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Melco PBL Entertainment (Macau) Limited (NASDAQ:MPEL)

Q1 2007 Earnings Call

May 15, 2007 10:00 am ET

Executives:

Simon Dewhurst – CFO, EVP

Lawrence Ho – Co-Chairman of the Board, CEO

Greg Hawkins – CEO, Crown Macau

Garry W. Saunders – COO, EVP

Analysts:

Grant Chum - UBS

Chan Pasterochi - National Securities

Waheed Shanith – Janus

Tony Pistosi – Firm Unknown

Anil Daswani – Citigroup

Unidentified Analyst

Operator

Thank you for participating in the first quarter 2007 earnings conference call of Melco PBL Entertainment (Macau) Limited. At this time all participants are in a listen only mode. After the call we will conduct a question and answer session. Today’s conference is being recorded. I would now like to turn the call over to Simon Dewhurst, Executive Vice President and Chief Financial Officer of Melco PBL Entertainment.

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Simon Dewhurst

Good morning. Welcome to the first quarter 2007 earnings conference call of Melco PBL Entertainment. Joining me on the call are Lawrence Ho, Co-Chairman and Chief Executive Officer, Garry Saunders, Executive Vice President and Chief Operating Officer, and Greg Hawkins, Chief Executive Officer of Crown Macau.

Please note that today’s discussion 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.

With that I’ll now turn the call over to Garry Saunders who will update you on key developments during the first quarter of this year.

Garry W. Saunders

Thank you Simon. Good morning ladies and gentlemen and welcome to MPEL’s first quarter earnings call. It’s only been about six weeks since our full year ’06 earnings call but there have been important developments during the interim. During the first quarter our focus remained on executing the development projects under way and completing construction of Crown Macau which formally opened to the public just three days ago on May 12th as scheduled. The gala celebration marked the opening of the latest addition to Macau’s vibrant casino, gaming, and hotel scene. Opening festivities brought more than 10,000 visitors to the property.

We believe that Crown Macau will raise the standard for servicing the VIP and premium mass market segments in Macau. Crown Macau opened with approximately 26 VIP tables, 142 premium mass tables, and 479 gaming machines operational. In its full configuration Crown Macau will have approximately 80 VIP tables, 142 premium mass tables and 550 gaming machines. We expect that the additional 54 VIP gaming tables and 71 gaming machines will be operational within approximately four weeks.

Crown Towers hotel will be operational with approximately 60 rooms available within three weeks. Approximately 216 hotel rooms, including all villas and suites, will be operational by the end of July 2007. The revised fully operational gaming table configuration is projected to include 54% more VIP tables than initially planned reflecting Crown Macau’s strong positioning in the premium market.

We continue to make significant progress at City of Dreams, our integrated casino entertainment resort in the island. All principle sub-structure construction is completed and a substantial portion of the steel podium superstructure has been manufactured off site in China. Erection of the podium structure has commenced and is transforming the visual status of the site. We have continued to revise and improve the overall scope of the project to reflect our positive outlook on market opportunities in Macau.

We have former improved major design and scope changes including the world’s first twin towers grand Hyatt hotel, the unique wet theatre designed by the paid partnership in co-operation with the world renowned Gragon Group and a second block of service departments with an interconnecting bridge. This includes major design and scope changes at City of Dreams under the business plan. The first stage of development at City of Dreams remains targeted to opening to the public before the end of May. We will finalize our estimates with the impact of approved scope changes together with steps we have taken to control capital expenditure on the total project development budget for City of Dreams in the near term.

We intend to issue an announcement in relation to final costing and timetable in due course. We continue to move ahead with plans for the development site during the quarter. Conceptual design has been presented for an iconic twin tower building with a gross floor area of more than one million square feet.

The gross property incorporates the mixed underwater casino with approximately 215 gaming tables and 500 gaming machines designed to cater to the day tripper mass market, the hotel and a single tower premium service partner.

Our existing Motor Clubs business is the largest operator of nine casinos, gaming machines in Macau. The property incorporates the mixed use casino with approximately 215 gaming tables and 500 gaming machines designed to cater to the day-tripper mass market from boutique hotels at a single tower premium service department. Our existing Mocha club’s business is the largest operator of non-casino gaming machines in Macau, plus the side growth during the first quarter, averaged that win per gaming machine per day increased by 26% to $230 from $183 in the same period last year.

Our progress comes amid a backdrop of strong overall growth in the Macau market. Macau continues to see very impressive growth in visitor arrivals and booming growth in gaining revenue for the period January to April 2007 up 43%, compared with the same period of 2006. This continued growth reaffirms our view that increasing quality supply growth is spurring demand growth and we have what is now the world’s largest casino gaming center by gaming revenue and Asia’s premier entertainment destination. I’ll now hand the call back over the Simon who will review our first quarter 2007 results.

Simon Dewhurst

Thank you Garry. Total revenue for the first quarter was $20.3 million up 274% from $5.4 million in the first quarter of 2006. This largely reflects the impact of the acquisition of the gaming sub-concession in September 2006 which resulted in a change in the reporting of gaming revenues from the company’s (inaudible) than from a service need basis prior to the acquisition of the sub concession, the gaming revenue based on net win after gaming taxes since the acquisition of the sub concession.

On a like for like basis, where we assume operation under a gaming sub concession during the first quarters of 2006 and 2007, first quarter of 2007 gaming revenues drew 18% year over year with natural revenues of $20.1 million. The number of gaming machines in operation at Mocha clubs average approximately 1,000 in six locations during the first quarter of 2007. As I mentioned, average net win for slot machine per day increased by 26% of $260 during the first quarter, up from $183 in the same period last year.

Total group operating costs and expenses are $56.1 million in the first quarter of 2007, up from $15.3 million from the first quarter of 2006. The increase was largely attributable to the commencement of the amortization of the company gaining sub-concession. Increased amortization of land-use, a project under development, an increase in pre-opening, selling, and marketing investment costs associated with the Crown Macau and the City of Dreams project.

Non-operating income from the first quarter of 2007 was $8.4 million, including $7.4 million in interest income and $1.9 million in foreign exchange games. As a result, the company referred to their net loss of $27.2 million in the first quarter of 2007, compared to a net loss of $7.5 million for the first quarter of 2006. Net loss in the first quarter of 2007 was $0.23 per share.

Turning to our balance sheet, we ended the first quarter with cash balances of $500 million. Outstanding debts at the end of the quarter totaled $115.2 million and fixed term loans borrowed from the company’s two principle shareholders. We have no additional external borrowings as of the end of the first quarter, and our debt to capital leverage ratio as of March 31st stood at less than 6%.

Construction and progress at Crown Macau and City of Dreams project increased $153.1 million during the first quarter of 2007 to a total of $391.8 million as of March 31st. Other capital expenditures for the first quarter of 2007 totaled $2.3 million.

I understand that Lawrence wants to say a few words before we turn the call over to the operator to administer the question and answer section of this call.

Lawrence Ho

Yes Simon, thank you. Just before we get into the Q&A, I wanted to say a few words regarding some of the commentary and reaction that we have seen throughout the opening of Crown Macau over the weekend. Let me start by saying that the property is going to be every bit as good as I had hoped. But unfortunately, regardless of how hard we all pushed, we were unable to get all of the aspects of the property open for Saturday. This was personally unacceptable to me. However, the decision to proceed with the opening was ours, and it was the right one.

The premium product is better than anything else available in Macau, currently, and I am confident that in just a few weeks, I’ll prove VIP gaming salon and hotel will underscore the position of the Crown Macau at the highest quality VIP and premier map casino and hotel in Macau. We were not going to allow our needs for a few more weeks to get this right to void to our commitment to delivering the best that Macau has to offer. With that said, I’m happy to hand the call over for questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen if you wish to ask a question, please press Star One. If your question has been answered, or you wish to withdraw your question, please press Star two. Please press Star one to begin and please standby for your first question.

And our first question will come from the line of Grant Chum with UBS. Please proceed.

Grant Chum - UBS

Gary might have mentioned this at the beginning but, did you say how many VIP tables are currently operational, and how many VIP tables do you expect to end up with and how does that phase between now and the eventual number?

Lawrence Ho

What we count on is 26 VIP tables, 142 match tables in addition to 479 slot machines. A total of four weeks. The key I emphasize is our (inaudible) VIP level tables across the property will come on-stream in a staggered basis. We expect to have one of those levels open this week and the following week another one will come on-stream and then realistically ten days after that, the final VIP level will come on-stream. So the total in about three and a half weeks in a staggered basis will works towards those 80 VIP tables.

Grant Chum - UBS

Do you think the fact that you won’t have all the hotel rooms open until the end of July, will that have some impact on the volume in the initial weeks for the VIP business?

Lawrence Ho

The answer to that will be yes. As we work to full hotel room inventory across the next ten weeks, clearly as we stagger the hotel rooms up to the 216 capacity, the correlation between the VIP activity is quite direct. So, as we go from 60 rooms in the next three weeks and build up to 216, I think all of the rooms will progressively come on-stream towards the end of July, we commute it to our VIP gaming activity, so if I would have thought there was a correlation between the two, there is a real drive to finish the hotel room inventory location as quickly as possible without in any way impinging on the quality of the product which is obviously extremely important to our positioning.

Grant Chum - UBS

OK, thank you.

Operator

Our next question comes from the line of Chan Pasterochi with National Securities. Please proceed.

Chan Pasterochi - National Securities

My question is, with the flight delays you are encountering now, what kind of gaming revenues would you be hopeful to expect for the end of this year? What would be a reasonable projection for you guys?

Simon Dewhurst

Chan, this is Simon Dewhurst. We’re not giving out forecasts for revenues whether its for the end of this year or over a shorter or longer period. At this stage we don’t give forward guidance.

Chan Pasterochi - National Securities

OK, do you have a goal though? Is there any sort of goal that you would look for or something to point me towards?

Simon Dewhurst

Well, I would point you towards the research which is out on the market.

Chan Pasterochi - National Securities

Thank you.

Operator

As a reminder ladies and gentlemen, please press Star One to ask a question. And there appears to be no additional questions at this time. I certainly do apologize. It does look like we have a question coming from the line of Waheed Shanith with Janus. Please proceed.

Waheed Shanith - Janus

Obviously we’ve all learned that the delays can affect materially and wipe off a billion or two in market cap. As you look into that and you looked at City of Dreams, what are you guys going to do to make sure this doesn’t happen again and that you make it on time? Do you really have control or working 24 hours, looking at the site right now, it does not look like that’s going to be an easy target. It’s probably going to be a very aggressive target. So what do you have in terms of numbers you can pull to make sure that happens on time and according to plan?

Lawrence Ho

First of all, we think we have a very good contractor, a consortium of contractors with John Holland and China State. We believe that getting the quality behind what they’re going to do is going to be very impactful in that.

Second of all, we’ve also done a number of things as we’ve developed our own staff and added quite a few positions recently on the design, development and structural side. It gives us the confidence that you’re talking about that we would have the capability internally to be able to fully plan and execute.

Operator

And our next question comes from the line of Tony Pistosi. Please proceed.

Tony Pistosi – Firm Unknown

Good morning. Are there any plans for increasing the number of Mocha clubs and is there room for further expansion at the Crown Macau after you reach the announced capacities you are going for right now?

Lawrence Ho

Tony, it’s Lawrence here. In terms of Mocha clubs, yes I think there are and we have guided that we hope to open two new venues per year with an optimal 150 machines per venue. So we are looking for venues and we are working on a couple of new venues. In terms of the market itself, I think we need to look at the big picture here. And look at the growth in the first quarter at Macau’s; 43% year-in-year. Still, this could easily be a $10 billion US market by the end of the year. So there is definitely going to be a supply driven market.

In terms of Crown Macau, I think at this point in time, it was designed for the number of gaming positions. There is the optimum size right now. They haven’t set that. If you look at Steve Wynn and what he has done with Crown Macua, he has effectively eliminated certain restaurants to make room for more gaming positions. In the old days of the Sands, they had removed office space for that. So from that perspective, we do have six restaurants at Crown Macau and when business is that phenomenal, I’m sure we’ll squeeze some space.

Greg Hawkins

One other thing I might add also in term of the yield of the space we have, we’ve already made a decision to increase the number of VIP tables and that’s always a method we can use if we’re successful in that market place to continue to drive better yield on the floor.

Tony Pistosi – Firm Unknown

Are the Mocha clubs as big a cash cow as I see them?

Simon Dewhurst

Tony, this is Simon Dewhurst. The Mocha clubs business has got a couple of embedded values that are very important to us. First and foremost we’ve got a thousand employees who are probably more expertise in terms of managing gaming machine activities at Macau than any other staff group that’s operating over there. So our ability to be able to take relationships with suppliers and the knowledge we’ve built up over the last three or four years in Macau, and extend that into our new property, specifically in City of Dreams which will have a two and a half thousand gaming machine inventory, it is huge. And that is really the embedded value.

One of the practical tasks that we face, as alluded to in terms of our ability to expand the network is that there are limited venues that are considered to be appropriate by the government in what is a very, very small market for a non-casino based gaming parlor. Yes, they are very good cash generator. How big can we scale the Mocha business…it’s not going to scale by reference to the sort of scale that we can see on the casino operating side of our business. If there’s embedded value there, over and above what we can see, as far as our new venues, yes absolutely. And you’ll see that come through as we bring City of Dreams on stream in the future.

Tony Pistosi – Firm Unknown

Thank you and best of luck.

Simon Dewhurst

Thank you Tony.

Operator

And now our next question comes from the line of Grant Chum with UBS. Please proceed.

Grant Chum- UBS

Oh hi, just a couple of numbers questions. Simon, is it possible to give an indication what you expect for Q2’s caution of Crown’s pre-opening cost…the residual of opening cost that fall into the current quarter. And secondly, in terms of the VIP model that you have at the Crown, can you confirm that you’re using a commission based model versus the revenue sharing?

Simon Dewhurst

Grant, I’ll answer the first question, and then I’ll flip your second question over to Greg.

The first question, it confirmed the residual balance of the total project development budget that we had for Crown Macau will basically be expensed pretty much in full through the course of Q2. We do not at this stage, with the information that we have available to us, anticipate that we will exceed that previously communicated total project development budget. For those who can’t remember what it was, it was $583 million. So we will not be going through that in Q2, Grant.

Grant Chum- UBS

OK.

Greg Hawkins

As for the commission models, it was mentioned previously, we were open to both commission or revenue share models. However, we’ve reviewed it in some detail, so I’d expect us to be gone on the operating commission models, but that wouldn’t exclude other model options if it demands that.

Grant Chum- UBS

OK, thanks.

Operator

As a reminder, please press Star One to ask a question.

Simon Dewhurst

Operator, there’s a question already lined up from Anil Daswani from Citigroup. Can you put him through please?

Operator

Yes, one moment. Thank you, our next question comes from the line of Anil Daswani. Please proceed.

Anil Daswani - Citigroup

Yeah, I have a question in relation to the City of Dreams. In the announcement, you talk about changing the scope of the project. Can you give us an idea of how that’s going to affect the CapEx budget at this stage for the City of Dreams? I know you’re saying there will be a formal announcement in due course, but in order of terms of magnitude, is it a significant change or is this a small event?

Simon Dewhurst

Anil, I think that you’re actually surprised to hear that we are not going to give any specific answers to that. We have not completed the exercise that we have committed that we will do, and we will have it complete in short order. And when we’re able to report with a fix on where the CapEx budget has gone to and what the program looks like, if it’s all different from what we’re looking at the moment, we will communicate that. But at the moment, I’m not going to speculate as to where the outcome is likely to be.

Lawrence Ho

Yeah, but I think it’s important to look at one of the scope changes as on the service apartment and the…that we are committed to building the second tower now. So we’ve got to hand that over to Garry to talk about that.

Garry W. Saunders

Originally in our plans, we had roughly a 300 room service apartment tower, and what we’ve added by adding the second tower that doubles that number. Plus, we’ve added an interconnect…a number of floors between the two towers that would add another 80. So, we’re still in the neighborhood of 380 different rooms that we have. As we look at the market here, we continue to believe that this is a great opportunity right now in Macau, and it presents an ability for us to take this because of the location that we create, an environment that we create around it, to monetize these assets far north of the type of costs that we put into them.

Anil Daswani- Citigroup

As a follow-up, can you just give us an idea of when you would intend to pre-sale those apartment blocks?

Lawrence Ho

We’re doing quite a bit of work behind the scenes at the moment. We have not announced timing yet. As you probably know, there are other people in marketplace doing the same thing and not being as clear about the timing at the moment.

Simon Dewhurst

There’s some advantage, Anil, to being a price taker rather than a price maker.

Anil Daswani- Citigroup

OK, thank you.

Operator

And your next question comes from the line of (inaudible). Please proceed.

Unidentified Analyst

I just learned that there were some changes in the Lands and Transportation department and the Macau government saying that they might review the land premium equations. Does that reflect the land premium for City of Dreams?

Lawrence Ho

Well I think, at the end of the day, when there are… it’s a very complex formula in terms of how many star hotels that you build. And so naturally, with a scope change, there will be some modification from the government in terms of the premium, and the more that you build, naturally, the larger the premium.

So, having said that, all of our approvals are on-going and when we finalize this exercise of all the scope changes and with the cost (inaudible) budget, we will submit it to the government again. I think we do expect changes in the premium.

Simon Dewhurst

I’ll add just a final beef to that. You know, you hit on a very important point and it is exactly at that type of revision that we need to do, and make sure that we’ve got correct before we come out with any fix to the market in terms of where our profit goes. So that’s an important point that you raise.

Unidentified Analyst

Right, thank you.

Operator

As a reminder, ladies and gentlemen, please press Star One to ask a question. And there appears to be no additional questions at this time. I would now like to turn the call over to management for any final remarks.

Simon Dewhurst

Thank you again for joining our first quarter 2007 earnings call and we look forward to speaking with you at the next call.

Operator

This now concludes your presentation. You may now disconnect and have a wonderful day.

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China Direct (ticker: CHND.OB) is a diversified management and consulting company. Our mission is to create a platform to empower medium sized Chinese entities to effectively compete in the global economy. As your direct link to China, our organization serves as a vehicle to allow investors to participate directly in the rapid growth of the Chinese economy.

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