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MPEL 2Q2010 CONF CALL NOTES

“Good progress has been made over the past quarter at City of Dreams, as we continue to derive benefits from the growth in our patron database and as our various brand building initiatives build momentum.... [At CoD], we are seeing further modest improvement in our mass market business in the third quarter of this year and target a more marked step−up in mass market gaming volumes in the fourth quarter of this year on completion of the final planned phase of amenities at City of Dreams, the highlight of which will be the opening of The House of Dancing Water on September 17, 2010. Altira Macau continues to perform much better under the traditional VIP business model to which we transitioned late last year. Profitability continues to benefit from the commission cap implemented last December. A provision of US$9 million was taken in the reported quarter against an amount due from a former contracting party. This provision is considered to be non−recurring.”

- Lawrence Ho, chairman and CEO

 

 

Management Restructuring

"Melco Crown Entertainment is announcing the implementation, effective next month, of a new operating management structure organized along functional as opposed to dedicated property responsibilities, to be led by newly created Co−Chief Operating Officer positions.  Ted Chan, currently the President of Altira Macau, has been promoted to Co−COO, Gaming, overseeing gaming activities across the entire organization....He is currently recognized as one of the leading experts in the VIP customer segment in Macau. Nick Naples has joined Melco Crown Entertainment and has been named Co−COO, Operations. He will be responsible for all non−gaming operating activities across the entire company.... Mr. Naples most recently held the position of Consulting Executive Vice President at Sands China Ltd. and was previously the Chief Operating Officer at Macau Studio City. His prior experience includes positions with Harrah’s Entertainment, Four Seasons, Ritz−Carlton and Hyatt. Both Mr. Chan and Mr. Naples will report directly to Mr. Lawrence Ho."

Conference Call

  • CEO Ho: CoD will drive mass business going forward; optimistic on Cotai in 2011
  • Using normalized 2.8-3.0%-- EBITDA would have been 89MM
  • Operating cost structure similar to peers
  • Will maintain pricing discipline
  • Growth in mass market in July
  • Would like to gain market share in the 4Q
  • Pricing bank facility: LIBOR+250bps (reduce further by 100bps in coming quarters)
  • Blended cost of debt: 6% (low relative to peers)
  • Financial covenants: 4.5x Sr Bank Debt Max and the first calc takes place in 4Q2010 ) pushed out 1Q...minimum covenant
  • 3Q guidance:
    • D&A:  78MM
    • Net interest: 30MM
    • Pre-opening: 4MM

Q&A

  • Think that when Galaxy and 5 & 6 opens it will help CoD by shifting the center of activity to Cotai from the Penninsula
  • Doesn't think that China is bothered by the growth in GGR in China.  Hearing that visa applications are actually being processed even faster than before. Still early days of these loosening measure. Unclear if this is just a temporary summer thing
  • Japan:  they are interested and staying on top of the potential of opportunity there
  • Mix of RC/ Rev share - they are 80% RC and 20% revenue share. 30% Rev Share at CoD and 10% at Altira.  As an operator they plan to maintain flexible arrangements with their junkets
  • Would like to have 60% of their business coming from Mass in CoD eventually
  • Provided 50% against outstanding amounts with AMA. Think that they have taken the right provision there
  • Macau Studio City?
    • Other than the government sending them a letter to make progress - no change there now
  • Their goal over the next 12 months is just to ramp up CoD, however if Macau Studio City looks available then they are interested and would want to participate
  • Claim that it doesn't matter if hold at CoD or Altira is lower? Altira held 5-10% above their range and CoD was below their expected range
    • CoD higher % of Rev Share mutes hold impact a bit
    • CoD also has a higher fixed cost to operate though
  • What is Restricted cash on the balance sheet is for?
    • $130MM of proceeds from the bond deal was parked to pay down bank loan. $35MM will be paid at Dec 2010, $35MM in March 2011, and balance in June 2011
    • Have $50-60MM of restricted cash which are for making retention payments to construction obligations on CoD - will go away in Sept/Oct
  • Maintenance Capex?
    • $30-35MM
  • Thoughts on growth rates for the rest of the year as comps get much tougher?
    • Still thinks they will see in excess of 30% growth in 4Q
  • New ferry terminal should open in 2013 (Tak On)
  • Pricing of the water show? Why would it be more successful than Zia?
    • Zia was a show already in development at Cirque vs. House of Dancing Water was designed for them and the Chinese customer
    • $50-$200 US admission fee
  • Capex for theatre was $250MM which was already completed; show production itself $60MM. Expects that fully loaded daily cost of manning the theatre and running the show - $100K per day
  • Customer database: over 300,000 now for CoD and target is 450,000 by YE
    • June was a little softer than expected, they saw money diverted towards soccer betting, but 2H July is tracking 10% ahead of 2Q run rates
  • Why don't they shift more towards revenue sharing from RC program to stabilize margins?
    • Claim that their competitors mix some premium mass play into their VIP revenues to inflate hold rate
    • Think that revenue share is generally more expensive in the long term
    • Think that since their goal is to build their non-VIP business it's not a priority or issue for them and would rather offer their junkets flexibility
    • We think the real issue is that MPEL has a lot of more "grind" VIP business and smaller junkets operating at their properties. Smaller junkets can't financially withstand the volatility of Rev Share programs. Hence the mix at their properties
  • They aren't company that chases market share, they are more focused on EBITDA growth
  • We are very skeptical of Dancing Water growing their EBITDA and Mass business significantly... one analyst's 50% suggestion seems absurd - as a result of the opening of amenities
  • Occupancy rate at Grand Hyatt?
    • June was at 80% want to get to high 80's / 90's by 2H2010
  • % of direct VIP at CoD?
    • Just below 20%