Aug 8, 2012
Executives
Geoffrey Stuart Davis – Chief Financial Officer Lawrence (Yau Lung) Ho – Executive Co-Chairman and Chief Executive Officer
Analyst
Anil J. Daswani – Citigroup Global Markets Asia Ltd.
David Bain – Stern Agee & Leach, Inc. Billy Ng – BofA Merrill Lynch Cameron McKnight – Wells Fargo Simon Cheung – Goldman Sachs (Asia) LLC Praveen K.
Choudhary – Morgan Stanley Asia Ltd.
Operator
Geoffrey Stuart Davis
[Call Starts Abruptly] everyone for joining us today for our second quarter 2012 earnings call. On the call with me today are Lawrence Ho, Ted Chan, Constance Hsu, and Ross Dunwoody.
Before I 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 (Yau Lung) Ho
Thanks Geoff. And thank you everyone for joining.
In the second quarter of 2012 we've reported EBITDA of US$204 million on approximately US$940 million of net revenue, delivering an EBITDA margin of approximately 22%. These results highlight the importance of our mass market segment and delivering a more stable earnings and cash flow stream.
At City of Dreams, our mass table games GGR grew 34% year-on-year, slightly ahead of the market-wide growth rate, despite the introduction of new supplying in Cotai. Our Rolling Chip segment continues to be impacted by our table optimization strategy.
This strategy has resulted in further table is being shifted from Altira to City of Dreams, as well as the movement of some tables from VIP to mass, during the second quarter of 2012. Whilst somewhat disruptive as it is happening, this initiative should set us up favorably going forward.
The majority of this table optimization strategy has been implemented, and we're optimistic that we should see a more efficient use of tables on a group-wide basis in the longer-term. Pleasingly, Altira's table yields have stabilized and have reached a more competitive level.
We now work towards ramping up those tables, which have been mobilized to alternative uses in order to drive future operating performance. We continue to proactively manage our table allocation to ensure we not only maximize near-term performance, but ensure that we have appropriate operational flexibility to take advantage of the changing landscape in Macau.
Notably, our performance in the Junket Rolling Chip segment on a volume basis was better than the estimated market-wide performance sequentially, despite the introduction of new supply. As another example of our commitment in driving our current portfolio of assets, we recently introduced a limited-run cabaret style show at City of Dreams.
This better utilizes our Club CUBIC space, and provides another exciting entertainment offering to further differentiate City of Dreams. Importantly for Melco Crown, the market-wide mass market table games segment continues to demonstrate strong year-over-year growth, expanding over 33% during the second quarter of 2012.
This once again reinforces our mass market focus strategy, particularly at the higher end of the market, which we believe will provide a more stable, loyal and profitable customer base for the foreseeable future. Visitation numbers from China continue to increase, with visitors from Chinese provinces and further abroad, such as Henan and Sichuan Province, delivering strong year-over-year growth, reflecting the broadening of the catchment area of Macau.
We believe Macau is perfectly positioned to take full advantage of the increase in infrastructure spend and development in the region, improving access to the expanding addressable markets, particularly throughout China. We remain fully confident in the future of Macau and believe its future success as well supported by the long-term growth and increasing consumerism in our core feeder market, China, as well as a progressive and stable regulatory environment, together with an exciting infrastructure and development footprint from Macau and the broader region.
We look forward to playing a key role in the development of Macau into the leading leisure and tourism destination in Asia. Now moving on to our exciting pipeline of future growth opportunities.
We recently received our revised formal land grant for Studio City. We are very grateful that the Macau Government has given us this unique opportunity to bring another world-class integrated resort to Macau, which we believe will further drive and broaden Macau's appeal as a world-class entertainment and leisure destination.
We have also received our permit from the Macau Government, which allows us to restart our construction work at Studio City, giving us the ability to expedite the development of this exciting project. Studio City will aim to focus on the mass market segment, and will have approximately 1,600 5-star and luxury hotel room, approximately 200,000 square feet of retail, numerous food and beverage outlets, a range of uniquely themed interactive attractions, a multi-purpose theater, as well as capacity for approximately 400 to 500 additional gaming tables.
As mentioned previously, the property's location is one of its key competitive advantages. Not only is Studio City directly adjacent to the increasingly important Lotus Bridge immigration center.
And it also has direct access to one of only three light rail casino stops in Cotai, and it enables to book in the North and the South of the Cotai strip. We also recently entered into a memorandum of agreement for the development and operation of an integrated casino resort in Manila.
This project represents an attractive opportunity to expand our footprint in Asia, allowing us to diversify and expand our sources of earnings and cash flow without impacting our ability to fully leverage our current portfolio of assets in Macau, or impact our ability to pursue either our strong pipeline with the development opportunities in Macau, or any other future regional opportunities. We look forward to keeping you updated on our progress in relation to both these important milestones for our company.
I would thank you again and back to Geoff.
Geoffrey Stuart Davis
Thanks, Lawrence. We reported adjusted EBITDA of $204 million in the second quarter of 2012, compared to approximately $216 million in the second quarter of 2011.
EBITDA margin in the second quarter of 2012 was approximately 22% compared to 23% in the same period last year. On a hold-adjusted basis, assuming we held that 2.85% across our entire Rolling Chip business, our second quarter EBITDA was essentially in line with our reported EBITDA, and up from approximately $185 million in the comparable period in 2011.
Despite a slightly higher than statistical blended VIP win rate of 2.8% across COD and Altira. The overall impact to EBITDA was de-minims due to an unfavorable win rate mix between our revenue sharing and rolling chip commission programs.
In other words, we experienced favorable win rates in revenue share, and unfavorable win rates in our turnover programs. The EBITDA contribution from our non-VIP segments continues to represent approximately 75% of hold-adjusted EBITDA City of Dreams, and approximately two-thirds of our hold-adjusted EBITDA on a group-wide basis.
Our net debt as of June 30, 2012, was approximately $530 million, and our net debt to shareholders equity was 15%. As we normally do, we'll give you some guidance on non-operating line items for the third 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 $23 million to $25 million.
That concludes our prepared remarks. Operator, back to you for the Q&A.
Operator
Thank you. (Operator Instructions) And your first question comes from the line of Anil Daswani of Citigroup.
Anil J. Daswani – Citigroup Global Markets Asia Ltd.
Hi, Jeff. A couple of questions from me.
First of all, the land grant that we all saw didn't actually include the wording that you were going to be approved to have a casino on site. Can you give us some comfort that you've actually got the approval to do that?
Lawrence (Yau Lung) Ho
Hi, Anil its Lawrence. I think the land grant does mention about the five star resort and hotel, and as you know, this site with the Studio City land, it's not a direct grant from the government to a concessionaire, similar to some of the other sites in Cotai.
There was some history that was associated with it. And also, this project is not wholly owned by concessionaire, and so I think that's why there's a bit of difference.
But going forward in terms of applying for gaming tables on the site, we are in the same boat as Win or Galaxy or SJM Cotai, because ultimately the DSSOPT, which is the Department of Public Works, is not the agency that's responsible for allowing gaming or not. It’s really lies with the DICJ, and also [Francis Ham's] Department.
And as we have disclosed earlier on, we have as recent as last December already submitted our application. And this was also a site back in 2006, 2007; we had already signed a casino management agreement which was approved by the government.
So again, we're very confident to have gaming as part of this exciting integrated resort, and I would like to re-emphasize that after the land grant stage, whether it's us or any of our competitors, we are going down the same route in terms of applying for gaming or gaming table.
Anil J. Daswani – Citigroup Global Markets Asia Ltd.
Fantastic, it’s clearly the mass market has been where your strength has been, and you guys held incredibly well in the second quarter. Can we keep guidance for hold rate in your mass properties around those levels, or was this an abnormally high quarter?
Ying Tat Chan
Hi, Anil, Ted here.
Anil J. Daswani – Citigroup Global Markets Asia Ltd.
Hi, Ted.
Ying Tat Chan
In our guidelines, we said 25% to 30%, and we're quite confident in COD, we will be very, very high end of that range going forward, because of our enhancement and all the efficiency on the floor during the last few quarters.
Anil J. Daswani – Citigroup Global Markets Asia Ltd.
Okay. Two other quick follow-ups.
Well, clearly, given how strong mass is has this rekindled any plans for the fifth tower at COD, or the third phase there?
Ying Tat Chan
That's an intelligent question, Anil. I think we are short of rooms at City of Dreams, and Tower 5 has always been in the plan, and given our strength in mass and also the fact that we do need more rooms going forward, we're at 90% plus occupancy every single day of the year, not just on weekends.
We have completed all of our conceptual designs for that tower. And I can assure you, when it's built it's going to be the ultimate art piece in Macau.
We hope to, again, it's subject to the government processes because this started as a apartment hotel in the early days, so we do need to have the need to have the land regazetted, but as soon as that is done, we would like to begin construction of that as early as next year.
Anil J. Daswani – Citigroup Global Markets Asia Ltd.
Okay. The last one from me on the Philippines.
Clearly, a very complicated set of economics there, but roughly speaking, does it all boil down to roughly 50/50?
Lawrence (Yau Lung) Ho
Anil, its Lawrence again. I know we still have I think around 60 days when we complete our formal agreements with our future Philippines market partner, so I can't I think there is, we can't disclose it, but I think again, you're very intelligent.
Anil J. Daswani – Citigroup Global Markets Asia Ltd.
Thanks so much Lawrence.
Operator
Your next question comes from the line of David Bain of Sterne Agee.
David Bain – Stern Agee & Leach, Inc.
Hey, great, thanks guys. Congratulations on the construction permit.
Geoff, can we assume that MSC financing now comes in short order? And can you give us any kind of color on what kind of deal we can expect and kind of ranges in terms of pricing?
Geoffrey Stuart Davis
I think at this point, we're still in discussions with our bank group, and it would really be premature to give any details on what the mechanics of that transaction are looking like. But as a project loan, you can expect it to be at a higher margin, then for example, just a corporate facility, which is now at a margin of 175 basis points.
But beyond that, I think would be premature to go into any detail.
David Bain – Stern Agee & Leach, Inc.
And do you think though that it can get done some time in the third quarter?
Geoffrey Stuart Davis
We're looking for completion of the financing by the end of this year.
David Bain – Stern Agee & Leach, Inc.
Okay. And then with regards to the Philippines, can you guys speak to some of the synergies with the SM Group for the local market there?
And also, just given you’re the only Macau concessionaire in the Philippines, can you give us some idea how you can leverage your database or direct VIP or otherwise to potentially open that market up from Mainland China?
Lawrence (Yau Lung) Ho
Hi, Davis. It’s Lawrence here.
David Bain – Stern Agee & Leach, Inc.
Hi, Lawrence.
Lawrence (Yau Lung) Ho
Excuse me. SM is, I think the SM group of companies combine market capitalizations over US$10 billion, and I think they are the strongest probably conglomerate in the entire Philippines.
And furthermore, their main focus is really on the consumer sectors. So I think they are Mall of Asia is famous throughout Asia and we were told that their database at Mall of Asia is over half a billion, 5 million, 5 million, it’s over 5 million.
David Bain – Stern Agee & Leach, Inc.
Okay.
Lawrence (Yau Lung) Ho
I wish half a billion like Facebook level. No, but over 5 million and they will allow us to use that database because we are equal partners in this sector.
So we're very enthusiastic about the market developing. And I think at first Philippians would be a huge local market, I think anybody who’s been to the Philippines can see that consumerism is fantastic there.
But with regards to we will look to try to create more synergy and monetize our existing whether it’s a VIP database or premium mass database that we have in Macau, let’s face it, I think the VIPs that will be going to the Philippines will be very different from the VIPs that come to Macau, but I think that’s the beauty of the synergy. So I think as infrastructure is more developed in the Philippines, and with these resorts opening up similar to what the integrated resorts have done to Singapore, we are very confident that the Philippines will be a very fast growing market.
David Bain – Stern Agee & Leach, Inc.
Okay. Great and then, Lawrence just last one on any potential long-term opportunity in Matsu?
Any color as to what MPEL’s vision for Taiwan may be?
Lawrence (Yau Lung) Ho
Yes, for the last few years, we have continued to do a lot of research and field work and lobbying work in both Taiwan and Japan. We are very encouraged by the passing of the referendum in Matsu.
So we’re studying. We're waiting for the next move from the Central Taiwanese Government and at the same time, we are looking at those places with keen interest.
David Bain – Stern Agee & Leach, Inc.
Okay, great. Thanks guys.
Lawrence (Yau Lung) Ho
Thanks
Operator
Your next question comes from the line of Billy Ng of BAML.
Billy Ng – BofA Merrill Lynch
Hi, good evening. Lawrence or Ted, can you give us some color about the condition of the premium mass market?
I guess that’s the first time we see you have a sequential job on the non-rolling volume. So do you attribute that to increased competition, or do you think COD has been doing so great and it’s pretty close to the full potential of the property?
How do you see that premium mass market right now?
Ying Tat Chan
Hi, Billy. It’s Ted.
Let me respond to your question. First of all, I think we’re very happy that the COD mass performance in the first quarter is exceptional where we grew more than 60% in the first quarter, of course give up a very high base.
Secondly, we are also very happy that we maintained this very high level of revenue level in the second quarter. If you look at the breakdown of the GGR in COD mass, we are still holding a very strong premium end of that mass market.
I think on the new supply in the second quarter in Cotai, we do experience somewhat our lower, mid to lower end customer moving across the Cotai area. But the good news is starting from third quarter July, we see a lot of this customer coming back and then we have a fantastic July rebound in that segment.
Billy Ng – BofA Merrill Lynch
Thanks. And do you see increased pressure of comps and incentives for the premium mass or it’s been stabilized?
Ying Tat Chan
As I mentioned earlier, I think overall the market, we see some more promotional activities in Macau, and I think the mid to lower end of the markets more sensitive to the promotional activities i.e., we see some of the changes when there are other properties in tandem doing these promotional activities. So I think we are still maintaining our premium position in COD and we’re very positive on the long-term development in that particular segment.
Billy Ng – BofA Merrill Lynch
Thanks.
Operator
Next question comes from the line of Cameron McKnight of Wells Fargo.
Cameron McKnight – Wells Fargo
Thanks. Good evening.
How are you?
Lawrence (Yau Lung) Ho
Hi, Cameron.
Cameron McKnight – Wells Fargo
Question for you, first, Lawrence. Could you talk to us about general trends that you’re seeing?
And specifically it seems that the recent slowdown we’ve seen in VIP has really caught everyone by surprise, I was only as recently as three months ago that the people were talking about stabilization in the market and relatively stable trends. As you sit here today, how are you feeling about the outlook, particularly if you look at trends in China?
Lawrence (Yau Lung) Ho
Well I think, Cameron, it really doesn’t surprise us, because we’ve always had, even at the beginning of the year, we had predicted that the market would grow at around 15% throughout the year. So inevitably, it was going to moderate.
And especially in this year, if you look at the macro environment in China and around the world, the environment isn't that great and even China is not as bullish as it once was. But having said that, this year is really a transitional year in China when the new leadership and the new government takes over in October.
So I think by the end of this year and early next year that should probably set us, obviously subject to nothing happening with the euro and other world economies. I think the Chinese economy will rebound starting next year.
So it really hasn’t called us by surprise. I think that’s why this year we’ve really spent our time and effort into improving the product of our VIP knowing that we’ve been, there has been disruption.
Inevitably when you renovate a VIP room, you will disrupt the business there. We have to again close off sections of it.
And I think that’s why on top of the general market trends, you are seeing some that slowdown in terms of some of our VIP business. But again, we are building for the future.
Our proposition is that we are the premium property in the highest end property on Cotai, and we’ll continue to do that.
Cameron McKnight – Wells Fargo
Great. Thanks Lawrence.
And turning to Altira, it looks as though OpEx is relatively stable at that property. Have you reached with VIP volumes in decline at that property, presumably due to higher comps elsewhere and greater competition in the market?
Have you reached a point at which you can’t cut any further costs there, or your ability to cut costs is limited?
Ying Tat Chan
This is Ted, it is a great question. I think starting from early this year, we decided that the allocation of VIP tables in Altira should be shifting more to COD to capture any future opportunity on Cotai area.
On the costs side, I think we maintained a very, very lean operation teams in Altira there for the last two or three years time. So I guess it is more about the productivity of the tables that we are working on Altira.
Recently, I think the productivity level at the moment is actually improved to almost the highest time in the last two years time in the last two months. So we are quite happy about this transition.
Cameron McKnight – Wells Fargo
Okay, great. And then just one final one, if I may.
Do you think Altira could get to a point where the tables are more valuable for you over City of Dreams versus at Altira? Therefore, you might be in a situation where you need to decide whether to keep the property open or not?
Assuming that VIP remains stagnant or continues to decline through the balance of the year?
Lawrence (Yau Lung) Ho
Yes, I think we lost Altira with the property is very, very premium. And as I said earlier, the job for us is really to improve the productivity.
At this moment, I think the productivity level of Altira VIP is quite close to COD level over these months of hard work by the team, and I think we will hold it in different view in terms of that VIP table for this moment. In respect of the mass table, I think Altira is one of the top five most productive mass gaming tables in town, so we are very happy with the results.
Cameron McKnight – Wells Fargo
Great, thanks very much guys.
Operator
Your next question comes from the line of Simon Cheung of Goldman Sachs.
Simon Cheung – Goldman Sachs (Asia) LLC
Hi guys. Two questions, again on Altira, I noticed that you have obviously shifted some tables to COD.
Can you confirm that the tables shift is largely done and we shouldn’t expect more to come? And secondly, I think again on Altira, we saw that the EBITDA now is running about $26 million per quarter, and if I look back a year ago you were running well above $70 million.
Although, obviously you said that table productivity is now very much in line with what you have seen in? And lastly, how should we think about the ROI going forward?
Because at the moment, I think that you’re running at 20% but in the old days you were able to run at about 60%. Thanks.
Ying Tat Chan
Great question. This was Ted.
First, I think we can confirm that the main job in terms of the allocation of VIP tables on Altira to COD was mainly done, and you will see maybe some moderate changes in the next few months, but I think this is done at this moment. In terms of the run rate, I think we are very happy with the last two months’ performance which is not reflected in the second quarter’s EBITDA number.
So with the current run rate, I think we will see some continuous improvement in the EBITDA generated by this property going forward.
Geoffrey Stuart Davis
This is Geoff. Just to add when we look at those look at those quarters when we were reporting in the $70 million range plus, that was with very favorable hold percentage over 3%, as well as a favorable mix of business.
So you have to take that into consideration when we think of run rate levels of EBITDA performance at that property.
Simon Cheung – Goldman Sachs (Asia) LLC
So can I follow-up you know based on what you guys mentioned, the higher efficiency in the last two months, what sort of EBITDA are we talking about per quarter, 40, 50, how should we think about it?
Geoffrey Stuart Davis
We're staying away from providing forward earnings guidance. I think we're going to stick with that policy.
Simon Cheung – Goldman Sachs (Asia) LLC
Okay, okay, that’s fine. One follow-up questions is on your table breakdown.
Can you perhaps give us your VIP and mass market table breakdown, if there is any?
Geoffrey Stuart Davis
Yes, in the end of second quarter, the number of VIP tables in MC aggregated was 354, and mass is 271.
Simon Cheung – Goldman Sachs (Asia) LLC
May I also ask how many has been shifted to mass market over may be perhaps last six months?
Geoffrey Stuart Davis
In the blended basis, we shift probably about less than 10 tables.
Simon Cheung – Goldman Sachs (Asia) LLC
Okay, great, thanks a lot.
Geoffrey Stuart Davis
Thank you.
Operator
Your next question comes from the line of Praveen Choudhary of Morgan Stanley.
Praveen K. Choudhary – Morgan Stanley Asia Ltd.
Thanks very much. Good evening guys.
I have two questions. The first question is related to the promotional allowance in this quarter, which has gone from $24 million to $32 million.
Even though we are seeing that year-over-year you’re rolling chip volume is down. So can you tell us what’s the reason behind that?
Geoffrey Stuart Davis
Praveen, I think if you look on a sequential basis, it’s more consistent, but really, what that reflects is taking a more aggressive approach to comping rooms, in other words, expanding our casino block within our hotels. And that’s what’s resulting in higher promotional allowance.
Praveen K. Choudhary – Morgan Stanley Asia Ltd.
Okay. You think that that’s not the reason for a little bit lower EBITDA that you’re reporting this time around versus expectation?
Lawrence (Yau Lung) Ho
No. If you look at it holistically with the incremental business, putting casino customers into those rooms, it’s actually a net positive.
Praveen K. Choudhary – Morgan Stanley Asia Ltd.
Okay. The second question I had about the minority interest that you probably mentioned, that $4 million related to Studio City.
Can you give a little bit more detail, does it mean that you have included $10 million on an overall basis on your OpEx, and is it above the EBITDA line of $204 million and then you write it back $4 million or 40%, which is not your portion? Just wondered.
And why is that number and why is it not included in the CapEx if that’s – if I understand, what exactly was this for?
Geoffrey Stuart Davis
Well, it’s the 40% that represents the minority shareholder’s interest in that standalone P&L for Studio City.
Praveen K. Choudhary – Morgan Stanley Asia Ltd.
Yeah, I understand that, but does it you have included $10 million into the overall and before EBITDA number for Studio City?
Geoffrey Stuart Davis
There is $10 million of total expense embedded in our P&L, and then pulling the 40% out through the minority interest line represents new Cotai stake in the property.
Praveen K. Choudhary – Morgan Stanley Asia Ltd.
Yeah, but is that $10 million before your $204 million EBITDA line, and was it not there in Q1 number? That’s why my Q2 versus Q1 is in figure?
That’s the question.
Geoffrey Stuart Davis
Not sure exactly how you’re getting to your number, but it’s a combination of both above the line and below the line, so its 40% of the net.
Praveen K. Choudhary – Morgan Stanley Asia Ltd.
No, I understand that, I’m saying (inaudible) forget about $4 million a minute, let’s talk about $10 million that you put in your P&L up to PAT level. Is that $10 million before EBITDA of $204 million or is it below EBITDA of $204 million?
That’s the first question? And the second question is what was that $10 million in Q1 of 2012?
Geoffrey Stuart Davis
I don’t have the first quarter P&L in front of me. But again, it is a combination of both above the line and below the line expenses.
Praveen K. Choudhary – Morgan Stanley Asia Ltd.
Okay. Very well.
Thank you very much.
Lawrence (Yau Lung) Ho
Thanks, Praveen.
Operator
At this time I would like to turn the call back over to management for closing remarks.
Federico Pignatelli
All right everyone. Well thank you for joining us and we look forward to getting together with you next quarter.