Melco Resorts & Entertainment Ltd (MLCO) 2011 Q3 法說會逐字稿

Good morning, and thank you for participating in the Third Quarter 2011 Earnings Conference Call of Melco Crown Entertainment Limited. (Operator instructions.)

Today's conference is being recorded.

I would now like to turn the call over to Geoffrey Davis, CFO of Melco Crown Entertainment Limited.

Good morning, and thank you for joining us today for our third 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.

Thank you, Geoff.

Our third quarter results represent another record for quarterly consolidated net revenue and EBITDA, which has built on the strong results in the first half of 2011.

Our third quarter EBITDA of $240 million was 76% higher than the same period in 2010 and up 11% when compared to second quarter of 2011. These results are indicative of our ability to compete effectively across all major segments in this dynamic environment. Our success in the mass market segment, particularly at the high end, demonstrates our ability to execute on our strategy, which has turned our mass market business into a meaningful competitive strength.

Following the successful ramp-up of City of Dreams, we're now focused on yielding up all of our various gaming and non-gaming amenities to ensure that we maximize profitability and cash flow from our current portfolio. This process involves strategies such as maintaining a dynamic approach to our table limits and floor layout, focusing on dealer training and efficiency and effective table allocation within and across our rolling chip and mass market segments. We also look to maximize our unique and diversified hotel offering to ensure Company-wide profitability while at the same time utilizing our world-class entertainment and food and beverage amenities to further drive brand awareness in all of our target markets.

We continue to move forward with the Studio City project. We are nearing the final stages of our design and development plan, which we hope to share with you in the near future. We're working alongside the Macau government to ensure that our vision for Studio City is consistent with our ongoing commitment to contributing and supporting the government's vision for Macau as a diversified leisure and tourism destination.

Our confidence in Studio City has been further strengthened as it becomes increasingly evident that the future of Macau gaming will continue its inevitable shift to Cotai, where we are ideally positioned to take full advantage. This belief in Cotai is supported by a number of factors, including various infrastructure projects, the favorable outlook for mass gaming due to the increasing wealth and consumerism in China, and the future supply of the hotel and gaming facilities, which are predominantly focused on Cotai.

As we have said in the past, we believe that supply is a key driver for gaming demand. We continue to see the expected supply outlook for both hotels and tables as supportive of a managed growth profile for Macau, providing an environment for sustained profitability for the overall gaming sector. However, we believe that regulated table supply outlook will benefit those operators who have exposure and are most leveraged to take advantage of the shift in the gaming epicenter to Cotai.

In relation to our proposed Hong Kong dual listing, we're continuing to work through the various required processes with the relevant Hong Kong regulators. We also continue to monitor the market situation, as well as our capital needs, to ensure that we maintain our prudent and forward looking approach to our capital structure. Due to the aforementioned processes, we cannot comment further on the listing at this time per strict listing rules.

Despite the recent volatility in the stock market, as well as uncertainty in the global economic outlook. The Macau gaming market remains resilient. The market continues to expand, with year-over-year GGR growth in Macau for October of over 42% and year-to-date growth of 45%.

Visitation from the Mainland China continues to significantly outpace the growth from other jurisdictions, with a year-over-year increase in Chinese visitation for September 2011 of approximately 39% as compared to an overall increase in visitors of 18. We believe this highlights the importance of China as it relates to the mass market sector. We remain confident that the outlook for Macau, the resilience shown by both the gaming and non-gaming sectors, particularly those relating to the mass market, solidifies our belief in the long-term profitability of the market.

This belief is further supported by the stable regulatory framework in Macau, which continues to provide leadership in managing the growth and supply outlook in the market, delivering supportive infrastructure improvements while at the same time meeting the needs of local Macau residents and ensuring Macau's long-term success as Asia's premiere travel, leisure, and tourism destination.

So back to Geoff.

Thanks, Lawrence.

We reported record adjusted EBITDA of $240 million in the third quarter of 2011 on approximately $1.1 billion of net revenue, delivering a consolidated EBITDA margin of approximately 23%. This compares to third quarter 2010 EBITDA of $136 million and net revenue of $727 million, reflecting a 76% year-over-year increase in EBITDA and a 45% year-over-year increase in net revenue. The EBITDA margin in the third quarter of 2010 was 19%.

We have delivered meaningful growth in both the mass market and rolling chip segments on a group-wide basis despite increased supply in the market in May. Our mass table games GGR grew 5% sequentially and 61% year-over-year, while our rolling chip volumes increased 3% sequentially and 40% year-over-year.

We continue to see improvements in our key mass market metrics, including our mass table game hold percentage at City of Dreams, where we have revised our expected mass hold percentage to a range of 23% to 26%. This compares to our range in 2010 of 20% to 22%. We believe this increase is sustainable and reflects various operational initiatives put in place over the last 12 to 18 months.

In the rolling chip segment, we have achieved these solid growth rates without changing our approach on VIP commission rates. As such, these growth rates reflect our ability to compete strongly through our high quality service and products at Altira and City of Dreams. As we've done previously, we'll provide hold-adjusted EBITDA for the quarter. Assuming that we held at 2.85% across our entire rolling chip business, our third quarter EBITDA was approximately $195 million, up from about $185 million in the second quarter and approximately $175 million in the first quarter of this year. This marks the ninth consecutive quarter of improving EBITDA on this basis.

I would like to highlight a few items on our financials, given that this is the first earnings report following the acquisition of our 60% stake in Studio City. Studio City's results are fully consolidated in our third quarter financials and reflect approximately two months of impact starting from the close of the transaction in late July.

On the P&L, the primary effect was an amortization of land use rights which increased from roughly $5 million to $11 million sequentially, which largely reflects and recognizes the fair value of land use rights acquired in the Studio City transaction. Operating expenses associated with Studio City were diminimous in the third quarter. The P&L now also includes a net income or net loss line attributable to non-controlling interest, which reflects the after-tax portion of our revenues and expenses of Studio City, which relate to our minority shareholder's 40% stake. On the balance sheet, you will now see a non-controlling interest line, which reflects the recognition of the fair value of minority shareholders' 40% interest in Studio City, partially offset by their portion of the expenses related to Studio City during the third quarter of 2011.

Now, as we normally do, we'll give you some guidance on non-operating line items for the final quarter of 2011. Total depreciation and amortization expense is expected to be approximately $90 million to $95 million. Corporate expense is expected to come in at $18 million to $20 million, and net interest expense is expected to be approximately $30 million.

Operator, back to you for the Q&A session.

(Operator instructions.)

Billy Ng with Bank of America.

Hello. Good evening, and congratulations on the solid results. Just want to get some colors on recent trend of the marketplace, especially for November. Have you seen any kinds of slowdown in terms of the overall marketplace? And also, since your neighbor, the Venetian or the Plazas, have opened a couple new VIP rooms, and have you seen any impact on your side, as well?

Hi, Billy, it's Lawrence here. First of all, thank you.

No, I think we haven't seen any real slowdown, because typically early November is, from a seasonality standpoint, it does slow down a bit given a lot of pent-up demand happens during Golden week and the period after that. But still, I think looking at our market share in the first seven to nine days, it's pretty consistent. So I think, overall, we haven't seen any deterioration in the business. And also, with regards to some of our competitors opening up new VIP venues or introducing new junkets to their venue, we haven't seen our rolling chip volume fall either in November. So I think, when you adjust for seasonality, this is approximately where it should be.

Thanks.

Thanks, Billy.

David Bain with Sterne Agee.

Hi, I assume that's me. Do you guys still anticipate heavy construction on MSC to begin in the first quarter?

Hi, David, it's Lawrence again.

Hey, Lawrence.

Hey. We're working closely with the Macau government. We have submitted various documents into the government. And so, subject to their approval and going through the regular processes, we hope to restart construction for Studio City in the first quarter. So I think in terms of a -- from a design standpoint, I think we are quite advanced in the conceptual design stage, so we're pretty much ready to go.

Okay, great. And then this could be a question for Ted or Lawrence. We see the media reports pointing to the Mainland credit tightening policies and potentially impacting some of the factory owners and potential VIP players in Guangdong. I guess the question being what's your confidence level of the player pool not related to junket liquidity will continue to grow? I mean, are your junkets, or through your direct play, are you seeing a more diverse group of VIPs as it relates to Macau as it expands?

And then also the same question for the mass market. How's that evolving from a player perspective?

Thanks, David. I think, just like last quarter, in terms of the China tightened credit and also the problem that we see in China reported recently, I think that is not anew news. It actually has started from beginning of the year, from April.

What we have to look is actually the existing liquidity and also the metrics that were built in the operation. I don't see any evidence so far, seeing the -- any correlation of the liquidity and also the problem that we always heard in China at the moment. So in other words, I don't see any significant changes currently.

In terms of the Mass, I think we still see some growth more than the visitation number in Macau. And in terms of volume and drop compare to Cotai, I think Cotai could pick it up faster than the Peninsula side. And I think that's the trend for the last one and a half months starting from fourth quarter.

Okay. And then just final one, Geoff, outside of Macau Studio City, can you give us an idea of CapEx expectations for next year?

Sure, Dave. These are some initial views. We're in the midst of budgeting for 2012. But I think we should be someplace in the $75 million to $100 million of CapEx for 2012.

Okay, great. Thanks, guys.

Thanks a lot.

Praveen Choudhary, Morgan Stanley.

Thanks very much. Again, very good results. Congratulations, Lawrence. Congratulations, Geoff.

Two quick questions from me. First one is about the Macau Studio City. I'm sure everybody's asking, but we are concerned about the table cap, which is supposed to be at 5,500 and growing at 3%, and I suppose along with you, Wynn, SJM and MGM are all saying that they have got approval to build casinos as well and it's just a matter of time. Would you give us some idea about how do you differentiate from other three, if any, and how do you go about allocating, or getting the allocation for table? That's the first question.

Praveen, it's Lawrence. Let me answer the first one first, and then perhaps you can ask the second one. With regards to the -- I guess the queue for construction on Cotai, I think we're confident that we are probably one of the early movers on that front, because at the end of the day, the previous owners of Studio City project had already put in $100 million into the ground of piling and foundation. So that's quite a few months of advance work that's already in the ground. And secondly, I think we all want to be rare. I mean, I can't comment for the other people, but the land grant that we had gotten in the past, quite a few years ago, I think we're one of the rare people to actually have that type of approval .

So for us, it's really -- it's not about getting started with construction. We're literally just restarting construction. So that's on your first question.

An in terms of table allocation, I think the Macau government message is very consistent in that, post-March 2013, they expect a 3% annual increase. But I think if you read into further publications in terms of some of their media comments, they're also contemplating the fact, given that there's going to be quite a few developments in Cotai over the next six years or so, that they could potentially early allocate some of those tables. But again, that's subject to the government's approval.

But I think what -- the fact that we can take comfort from the government and be confident in is the fact that they do understand, in order to make these projects work and financially viable, gaming tables must be a part of

Okay, great. Two quick questions further. One is your mass win table, mass win per table per day, or the yield that you are generating on mass, is significantly higher than many other competitors, including Venetian. That is a bit surprising. Clearly you have done a great job. But just want to understand, is that include some part of premium mass which is not necessarily mass, a bit of VIP mix, or anything that we should understand clearly to get a sense of it? And how far can it go, because it's already very high?

And I have one last question, if I could ask that, as well. The VIP business slowdown that everybody is asking or expecting or hoping, and we haven't seen any of that, we had earlier a Genting call, and we had a big provisions for bad debt, although there has not been anything happening yet. Are you seeing less number of gamblers coming, or the size of bets slowing down, which is not explained by seasonality?

Praveen, it's Ted. Let me answer the first question about the mass performance in COD and Altira. I think we continue to think -- 12, 18 months ago, we continued to look into segmentation of mass. I think that definitely the market is very, very promising in Macau, and we continue to focus one segment, which is what we are strong at, which is the premium mass and the high-end premium mass segment.

So you look at it per table, it's more about optimization of the table that we have. Table is very scarce now in terms of availability. So we have to optimize each table and in each (inaudible).

I think that's the focus on the COD side. On Altira, we only have 30 tables, so what we have to do is actually continue to improve the service level on that venue.

And Praveen, sorry, I think your other question is are we seeing changes in bet size or any change in traffic patterns. And Ted, please jump in if you think -- but I don't think we're really seeing any change at all in overall traffic patterns in either the mass or the VIP, it continues to perform at the level that we've seen it over the last year.

Yes. I was more concerned about VIP, where are you seeing any kind of cash collection cycle lengthening, either from you to junkets or from junkets to gamblers, if you are tracking those?

No. we track that both in our premium direct, and we're not seeing any change in collections at all in that direct relationship. And through the junkets, we're not seeing any change in credit quality or ability to collect, lengthening of cycles or any of those things. So no, it's been pretty consistent throughout.

Great. Thanks very much, and good luck with Q4.

Thanks, Praveen.

Gary Pinge with Macquarie.

Hi, guys, how you going? Thanks very much for taking my call. I had a couple of questions. The first one's probably best directed at Lawrence. And Lawrence, I appreciate what you said about disclosure, given the dual listing and things like that. But in your announcement around the paragraph around the Studio City project, you've said that your financing plans that you would look at include a bank loan and debt financing. Is it fair to say that we can kind of rule out equity financing for the Studio City project? Is that how we're supposed to read this comment, or can you give us any more color around that?

Our view is that we can finance Studio City through a combination of cash equity and debt financing at the Studio City level, so that hasn't changed. And we believe we can fund our portion of the equity through our existing cash and our current cash flow outlook.

Right, okay. So, I mean, if there was going to be any equity issuance, it wasn't specifically going to be for the Studio City project. Is that fair?

Well, I think we're still going through that process. As Lawrence said, it's really difficult to comment specifically on a number of items, including use of proceeds.

All right. Okay, all right, fair enough. And a second question was around the VIP side of your business at City of Dreams. I think you've added a couple of junkets, have you, in the third quarter, coming into the middle of the third quarter? Is that right?

Hi, Gary, it's Lawrence. Yes, we did add -- it's a constant process to replace some of the underperforming or nonperforming junkets with better performing ones. So yes, I think in July, we -- one of the bigger ones that we've added, and it's probably the last big junket consortium that wasn't operating at City of Dreams was obviously Neptune, so we added them, and as part of our regular process to increase productivity. So we do look at this on a regular basis.

Okay. All right, because if I look at your market share of kind of VIP turnover, it doesn't seem to have ramped up as much as you'd expect if you've added a large kind of consortium of junkets in there -- junket group in there. Is that likely to ramp in the fourth quarter, do you think, or was there some reason that it didn't ramp up in the third quarter specifically?

Hi, Gary, it's Ted. I think in respect to a few junket operator, we are looking to the productivity in a very disciplined way. In terms of ramping up, I think so, because we are looking at some enhancements of facilities at the moment in COD, especially in the VIP level two area and also with the more -- enhancement of facilities on this first quarter next year, as well.

Right. Okay. Okay, perfect. Thanks very much, Ted. Thanks, guys.

Thank you.

Thanks.

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

Okay. Well, thank you all for joining, and we look forward to getting back together with you next quarter. Good night.

Thank you for participating in today's conference. You may now disconnect.