Melco Resorts & Entertainment Ltd (MLCO) 2011 Q2 法說會逐字稿

Good morning and thank you for participating in the second quarter 2011 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, Chief Financial Officer of Melco Crown Entertainment Limited. Please go ahead.

Thanks, Operator. Good morning, everyone, and thank you for joining us today for our second quarter 2011 earnings call. On the call with me today are Lawrence Ho, Ted Chan, Nick Naples, and Ross Dunwoody.

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.

Thanks, Geoff. Our second-quarter results represent another record for quarterly consolidated net revenue as well as record quarterly rolling chip volume and mass table drop. This quarter also represents a record for consolidated EBITDA of US $216 million which was 195% higher than the same period in 2010 and up 78% when compared to first quarter of 2011.

These results reflect the improvements in underlying fundamentals as well as our commitment to controlling costs. I am confident that our results demonstrate the ability of our management team to leverage our high-quality assets to ensure that we more than simply participate in the growth of Macau, as well position ourselves to take full advantage of future growth opportunities.

As we have mentioned in the past, we are committed to growing our mass-market operations, particularly the highly profitable premium mass market segment. However, our ability to capture this mass market share has not come at the expense of our VIP business.

At the end of 2010, we made a commitment to further drive our margins through cost control initiatives which, on top of revenue growth and increased mass-market contribution, ensures that we continue to translate topline growth into strong bottom-line profitability. Our non-gaming amenities continue to drive visitation and spending, particularly at City of Dreams and meaningfully contribute and support other areas of our business.

Club Cubic, our new nightclub which opened on April 1 this year at City of Dreams, is performing well which, together with the The House of Dancing Water and our high-quality hotel and food and beverage offerings, continue to drive strong brand recognition particularly in our key markets of Hong Kong and China. We are particularly pleased with the success of The House of Dancing Water which will celebrate its one-year anniversary in September of this year.

Since its opening, we have entertained more than 700,000 guests. The show continues to sell out with strong interest from local and international visitors alike. We believe that The House of Dancing Water is a key differentiator for our Company, delivering to our customers a unique experience and one which is consistent with our premium focus while also illustrating our innovative approach to our non-gaming operations.

The show, while operating at above breakeven on a stand alone basis, also generates a meaningful ripple effect throughout the whole business including higher property visitation, improved hotel and food and beverage metrics, as well as provides a significant contribution to our gaming business through amongst other things adding key customers to our database to drive profitability and future growth.

We are continuing to refine our approach to hotel revenue management and CRM which focuses on profit optimization as opposed to the more traditional occupancy or yield-driven approach. These programs will continue to cultivate a loyal customer database of high yield and premium customers, building on our considerable progress to date.

Since our last earnings call we have had some significant developments. First, we have successfully completed the acquisition of a 60% interest in the developer of the Studio City Project. This represents one of the most significant milestones in our Company's history to date. The Studio City Project while obviously substantially expanding our footprint in Macau, has the added benefit of further increasing our exposure to the mass-market segment. We believe this property will enhance and broaden our portfolio of assets. We believe Studio City's location at the Lotus Bridge immigration point and light rail stop is a strategic competitive advantage.

While we are finalizing our designs and working through the approval process, we are excited about the opportunity to work with Macau government to move this project along, which will no doubt help Macau achieve its goal of becoming the premier leisure destination in Asia.

Secondly, we recently announced that we have made an application to the Hong Kong Stock Exchange for a proposed primary dual listing of our shares on the main board of the Hong Kong Stock Exchange and are also considering a possible global share offering. This proposed dual listing and possible offering will provide a number of benefits, including broadening our investor base by allowing local and Asian investors to invest directly in our Company and enhance liquidity for our existing shareholders and provide us with a future source of capital.

It is important to note that this proposed dual listing process involves significant preparatory work, as well as a number of approvals and as such we are not able to comment further at this time, per strict listing rules.

In terms of recent market trends, we continue to see strong GGR growth in Macau with a year-over-year increase in July of 48%. We believe that this growth in gross gaming revenue is structurally supported by the strong and resilient Chinese economy and the continuing emergence of the Chinese consumerism.

We also believe that recent growth is also supported by the addition of new supply to Macau, which in turn draws incremental visitation, particularly in the mass market.

Notably, visitation from mainland China continues to significantly outstrip the growth in other jurisdictions. With year-on-year increase in Chinese visitation for the second quarter of 2011 of approximately 20% as compared to approximately 3% for all remaining visitors. We remain confident in Macau's growth outlook with continuing improvements in infrastructure both within and throughout China, as well as a supportive and strong regulatory environment. We continue to be optimistic regarding Macau's long-term success, not just in terms of the very strong gaming fundamentals but also as a position as Asia's premier leisure and entertainment destination catering to a wide range of customers. So back to Geoff.

Thanks, Lawrence. We reported record adjusted EBITDA of $216 million in the second quarter of 2011 on $960 million of net revenue, delivering a consolidated EBITDA margin of approximately 23%. This compares to second-quarter 2010 EBITDA of $73 million and net revenue of $574 million, reflecting increases of 195% and 67%, respectively. EBITDA margin in 2Q 2010 was 13%.

We have delivered significantly above market mass table GGR growth rates this quarter in both the year-over-year and sequential basis. In the second quarter, our mass table GGR improved 66% year-over-year and 17%, sequentially. This compares to market wide mass table growth rates of 36% and 8%, respectively.

These impressive growth rates have been achieved despite the additional competition on Cotai, indicating that we are capturing a loyal mass-market customer base which will continue to underpin our future growth particularly as Cotai develops, while also supporting our belief that new meaningful supply will drive incremental visitation and spend.

We have also delivered another strong quarter in our VIP business, with sequential and year-on-year growth in VIP revenue of 15% and 65%, respectively. We continue to participate in the growth of VIP segment while maintaining our disciplined approach to junket productivity and long-term profitability.

As we have done previously, we will provide hold adjusted EBITDA for the quarter. Assuming that we had held at 2.85% across our entire rolling chip business, our second-quarter EBITDA was approximately $185 million. This marks the eighth consecutive quarter of improving EBITDA on this basis.

Now, moving on to the balance sheet. In May, we completed a US$356 million equivalent RMB bond offering priced at an interest rate of 3 3/4%. We have entered into a Hong Kong dollar deposit linked loan which hedges our exposure to movements in RMB. The impact of the RMB bond and the deposit of linked loan on the balance sheet is two-fold. You'll see an increase in debt for the US $356 million RMB bond as well as an increase in non-current restricted cash from the net proceeds of the bond.

In addition to this, you will find a further increase in debt equal to the deposit linked loan of approximately $353 million which is offset by an increase in cash. There's no material impact on net debt as a result of the deposit linked loan.

As announced in early July, we also successfully completed the refinancing of our existing City of Dreams Project Facility into a more standard corporate loan, providing us with greater flexibility as it relates to our cash and cash flows. This flexibility, while coming at a small increase in effective interest rate, is important because it allows us to use our cash in the most effective manner to achieve operating objectives while at the same time allowing us to pursue growth opportunities.

As a result of this refinancing process, we have incurred an approximately $4 million charge in recognition of fair value of our interest rate swap contracts when the hedging relationship was terminated it under the City of Dreams Project Facility as well as a one-off charge of approximately US $25 million relating to the write off of deferred financing charges for the City of Dreams Project Facility.

As we normally do, we will give you some guidance on non-operating line items for the third quarter of 2011 as they relate to MCE's ongoing operations. Depreciation and amortization expense is expected to be approximately $85 million. Corporate expense is expected to come in at approximately $20 million. Net interest expense is expected to be approximately $30 million which includes the impact of the various capital structure initiatives mentioned above. And that concludes our prepared remarks.

Before we start our Q&A, I would like to reiterate Lawrence's previous comment. Our proposed Hong Kong listing and global offering severely limits our ability to discuss not only the proposed listing, but also any forward-looking projects including Studio City.

Operator, back to you for the Q&A.

(Operator Instructions). Larry Klatzkin with Klatzkin Advisors.

Great results.

Thanks, Larry.

Can you tell us how the current quarter to date is looking? I mean you're a big chunk through it. Are you -- with the offering you can't really discuss that stuff like that?

Well, I think we can talk about market-wide trends. As we said earlier in the call, July, the full month of July was, ended up market-wide with 48% and so far in August it's around 45% from a market-wide basis. And as we previously said, our City of Dreams offering caters to the premium side of the business, both on the VIP side and also on the mass side.

So we tend to do pretty well over the summer periods since we appeal more to the more sophisticated crowd like the Hong Kong and higher end China market. So although I can't give more color than that, I think we are pretty happy so far with Q3.

Fantastic. And the competitive outlook, it seems like people have geared up a little bit. Is that true?

Sorry, can you repeat that again?

The competitive outlook. It seems like some of your competitors have geared up a little bit. Have you been seeing that?

I think on the competitive outlook side with Galaxy Cotai's opening, it certainly has moved the center of gravity further into Cotai and I think we have benefited from that. So I think, all in all, I think operators in Cotai at this moment in time are very happy. And I think that gives us more even more confidence with the Studio City Project going forward.

I know there's some restrictions on new tables and stuff like that. I know you can't discuss it, but Studio City, what would be an optimal time to start construction on that? Can you at least say what you would love to see if everything went right?

I think as per our previous guidance, I think our view is that -- I think first of all, the previous owners of the Studio City Project had commenced construction in the good old days and had put over US$100 million into the ground. So that would give us a somewhat of a head start. You know, our view is that to restart construction from the recommencement of construction to finish would be about a 36-month to effectively a three-year process.

And we previously said we hope to restart construction sometime before the end of Q1 of 2012.

All right. Perfect. Thanks. I'll let someone else ask questions.

David Bain with Sterne, Agee.

Lawrence, can you give us a little color on what the Macao Studio City target demographic may be, relative to City of Dreams? Will there be crossover marketing opportunities or is this going after a fairly different patron base?

Unfortunately, as Geoff said earlier on, we are on a pretty tight lease from the -- with regard to the dual listing in Hong Kong. So we have been advised by our Counsel that we can't say too much beyond that. But I think all we can say is point to the fact that the reason that we were so excited about Studio City, the reason we are so excited about it is really in its location, the fact that it is located right at the border gate. The Lotus Bridge border gate, which we heard, that will probably go 24 hours and hopefully be sometime in the future. So I think given its location it really does give us flexibility in terms of the market that we will approach.

Okay. And then if you could maybe speak to on the other side outside of Macao where that Lotus Bridge begins, is there critical mass building where that could be a more -- there will be more critical mass to allow for more patrons to go that extra five minutes? To that entry point?

Well, I think if you look at the Lotus Bridge border and also the future light rail station which is right at the Lotus Bridge border, it is effectively a 30-second walk from that border to Macao Studio City.

So as a comparison it's even much closer than Oceanus is to the current Macao peninsula ferry terminal. So, again, we expect and hope to have extremely high foot traffic going forward in the future.

Okay. And then, just a longer-term, is there a target margin at City of Dreams now, at Altira? Maybe you could share with us and maybe just a little additional granularity around the operational refinements you have put in and maybe what we can look for going forward?

Without getting too specific on forward-looking numbers, Dave, I think what we are really trying to do is keep our operating expense in check and look for ways that actually reduce that operating expense going forward as we really try to gain some synergies and leverage the fact that we have three operating units in Macau and at the same time continue to drive as much top line growth as we possibly can.

And that -- those two things combined will leverage into margin improvement and at the same time, I think the initiatives that we have in the mass business, particularly in premium mass, will help us from a mix shift perspective as well. So we see some potential upside there, but don't want to get too specific about individual numbers.

Okay and, promise, last one. Can we get an update as to the current thinking for a new hotel tower at City of Dreams if the timing of 5 and 6 comes into play?

I think, given the Studio City Project, and the fact that a lot of the focus right now is on building that, I think both from a management time standpoint and, also, managing our balance sheet standpoint we probably put the additional tower of phase 3 of City of Dreams on the back burner for now.

But needless to say if you look at some of our KPIs coming out this quarter, all of our hotels within our portfolio effectively completely full now so I think we do need those rooms somehow, some way in the future, but at this point in time we will consider that a little bit later on.

Great. Thank you.

Grant Chum with UBS.

Good evening. First question, just on the hold adjusted EBITDA, Geoff, can you give us those equivalent numbers for the two properties separately?

Yes. Of the total amount of the adjustment about $7 million would be at City of Dreams and the remainder would be at Altira.

Sure. So, on the City of Dreams, I mean it looks like the margin's very strong. I mean was there any kind of savings or reductions in the amount of promotions or discounts that you're offering to the mass customer? Or was it really just a volume growth that contributed to the margin improvement?

Hello, Grant. This is Ted. I think in the second quarter and the first quarter what we have been doing is actually focus much on the premium side of the mass business whereby we invest more on the service side than the traditional promotion or advertisement expenses than probably a lot of the other properties did in the past.

So I think the focus in the premium mass service side drastically did reduce the expenses, i.e., we have a higher margin at that particular end of it.

I see. So, Ted, if you look at the -- I mean, whether you look at it on a year-on-year sequential basis, I mean if I look at City of Dreams the mass table revenues growing I guess close to 70% year on year. If you were to try to break that out between the growth in premium mass versus the grind business, what would the growth rates by segment look like within the mass market?

Well, I think in the past we are probably more than 60% rely on premium mass, but due to our increase in portfolio of customer particularly on a database growth and our focus on that portion of business, the growth in premium mass is actually hand-in-hand with the grind mass area whereby grind mass is actually higher than those premium mass customers in terms of database.

So I think currently, in the current portfolio, I think we are quite close to somewhere about 50% to 60% contributed on the premium mass side compared to last year's 60% to 70%.

Sorry, can you just say that again?

This year it's -- this year, the percentage on a premium mass is somewhere about 50% to 60% and whereby the last year, which its number is especially lower and the premium mass contribution is about 60 to 70% (technical difficulties).

We can take the next question, operator.

Praveen Choudhary with Morgan Stanley.

Awesome results. I am just going to dig deeper on to understand the hold adjusted numbers if it's okay with you. You said City of Dreams was (technical difficulties) quarter so I'm not understanding why there should be downward adjustment of $7 million because of that. (technical difficulties).

You don't have a good connection. I think you are asking about City of Dreams hold-adjusted EBITDA.

Yes.

There are two things happening there. It's actually because of rounding the number is 2.8%, but it's pretty close to 2.85%. So from a hold perspective, City of Dreams is pretty close to the midpoint of the range. But we had a favorable mix shift or a favorable mix in the quarter between turnover and revenue share.

So when -- as we always do is we go at 2.85% across all of our programs the result would be an increase -- I'm sorry, there's a $7 million benefit at City of Dreams as a result of that. And again the rest would be at Altira a combination of higher hold than the 2.85% mid-point (technical difficulties) and also favorable (technical difficulties).

That's extremely helpful. Now if I compared to Q2 versus Q3, in Q2 you had a hold adjusted number of $175 million, in Q3 you have $185 million. So that's just $10 million on $175 million whereas your revenue grew by 19%. So I'm just thinking that it seems like your margin actually declined rather than improved on a hold adjusted basis between Q2, Q3 and Q -- sorry, Q2 and Q1. Is that fair?

Yes. Sequentially from the first quarter to the second quarter the margin on a hold adjusted basis, of course, on an actual basis, the margin was much improved. On the hold adjusted basis, sequential improvement was about $10 million and the EBITDA margin on a consolidated basis was essentially flat.

I thought it would be down because you are -- (multiple speakers).

You may not be adjusting revenue.

Yes.

You have to adjust your revenue as well as your EBITDA and we can do that (multiple speakers).

Okay, okay so the margin is flat. Last question for me. Was there any change in the commission that you are paying between two quarters or in the operating expense? Meaning that the promotional expenses that you were doing in the mass side has reduced or increased between Q2 and Q3 please?

Yes. Q1, Q2, basically the only change in Q1 and Q2 is the mix of the revenue share and the turnover based junkets] in the 2 properties. And basically the terms that we provide to the junket operator is identical in the two quarters.

In terms of expenses for the mass side as I said earlier, we pretty much invest in the service side on the premium mass segment. So that comparatively to the other traditional marketing in terms of advertising and promotion activities. That kind of activity we really, reduce in the second quarter.

Thanks again.

And I can confirm that these -- our estimate of player rebates in the first and second quarter has not changed.

Okay. That's fantastic. Thanks again and good results.

Robert Ryan with Elliot Management.

Just along the same lines, at a high level, it looks like the market grew around 12% the entire market, from the -- sequentially from the first to the second quarter. And your normalized EBITDA grew 5% to 6%. Which, all else being equal, it seems a little bit light and I know you have alluded to some of the factors behind that.

But going forward, do you think you would be able to capture greater upside that we would see the result of greater operating leverage going forward? That is -- what would you need to see or what would you need to do to capture more of that incremental revenue and translate it into EBITDA? And this is in the context of the normalized EBITDA increasing from $174 million to I believe you said that figure was $185 million or thereabouts.

Yes, that's correct that we did have some headwind some of which we pointed out in the last call as we go into the second quarter. We have higher utility expense. There was a timing difference with some VIP marketing events as well. They gave us some headwinds going from first quarter to second quarter.

But also with the very strong actual results we have to book a higher bonus provision in the second quarter than we did in the first quarter. So you normalize for some of those things and you get a more normal or typical level of flowthrough.

I think you know going into the third quarter, we plan on keeping operating expense essentially flat with what we've seen in the second quarter. So we will fully benefit from any VIP or mass market topline growth that we can generate.

Okay. Thanks. And this may have been touched on earlier but the market as a whole is approaching this table cap of I guess it's 5,300 tables. Do you have any sense of how the regulators will or the Macanese government will deal with that, how the operators will deal with it and how firm or soft a limit that is, how it will be implemented?

I think the Macau government has previously guided that the table cap or the table freeze last until March 2013 and their initial view is that post-March 2013 they would increase the potential table count by an annual basis 3% to 5%. So I think if you read between the lines it effectively -- only new builds from now until 2013 will get those tables. I think with Sands 5 and 6 opening up next year and the year after that that's where the allocation of tables will be.

So from our internal perspective with regards to City of Dreams and Altira, I think Ted alluded to it earlier on. We are continuing to yield up the business and we are trying to operate and utilize the tables as efficiently and as profitably as we can. And I think so far in the one-year experiment that we've been doing that, we view there's some significant results in terms of the average daily theoretical improving significantly. So I guess we will continue to do that.

Thank you. And I guess that announcement was made as part of a policy speech, as I understand it. There hasn't necessarily been a great deal of detail in terms of -- publicly provided -- in terms of how the cap will be implemented, how operators should interpret it, how much flexibility the operators might have in and around the cap. Is that something that the operators are seeing or hearing directly from regulators? Are they getting any more color, any more useful feedback than we might be getting publicly based on what we read in the media?

Well, you know, I think the operators we have a very close dialogue and we work very closely with the Macau government. I think whether it's our existing operations or even for the Studio City Project going forward, we have total trust in the Macau government. Because at the end of the day, it is in our best interest and also in their interest to make these integrated resort developments to further diversify Macau (technical difficulties). Their interest to make it financially viable for all of us so I think with our dialogue and I think with every operator's close dialogue with them, you know, I think they understand what it takes.

So I think so far yeah there hasn't been any more public announcements on the table cap issue, but from our daily communication and work with the government, it is a fixed cap until 2013 and we respect that.

Thank you. I was picking up some static on my line. That might be my cue that I reached my question quota. So thank you again.

Simon Cheung with Goldman Sachs.

Good evening. I have two questions. The first one I was looking at your stats in City of Dreams. Obviously you have done very well on your mass markets. However if I look at the rolling turnover based it has actually decelerated to about 3%. I was just wondering is that a deliberate consideration that you have shipped some of your tables back to mass market or what exactly is going on over there? Is that because of competition from Galaxy Macau and going forward what are you thinking in terms of the revenue mix between mass and VIP? That's the first question. Then I will follow up with the second question later.

(technical difficulties) on the growth, margin growth from Q1 to Q2. It's probably due to the win rate percentage in second quarter whereby we have a higher than (technical difficulties) 2.85% to 2.95 on those turnover based junkets. That may have some impact on the growth-- in that area and, second, I think we have some plans in terms of the opening of 1 to 2 operator but due to some labor issue we have to move those openings to the third quarter. And that basically hurt a little bit on the growth stats on the second quarter. I guess that might be adding some color on that front.

So is that fair to say that so far I guess in July and August you're actually seeing the rolling turnover trend back to norm, you know, in line with industry trends.

(technical difficulties). I think as July and August as mentioned by Lawrence earlier we are very happy about this summer seasons both in the VIP junket and mostly mass side.

Thanks. The second question is related to Macau Studio. Lawrence, you earlier mentioned that you are planning to start your constructions in the first quarter of next year. What exactly do you have to wait for? Is that still just the land concessions? Are you comfortable feeling comfortable that you would get tables or are you -- do you have any visibility as to what you are going to be constructing? How many tables, how many hotel rooms, etc., etc.?

As we said earlier on, we are on a very tight leash from the -- with regard to our disclosure from a Hong Kong perspective. The Hong Kong stock exchange perspective, I mean. But I think what we can say is that, even back in 2007, before we took an equity stake in the Macau Studio City project, we had an existing casino management contract with the previous owners and that management contract is still in effect. And I think -- and again we have with our -- from the very get go before we even undertook investing in the Macau Studio City project, we have had dialogue and communication with various levels of the Macau government and they have been very supportive throughout the way.

And so, we have complete trust in the government making this project a reality. And in order to make it a reality, of course, we would need the necessary gaming tables to make the project financially viable for us. And you know with regard to what it takes for us to recommence construction and I think, unlike some of our competitors who are still waiting for their land-grant, as I pointed earlier on, the previous owners of the Studio City Project had already commenced construction a few years ago and had put in significant piling and foundation work that was worth over US$100 million.

So for us right now it's really a process of recommencing and getting the necessary approval to restart construction. So it's a much less complex and complicated process than what others would be looking at.

Ladies and gentlemen, that concludes the Q&A session. We would now like to turn the call back over to Geoffrey Davis for closing remarks.

Thank you all for participating in our conference call today. We look forward to speaking with you again next quarter.

Ladies and gentlemen, thank you for joining today's conference. You may disconnect. Have a great day.