Melco Resorts & Entertainment Limited (MLCO) Q4 2011 Earnings Report, Transcript and Summary

Good morning, and thank you for participating in the Fourth Quarter 2011 Earnings Conference Call of Melco Crown Entertainment Limited. [Operator Instructions] Today's conference is being recorded. I would now like to turn the call over to Geoffrey Davis, 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'll now turn the call over to Lawrence.

Thanks, Geoff. I'm pleased to report our fourth quarter results of 2011, which capped 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 USD $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 operation, 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've delivered full year EBITDA growth of 88% in 2011 on a 45% increase in net revenues, 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 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 operation, 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 operation and assuring we leverage our hotel inventory, food and beverage outlets, as well as our enviable production of world-class entertainment offering to drive group-wide profitability. We are optimistic regarding GGR growth for 2012, particularly in relation to the highly possible mass market segment, which continues to be strong as evident in the increased visitation and strong mass table growth rate. We believe that our current exposure to the fast-growing Cotai region, as well as our development pipeline, places us in 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 and Cotai. We are excited about the infrastructure development plan for Macau, particularly in Cotai, as well as supportive infrastructure development in our core feeder market. A key area of interest is the development of Chong-Seng, providing further evidence of the strong support from the 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 measuring gaming in Macau. So back to Geoff.

Thanks, Lawrence. We reported record adjusted EBITDA of $232 million in the fourth quarter of 2011, and approximately $1 billion of that 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 at 10%, 40%, respectively. In other words, we took share of the mass table segment despite the new supply in markets. The strong mass table growth is a result of both improved volumes and the sustainable and improving mass hold rate. A mass table hold percentage in the fourth quarter was 25.7% City of Dreams compared to 22% for the comparable period in 2010. Our rolling chip segment continues to perform strongly, where we have remained disciplined on VIP junket pricing and growth in capital support. Assuming that we held a 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% from 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 the VIP was approximately 1/3 total. As mentioned by Lawrence, we have been actively managing our capital structure over the past 12 months, as evidenced by refinancing of our City of Dreams project facility, the issuance of our RMB note today, as well as the conversion of the shareholder loan in November of 2011. These initiatives, together with our operating cash flow, ensure we have a strong position to pursue organic growth and development opportunity. Our net debt-to-shareholders' equity ratio has improved to 49% at the end of 2010, 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 cost and strong operating cash flows [indiscernible] by operating profitability. As we normally do, we'll give you some guidance on our nonoperating 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] I have a question from the line of Grant Govertsen of Union Gaming.

I just wanted to ask question about Altira. As I look at your properties combined, 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'm wondering if you can give a little bit of color on that.

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

Grant, first of all, let's look at the mass volume in Altira. I think in the fourth quarter last year, we really focused on the enhancement of the full percentage on the gaming floor. We introduced a lot of initiatives. So although the volume, the draw volume in Altira in mass has actually reduced a little bit, but the [indiscernible] has improved. This is a good outcome of the fourth quarter in mass side. On the productivity per table wide in mass, it's actually improved substantially, and that's one of the highest productivity per table wide mass in Macau in the moment. Let me comment on the volume drop in the fourth quarter compared to the third quarter in terms of rolling chip volume. I think in the fourth quarter, we continue our program in giving up tables in VIP rolling on a basis productivity. And they're trained that junkets are moving to more on a revenue share scheme, and that might result in a drop in volume. And however, it will be up more gaming table for us to introduce more new and high productive junket in both Altira and COD. So we can see that the drop in volume in the fourth quarter is actually transitional.

Okay, great. 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-percent growth rate for 2012. Is there anything that you're seeing or hearing from your VIP operators that might suggest that -- or just causing to change your outlook?

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 regards to 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're very comfortable with that growth rate.

Your next question comes from the line of David Bain of Sterne Agee.

Ted, I think you kind of touched on this, but there was a reduction of tables at Altira and 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're right. Looking at the number of table and shifting and allocation of the most valuable asset, which is the tables, we see some potential in COD there. And we, as you know, we shift some of the gaming for long by the end of the fourth quarter and we are able to introduce some new junket operator. In the future, a couple of months, we have put in place a program to improving, expand our VIP gaming facilities in COD. And we should be able to add another free junket operator in next year's 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 but 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 growth share, or this is something everyone has seen before?

Dave, I think we will continue to monitor the situation closely, particularly as it relates to junket pricing environment. As a policy, and it has served us very well over the last 2 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, an approach that is supported by our world-class facility. Of course, we will, as Ted mentioned early on, we will continue 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 or 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 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, that was a 21% margin. Does that mean EBITDA in the middle of the range, VIP range, would have been 2 10-plus, or did I mishear you? 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 2.85%?

Yes.

Okay, got it.

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

Your next question comes from the line of Cameron McKnight of Wells Fargo.

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 U.S. are concerned about this growth and the fact this is 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 a 15%, 20% growth in the gross gaming revenue overall in the market for this year is based on around a 8% GDP growth. So at this moment, again, we're pretty comfortable with the budget that we had set last year and with the current trading rate in Macau.

Great. And one follow-up question. With the leadership in China transitioning this year and some of the recent events in Chong-Seng [ph], 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 transition all 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 Chong-Seng [ph] is isolated cases. When a country as big as China with 1.4 billion people and still developing rapidly, things like that do happen occasionally. So I don't think, one, an incident in one city or another is going to cause the national policy to change.

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

That's correct, $200 million, 2-0-0.

Your next question comes from the line of Billy Ng of Bank of America.

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 in that 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 like, basically, I think 2 days ago or yesterday, the Macau government announced that they may be able to approve 2 projects this year only. So is Macau Studio City a separate case as not being target for those 2 projects? Or ultimately, can you elaborate a little 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 of $265 million. That's mostly related to our deposit link 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 will 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 cost remains at $1.9 billion.

And Billy, it's Lawrence here. With regards to what the Director Gary Ong [ph] said, over the weekend of approving 2 of the 3, well, as you know, we don't want to speculate -- as we weren't there, and we don't want to speculate what Director Gary Ong [ph] 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 approvals to commence construction. And as we have always been, we remain extremely respectful to the government processes.

Your next question comes from the line of Grant Chum of UBS.

Can I just, first question, follow up with Ted on Altira. I mean, can you just give 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 we'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 wanted to get more color on exactly how the transition may trend after the 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 said that we have to really build up our table productivity. So as you know, we allocate quite a lot of new tables in Altira because of shifts to Altira. So per table particularly compared to COD or Cotai standards is a little bit low. So what we are trying to do is actually put in place some program for the junket operator so that some of them in the fourth quarter moving towards the revenue share model year. These junkets are more quality and bigger junket operator. So in the process, doing so, we should be able to generate more, free up more table whereby, we could either introduce some of new junket operator on the Altira or move those table onto COD for extension playing next few months time.

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

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

Okay. And a separate question, then this question is 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 1/3 of those relating to premium direct and the rest will be junket related.

And 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 then just 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, 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 when 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're working closely with the Macau government and we've had numerous exchanges. And so far, we're very optimistic about the progress. So again, it's ultra complicated. As I said earlier on, we're 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.

Your next question comes from the line of Anil Daswani of Citigroup.

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 entire level to fund Studio City? And given your solid cash flow, you shouldn't need to, anyway, right?

Anil, well, based on our current cash balances and future expected cash flow, we do not anticipate requirement to raise equity capital for Studio City. As Geoff mentioned earlier on, our focus is on working through that debt financing plan for the project. So I think that's the latest update and 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 first quarter [ph] of January, those trends have continued, and that 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 EBITDA from both segments. But as you said, [indiscernible] similarity in the growth rates combined with the differential in the margin, I think you'll start to see mass take a larger [indiscernible] represent a larger part of our mix of EBITDA.

And there are no audio questions. I would like to turn the call back over to Mr. Geoffrey 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.