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Melco Crown Entertainment Limited (NASDAQ:MPEL)

Q3 2012 Earnings Call

November 7, 2012 8:30 a.m. ET

Executives

Geoffrey Stuart Davis – CFO

Lawrence Ho – Executive Co-Chairman and CEO

Ted Chan - Co-COO

Analysts

David Bain – Stern Agee & Leach

Karen Tang - Deutsche Bank

Grant Chum - UBS

Cameron McKnight – Wells Fargo

Anil Daswani – Citigroup

Simon Cheung – Goldman Sachs

Operator

Thank you for standing by, and welcome to the third quarter 2012 Melco Crown Entertainment Limited earnings conference call. At this time, all participants are 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 7 of November, 2012.

I would now like to hand the conference over to your first speaker today, Geoffrey Davis, Chief Financial Officer of Melco Crown Entertainment Limited. Thank you sir. Please go ahead.

Geoffrey Stuart Davis

Thank you operator and then good morning everyone. Thank you for joining us today for our third quarter 2012 earnings call. On the call with me today are Lawrence Ho, Ted Chan, Constance Hsu, and Ross Dunwoody.

Before we get started, please note that today's discussion may contain forward-looking statements made under the Safe Harbor provision of federal securities laws. Our actual results could differ from our anticipated results.

I will now turn the call over to Lawrence.

Lawrence Ho

Thanks Geoff. Hello everyone. In the third quarter of 2012 we reported EBITDA of US$226 million on approximately US$1 billion of net revenue, delivering an EBITDA margin of approximately 22%.

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

Market wide, the mass market segment continued to deliver strong growth rate outpacing the VIP segment over the past four quarters on a year over year basis. The consistent strength in this segment continues to validate our long term focus on mass market customers. A wide range of innovative product offering, including a diverse hotel brand mix and world class entertainment attraction as well as our properties’ attractive location position to take full advantage of these assets growing gaming segment of the market.

In the rolling chip segment for the third quarter of 2012, we outperformed the broader market with our group wide rolling chip volumes improving over 40% sequentially compared to an estimated decline of approximately 3% in the market over the same period. City of Dreams continues to maintain its market leading mass market deals when compared to all other major mass focused properties in Macau, while at the same time it has delivered a strong improvement in rolling chip table yield over the prior period.

Altira Macau has also delivered substantially improved per table operating metrics compared to the previous quarter which we are confident (inaudible). This strong group wide improvement enabled you demonstrate the success of our table optimization strategy. We are confident that we have realized strong relative performance across our entire portfolio of assets as we continue to proactively manage yields at our gaming tables to maximize group wide EBITDA.

The Macau government has made significant steps towards expanding and improving the local consummation infrastructure. With the light rail and permanent type of ferry terminal clearly moving ahead, our exposure to the fast growing Cotai region as well as City of Dreams and Studio City’s location on the light rail and close proximity to both the type of ferry terminals and Lotus Bridge entry point position Melco Crown the benefit of the growth in this region of Macao.

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

Now for update on our development opportunity. Studio City is moving ahead on its expected timetable, with the majority of the (indiscernible) and foundation work now complete. We have also recently engaged on a fixed price lump-sum contract basis on main contractor, providing us greater clarity and certainty around Studio City’s benign infrastructure cost. We remain on track to open this property around mid-2015.

We recently signed a commitment letter for US$1.4 billion senior secured facility for Studio City and have now entered in the syndication space. This represents a major milestone for Studio City, bringing us one step closer to finalize in the project debt financing. As we announced earlier today we’re also contemplating a high yield bond issue for Studio City. We expect that upon finalization of our Studio City debt financing. When combined with our anticipated cash equity contribution we will have a fully funded project subject to certain conditions.

Studio City was based on consisting of capacity for up to 500 additional gaming tables and 1600 hotel rooms. We’ve substantially expanded our product offering and prototype. Where the property is main stream mass market focus (indiscernible) a broader array of entertainment opportunities. Studio City provides us an excellent opportunity to target a customer base complementary to our existing current portfolio of assets which in turn further (indiscernible) to a wider spectrum of visitors to Macau.

We’ve also signed a corporation agreement regarding our development in Manila further formalizing the key terms and conditions for the project. The broad economic arrangement between us and the Philippines party is designed to allocate total property EBITDA approximately equally subject to overall property revenue and profitability level. With our current expected investment upon opening of both phase 1 and 2 of the project expected to be around US$600 million. We believe that this venture offers the company an opportunity to deliver strong return on invested capital while also providing us with a platform for future expansion throughout Asia.

We currently expect both phases to open together by the first half of 2014. We look forward to keeping you updated on our progress in relationship to both these important development projects for our company. So back to Geoff?

Geoffrey Stuart Davis

Thank you Lawrence. We reported adjusted EBITDA of $226 million in the third-quarter of 2012 compared to approximately $240 million in the comparable period of 2011. Our EBITDA margin in the third-quarter of 2012 was approximately 22% compared to 23% in the same period of 2011. On a market adjusted basis assuming VIP win rate of 2.85% across our entire rolling chip business, our third-quarter EBITDA was approximately $210 million, an increase of approximately 8% when compared to the third-quarter of 2011 and up From approximately $205 million in the second quarter of 2012.

Altira Macau’s market adjusted EBITDA was approximately $36 million and as Lawrence mentioned, Altira Macau has stabilized but we aim to generate improved operating metrics going forward. City of Dreams generated market adjusted EBITDA of approximately $180 million in the third-quarter of 2012 representing a year-over-year increase to more than 17% on this basis.

EBITDA contribution from our non-VIP segment continues to represent approximately 75% of market adjusted EBITDA at City of Dreams and approximately two-thirds our market adjusted EBITDA on a group wide basis. To provide the company with significant flexibility in relation to our future funding needs, we have successfully completed a consent solicitation for the release of US$400 million from our existing high yield bonds restricted payments basket. This amendment among other things gives us the ability to efficiently deploy our meaningful cash reserves.

The recently announced US$1.4 billion senior secured credit facility for Studio City , our limited resourse primarily in the form of $25 million US completion guarantee. Contemplating senior notes launch today will not be guaranteed by Melco Crown Entertainment.

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

As we normally do we’ll give you some guidance on non-operating line items for the fourth quarter of 2012. Total depreciation and amortization expense is expected to be approximately $90 million to $95 million. Our corporate expense is expected come in at $18 million to $20 million and net interest expense on MCE’s existing debt is expected to be approximately $23 million to $25 million.

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

Question-and-Answer Session

Operator

(Operator Instructions) First question comes from the line of David Bain from Stern Agee.

David Bain – Stern Agee & Leach

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

Lawrence Ho

We’re very positive about the market especially heading into next year. As you know there has been quite a bit of global macro headwinds this year whether the European debt crisis of the fact that the Chinese economy which is the biggest impact to our growth. China has had a softer growth here. You know the U.S. election today, the Chinese change in leadership is taking place in two days and even this golden week and it was a record month for Macau that in speaking to some of our VIP customers, a lot of the people were – even though there is very little uncertainty with regard to the change in leadership in China, people were kind of just waiting for it to happen before really coming out in full force.

But even in November the first few days in terms of the GGR growth has been quite phenomenal, much higher than the rest of the year. So heading into next year and hoping that some of the global headwinds like the European -- people get used to the European debt crisis and there’s less headwinds. And eventually I think the Chinese leadership, they’ve had very tight grip on the various sectors such as the real estate sector which has impacted as the crisis. So once those things are behind and with the new leadership in place, I am quite optimistic about next year. And so year-to-date the growth has been 14% even for these headwinds. So I am quite optimistic that next year is going to be better.

Ted Chan

Dave, I think with respect to the VIP growth and compared to the past month, would beat via derivative month particularly in the 40 weeks time compared to last year and so we view no pressure in terms of the credit as well as liquidity in terms of operator. And I think we are seeing some improvement as compared to the previous month.

David Bain – Stern Agee & Leach

And that was a two-part one question. My second question is phase 3 of City of Dreams, do you guys envision beginning that potentially next year? And do you think that there could be any construction disruption? It doesn’t seem so just given the position but if you could speak to that. And then finally, our tracks are showing it has a 50% more GFA than Altira, given that kind of scale, doe the design encompass the possibility for either table expansion or moving around your current base of tables that opened?

Lawrence Ho

Hey David, Lawrence again. Obviously City of Dreams phase 3, some people call it tower five, it is a pretty big. As you said you are right, 50% bigger now Altira, the total GFA for development is 1.5 million square feet. And we do plan on – we’re all in the room. I think right now we do need more rooms at City of Dreams and Macau in general, We continue to believe as they supply throughout the market – at this stage it’s a bit too early to talk about some of the – our projections or forecast. I think we have probably one of the more exciting development pipelines in the global gaming world with Manila coming online in the first half 2014, Studio City in 2015.

Obviously City of Dreams phase 3, the additional (indiscernible) is still subject to – we’re going through the formal government approvals to get, we get added, because we have upgraded the building and had included more amenities. So assuming it gets approved, we are hoping that we could get started on that project probably in the middle or the latter half of next year. At this stage I think our own return analysis is built based on no additional gaming tables but with more gaming stage. And we think the incremental gaming states within (indiscernible) is so compelling that it could be impressive return. But in the case that the iconic building to get more tables, it would just be a grand flag.

Operator

Next question comes from the line of Karen Tang from Deutsche Bank.

Karen Tang - Deutsche Bank

Hi guys, I’ve got two questions with regard to City of Dreams table yield. You mentioned that you are now on the mass market kind of like one of the leading in mass table yields. We’re wondering that now that your whole percentage is already very high, what are the ways to further improve your table yield on the mass market? And my second question is with regard to the VIP table yield. Right now you do quite a discount to the leading casinos on average VIP table, what are plans that you have to improve those?

Ted Chan

Karen, it’s Ted. Let’s look at the mass side in Studio first. Currently yes we’re on a leading arena in terms of the mass segment. In order for us to improving that segment, I think it’s so important that we focus on line of properties quality with the customer base. We’re very happy to see a sequential quarterly improvement on the active customers on this premium mass area in the last perhaps eight quarters. And it’s continued to grow, and I think that it’s so important not only the table allocation but also the quality of property with the right team managing these tables. So this is a mass side.

In terms of the yield on the VIP side, yes, you are right that we are a little bit discount to the leading property at the moment. So I guess we have put a plan in the optimization process during the last three quarters in both Altira and COD. It’s an ongoing process and we hope that we could be able to stabilize Altira at the moment but we’re still putting our effort in COD. So you’ll see some improvement in the next two quarters.

Lawrence Ho

Karen, it’s Lawrence here. There’s no secret that for the last three or four quarters we have moved tables away from Altira into City of Dreams. But we’re also optimistic about that productivity, table productivity to us because we are continuing to look at the right amount of – the ratio with regard to mass table versus VIP table. And given our strength we have and the fact that we will continue to grow that sizes because ultimately we’re very lucky to be in a highly aspirational business. So we are doing that as we speak, and even within the VIP universe we continue to analyze how we improve productivity and also quality of credit. So there are some big plans ahead. So we do see further upside.

Operator

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

Cameron McKnight – Wells Fargo

A quick question for Geoff or perhaps Lawrence, I think it’d be helpful if you could talk through the sources and uses of cash for the Studio City projects specifically the split between yourself and the minority?

Geoffrey Stuart Davis

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

Cameron McKnight – Wells Fargo

And then Lawrence, as we look out to say the 2015 through 2017 timeframe, there are lot of projects that have been announced, how are you guys thinking about the supply picture as we look out into the medium-term?

Lawrence Ho

Cameron, the good thing about Macau is the government has been very transparent with regard to the table cap and the next 10 years from March 2013 to 2022 the government has said there is only going to be – there are only going to be 2000 new tables and they will allocate those tables ahead of time when the property – when new properties are built so that it would intensify to motivate the casino operators and property developers to build them up. I think looking at Studio City which is coming online in 2015, I know Galaxy phase 2 is around the same timeframe. But beyond these two projects which has gone ahead with heavy-duty construction, beyond the projects either just recently got their kind of land contract and I think it’s well documented by you and other analysts as well that, that process could take months if not even longer before the land gets (indiscernible). Even after land gets, you still need the kind of construction loan approved and get a construction permit.

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

Geoffrey Stuart Davis

Cameron, just as a follow up to your first question, the first US$150 million has already gone into the project pro-rata basis 60:40 and our minority shareholder.

Operator

Next question comes from the line of Grant Chum of UBS.

Grant Chum - UBS

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

Lawrence Ho

Hey Grant, it’s Lawrence here. I think ultimately between the two principal shareholders Melco and Crown, we only – we only put more skin in the game, never take any money out of the business. So I think similar to all of our institutional shareholders we would love the dividend. But at the same time I think the board concluded recently that we do want a very exciting development pipeline with Manila, Studio City, City of Dreams phase 3 to be on its way first so that we started significant construction, have business plan fully funded before we consider that but ultimately I think that we are in the business and crop at years’ time. I think the next year is really about getting built up on Studio City and Manila as quickly as possible and also getting City of Dreams phase 3 constructed.

Grant Chum - UBS

So Lawrence, just on Manila, can you give us just some sense of the state of the current construction on phase 1 in Manila and how this phase 2 get developed concurrently? And what is the scope for changing the design elements of phase 2 and the different components especially as we’ve observed next year what happens after (indiscernible) opens?

Lawrence Ho

Well, I think the current phase 1, before our involvement was really – and effectively the selling point is fully built and is actually weather proof so that the thought is on. So for Melco Crown has brought to help that up. We have been working on the deal for over a year now, and our project design and development team has been engaged for quite some time and we are moving along with the design both internal and also for the phase 2 design. So I think the current thinking is that, I think what’s built in phase 1 is built but we will try to make phase 2’s to be really the iconic feature and architectural masterpiece of the property and it will -- phase 1 with the build there is going to supplement that and really make the whole property design.

We’re happy with what has been built and I think we are – phase 2 is going to get underway with this (indiscernible) foundation work relatively soon. So the timeline that we gave earlier on in our prepared remarks is valid and I think ultimately we will have one of the most compelling projects in Manila.

Operator

Next question comes from the line of Anil Daswani from Citigroup.

Anil Daswani – Citigroup

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

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

Ted Chan

Anil, this is Ted. In terms of the percentage of premium mass to the mass market, first of all it’s difficult for me to determine the premium mass as to the whole portfolio that it might be in the moment. So we actually divide this premium mass into the area that we dedicated for the high end customers. So that with that, you should assume roughly about 50, 60 at this stage for COD. Margin wise, we see a higher margin for premium mass compared to the mass market. As you know you need a lot of completion from our labors in terms of the mass market area. The premium mass area is very specific. So we see a higher margin in this particular area.

In terms of the property table, we think that Altira’s optimization is basically done and although we will – this is actually ongoing process for us to optimize our table use, I think that as we’ve gone through it in Macau, and we see a great potential for us to yield our power VIP tables but at the same time if we identify opportunity for this mass expansion for sure we’ll shift some table to mass side. So first question being property wise I think is basically about the current level. And in terms of the mass and the VIP mix, I think it’s ongoing process and use based on margin improvement, what we’re doing this new performance in the next few quarters.

Operator

The next question comes from the line of Simon Cheung from Goldman Sachs.

Simon Cheung – Goldman Sachs

Two questions, one again on your balance sheets, just with regard to your announcement about the senior note offering. Trying to understand why do you be seen in the casino, as Grant pointed out, you guys are almost in a net cash positions. I think you still have almost $2 billion cash on your balance sheet. So why do you do that? And what’s your expected cost of funding for that senior note especially given it’s nonrecourse to MPEL? That’s the first question I have and I have another follow-up.

Geoffrey Stuart Davis

This is Geoff. Given that we just launched or made the announcement today we really couldn't comment on pricing. We will have better sense down the track after we get to the pricing and close the transaction. The structure -- our financing structure of Studio City reflects the fact that we do have several projects underway with the Manila Studio City as well as phase 3 at City Of Dreams. And it also reflects the fact that we don't own a 100%, we own 60% and that informs the structure of -- the capital structure of that project.

Simon Cheung – Goldman Sachs

And maybe as a follow up, can you remind us the equity injection you mentioned, Macau’s Studio City, you need about $825 million equity injection and pro-rata perhaps you need about $500 million, $600 million. What about the other ones like Philippines and then I suppose the tower 5 for City of Dreams will be fully funded by yourself. Just can you give us a sense how much CapEx or equity injection you need over the next maybe two to three years?

Geoffrey Stuart Davis

Sure. Well, in addition to the Studio City numbers that we’ve already discussed, we anticipate spending approximately $600 million in Manila upon opening and as we said we anticipate having $325 million of that funded through local loan. So you can bake into our equity component there and you are correct on phase 3 of City of Dreams that will be funded by cash – internally generated cash flow.

Simon Cheung – Goldman Sachs

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

Geoffrey Stuart Davis

We actually haven’t provided the CapEx budget for phase 3 given the size of this though, given the level of fit and finish at that project and it is 1.5 million square feet of GFA, 50% larger than Altira, you can work out that it’s going to be a significant number but we’re still finalizing the plan that we will be able to give a more detailed project outlined in due course some time perhaps next year.

Simon Cheung – Goldman Sachs

The second question is just looking at your mass market win rate in City of Dreams I saw some sequential decline like from Gemini percent down to 27.4%, on the other hand, saw quite a significant pickup on your swap handling -- handle volume and perhaps if you can share with us what's going on, should we be concerned about the slowdown or the decline in the mass market win rate?

Ted Chan

Simon, it’s Ted. In terms of the whole percentage, yes sequentially we dropped 1.6% from the second quarter. I think that’s within the range of the four percentage that we have quarterly and I think we give a guideline of 25% to 30% in terms of the whole percentage (inaudible), that’s not out of expectation. To the actual fact that, the third quarter actually you look at our drop in business volume, we actually grew more than 8% in business volume as a indicator for the business.

In terms of the slopes, also you’re referring to the drop in terms of revenue with the sequential growth in terms of the turnover, it’s actually due to of course in the slope world, you also see a range of different quotes. But it’s also affected by the mix of the VIP slot as well as the mass slot. So we have a higher VIP slot, of that we are using the whole percentage which is also normal in our major business.

Operator

With no further questions at this time, I would like to hand the conference back to the management for closing.

Lawrence Ho

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

Operator

Ladies and gentlemen, that does conclude our conference for today.

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