Melco Resorts & Entertainment Ltd (MLCO) 2011 Q4 法說會逐字稿

Good morning and thank you for participating in the fourth quarter 2011 earnings conference call of Melco Crown Entertainment Limited. At this time, all participants are in a listen-only mode. After the call, we will conduct a question-and-answer session. Today's conference is being recorded.

I would now like to turn the call over to Geoff Davis, Chief Financial Officer of Melco Crown Entertainment Limited.

Thank you, operator. And good morning, everyone, or good evening. Thank you for joining us today for our fourth 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. I'm pleased to report our fourth quarter results of 2011, which cap off a truly exceptional year for our Company. Our fourth quarter results represent another record quarter of hold-adjusted EBITDA and EBITDA margins, demonstrating our ability to build on the significant improvements in profitability and cash flow generation made during the earlier part of 2011.

We reported fourth quarter EBITDA of $232 million, up 73% from the same period in 2010 on a 30% increase in net revenues. These steady improvements in underlying profitability are indicative of the success of our key focus on driving our mass market operations, which we believe will continue to underpin future profitability and cash flow.

As a result of this significant ramp up in our mass market operations, together with our strong Group wide cost control focus, we delivered full year EBITDA growth of 88% in 2011 on a 45% increase in net revenue, reflecting impressive EBITDA flow through.

Our commitment to providing a market leading service to our core customers, supported by our high quality facilities and amenities, has driven our success in our mass market segment, particularly at the premium end, into a significant competitive advantage.

I would like to highlight that we have delivered these impressive operational and financial results at the same time as executing on a range of strategically important milestones for our Company, including the Studio City acquisition and listing by introduction on the Hong Kong Stock Exchange, while also proactively managing our capital structure.

Our Studio City project continues to move closer towards realization and we look forward to keeping you updated on our progress in the future.

While we are proud of our achievements made so far in ramping up our operations, particularly at City of Dreams, we continue to look for ways to further yield up our core businesses. This process is ongoing as we focus on improving the efficiency of our gaming operations and ensuring we leverage our hotel inventory, food and beverage outlets, as well as our enviable collection of world-class entertainment offerings to drive Group wide profitability.

We are optimistic regarding GGR growth for 2012, particularly in relation to the highly profitable mass market segment, which continues to be strong, as evident in the increased visitation and strong mass tables' growth rates. We believe that our current exposure to the fast growing Cotai region as well as our development pipeline places us in a strong position to take full advantage of the inevitable shift from a market dominated by the Macau Peninsula rolling chip segment to one catering to a broader spectrum of customers, notably in the mass market segment in Cotai.

We are excited about the infrastructure development plan for Macau, particularly in Cotai, as well as supportive infrastructure development in our core feeder markets. A key area of interest is the development of Hengqin Island, providing further evidence of the strong support from local and mainland authorities to the long term success of the region.

We remain confident in the future of Macau and believe the outlook for 2012 remains solid, given the supportive government framework for the development of the region together with the underlying demand for leisure and gaming in Macau.

So, back to Geoff.

Thanks, Lawrence. We reported record adjusted EBITDA of $232 million in the fourth quarter of 2011 on approximately $1 billion of net revenue, delivering a consolidated EBITDA margin of approximately 23%. This compares to fourth quarter 2010 EBITDA of $134 million and net revenue of $774 million, reflecting a 73% year-over-year increase in EBITDA and a 30% year-over-year increase in net revenue. EBITDA margin in 4Q 2010 was 17%.

We have delivered meaningful year-on-year growth in both the mass market and rolling chip segments on a Group wide basis. Notably, our mass table GGR increased 12% and 60% on a sequential and year-over-year basis respectively, compared to the overall market which grew by 10% and 40% respectively.

In other words, we took share in the mass table segment despite the new supply in the market. This strong mass table growth in the result of both improved volume and a sustainable and improving mass hold rate. Our mass table hold percentage in the fourth quarter was 25.7% at City of Dreams compared to 22% for the comparable period in 2010.

Our rolling chip segment continues to perform strongly and we have remained disciplined on VIP junket pricing and working capital support. Assuming that we held at 2.85% across our entire rolling chip business, our fourth quarter EBITDA was approximately $200 million, up from approximately $195 million in the third quarter, $185 million in the second quarter, and approximately $175 million in the first quarter. This marks the 10th consecutive quarter of improving EBITDA on this basis.

During the fourth quarter, we delivered a record hold-adjusted EBITDA margin of 21%, which compares to 16% in the same period in 2010 and up from 20% in the third quarter of 2011.

To provide some additional color on the strength of our mass market business in driving our bottom line, I would like to point out that in the fourth quarter of 2011, on a hold-adjusted basis, less than half of our Group wide EBITDA was generated from the VIP segment. At City of Dreams, the hold-adjusted EBITDA contribution from VIP was approximately one third of the total.

As mentioned by Lawrence, we have been active in managing our capital structure over the past 12 months, as evidenced by the refinancing of our City of Dreams project facility, the issuance of our RMB note in May, as well as the conversion of the shareholder loan in November of 2011. These initiatives, together with our operating cash flow, ensure that we are in a strong position to pursue organic growth and development opportunities.

Our net debt to shareholders' equity ratio has improved from 49% at the end of 2010 to 25% as of the end of 2011. Our net debt is now approximately $800 million compared to $1.2 billion at the end of 2010, demonstrating our ability to pay down our previous development costs with strong operating cash flows while further driving operating profitability.

As we normally do, we'll give you some guidance on non-operating line items for the first quarter of 2012. 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 $25 million to $30 million.

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

(Operator instructions.) Grant Govertsen of Union Gaming.

Hey, guys. Good evening. Just wanted to ask a question about Altira. As I look at your properties combined, it looks like gaming volumes were up on a year-over-year basis, largely in line with the market, but Altira we saw some sequential declines in rolling chip as well as mass drop. I was wondering if you could give us a little bit of color on that.

Hey, Grant. It's Lawrence here. Why don't we get Ted to answer that question?

Great. Hi, Grant. First of all, let's look at the mass volume in Altira. I think in the fourth quarter of last year we really focused on the enhancement of the hold percentage on the gaming floor whereby we introduced a lot of initiatives. So, although the volume, the drop volume in Altira in mass is actually reduced a little bit, the net-net GGR has actually improved. This is a good outcome of the fourth quarter in the mass side.

The productivity per table wise in mass has actually improved substantially. And that is one of the highest productivity per table wise in mass in Macau at the moment.

Let me comment on the volume drop in the fourth quarter compared to third quarter in terms of rolling chip volume. I think in the fourth quarter we continued our program in yielding up tables in the VIP rolling on the base of productivity.

And there is trend that junkets are moving to more on the revenue share scheme. And that might result in a drop in volume. However, it will free up more gaming tables for us to introduce more new and high productive junkets in both Altira and COD. So, we can see that the drop in volume in the fourth quarter is actually transitional.

Okay, great. Thanks, Ted. And just one other just more generally, and I think I know what the answer is going to be. But, have you seen anything, I guess since the last time we spoke a few months ago, that would cause you to change your outlook? It seems like operators are coalescing around a 15%-plus growth rate for 2012. Is there anything that you're seeing or hearing from your VIP operators that might suggest that you'd -- or just causing you to change your outlook?

Hey, Grant. It's Lawrence here. We continue to be very optimistic for 2012. It has been off to a good start, although as you know, there was a timing difference with regard to the Chinese New Year. But, at the end of the day, we believe the growth rate is supported by our belief in the structural story in Macau. And with the strong and evolving core feeder market, we've very confident with that growth rate.

Great. Thanks and congrats on the quarter.

Thanks, Grant.

Dave Bain of Sterne Agee.

Great. Thanks. Hey, Ted, I think you kind of touched on this, but there was a reduction of tables at Altira and an increase at CoD in the fourth quarter. Can you guys maybe speak to any forward shifts that may take place to help us better model roll at the individual properties going forward?

Yes. Well, you are right. Looking at the number of tables and the shift in allocation of the most valuable asset, which is the tables, we see some potential in CoD there. And as you know, we freed some of the gaming salon by the end of the fourth quarter and we are able to introduce some new junket operators.

In the future couple months, we have put in place a program to improve and expand our VIP gaming facilities in CoD. And we should be able to add another three junket operators in the next few months time.

Okay, great. And Lawrence, as you know, I mean, one of your competitors recently began offering junkets more incentives in the form of credit and revenue share bonuses. They're doing it on Cotai. I mean, do you anticipate changing your own methodology for junket pay? And then also, do you think the market in general could become irrational in terms of junket comp to try and maintain a gross share, or is this something everyone's seen before?

Hey, Dave. I think we will continue to monitor the situation closely, particularly as it relates to a junket pricing environment.

As a policy, and it has served us very well over the last few years, we do not intend to compete on price or credit in the rolling chip segment. But, instead we compete by delivering a premium gaming experience to our customers. And the approach, that has worked -- that is supported by our world-class facilities.

Of course, we will -- as Ted mentioned earlier on, we are continuing to make improvements to our facilities and continue to improve the productivity of the gaming tables. Given that we are in a fixed table cap environment, we will continue to shift the tables to make sure we're yielding them up.

I think after the global financial crisis and some of the credit or commission wars that went on in 2007 and 2008, I think most operators understand that this is really -- it's not a game that will benefit anybody in the long run. So, I think everybody will be a lot more cautious going ahead before engaging in one of these wars again.

Okay, great. And just a final one. Geoff, I think you mentioned, on a hold-adjusted basis, and I assume you're talking about the middle end of the theoretical range, it was a 21% margin. Does that mean EBITDA in the middle of the range, VIP range, would have been $210 million plus, or did I mishear you?

Can you repeat the tail end of that question?

I believe you had mentioned hold-adjusted 21% margins for the fourth quarter. Maybe I misheard you.

No, that's correct.

Okay. So, you were taking theoretical at 2.85%?

Yes.

Okay, got it. Thank you very much.

The middle of the range, that's correct Dave.

Right. Thanks, guys.

Thanks, Dave.

Cameron McKnight of Wells Fargo.

Good evening, guys. How are you?

Fine. Thanks, Cameron. How are you?

Not too bad. Lawrence, just wondering if you could comment on some of your thoughts on the macro outlook in China, especially with inflation coming in slightly ahead last night.

Well, I think China is projected to probably grow. The GDP growth should be around 8.2%, 8.5%. And I think for anywhere in the world that would be an amazing number, but we continue to hear how investors or people in the US are concerned about this growth and the fact this was a potentially soft landing or hard landing.

I think this year Chinese growth will continue to be measured as the government continues to try to rein in the real estate sector, and also there are certain restrictions on banking as well. But, having said that, I think when it comes to the discretionary spending and consumer sector, we really haven't seen -- at the end of the day, the government has been doing this for over a year now. We haven't seen any significant slowdown in Macau.

So, again, I think our hypothesis for 15% / 20% growth in the gross gaming revenue overall in the market for this year is based on around 8% GDP growth. So, at this moment in time, again, we're pretty comfortable with the budget that we had set last year and with the current trading rate in Macau.

Great. Thanks, Lawrence. And one follow up question. With the leadership in China transitioning this year and some recent -- and some of the recent events in Chongqing, are you concerned that that transition could possibly stall progress on land approvals or any policy initiatives in Macau this year?

No, I don't think so, because at the end of the day, as you pointed out, in October there's going to be a leadership change. And I think with a transitional year like this one, I suspect -- and of course, I can't speculate. I'm no politician, but I think China will try to keep it as stable as possible.

I think what happened in Chongqing is isolated cases. When a country is as big as China with 1.4 billion people and is still developing rapidly, things like that do happen occasionally. So, I don't think one incident in one city or another is going to cause the national policy to change.

Great, thanks. And, Geoff, just wanted to confirm it was $200 million normalized net EBITDA for the quarter.

That's correct, 200, two-zero-zero.

Great. Thanks very much.

Billy Ng of Bank of America.

Hi. Good evening, folks, and congrats on the solid results. Basically just have questions on Macau Studio City project. I believe it's been said that the Company is not going to issue equity to finance the project. So, can you walk us through briefly your cash balance and debt situation, and also what kind of cash requirement you need to put in to get the project start?

And then, my second part of the question is that basically I think two days ago or yesterday, the Macau government announced that they may be able to approve two projects this year only. So, is Macau Studio City a separate case? It's not the target for those two projects, or can you elaborate a little bit more?

So, Billy, this is Geoff. Our cash and cash equivalents are approximately $1.2 billion at the end of the year. That's excluding any restricted cash that you see, long term restricted cash, at $365 million. That's mostly related to our deposit linked note.

As far as the financing plan for Studio City, we're working through those plans right now. We said previously we're working on putting together a bank facility as part of the plan, as well as some other debt financing.

As far as the equity, the cash equity component that we'll put into the project, it'll be roughly on a pro rata basis with our minority shareholder. But, as far as getting into the details of quantum at this point, I think it'd be premature.

Our project budget for design and construction costs remains at $1.9 billion.

And Billy, it's Lawrence here. With regards to what Director Carion said over the weekend about approving two of the three, well, as you know, we don't want to speculate, as we weren't there and we don't want to speculate on Director Carion meant.

But, for ourselves, our design plans in relation to Studio City are effectively complete and we're undergoing the necessary government processes to obtain the approval to commence construction. And as we have always been, we remain extremely respectful to the government processes.

Thanks.

Thanks, Billy.

Grant Chum of UBS.

Hi. Good evening. Can I just -- first question a follow up with Ted on Altira. I mean, can you just get in a little bit more detail exactly what is happening at that property on the VIP side? I mean, are you implying that -- just a brief period where you're churning out some underperforming junkets and you'll be replacing them imminently in that property, or are we talking about reducing the volumes there and the tables there so that you can increase the volumes and the capacity at City of Dreams? Just want to get more color on exactly how the transition may trend after this sequential drop. I mean, should we expect stabilization here, or is there more churning to come through in the coming months?

Yes, Grant. Basically as Lawrence earlier said, we have to really yield up our table productivity. So, as you know, we allocate quite a lot of tables in Altira because of the history of Altira. So, per table productivity compared to CoD or Cotai standard is a little bit low.

So, what we are trying to do is actually put in place some program for the junket operators so that some of them in the fourth quarter -- end of fourth quarter are moving towards the revenue share model, i.e., these junkets are more quality and bigger junket operators. So, in the process of doing so, we should be able to generate more -- free up more tables whereby we could either introduce some more new junket operators onto Altira or move those tables onto to CoD for our expansion plan in the next three months time.

And if it's the latter, I mean, are you able to quite rapidly adjust the cost base at Altira to reflect the lower volumes?

Yes, basically we will look into per table productivity ratio to determine.

Okay. And a separate question. I don't now whether this is a question for you, Ted, or Geoff. Could you tell us, at the end of 2011, what your gross casino receivables were? And if you could split that out between the receivables related to junkets and the receivables related to your premium program, that will be very helpful.

Our total receivables were about $306 million, $307 million with about a third of those relating to premium direct. And the rest would be junket related.

So, that's the on balance sheet number. What would it be before the provisions?

The provision for the quarter was roughly in line with what we've seen over the course of 2011, approximately $10 million.

I see. Okay. And just a final question. On the Studio City approval process, I mean, what are the milestones we're looking for here? I mean, is the next thing going to be the agreement on the revised premium, or is it something else that we're waiting for before you can apply for the construction permit?

Grant, it's Lawrence here. As you know, the government approval process in Macau is quite complicated, and since -- Studio City was a project that had started construction quite a few years ago. So, I think the exact process is not quite identical to some of our competitors like Wynn or some of the other guys waiting for their initial approval.

So, for us, it's really about restarting construction. So, I think hopefully we can -- we're hopeful and optimistic that we can stick by the schedule that we had previously guided. And so, the next official announcement from us regarding Studio City, as the designs are all done now, would be a restart of construction.

Right. And what approvals would you be waiting for in order to restart? Is it just a permit to restart or is there more amendments to be agreed on the conditions relating to the lease, the land lease?

Well, as you know, the project had been stalled for quite some time. So, there are quite a few things, including development period, that we need to refresh on. But, again, we are working closely with the Macau government and we've had numerous exchanges. And so far, we are very optimistic about the progress.

So, again, it's ultra complicated. And as I said earlier on, we are very respectful of the government's process and the fact that they would more often than not prefer these types of discussions and negotiations not to be public knowledge.

I understand. Okay. Thanks, Lawrence.

Anil Daswani of Citigroup.

Good evening, Lawrence. Just a quick follow on first on Studio City. Given your statement with regards to looking to debt, can you confirm that you're not going to be looking to raise any new equity at the MPEL level to fund Studio City? And given your solid cash flows, you shouldn't need to anyway, right?

Hey, Anil. Well, based on our current cash balances and future expected cash flow, we do not envisage a requirement to raise equity capital for Studio City. As Geoff mentioned earlier on, our focus is on working through the debt financing plan for the project. So, I think that's the latest update in our thinking.

Okay, fantastic. And a little bit of a follow on, clearly we saw some very good trends in mass in the fourth quarter. And looking through the channel check numbers that we get for sort of January, those trends have continued. And it looks like slot growth and mass growth has remained robust at north of 40%. How do you see that mix shift affecting margins in upcoming quarters as we see more and more growth on this mass side rather than VIP?

I think we'll continue to try to maximize our profitability and EBITDA from both segments. But, as you said, there's been a similarity in the growth rates. Combined with the differential in the margin, I think you'll start to see mass take a larger and larger -- represent a larger and larger part of our mix of EBITDA.

Thanks very much, guys.

Thanks a lot, Anil.

And there are no audio questions. I would like to turn the call back over to Geoff Davis for any closing remarks.

All right. Well, thank you, everyone, for participating in our conference call. We look forward to seeing you next quarter. Thank you.

Thank you for joining today's conference call. You may now disconnect.