Melco Resorts & Entertainment Ltd (MLCO) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the third quarter 2012 Melco Crown Entertainment Limited earnings conference call. At this time, all participants are listening -- on a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions) I must advise you that this conference is being recorded today, Wednesday the 7th of November, 2012.

I would now like to hand the conference over to your first speaker today, Mr. Geoffrey Davis, Chief Financial Officer of Melco Crown Entertainment Limited.

Thank you, sir. Please go ahead.

Thank you, operator, and good morning everyone and thank you for joining us today for our third quarter 2012 earnings call. On the call with me today are Lawrence Ho, Ted Chan, Constance Hsu, 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. Hello everyone. In the third quarter of 2012 we reported EBITDA of $226 million on approximately $1 billion of net revenue, delivering an EBITDA margin of approximately 22%.

Our mass market operations particularly at City of Dreams continue to drive Group-wide profitability delivering more consistent and stable earnings and cash flow. The mass table games segment at the property delivered an impressive 30% year-over-year growth during the third quarter, despite the entry of new supply in the market.

Market-wide, the mass market segment continued to deliver strong growth rates, outpacing the VIP segments over the past four quarters on a year-over-year basis. The consistent strength in this segment continues to validate our long-term focus on mass market customers.

Our wide range of innovative product offerings including a diverse hotel brand mix and world class entertainment attractions, as well as our property's attractive locations, position us to take full advantage of the fastest growing gaming segment of the market.

In the rolling chip segment for the third quarter of 2012, we outperformed the broader market. With our Group-wide rolling chip volumes improving over 40% sequentially, compared to an estimated decline of approximately 3% for the market over the same period.

City of Dreams continues to maintain its market leading mass market yields when compared to all other major mass focus properties in Macau. While at the same time it has delivered strong improvements in rolling chip table yields over the prior period.

Altira Macau has also delivered substantially improved per table operating metrics compared to the previous quarter, which we are confident can be further built from here. These strong Group-wide improvements in table yield demonstrate the success of our table optimization strategy.

We're confident that we can drive strong relative performance across our entire portfolio of assets as we continue to proactively manage yields at our gaming tables to maximize Group-wide EBITDA.

The Macau government has made significant steps towards expanding and improving the local transportation infrastructure. With the light rail and permanent Taipa ferry terminal clearly moving ahead.

Our exposure to the fast growing Cotai region as well as City of Dreams and Studio City's location on the light rail and close proximity to both the Taipa ferry terminal and Lotus Bridge entry points, positions Melco Crown to benefit from the growth in this region of Macau.

Macau's leverage to the fast growing Asian consumer, particularly from China, provides strong support to the long-term development and growth of the region. We believe that Macau remains one of the most exciting gaming jurisdictions in the world. And will continue to deliver a unique opportunity to generate long-term value for our shareholders.

Now, for an update on our development opportunity. Studio City is moving ahead on its expected timetable. With the majority of the piling and foundation work now complete. We have also recently engaged on a fixed-price lump-sum contract basis, our main contractor, providing us greater clarity and certainty around Studio City's design and construction costs.

We remain on track to open this property around mid-2015. We recently signed a commitment letter for a $1.4 billion senior secured facility for Studio City. And have now entered the syndication stage. This represents a major milestone for Studio City, bringing us one step closer to finalizing the project's debt financing.

As announced earlier today, we are also contemplating a high yield bond issuance for Studio City. We expect that upon finalization of our Studio City debt financing, when combined with our anticipated cash equity contribution, we will have a fully funded project, subject to certain conditions precedent.

Studio City with phase one consisting of capacity for up to 500 additional gaming tables and 1,600 hotel rooms, will substantially expand our product offering in Cotai. With the property's mainstream mass market focus, the cinematic theming and broad array of entertainment offering, Studio City provides us an excellent opportunity to target a customer base complementary to our existing current portfolio of assets, which in turn further broadens our appeal to a wider spectrum of visitors to Macau.

We've also signed a cooperation agreement regarding our development in Manila, further formalizing the key terms and conditions for the projects. The broad economic arrangement between us and the Philippine Parties is designed to allocate total property EBITDA approximately equally, subject to overall property revenue and profitability levels.

With our current expected investment upon opening of both phase one and two of the project expected to be around $600 million, we believe this venture offers the Company an opportunity to deliver strong returns on invested capital, while also providing us with a platform for future expansion throughout Asia.

We currently expect both phases to open together by the first half of 2014. We look forward to keeping you updated on our progress in relation to both these important development projects for our Company.

So now back to Geoff.

Thank you, Lawrence. We reported adjusted EBITDA of $226 million in the third quarter of 2012, compared to approximately $240 million in the comparable period of 2011. Our EBITDA margin in the third quarter of 2012 was approximately 22% compared to 23% in the same period in 2011.

On a luck-adjusted basis, assuming VIP win rate of 2.85% across our entire rolling chip business, our third quarter EBITDA was approximately $210 million, an increase of approximately 8% when compared to the third quarter of 2011, and up from approximately $205 million in the second quarter of 2012.

Altira Macau's luck-adjusted EBITDA was approximately $36 million. And as Lawrence mentioned, Altira Macau has stabilized. But we aim to generate improved operating metrics going forward.

City of Dreams generated luck-adjusted EBITDA of approximately $180 million in the third quarter of 2012, representing a year-over-year increase to more than 17% on this basis.

EBITDA contribution from our non-VIP segments continues to represent approximately 75% of luck-adjusted EBITDA at City of Dreams, and approximately two-thirds of our luck-adjusted EBITDA on a Group-wide basis.

To provide the Company with significant flexibility in relation to our future funding needs, we have successfully completed a consent solicitation for the release of $400 million from our existing high-yield bonds' restricted payments basket. This amendment among other things gives us the ability to efficiently deploy our meaningful cash reserves.

The recently announced $1.4 billion senior secured credit facilities for Studio City are a limited recourse, primarily in the form of a $225 million completion guarantee. The contemplated senior notes launched today will not be guaranteed by Melco Crown Entertainment.

Our net debt as of September 30, 2012, was approximately $266 million and our net debt to shareholders equity was 7%. This compares to net debt of $532 million as of June 30, 2012, and a net debt of over $800 million as of the end of 2011, illustrating the impressive cash flow generating power of our current operating assets and our ability to quickly de-lever.

As we normally do, we'll give you some guidance on non-operating line items for the fourth 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 on MCE's existing debt is expected to be approximately $23 million to $25 million.

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

(Operator Instructions)

David Bain, Sterne, Agee.

I guess, Lawrence, I know it's early days, but maybe you guys can give us a sense as to how you see the market growth as a whole next year versus this year? And maybe, Ted, if you can opine on VIP, what you're currently seeing relative to a month ago, if there are any changes there and what you envision for next year?

Yes, Dave, it's Lawrence here.

Hi, Lawrence.

We were actually, -- hi. You know, we're very positive about the market, especially heading into next year. As you know, there has been quite a bit of global macro headwinds this year, whether it's the European debt crisis or the fact that the Chinese economy, which has the biggest impact to our growth, China has had a somewhat softer growth year.

Although the U.S. election is today, the Chinese change in leadership is taking place in two days, and even this Golden week and with the record months for Macau, but in speaking to some of our VIP customers, a lot of people were -- even though there is very little uncertainty with regards to the change in leadership in China, people were kind of just waiting for it to happen before really coming out in full force, but even in November, the first few days in terms of the GGR growth has been quite phenomenal and much higher than the rest of the year.

So heading into next year and hoping that some of the global headwinds like the European -- people get used to the European debt crisis and there is less headwinds and eventually, I think the Chinese leadership they have had a very tight grip on the various sectors, such as the real estate sector, which has impacted asset prices but once those things are behind and with the new leadership in place, I am quite optimistic about next year.

And so year-to-date the growth has been 14%. You know, even with all these headwinds, so I am quite optimistic that next year's growth should be better.

Okay, great.

Ted, you want to --

Yes. Dave, I think with respect to the VIP growth and as compared to last month, we did experience a very, very good month in -- particularly in the Golden Week time compared to last year same period. At the same time, we feel no pressure in terms of the credit as well as the liquidity along with junket operators and I think we are seeing some improvement compared to the previous months.

Okay, great. And since that was two part one question, my second question is phase three at City of Dreams. I mean, do you guys envision beginning that potentially next year and do you think that there could be any construction disruption? I mean, it doesn't seem so just given its position, but if you could speak to that. And then finally, our checks are showing it has like 50% more GFA than Altira, given that kind of scale I mean does the design encompass the possibility for either table expansion or moving around your current base of tables at open?

Hey David, Lawrence again. Obviously, City of Dreams phase three, the -- well or some people call it Tower Five is a pretty big, as you said, you are right it's 50% bigger than Altira. The total GFA for development is 1.5 million square feet and we do plan on -- we are under roomed. I think our -- right now we do need more rooms at City of Dreams and Macau in general. We continue to believe that it's a supply driven market.

You know, at this stage it is a bit too early to talk about some of our projections and forecasts, but I think we have probably one of the more exciting development pipelines in the global gaming world with Manila coming online in the first half of 2014, Studio City in 2015.

Obviously City of Dreams phase three, the additional tower is still subject to -- we are going through the formal government approvals to get it re-gazetted because we have upgraded the building and have included more amenities.

So assuming it gets approved. We are hoping that we could get started on that project, probably in the middle or the latter half of next year. At this stage, I think our own return announces is built based on no additional gaming tables but with more gaming space and we think the incremental gaming space within that tower is so compelling that it's going to be a fantastic return, but in the case that the iconic building could get more tables it would just be a grand slam.

Karen Tang, Deutsche Bank.

I have got two questions with regard to City of Dreams table yield. You mentioned that you are now on the mass market kind of like one of the leading in mass table yield. We are wondering that -- now that your hold percentage is already very high what are the ways to further improve your table yield in the mass market?

And my second question is with regard to the VIP table yield. Right now, you are still quite a discount to the leading casinos on average VIP table yield. What are plans that you have to improve those? Thank you.

Karen, this is Ted. Let's look at the mass side first. Currently, yes, we are very proud that we are on the leading arena in terms of the premium mass segment. In order for us to keep on improving that segment, I think it's so important that we are focused on aligning our property's quality with the customers' base.

We are happy to see a sequential quarterly improvement on the active customer on this premium mass area in the last, perhaps eight quarters and it's continued to grow. And I think that it's so important it's not only the table allocation but also the quality of the property, the right team managing these tables, so this is a mass side.

In terms of yield on the VIP side, yes, you are right that we are a little bit discount to the leading property at the moment, so I guess we have put plans in the optimizing process during the last three quarters in both Altira and COD.

This is a ongoing process and we hope that we could be able to stabilize Altira at the moment, but we are still continuing to put the efforts in COD, so you will see some improvement in the next few quarters.

Hey, Karen, this is Lawrence. Just to supplement Ted's point, we -- there is no secret that for the last three or four quarters we have moved tables away from Altira and into City of Dreams. But we are quite optimistic about that productivity -- table productivity drive because we are continuing to look at the right amount of the ratio with regards to mass table versus VIP table, and given our strength in mass and the fact that we will continue to grow bet sizes, because ultimately we are very lucky to be in a highly aspirational business.

So we are doing that as we speak and even within the VIP universe we continue to analyze how we improve productivity and also the quality of credit. There are some big plans ahead. So we do see further upside from those conditions.

Cool. Thanks guys keep up the good work.

Cameron McKnight, Wells Fargo.

A quick question for Geoff or perhaps Lawrence -- I think it would be helpful if you could talk through the sources and uses of cash for the Studio City project, specifically the split between yourself and the minority and then I have got a follow up.

Sure. So on Studio City, the equity going into the project is $825 million, with a $225 million completion guarantee. The first $800 will go in pro rata at our ownership stake currently at 60-40. The remainder will go in a 100% funded by MCE, subject to the option for our minority shareholder to put in their 40% of that amount, but we will know that in about six months. Their option expires in roughly six months, so it will be somewhere from 0% to their 40% of that incremental amount.

Okay. Great. Thanks. It's helpful. And then, Lawrence, as we look out to say the 2015 to 2017 timeframe there are a lot of projects that have been announced. How are you guys thinking about the supply picture as we look out into the medium term?

Well, I think the -- Cameron the good thing about Macau is the government has been very transparent with regards to the table cap and the next 10 years, from March 2013 to 2022. The government has said there is only going to be -- there are only going to be 2,000 new tables and they will allocate those tables ahead of time when the properties -- when new properties are built, so that it would incentivize or motivate the casino operators and property developers to build them all.

I think looking at Studio City, which is coming online in mid-2015, I know Galaxy phase two is around the same timeframe, but beyond these two projects which has gone ahead with heavy duty construction, the other projects are either just recently got their -- time for land contract and I think it's well documented by you and other analysts as well that that process could take months, if not even longer, before the land gazettal and even after land gazettal you still need the kind of construction drawings approved and get a construction permit.

So I think looking at 2015 really there's probably two projects and then perhaps 16 and after is the rest of the projects. We are quite comfortable knowing that there is a very clear supply pipeline with the tables, we couldn't be happier. And ultimately, I think Macau continues to be a place where supply drives demand. I think if anything right now with better infrastructure to bring people into Macau and more hotel rooms, it would be a much bigger market than it is.

Cameron, just as a follow up to your first question, the first $150 million has already gone into the project on a pro rata basis 60/40 us and our minority shareholders.

Great, thanks very much guys.

Grant Chum, UBS.

First question on the balance sheet; I mean now that you've got the amendment to the high yield, you've got a lot more flexibility with using your actual cash balance and you are almost net cash and the Studio City financing is more or less getting into place. I mean how are you thinking about the potential for dividend distribution out of Melco Crown into next year and perhaps beyond?

Thank you, Grant, and Lawrence here. I think ultimately between the two principal shareholders, Melco and Crown, we've only put more skin in the game; we have never taken any money out of the business. So I think similar to all of our institutional shareholders, we would love a dividend. But at the same time, I think the Board concluded that recently that we do want our very exciting development pipeline, with Manila, Studio City, the City of Dreams phase three, to be on its way first so that we started construct -- significant construction, have business plans fully funded before we consider that.

But it's definitely a topic that I think we would revisit in perhaps a year's time, but I think the next year is really about getting built up on Studio City and Manila as quickly as possible and also getting City of Dreams' phase three started.

Sure and Lawrence, just on Manila, I mean can you give us just some sense of the state of the current construction on phase one in Manila and how does phase two get developed concurrently and what is the scope for changing the design elements of phase two and the different components, especially as we observe next year, what happens after Bloomberry opens?

Well, I think the current phase one before our involvement, we've fully -- effectively the shell and core have been fully built and is actually weather proofed so the -façade is on. So for Melco Crown is really for us to help fit out. We've been working on this deal for over a year now and our project design and development team has been engaged for quite some time and we are moving along with the design both internal and also for the phase two design.

So I think the current thinking is that I think what's built in phase one is built but we will try to make phase two to be really the iconic feature, the architectural masterpiece of the property and it will -- phase one, what's been built there is going to supplement that and it really makes the whole property shine.

We are quite -- we are happy with what has been built and I think we are -- phase two is going to get underway with its piling and foundation work relatively soon. So the timeline that we gave earlier on in our prepared remarks is valid and I think ultimately, we will have one of the most compelling products in Manila.

Sure. That's very helpful, thanks Lawrence.

Anil Daswani, Citigroup.

First of all, fantastic performance in the mass segment, my question really relates to premium mass. Can you give us a feel for how much of your mass business is premium mass versus mass mass? And one of the big questions I keep getting is how do margins compare in your premium mass business versus the pure mass business and the VIP business. That's the first question.

And the second question relates to the optimized mix between tables at Altira and COD. Have you guys got the right mix today or is there still a possibility for more tables to come in from Altira into COD?

Anil, this is Ted. In terms of the percentage of premium mass to the mass mass, first of all, it is very difficult for me to determine the premium mass, actually the whole floor is actually quite premium at the moment.

So we actually divide this premium mass into the area that we dedicated for the high end customers. So in that respect, I think you should assume roughly about 50/50 at this basis for COD.

Margin-wise, we see a higher margin for premium mass compared to the mass mass, as you know, you need a lot of like competition from our neighbors in terms of this mass mass scenario. The premium mass area is very specific. So if we be in the higher margin in this particular area.

In terms of the property tables, we think that Altira's optimization is basically done and although we will -- this is actually a ongoing process for us to optimize our table yields. I think that everyone's doing this in Macau and we see a great potential for us to yield up our VIP tables. But at the same time, if we identify opportunity for this mass expansion which we are sure will shift some table to mass side.

So first question being property wise, I think is basically about the current level and in terms of the mass and VIP mix I think is ongoing process and you see some margin improvement if we are doing this review -- performance in the next few quarters.

Thanks very much, Ted.

Simon Cheung, Goldman Sachs.

Two questions; one again on your balance sheet, just with regard to your announcement about this Indian offering. Trying to understand why did you -- need the senior notes, as I think as Grant pointed out, you guys are almost in a net cash positions. I think you still have almost $2 billion cash on your balance sheets. So why do you do that and what is your expected cost of funding for that senior note especially given that its non-recourse to MPEL. That's the first question I have and I will follow up.

This is Geoff. Given that we just launched, or made the announcement today, we really couldn't comment on pricing. We'll have a better sense down the track after we get to the pricing and close the transaction.

The structure, our financing structure at Studio City reflects the fact that we do have several projects underway with Manila, Studio City as well as phase three at City of Dreams and it also reflects the fact that we don't own 100%; we own 60% and that has formed the capital structure of that project.

Okay, maybe as a follow-up, can you remind us the equity injection you mentioned Macau Studio City, you need about $825 million equity injection and pro rata perhaps you need about what $500 million, $600 million. How about the other one; the Philippines and then I suppose the tower five for City of Dreams will be fully funded by yourself, just can you give us a sense how much CapEx or equity injection you need over the next maybe two to three years.

Sure. Well, in addition to the Studio City numbers that we've already discussed, we anticipate spending approximately $600 million in Manila upon opening and as we said, we anticipate having $325 million of that funded through a local loan. So you can back into our equity component there. And you are correct on phase three of Studio -- of City of Dreams beg your pardon -- that will be funded by cash and internally generated cash flow.

And that is what, $1 billion projects, can you remind us, how much is it?

We actually haven't provided the CapEx budget for phase three, given the size of it though and given the level of fit and finish at that project and it is about 1.5 million square feet of GFA, 50% larger than Altira. You can work out that it's going to be a significant number but we are still finalizing plans and will be able to give a more detailed project outline in due course some time perhaps next year.

Okay, understand. The second question, just looking at your mass market win rate in City of Dreams, I saw some sequential decline like from 29% down to 27.4% on the other hand. So it's quite a significant pick up on your slot handling, handled volume. Perhaps you can share with us what is going on; should we be concerned about the slowdown or the decline in the mass market win rate? Thanks.

Simon, it's Ted. In terms of the whole percentage, yes, sequentially, we dropped 1.6% from the second quarter. I think that's within the range of the hold percentage that we have in this property and I think we've given guidance of 25% to 30% in terms of the hold percentage in COD. That's not out of expectation. To the actual fact that the third quarter actually you look at our jobs -- business forum, we actually grew more than 8% in COD which is more important as an indicator for the business.

In terms of the slots, also you are referring to the drop in terms of revenue, but with a sequentially growth in terms of the turnover, it is actually due to -- of course, in slot where you see -- we also see a range of different hold, but it is also effected by the mix of the VIP slot as well as the mass slot. So we have a higher VIP slot of that which is reducing the hold percentage which is also normal in our major business. I hope that answers your question.

Thank you for your questions. We appear to have no further questions at this time. I would like to have the conference back to the management for closing.

Thank you, operator, and thanks everyone for joining us today. We'll look forward to speaking with you again next quarter. Bye.

Ladies and gentlemen, that does conclude our conference.