau, more specifically with the potential third tower at the City of Dreams? Are you guys gearing towards serviced apartments there or just simply building hotels? And beyond that second question, do you see any other opportunity in Macau, given the property's not delivering the type of returns that, I guess, you guys would have at least expected from City of Dreams, do you see any further potential in Macau? Are there other land sites that you'd be looking at? Is there future growth beyond COD and Altira?

Hey, Anil. It's Lawrence. On the apartment hotel or the new hotel tower, with our hotel occupancy hitting about 80% level, especially during the Christmas period and now Chinese New Year and even in a normalized period, we are, at this stage and in very preliminary stages of dusting off that plan and looking into what we're going to do.

And obviously, that is a big development in itself. There's that additional hotel tower, together with the podium, is a 1.5 million square feet development. So I think it will be -- when we do build it, it's going to be a significant addition to City of Dreams, not just on the hotel inventory side, but also in addition on the overall propositions being subject to regular government approval, additional gaming space, or retail -- restaurant proposition.

At this stage, we are planning for -- we've always had a very flexible plan with regards to the hotel tower. But from our perspective, more likely than not, we need the hotel rooms and it's going to be a hotel tower for us. And frankly, after years of waiting for government approvals of apartment hotel, I'm just not that enthusiastic about it in Macau. So we'll see what happens. If the government, for whatever reason, gives approval for apartment hotel, it would just be icing on the cake for us.

And with regards to other development opportunities in Macau, with the market growing as rapidly as it has, I think there are, certainly, massive demand for new properties or new developments. But as you know, the government has recently announced that, as part of taking away some land from one of our competitors, that they do hope that there is going to be a moderate growth and that they will judge the merits of granting additional land in future years to come -- effectively upholding the table cap and making sure there's an orderly supply into the market.

But for us, as you know, we still have a management contract for Macau Studio City. And we continue to have discussions with the partners of Macau Studio City to hopefully have that project started in one way or the other.

Thank you, Lawrence, and congratulations on the great results.

Okay. Thanks a lot, Anil.

Your next question comes from the line of David Bain with Sterne, Agee. Please proceed.

You touched on my question. It was with Macau Studio City, so I'm good. But I guess one follow-up would be on Cubic. Are we expecting the opening still in April? And any other operational refinements going forward in '11 at City of Dreams would be creating a timeline for those?

Dave, I think, Cubic -- we are in the final stages of the relevant government approval. But I think we are looking at a -- end of first quarter, early second quarter date. So we're very excited about it. For people who went there for The House of Dancing Water after party quite a few months ago, I think one would say that it is by far and away the best night club in probably Southern China. So I think that will bring a new element of proposition to Macau. And David, sorry, your second -- the second part of your question was kind of -- it was blurred.

I'm sorry. Just the -- any other timeline for continued operational refinement such as the Cubic? We've talked about the Hard Rock Cafe and you've transferred some mass to VIP tables, different things like that. Anything we should look for going forward?

I think, on the gaming side, before Chinese New Year, we opened level 17 at Altira, which is a shared premium direct and a premium mass area. And we also opened two new junket rooms at City of Dreams.

Yes.

And so we've opened those things. I think, Nick, do you want to give an update on the Hard Rock Cafe?

Sure. Thanks. Hard Rock Cafe is certainly a lease that we have with a licensee from Hard Rock International. They plan to start construction within the next month or so and are currently planning a September or Q4 opening for the cafe.

Okay. Great. Thank you, guys.

Okay.

Thank you.

Your next question comes from the line of [Tehes Kahara] with Deutsche Bank. Please proceed.

Hi. Hi, everybody. Congratulations on great quarter results. Just a quick follow-up question. I don't know whether you guys have already answered this. On optimizing the capital structure that you guys are looking at, could you just show us some color on the options that are likely to be considered during the course of the year in terms of debt to -- or vis-a-vis equity or --?

At this point, I think we're taking a look at all the different possibilities. We want to be opportunistic and take advantage of good pricing in various markets. But it's a little too early to provide a lot of additional color at this point. We're still studying our options and no decisions have been made.

And are you like -- and any talks in terms of the likelihood of terming out the majority through tapping your existing yield bond? Are there any thoughts on those lines at all? Or is it way too open at this point of time?

I think it's premature at this point.

Alright. Just one last quick question on the -- what's the CapEx outlay for 2011 at this point of time that's being planned?

CapEx is approximately US$60 million -- six, zero.

Alright. Okay. Thank you.

Thank you.

At this time, there are no further questions. I would now like to turn the call back over to Mr. Geoffrey Davis for closing remarks.

Great. Well, thank you, everybody, for participating and we'll be back to you next quarter.

Thank you for joining today's conference call.