Melco Resorts & Entertainment Limited (MLCO) Q4 2007 Earnings Report, Transcript and Summary

Good morning, and thank you for participating in the Fourth Quarter 2007 Earnings Conference Call of Melco PBL Entertainment (Macau) Ltd. At this time, all participants are in a listen-only mode. After this 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 Mr. Simon Dewhurst, Executive Vice President, Chief Financial Officer of Melco PBL Entertainment.

Good morning and thank you for joining us today for our fourth quarter earnings call. On the call with me this morning: Lawrence Ho, Garry Saunders, Stephanie Cheung, Greg Hawkins, Constance Hsu and Geoffrey Davis. Please note that today's discussions may contain forward-looking statements made under the Safe Harbor provision of Federal Securities laws. Please see today's press release under the section Safe Harbor Statement for a discussion of risks that may affect our results. In addition, we may discuss adjusted EBITDA, adjusted net income, adjusted EPS and adjusted property EBITDA, which are all non-GAAP measures. Definition and reconciliation of each of these measures to the most comparable GAAP financial measures are included in the press release. Please note that this presentation today is being recorded. We won't spend lot of time reiterating the details of our quarterly results on the call, so after some brief comments from our Chief Operating Officer, Gary Saunders we'll open the call up for questions-and-answers. Gary?

Thank you, Simon. As we mentioned on our last call, the fourth quarter was expected to be a transitional period as we reconfigured Crown Macau to accommodate additional rolling chip capacity with the commensurate reduction in mass market tables and gaming machines. We accomplished our goal of completing the physical reconfiguration of the gaming space at Crown Macau during the fourth quarter, realigning the property with its core strength, which is a dedicated rolling chip table games market. This reconfiguration resulted in an extensive amount of property renovation and was literally the second pre-opening exercise for the property in 2007. The complete program of gaming floor reconfiguration spanned 12 weeks and included significant capital works across three levels of the casino. During most of this period, potential gaming capacity was reduced by approximately 40% and access to our casino food and beverage outlets was restricted. Thus, we were forced to operate the property in less than optimal condition, as well as the physical property reconfiguration, we recruited an additional 350 table gaming staff to cater for the anticipated growth. We successfully launched the operations of AMA at Crown Macau on schedule, on December the 15th. By any measures, they hit the ground running and we view AMA's immediate success in capturing significant market share as resounding validation of our strategy. Operationally, the launch was smooth and we look forward to working with Ted Chan, the CEO of A-Max and his team to drive further improvements to our market share over the coming months. We will also continue to fine tune our margins and efficiencies at the property, as well as access various viable options to increase gaming capacity. January was the first full month of operations at Crown Macau under this business model and initial results are very encouraging. As many of you already know, AMA's rolling chip turnover was at a monthly run rate of approximately HK$30 billion, in December last year. This increased to HK$40 billion in January. Our total table games market share was 16% in January and in the same period, our total market share in the VIP segment registered a market leading 21%, based on gross gaming revenue. Year-to-date, we believe that Crown Macau generated the highest rolling chip turnover of any single property in Macau. We estimate our total February table games market share to be approximately 18% month-to-date. Furthermore, we believe we've a potential for further improvement in gaming volume over the coming months. On a per unit basis, our sequential performance from third quarter '07 to fourth quarter '07 has been impressive. Specifically, our win per machine per day increased from US$85 in the third quarter to US$145 in the fourth quarter. And our win per table per day increased roughly from US$6,500 to over US$14,000, over the same period. Though that's a relatively small contributor to Crown Macau's overall results, we believe that our mass market offering to date provides a significantly improved and more compelling and exciting gaming environment as a consequence of our recent efforts to optimize mass market capacity at the property. Year-to-date in 2008, our win per gaming machine per day and win per table per day metrics have further improved to approximately US$165 and US$29,000, respectively. I am pleased to report that our business operating levels have been solid through Chinese New Year and we've not experienced any noticeable impact on inbound visitation as the result of the recent and devastating snowstorms in central and southern provinces of Mainland China. Rolling chip table games hold percentage was roughly 3% in January and remains above 3% thus far in February, in excess of our 2.7% targeted hold. Life-to-date hold percentage at Crown Macau is approximately 2.7%. We expect that this significant increase in rolled volumes since AMA commenced its operations at Crown Macau will have the impact of reducing the volatility and hold percentage between reporting periods. On City of Dreams, good progress has been achieved during the past few months, and we expect to top out the first tower by the end of the current quarter. As the project transitions from using initial cost estimates to securing hard pricing course for individual contractor packages, we determine a much more accurate picture of completion cost for the project as a whole. We've currently priced with hard digits [ph] approximately 51% of the total City of Dreams project, and roughly 71% specifically as the project's Phase I components. Current information indicates that the construction program is intact, but that the total cost will be within a 5% sensitivity range to our overall budget. We will continue to monitor and assess this as further detailed pricing information becomes available. Now, I'll turn the call back to Simon.

Thanks Garry. Crown Macau experienced low hold of 2.4% in the fourth quarter, low at 2.7% targeted hold. We believe low hold negatively impacted adjusted EBITDA at Crown Macau by approximately US$10 million in the quarter under review. Though we are maintaining our policy of not providing forward earnings guidance, we thought it might be helpful for us to provide some forward-looking color on non-operating line items expected in our income statement in the first quarter of 2008. Depreciation and amortization cost of US$33 million in the fourth quarter of 2007 provides a good indication of our run rate going forward. This amount includes the US$14 million monthly amortization of our sub-concessions. Net interest income in the first quarter of 2008 is expected to be in the range of $3 million to $4 million. This assumes that we will be able to fully capitalize interest expense related to the ongoing developments of City Of Dreams. Pre-opening expense in Q1 2008 is projected to be roughly US$4 million to US$5 million, entirely associated with City Of Dreams. And finally, capital expenditure in Q1 '08, which includes capitalized interest is expected to be in the range of US$180 million to US$220 million. Operator, we are now ready to open the call for questions. Question And Answer

[Operator Instructions]. Our first question comes from Larry Klatzkin of Jefferies. Please proceed. Lawrence Klatzkin - Jefferies & Co.: One, corporate expense seem to double from the third to fourth quarter, could you guys just talk about that and what we should be thinking about that going forward?

Yes Larry, hi Simon. Lawrence Klatzkin - Jefferies & Co.: Hi Simon.

We had some one-off corporate expenses in the fourth quarter specifically tied into the financing activity that occurred during that period. I would imagine that a forward-looking run rate on overall corporate expenses for the first quarter will be somewhere between those two points. Lawrence Klatzkin - Jefferies & Co.: All right, all right. Okay, so you are saying, they are really one-time, why don't you break them out and tell us where they were? Are you there?

Larry, I can hear you fine, I didn't hear you -- Lawrence Klatzkin - Jefferies & Co.: Oh I said, if they are one-time items, could give us some details on them?

All right Larry. They are specifically costs directly related to the placement that we did last year, we are not going to break them [Technical Difficulty]. Lawrence Klatzkin - Jefferies & Co.: All right. As far as capitalized interest in the fourth quarter, can you give us that number?

Yes, we capitalized US$9.7 million of interest in the fourth quarter, Larry. Lawrence Klatzkin - Jefferies & Co.: Okay. Mocha Slots margin you said just because of the change in expenses, the way the market is operating; margin was down to 22%. I guess that's implying that we should expect that the similar margin's going forward.

I think that that would be right Larry, yes. Lawrence Klatzkin - Jefferies & Co.: Okay. A-Max at this point, how would... I know your hold was pretty good in 2008, how was theirs looking, is it similar I assume?

Yes, I mean basically with the rollings, the rolling hold that we talked about was a blend of all of our hold percentage across all of our operators. Lawrence Klatzkin - Jefferies & Co.: I know still the bulky year, okay good, good, good. And then I mean LVS just walked it's... the risk on hold by doing switching to 60-40, I heard rumors you guys are going to do the same as there... is that something you guys are looking at, to kind of wrap the whole deal with the lease with A-Max or are you going to keep with a percent commission.

Larry, we currently actually have a 60-40 operations at the property, and certainly we look at exploring that to increase that. Lawrence Klatzkin - Jefferies & Co.: All right but A-Max is not 60-40, is that correct?

That's correct. Lawrence Klatzkin - Jefferies & Co.: Okay, so that will... that would be the one you would switch, okay. But at this point, you are not... we should just assume you continue as usual?

I think currently, the AMA program is a commission on roll license. We are giving consideration to models, which will effectively optimize our earnings moving forward. So we won't be making any further comment on that at this stage, but obviously we will keep an eye on what's happening in the market and make sure our models reflect best practice. Lawrence Klatzkin - Jefferies & Co.: Okay. And then the last question as far as... about two things; Mocha slots, as far as number of units on average for the quarter?

About 1100 machines. Lawrence Klatzkin - Jefferies & Co.: 1100 for the fourth quarter?

Yes. Lawrence Klatzkin - Jefferies & Co.: Okay. What's that?

I mean the weighted average number for the fourth quarter of fiscal 2007. Lawrence Klatzkin - Jefferies & Co.: Right, perfect, all right. And then on service departments, what are you guys seeing worldwide and Elvis made some comments, what could you say about the prospect of selling service departments?

Right, we are still moving ahead with the design and various aspect of this. We are working with our attorneys and consultants Larry, on the appropriate structure that we would use to monetize these assets, would probably result in a right to use arrangements that would comply with the land use criteria and co-tie, but we are still moving ahead. Lawrence Klatzkin - Jefferies & Co.: All right great, thank you guys.

Our next question comes from Cameron McKnight from JP Morgan. Please proceed.

Good evening, guys. Just wondering if you could talk us through the math on your calculation of normalized EBITDA?

Yes Cameron, it's Simon here. You... it's a little bit more complicated than just going straight forward from 2.4% hold that we had in the quarter three to 2.7% because we also have in the property a 60-40 junket operator, so it depends how well they held, do they share that piece of the pain through the course of the fourth quarter. So, if you assume that we are on just the basis... being just either way across the property you'd come up with a normalized EBITDA at around about 15 million. But because the 60-40 junket operator held below theoretical, they have carried some of that pain so the theoretical adjustment drops down to 10 million.

Yet no worries. And can you comment on financing for the remainder of City of Dreams and Trinity and what are you seeing in debt markets for the moment?

In terms of financing for City of Dreams, obviously, you can see from the balance sheet condition at the end of last year, we sit on cash of approximately US$1.1 billion. We got US$1.25 billion as yet undrawn on our facility, subject to us continuing to meet the CTs on that debt, which we would... anticipate we will do. We will be able to fully finance all of our development at City of Dreams through the financing that is available to us today, Cameron.

Yes.

With regards to us developing forward with the Trinity project; that project is partially financed with monies that we have on hand today and we will continue... when we decide to move forward from where we are at this current stage on that project, we will ascertain as to how we can bring some debt financing into that bridge outside the 1.75 billion debt financing asset group.

Okay, great. Thanks very much.

Our next question comes from Robin Farley from UBS. Please proceed.

Thanks. I have a question on Venetian Macao having raised commission levels as of February 1st. Do you see that putting more upward pressure on commission levels in the market? I guess the question is really, if you had seen that affect market share already?

The structure that they've put in place is similar to what is already existing in turn with a couple of the other operators. So at this point, we don't believe that there is any particular impact.

Yes Robin, its Lawrence here. The 60-40 scheme has been a scheme that HAM has ran for literally over 20 years. So, it's really nothing new. It's effectively for that more risk loving junket who would like to share the upside of the win over theoretical hold. So it's nothing that's new to Macau.

I realize the structure of 60-40 is not new to Macau, and I realize how it affects the sharing of risk with junkets. The question was really about the idea that if this large operator in the marketplace has now adopted a structure that everyone else was using in the marketplace, it still would suggest that other properties commission levels relative to that, in other words, the change in the Venetian Macao, whether or not everyone else is doing it, is that affecting a market share shift from what you've seen, in other words, does that matching levels in the market affect market share from what you've seen so far?

Robin, this is Simon. As Garry has already mentioned our market share grew in February over January from 16% to 18%.

Yes, I thought that I am just wondering it overall as the market, are you seeing that as well, in other words, your hold would affect your market share to some degree in terms of revenues. So I am talking about sort of overall competition in the market and shift in the market in general.

I don't think we really commented about the shift among the other operators, but if you look the market is continuing to just experience explosive growth and so at this point I am not sure exactly how it will sweat out with the individual operators and in our case, it has not affected us.

Okay. And then just lastly, the market share increase you talked about in January and February, you also mentioned your hold was above theoretical hold. So just to clarify, is the market share you were talking about was that adjusted for hold, in other words, with normalized hold give you that market share or no?

No, that's based up on actual win numbers.

Can you give us what your market share is on a hold adjusted basis?

Well that would require few tools, so hold adjustable with the other operators in the market place.

Sure. But just in terms of your progression in January-February, would you have any context you could put that in, I am just trying to square the comments about changes in market share increasing and all that and what part of that is for hold and part of that is from the competitive dynamic?

Well, I think the best guidance, we could give on that would be the volume growth from January to February. So, volume being the key metric used with safe dial [ph], so we've... well, AMA have made some announcements with regards to the volumes they have crossed January to February, which is reflecting in our property as well. So, I think if you want to only invite this, we've had significant growth across those three months.

Okay. Although, I guess with Chinese New Year as well, you are just talking about sequentially February being up from January?

Yes, I think if you effect the Chinese New Year into February on a seasonal basis that will always give you an uplift as well. With that emphasizing on point three months, I think by observation and by performance on either side is that Chinese New Year period as well, Macau's volumes are continuing to show upward growth.

Okay. Thank you.

Our next question comes from Grant Chum from UBS. Please proceed.

Hi, good evening. Yes, I just want to clarify, from the information that AMAX is giving at $40 billion of rolling chips that you still be paying them only 1.3% of that rolling chip, as opposed to the maximum. Can you confirm that's the case? And also I am just curious, I mean if there really... is that actually financially better for you to be... for them to roll any $44 billion as opposed to $46 billion. I am just trying to understand how the sliding scale works because it seems with $40 billion if you pay 1.3%, your hold is going to be over 3%. This quarter looks like it's going to be like a massive quarter in terms of EBITDA. I am just trying to understand the dynamics between the hold and the starting scale of the commission you have to pay to AMA?

I think as A-Max presented publicly previously, both scales of having a base commission of 1.2 on roll, the property structure plus bonus components is what we are enforcing within the properties. So a 1.3% range for anything below 45 is what we would expect to pay.

Right. And Greg, on the... on your own on the non-AMA rolling chip, do we assume that this part of the business continues to decline, because I guess you guys were sort of doing more into some $12 billion to $15 billion in Q4 a month and now you are still down to may be $10 billion. Should we assume that continues to erode or does it stabilize at around the $10 billion level?

This is Greg. We indicated previously we expected some dilution in that area. But the key from our point of view is we are really looking at optimization on a per table basis across the property. So across the blend of seven existing fixed chartered operations that we have at Crown Macau, the target to all those is to optimize performance per table. So if that comes from one and for example, it may be AMA, we'll make sure we are optimizing the number of tables that they have access to. So I think what I make sure is that continual review of what's happening across that property. You can expect some dilution; at the same time having multiple operators on the site is particularly important for us as we lead into some our City of Dreams planning strategies as well. And in terms of the table demand across the property, that's been particularly high over the Chinese New Year period, which is a good problem to have I guess. We are looking at a number of options for us to expand gaming units numbers as well to cater for increased gaming and junket play across the property.

Right, okay and just lastly, I mean Greg, on the mass volumes you didn't see any noticeable impact I guess from in early February from the snowstorms, I mean your mass volumes looked pretty much as you were expecting?

Yes, pretty much Grant, what we have mentioned previously is within the mass effect of being compressed in the property on the two labels, we really particularly trying to focus on the premium end of the A-Max as well with a range of program. So by nature of that, the transportation mechanisms and promotional aspect, we are a bit more specific as opposed to general inbound boxing strategy, so I think as a consequence of that we didn't see any negative impact resulting from the issues in Southern China.

Okay, thanks very much.

Our next question comes from Celeste Brown from Morgan Stanley, please proceed.

First, just in terms of accessing hotel rooms outside of the Crown, have you reached a level where at any time you mean it to use those rooms, or you are still using rooms within the Crown? And then my second question relates to City of Dreams, and what... in terms of watching the Venetian and what its successful it is or not successful is, how does that change your view of what you are offering at City of Dreams and do you need to treat that at all? Thanks.

Yes, Robin it's Lawrence here. I think so far AMA has been using their room inventory at Crown Macau. So, it really haven't happened to the Regency or the new Centria [ph] yet for the lower grind height of the IT segment. So, I am sure there is a little bit more room for growth there. And in terms of City Of Dreams, I think the Venetian has attracted over 10 million people in less than six months. So we think we are well positioned to be across the street from them, to take a significant portion of the premium mass business and also throughout this A-Max experience, we've learned that there is a revolutionary process going on in the VIP market and we will try to take some of that over to City Of Dreams. So, so far we've been... we were fortunate that the design and construction process has gone smoothly and I think some of the ideas and visions we had in the past two years are spot on.

Thank you.

[Operator Instructions]. Our next question comes from Larry Klatzkin from Jefferies. Please proceed. Lawrence Klatzkin - Jefferies & Co.: Hi guys, just a clarification. I understood that LVS did not increase the commissions when they switched over how they did it, they just changed their methodology from a percent to 60-40 or 60-40-40-20 and they didn't increase commission rates, and that there is not a competitive commission rate increase going on in the market, am I mistaken?

Larry, it's... you are not mistaken. Lawrence Klatzkin - Jefferies & Co.: Because there has been no increase in the rates and people aren't competing on increased rates with other junket operators.

No. Lawrence Klatzkin - Jefferies & Co.: All right, just wanted to check on that, thanks guys, that's all I had.

[Operator Instructions]. At this time, there are no further questions. I would like to turn the call over to management for closing remarks.

Operator, it looks like we have a couple of more callers trying to ask questions.

Our next question comes from Robert Farley from UBS.

Oh yes, I was just trying to clarify, when the 60-40 commissions were in fact being increased above 1.1 commission level, at the minimum it would be 1.2 and it could go to 1.3 and above, if hold was above that. So wouldn't that be an effective increase in commission level?

I think, if you looked at the nation position, it might well be. But that's not really for us to comment on. From a broader market perspective, the 60-40 model is one that has been operating across the region as Lawrence referred to for a long time. So we don't see that as an effective increasing in rates across the sector. But from a LVS point of view, you need to part with that question today.

Sure, no Garry, I just want to clarify it from that property level is there an increase in commission levels. Okay, I just want to clarify that. Thanks.

And you are right on that Robin, and as much the... it depends where you put the point as far as where theoretical sits in the marketplace. Our position on that has been the theoretical sits at 2.7%. And obviously, if you move that needle up to 3%, then you are absolutely right from what you say.

Our next question comes from Gary Hitch from Macquarie [ph]. Please proceed.

Hi guys. Thanks very much for your time today. I had two questions. The first one was with regards to your commission rate that you paid out in the fourth quarter, I understand it was a bit blended across the revenue shares, was the turnover base of commission. Can you give us any indication on what that blended commission rate would have been, that's the first question. The second question is within your accounting format, what proportion of that commission rate is sort of recognized or netted off against revenues as opposed to recognized into your cost base? And the reason I am asking that I am just trying to work out the cost base for Crown in the fourth quarter?

Greg, you want to take the third part of that question and I'll take the second.

I think we haven't given specific guidance on our blended rate across the board, but it is fair to say that though there would be a greater component on a commission base model as opposed to the revenue share model, particularly based on the activation of AMA in the second half of December. That's all and I'll hand over to you address the second part of the question.

Yes, we take in terms of Gary, you are referring the fact that commissions are split. So, that portion of the commission which is effectively a player rebate on the U.S. GAAP is taken as a deduction against revenue and that portion of the commission which is effectively a marketing expense, the fees that's paid to the junket operator is reported as a cost in the operating cost line. And in terms of taking our commission costs for the fourth quarter, the split out between those two parts is approximately 70-30. So, about 70% of that commission comes of the top and about 30% is recorded as a cost.

Okay. Because that's in fact the assumption of being running in, perhaps I missed something, but I can't quite tie back the cost base, Simon, maybe it's a question I'll take offline with you tomorrow, that's okay?

Sure, no problem.

Thanks very much guys.

Thank you.

At this time, there are no further questions. I'll like to turn the call back over to Simon Dewhurst.

Okay. Thanks very much. I appreciate everybody's input and participation in this morning's call and we look forward to speaking to you all again, at the end of our next quarter. Thanks.

Thank you for participating in today's conference. This concludes the presentation. You may now disconnect. Have a great day. Thank you.