Melco Resorts & Entertainment Ltd (MLCO) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2013 Melco Crown Entertainment Limited earnings conference call. At this time, all participants are in 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, August 7, 2013.

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. Please go ahead, Mr. Davis.

Thank you, operator, and good morning, everybody. Thank you for joining us today for our second quarter 2013 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 law. The actual results could differ from our anticipated results.

I will now turn the call over to Lawrence.

Thanks, Geoff. Good morning, everybody. In the second quarter of 2013, we reported another quarter of record EBITDA and EBITDA margins, as well as rolling-chip volumes and mass table games revenue.

City of Dreams' leading position in the premium and high-end mass market segments in Macau was further strengthened during the quarter with increased market share and market-leading mass table yields, which, we believe, are over 20% higher than the next closest major property.

These results show the ideal positioning of City of Dreams and the success of its market-leading customer reward and retention programs, which have enabled us to expand our market share while maintaining margins.

City of Dreams continues to grow its customer base, while at the same time we are fully committed to nurturing repeat business, which, in turn, drives customer loyalty and enhances long-term profitability.

During the second quarter of 2013, we re-launched our unique Taboo show, leveraging the world-class facilities of Club Cubic to deliver another market-leading entertainment attraction to our customers.

The House of Dancing Water show, which has entertained over two million patrons to date, continues to attract new customers to our property, and remains a major tourism draw card for Macau.

We are well positioned through our current operating assets, as well as our Macau development opportunities, to capitalize on the strength in the mass market table game segments which, we believe, will continue to be the key driver of revenue and, in particular, earnings for the foreseeable future.

In addition to the success in the mass market segment, we have also taken market share in the rolling-chip segment during the quarter, growing volumes by approximately 25% on a year-over-year basis compared to the market, which expanded by approximately 10%.

Both Altira and City of Dreams have also delivered strong improvements in rolling-chip volumes per table, which have increased approximately 30% on a Group-wide basis, illustrating our success at maximizing table productivity and profitability.

On a market-wide basis, gaming revenues have once again delivered meaningful growth in the second quarter of 2013, with this strength continuing into the second half of the year.

The mass table game segment continues to perform strongly, growing at a relatively stable, yet [impressive] (Company corrected after the conference cal) 30% on a year-over-year basis. Excluding the impact of Sands Cotai Central, this market-wide year-over-year growth in mass table games would have been closer to 23%. Over the same period, we delivered mass table growth of approximately 47%.

Meanwhile, the market-wide rolling-chip segment has delivered robust growth rates during the quarter, building on the strong performance in the first quarter of the year.

Our exciting development pipeline is progressing well. Studio City, our unique cinematically themed integrated resort remains on-budget and on-track to open in mid-2015, bringing a unique area of interactive entertainment attractions to the fast-growing Cotai region. With the foundation and piling work complete, the construction of the next phase is progressing as planned.

The development of our Philippine project is also moving forward as anticipated, with the opening date remaining unchanged at around the middle of 2014. The multi-faceted integrated resort will deliver an impressive offering of gaming and non-gaming attractions unique to the developing leisure and tourism market in the Philippines.

In addition to our extensive experience in developing and operating integrated resorts in Asia, our access to, and understanding of, the rolling-chip and premium mass segments places us in a strong position to drive demand to our property in Manila.

As a result of our top up placement at the Melco Crown Philippines level, we raised approximately $335 million of equity, including the exercise of the over-allotment option. This equity raising, together with additional debt financing, is expected to provide the necessary funding to open our exciting development.

We anticipate starting construction on a fifth tower at City of Dreams before the end of 2013. This iconic development will provide another powerful lever to drive our premium mass business, and expand our high end patronage at City of Dreams in turn, enhancing property wide return on invested capital.

I'm pleased to announce that as at June 30, 2013 our Company is in a net cash position, placing us in an even stronger position to capitalize on value-accretive development opportunities; while at the same time allowing us to consider the potential to return capital to our shareholders, should the Board deem it appropriate.

So, back to Geoff.

Thanks, Lawrence. We reported all-time high adjusted EBITDA of $330 million in the second quarter of 2013, compared to $204 million in the same period in 2012.

Our EBITDA margin in the second quarter of 2013 was approximately 25.5%, compared to 21.7% in the second quarter of 2012; and 23.9% in the first quarter of 2013.

On a luck-adjusted basis, assuming a VIP win rate of 2.85% across our entire rolling-chip business, our second quarter 2013 EBITDA was approximately $290 million, an increase of approximately 42% when compared to the second quarter of 2012 and up sequentially from approximately $280 million in the first quarter of 2013.

We delivered this strong improvement in luck-adjusted EBITDA and slight increase in margins despite the increase in wages during the quarter.

The EBITDA contribution from our non-VIP segment continues to represent approximately three-quarters of luck-adjusted EBITDA at City of Dreams, and approximately two-thirds of luck-adjusted EBITDA on a Group-wide basis.

As mentioned by Lawrence, we are now in a net cash position. This impressive deleveraging is evidence of the strong cash flow-generative nature of our operation, as well as our proactive approach to managing our capital structure.

As we normally do, we'll give you some guidance on non-operating line items for the upcoming quarter. Total depreciation and amortization expense is expected to be approximately $95 million to $100 million. Corporate expense is expected to come in at $20 million to $22 million. And consolidated net interest expense is expected to be approximately $38 million to $40 million, which includes finance lease interest of $11 million relating to the Philippines development and approximately $10 million of interest expense associated with Studio City. This takes into account approximately $8 million of capitalized interest related primarily to Studio City.

That concludes our prepared remarks. Operator, back to you.

Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions). Cameron McKnight, Wells Fargo.

Lawrence, or perhaps Geoff, it looks like margins were very impressive at both City of Dreams and overall; was that the winding back of some promotional items, or a mix on VIP? Or was there some cost control in there?

We're always very mindful on the cost controls, Cameron. But at the same time, we did benefit on a reported basis from higher-than-the-theoretical hold, as well as favorable mix of hold within the VIP business.

Right, got it. And then, Lawrence, a little more generally, if you could comment on the macro outlook in China and what you guys are seeing and hearing from your customers versus what you're reading in some of the newspapers that would be very helpful.

Yes, hi, Cameron. I think ever since the fourth quarter of last year we have been improving on our performance. And as we had predicted very early on, probably at this time last year, we said ever since -- as soon as the political leadership officially changed over in March we expected our customers to be more enthusiastic, and I think we have seen that.

I think on a separate front, we are witnessing the transformation of the Chinese economy. But it's transforming into more of a consumption-led tourism focused-economy, so I think in the medium to long run that is going to benefit Macau, and us as well.

But I think some of the macro data that we are seeing on the news and in the media that hasn't affected Macau because, again, we are extremely grateful to be operating in this very exclusive and unique market. And Macau will always be a supply constrained market because there's just too much people who want to come to Macau. So, for now, we continue to be very happy.

I think in the very near future there are more and more infrastructure projects that will improve the transportation for people who come to Macau. So even before, when the visitation to Macau was flat, revenue numbers were growing very fast. But I think in the last two quarters we've actually seen, with some of the improvement of infrastructure, that visitation is increasing.

So I think when all those things come together over the next two or three years it's going to be pretty much the next wave of the golden age of Macau.

Great, thanks. And then finally, if you could comment on progress at Studio City, and, in particular, the issue of construction labor and how that may impact the timetable one way or the other.

Well, Studio City is progressing according to schedule, so we are on time, on budget. And the mock-up rooms that we've built, whether it's hotels or the casino mock-up, are some of the best that we've ever built, so we are extremely happy with the outcome of those mock-ups. We have a very good contractor in Paul Y / Yau Lee, that we are working very well together on.

In terms of construction labor, I guess, based on our previous track record -- don't forget, during 2008/2009 City of Dreams was the only project that kept building in Macau, and effectively kept the entire construction labor force employed. So I think we are being rewarded for that.

The Government has been very supportive in terms of our labor quota, foreign labor quota approval. But, at the same time, Melco Crown Entertainment has always been one of the most accommodating, and we always obey the rules and regulations. So I think we have a very good track record built up with the Government, and we are seeing that with the support that we're getting from the Government on this very important project.

So we're extremely happy with the progress, and it will be a very different, and we will make use of the amazing location at Studio City to build something that doesn't currently exist in Macau.

Perfect. Thanks, Lawrence. Thanks Geoff.

Thanks, Cameron.

Praveen Choudhary, Morgan Stanley.

A quick question from me; one about dividend. You did mention your net cash position of $300 million, can you give us a little bit more details in terms of timing, and what it is contingent upon? And then I have a follow-up question.

Praveen, I think we've been very consistent in that our Board has earlier this year talked about discussing potentially how do we return capital to our shareholders probably at the end of this year, and especially at the end of this financial year.

We have been very consistent in a sense that this year and next year are also heavy CapEx years for us, because we do have one of the most exciting growth pipelines in all of gaming with, as we mentioned earlier on, Manila due to open around middle of next year; Studio City middle of 2015; and then the City of Dream's new tower probably end of 2016/early 2017. So I think we want to get through some of those hurdles first.

But at the same time, we -- I think the Board is committed to look at a regular dividend policy because, unlike some of our competitors, I think our Board, and the management team, would prefer if we had stuck to one dividend policy. So we don't want to make the decision like hastily.

So anyway, it's going to be some time at the end of this year/early next year that we're going to sit down and discuss.

Okay, that's great. The second question I had was related to opportunities outside Macau. We saw Russian opportunities being taken up by parent company, that's 200-HK, but any other opportunity that you are thinking at this point in time that you can tell us more about?

Along with that, would you also comment on the rumor, or the talks, about license renewal at the time of 2015? Does it make any of your investment decisions, or does it change any of your investment decisions at all? Thank you.

Well, I think, Praveen, Melco Crown Entertainment was always set up to focus on major Asian jurisdictions so, on that front, we continue to lobby and support the gaming initiatives in both Japan and Taiwan.

We've been lobbying in Japan for probably close to eight to nine years, and Taiwan for probably four years, but we also are very respectful and understand the long process that the respective governments need to take, and we are ready and able.

As I have said before, the more time that it takes for those governments to get through this process, the more beneficial it is for us because if you think about our portfolio of proud projects it's only going to get better over the next two or three years. But, at the same time, this is not a timetable that we can control, but we will be ready whenever they're ready.

With regards to your second question, which is the license renewal in Macau, or the concession renewal, we are very enthusiastic that the Macau Government has proactively thought about starting this discussion earlier, in 2015, as announced by Francis Tam in the media.

I think that would be an excellent way for -- as 2016, 2017 is -- and 2018 is affectively the second major wave of new properties to open on Cotai, it would be very beneficial for most of the operators, especially the operators who are opening after us, to know what the ultimate renewal policy is.

But my view on this topic, again, has been very consistent probably for the last two years, is that, and which echoes what Edmund Ho said all the way back in 2006 when we bought Wynn sub-concession, for the foreseeable future the Macau Government views these six operators as the operators going forward. Furthermore, if you look at the land mass in Macau, it really doesn't allow for another operator to come in.

And given how high the gaming tax is in Macau, it's close to 40%, by far and away the highest in any major gaming jurisdiction, I guess the only thing that -- and we're hopeful that the Government will look at is, potentially a renewal fee.

But again, I don't want to speculate. We are just very happy that the Government has been so proactive and wants to have this discussion early.

Great, thanks. And, look, you don't need me to tell you the result was fantastic; the numbers beat our numbers, so congratulations on that.

If I could just follow up on that, it seems like premium mass has been the reason for you to do so well, and you did mention your win per table is 20% higher than the next best. What I want to understand is do you think -- and this question has been asked before, but let me try again. Do you think it's easier for others to catch up with you, to get to the limit that you have shown them is possible, versus you to keep this 20% gap between yourselves and the second best?

Praveen, Ted is here, so I'll let Ted answer your question.

Hi, Praveen. Yes, I think you have to appreciate that over the last two years we have done a lot of changes in City of Dreams in terms of all the improvements or enhancement of our properties.

We very much focus on one segment, premium mass, whereby most of our competitors they have broader portfolios. So I think it's all about, if you look at the performance, our hold percentage, or the revenue on this per table productivity, it comes from different pieces of improvements, such as hotel rooms, F&B, you have F&B, you have the right shops, you have the right casinos, you have the right limos. It's all about the total experience.

So it took almost two years, improving and focus on this area. I think everybody's actually looking at that segment and would like to replicate what we're doing. I think that it takes some times.

And secondly, the improvement of this piece, including this non-gaming improvement, really, really help us to improve our length of stay for those customers.

Currently, with those like premium mass customer length of stay compare to the non-gaming retail customer, basically, it's about two times of the length of stay.

So in order for any competitor who are looking at that segment, it would take some time to not only improving your casino, but also all the other non-gaming elements to cope with that. So I think that -- I hope that answers your question.

Thanks so much. Yes, it does, thank you.

Billy Ng, Bank of America.

Thanks for taking my questions. First of all, congratulations on a very good set of results. I have two questions. One is regarding to the luck-adjusted number. If I got it correctly it's $290 million for this quarter, right?

So my question is compared to last quarter, the last quarter is $280 million, so it seems like the change is only $10 million. But given how strong of the operating performance of COD, which in terms of VIP and also mass market, even based on my calculation, the luck -- the revenue and the volume increase should be in the range of $60 million/$70 million. I'm just wondering how -- maybe if you can give us a little bit more guidance on how we should calculate on the luck-adjusted number.

Sure, Billy, I think you've got the numbers correct; $280 million in the first quarter, so a $10 million sequential increase to $290 million.

I think it it's worth remembering that there were a couple of headwinds on a sequential basis; the April 1, wage rate increase, which was -- had about a $4 million impact on a sequential basis. And while we normally wouldn't get into this level of granularity, there was also a couple of million of utility expense; a million of Taboo cost in the quarter on a sequential basis.

So you add those together and I think it probably makes more sense on a sequential basis for you, given the volume increase in gaming.

I see. Fair enough, thanks. My second question is actually regarding to Philippines; just any update from Pagcor related to the tax treatment, whether there are further communication from them?

Hi, Billy. Yes, I think the all four licensees have jointly have had a lot of discussions with Pagcor. I would say that the discussions are going very well, and we are -- I think everybody is waiting for the official confirmation from Pagcor. So until then there's not much more we can say. But again, so far, it's been unanimous between the four, and I think Pagcor is sympathetic at the same time. So we'll wait for the announcement, which we hope to be quite soon.

Thanks. Thanks a lot.

Simon Cheung, Goldman Sachs.

Congrats on the great results. I have two questions. One, I think, Ted, earlier you mentioned that one of the drivers for the very strong table yield for you guys has been hotel, as well as the other stuff. With the occupancy now running at I think 97%, 98%, I just want to get a sense how you are thinking about further driving your efficiencies so that you can maintain your table yield gap versus the other competitors. That's the first question.

Then the second question, I think, Lawrence, you just earlier mentioned that the hotel tower you're expecting to complete by 2016/2017. I suppose if you start the constructions later this year that means it would take you, what, about 3.5 years/four years to get it complete. Just wondering why would that take so long, and if you have perhaps some CapEx number for the tower as well. Thank you.

I think Ted will answer your first question.

Simon, I think let me correct this; it's the contribution to the improvement of the hold percentage in the revenues is not just hotel rooms.

I think what I referred to is the quality of different pieces together as a total experience for customers so that their length of stay would be lengthened. That includes the quality of the hotel rooms, which we fixed in the last two years; the quality of F&B, that we fixed in the last two years; and also, all the other elements, such as a limo; and, of course, the changes to casino, coupled with the demand of the premium mass segment also help.

In order for us to further improve the business with the very, very high occupancy, what we have to do is really further yielding up of our hotel rooms occupancy on the right type of customers. So really, we have to look at the higher ADT customer against the low ADT customer, against the non-gaming customer. So I think it's all about optimization of the assets that we have; not only the gaming assets, the tables, but also the hotel rooms.

So we see a lot of upside, and not only because of the cap on the hotel rooms, but we should really look on the quality of the customer on those rooms. Nothing in progress for the last two years, so it's proven to be working very well.

Right, okay.

Simon, with regards to your second question, in terms of the new towers, City of Dreams, as we said on the last call as well, we target to start construction at the end of this year. I think sometime in the fourth quarter of this year we will hold an event to announce it.

I think the reason that it's taking -- it's going to take a longer time is the fact that this is the final piece of the City of Dreams to be built. It is a big structure; it's 1.5 million square feet in total gross floor area. So, in comparison, Altira is only 1 million square feet.

At the same time, as we have alluded to previously, this building is one of the most iconic buildings ever built in Asia, and will be designed by one of the most renowned architects in the world. So when you combine all of those things, it is a more complex structure.

Right, okay.

But we're very, very excited about it, and it's really -- we think Macau deserves a sculpture.

Right, can I have a follow up? Again, if you have the hotel CapEx number, the hotel tower CapEx number, that would be great?

And the second one is I think, Ted, you said that you wanted to perhaps upgrading some of your hotel rooms, just like what the other operator did, like Wynn, obviously. Obviously, your City of Dreams is now, what, four years or five years old, do you need to spend a bit more CapEx to do some upgrading? If so, then how much were you thinking of spending? Thank you.

Hi, Simon. Before we knew it, we actually did some changes in Hyatt; we did some changes for the 200 rooms back perhaps 1.5 years ago, so in Macau, which is actually a fantastic business we have a very high occupancy, we can't really shut down a substantial number of rooms and do the refurbishment.

So we have to program up in, let's say, about two years time to do up-keeping. So there is program in place, and perhaps we can start that program next year, not right now. But actually, we made some changes actually 1.5 years ago.

Okay. And for the hotel towers, again, the hotel tower, do you have a CapEx number there you can share with us?

Simon, when we announce the project sometime in Q4, I think we will announce it at the same time.

Okay, great. Okay thanks a lot, guys. Thanks.

There are no further questions at this time. I would now like to hand the conference back to Mr. Geoffrey Davis. Thank you. Please continue, sir.

Thank you, everyone, for joining us today. If you have any follow-up questions, please don't hesitate to contact us. We'll be back to you in three months with our third quarter results. Thank you.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all now disconnect.