Melco Resorts & Entertainment LTD Q2 FY2020 Earnings Call

Ladies and gentlemen, thank you for participating in the Second Quarter 2020 Earnings Conference Call of Melco Resorts & Entertainment 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 Mr. Richard Huang, Director of Investor Relations of Melco Resorts & Entertainment Limited. Thank you. Please go ahead, sir.

Thank you, operator. And thank you all for joining us today for our second quarter 2020 earnings call. On the call today are Lawrence Ho; Geoff Davis; Evan Winkler; and our Property Presidents in Macau and Manila. Before we get started, please note that today’s discussion may contain forward-looking statements made under the safe harbor provision of federal securities law. Our actual results could differ from anticipated results. I’ll now turn the call over to Lawrence.

Thank you, Richard. And hello, everyone. I hope all of you and your loved ones are safe and sound during these challenging times. I would like to once again express my sincere gratitude to the Macau Chief Executive for his proactive response to contain the spread of the virus and for his prudent, cautious approach to reopening the economy. I'm glad also to report that Macau was largely unharmed by Typhoon Higos. Our properties remained open with no loss of power. However, some parts of the city were affected. Within 24 hours, Melco was the first to reach out to the community in conjunction with the government to provide aid where needed. Moving on to our results. During the second quarter, our operating and financial performance was severely impacted by COVID-19. To mitigate this impact, we have been quick to formulate strategies to preserve liquidity and improve the stated health of our balance sheet. Recently, we further optimized our capital structure and increased our liquidity on hand with a series of capital market transactions, which Geoff will go through in detail later. Over the past months, we've been excited to see some early signs of normalization in our integrated resort operations. In the middle of June, operations at Cyprus Casinos partially resumed. Beginning in the middle of July, we began to see a gradual relaxation of travel restrictions between China and Macau, with travelers from Macau permitted to enter nine cities in Guangdong without being subject to a 14-day mandatory quarantine. That loosening of travel restrictions was extended to the entire Guangdong province on July 29. On August 12, Chinese authorities resumed issuance of IVS and tour visas for Zhuhai residents. We look forward to the resumption of IVS visa issuance expanding to cover Guangdong on August 26 and to cover the entire nation on September 23. It will likely take a week or two for the logistics to be worked out, so we expect benefits from these relaxations to start flowing through from September onwards. While we're eager to resume our integrated resort operations, ensuring the safety and well-being of our colleagues, customers, and the communities in which we operate remains our highest priority. We continue to expect a faster rebound and faster growth in the premium gaming segment, which benefits Melco’s portfolio of luxury integrated resorts. It has also enabled Melco to meaningfully outperform year-to-date in 2020, setting us up nicely for the expected recovery in the second half of the year. To strengthen our leadership in premium mass, we have made good use of the past few months to accelerate various upgrade projects at City of Dreams, with the fully renovated new hotel tower currently anticipated to reopen by year-end. Despite COVID-19, Melco remains committed to its global development program. Our next major project in Macau will be Studio City Phase 2. Upon completion, the Phase 2 expansion will increase Studio City’s hotel room inventory by approximately 60%, with two new hotel towers offering approximately 900 luxury hotel rooms and suites. In addition to an expansion of the gaming space, Phase 2 will also offer new non-gaming attractions that are highly complementary to those in Phase 1, including a cineplex, one of the world’s largest indoor/outdoor water parks, fine dining restaurants, and state-of-the-art MICE space. In Cyprus, we are developing City of Dreams Mediterranean. Construction restarted on May 6th. Upon completion, COD Mediterranean will be Europe’s largest integrated resort offering over 100 gaming tables, 1,000 slot machines, and 500 hotel rooms. Turning to Japan, we continue to believe that Japan represents the best new integrated resort development opportunity outside of Macau, and we are unwavering in our commitment to bring the world's leading IR to Japan. We know that a number of our global competitors have abandoned their efforts in Japan. I'm pleased to differentiate Melco and demonstrate our long-term commitment to Japan. When I entered this race more than a decade ago, I knew it was a marathon and not a sprint. Frankly, while COVID has certainly impacted development efforts in the near term, based on all the news flow out of the medical community, COVID will be well in the rearview mirror when IRs actually open in Japan in the back half of this decade. Our global team continues to work and plan remotely, and our local Japan team continues to diligently work and meet with key stakeholders to discuss and refine our integrated resort development plan. Hopefully, COVID permitting, I will be able to visit Japan again soon in person. Last, I want to reiterate our bullishness on Melco's medium and long-term growth prospects. Macau remains the most attractive integrated resort market in the world, benefiting from the expanding Chinese middle class and infrastructure development in the Greater Bay Area, including the long-awaited Hengqin Port checkpoint and the extended train line from Zhuhai, which commenced operations just a few days ago. We have one of the most exciting global development pipelines that will allow us to reap the benefits of favorable market dynamics. Our recent capital market transactions have also strengthened our balance sheet, enabling us to overcome near-term challenges while investing for the future. With that, I'll turn to Geoff to go through some of the numbers.

Thanks, Lawrence. In the second quarter of 2020, we reported negative group wide property EBITDA of approximately $156 million, while luck-adjusted EBITDA came in at negative $178 million. A favorable VIP win rate positively affected EBITDA at COD Macau, Altira, and COD Manila by approximately $21 million, $3 million, and $1 million, respectively. At Studio City, EBITDA was negatively affected by an unfavorable VIP win rate by approximately $3 million. On a consolidated basis, overall results were positively impacted by approximately $22 million. In addition to the VIP win rate fluctuation, our performance was also affected by our bad debt provision. During the second quarter of 2020, we incurred a bad debt charge of approximately $22 million, compared to a bad debt reversal of approximately $0.5 million in the second quarter of 2019. On a year-over-year basis, the change in the bad debt provision negatively affected EBITDA by approximately $23 million. On our first quarter conference call, we discussed how we have reduced our daily fixed operating expense run rate in Macau from approximately $3 million per day before the emergence of COVID-19 to approximately $2.2 million per day in April. With further cost reduction efforts, our second quarter daily fixed operating expense run rate for our Macau operations came in at approximately $1.9 million per day, which was approximately 12% lower than April. In July, we have further reduced our run rate to approximately $1.7 million per day, which represents an over 40% reduction from pre-COVID levels. With successful cost controls, we expect our Macau operations to achieve breakeven adjusted property EBITDA upon reaching approximately 30% to 35% of our historical gross gaming revenue levels. To bolster our balance sheet, in April, we entered into a new senior facilities agreement and sold the shares we held in Crown. In May, the Board suspended the Company's quarterly dividend program. To optimize our capital structure, Studio City in July issued $500 million of 6% senior notes due 2025 and $500 million of 6.5% senior notes due 2028, the proceeds of which were used to retire $850 million of 2021 senior notes and to partially fund the Phase 2 expansion of Studio City. In August, Studio City completed a series of private share placements, raising approximately $500 million of proceeds to strengthen the balance sheet. Additionally, Melco recently issued $500 million of 5.75% senior notes due 2028, the proceeds of which were used to repay the drawn amount of approximately $350 million from the revolver and for general corporate purposes. Taking advantage of favorable market conditions, Melco subsequently tapped the 2028 notes for another $350 million, which brings a blended average yield for the entire 2028 notes offering to 5.68%. These transactions significantly increased Melco's liquidity while meaningfully improving Studio City's ability to fund its Phase 2 expansion. They also push out Studio City's next material debt maturity to 2024 and Melco's to 2025. As of the end of June, we had approximately $1.2 billion of cash on hand. Pro forma for the aforementioned transactions, our cash balance would have been approximately $2 billion, which combined with our undrawn revolver facilities in Macau and Manila of approximately $2 billion implies pro forma available liquidity of approximately $4 billion as of the end of June. To provide more clarity regarding our capital structure within our wholly-owned group, we had cash of approximately $670 million and gross debt of approximately $3.4 billion at the end of the second quarter of 2020, excluding Studio City, the Philippines, and Cyprus. As we normally do, we’ll give you some guidance on non-operating line items for the upcoming quarter. Total depreciation and amortization expense is expected to be approximately $150 million to $155 million. Corporate expense is expected to come in at approximately $20 million to $22 million, and consolidated net interest expense is expected to be approximately $94 million to $98 million, which includes finance lease interest of $10 million relating to City of Dreams Manila and $2 million of capitalized interest. That concludes our prepared remarks. Operator, back to you for the Q&A.

We have the first question from Joe Greff at JP Morgan. Please proceed.

I have two quick questions. Lawrence, you mentioned that the premium segments are experiencing the fastest rebound. Can we discuss the VIP segment for a moment? Are you planning to focus on that more compared to the past? Are you considering more direct VIP engagement and using your own capital? Can you provide insight into the financial positions and liquidity of your key partners? Should you and others in the market be concerned about this potentially being a constraint?

Hi, Joe. I’ll address the first part of your question, and then David Sisk and Geoff Davis can provide additional details. Melco has consistently focused on and performed well in the premium mass and direct VIP segments. We believe these segments will play a significant role in the recovery. However, there are ongoing concerns regarding the junkets and their stability. I’ll hand it over to David and Geoff for further insights.

Sure. Hey Joe, it’s David. When we look at the junkets and look at our premium direct play, we're really not seeing anything out there that gives us a lot of concerns. We do spend a lot of time trying to understand from a credit standpoint and the cash repayments to ensure that we feel pretty comfortable with what the junkets and the credit that we give them. But so far, we've seen nothing that gives us any concern. We've done very well as you know, because of the assets that we’ve built. We've got good partnerships with our junkets, and we also have really good partnerships with our players and the products that we’ve developed. Certainly, on the renovations that we've done over the last couple of years and with Morpheus opening up, we have super products that are very attractive to the players and to the junkets. So, we always think we get more than our fair share with that. We think we've got good relationships, and we're not concerned about credit at this point. We've seen nothing out there on the market. We're cautious when we do extend credit. So, going forward, I think as soon as the market actually receives the IVS and some of the other things come together, we believe we have a pretty good business model. We’re happy with it.

Great. Your last comment leads to my next question about the resumption of issuing IVS visas. I'm wondering about the experience at Zhuhai and any potential visitation from the market. Can you provide any recent insights or confirm what you've observed? Regarding the September 3rd resumption for the rest of the country, do you expect any bottlenecks or slowdowns compared to the past? I know Lawrence mentioned that we might see benefits from the visa issuance within one or two weeks. Is that timeframe sufficient to witness a significant increase in visitation for the Golden Week holidays? Thank you.

So, again, why don't I hand it over later on to David? But, as we talked about, we believe that the processing time is going to be around 7 to 10 days. Thus, in a few days, we might start seeing something on the Zhuhai resumption, but the key will really be Guangdong. In any case, with so much uncertainty in the world, we certainly see medium to long-term positives, considering that Macau is probably the safest place on earth without a single COVID case for quite a few months now and also the lack of travel options and destinations for mainland Chinese guests. So, I think those are medium to long-term positives. Regarding the short-term, it will be a gradual recovery. It’s not going to be a V-shaped recovery because, at the end of the day, people will be traveling outside the country for the very first time. So, I guess, David, do you want to fill in on what you are seeing on the ground?

Sure. Yes. So, there are essentially two processes when people go to get the visa application for the IVS. One is a manual process, and the other is more automated. Unfortunately, the automated process is turned off. Effectively, a person who wants to come to Macau has to make an appointment. It takes about 7 to 10 days to process. There is a bit of a lag as they go through there, and they've also got to get a COVID test before they can come across the border. You asked about the testing. We've expanded the testing in Macau, and there are plenty of good sites in China. I don't anticipate that being a problem. So, like Lawrence, I think there's going to be a lag. As we go from Zhuhai to Guangzhou, I don't think there's anything out there that we know or that we've seen that suggests Guangzhou will likely have the same deliberate process that was instituted in Zhuhai. As we get closer to September 23rd for the rest of China, I believe it will probably be a similar process. As Lawrence mentioned, we haven't had a local case in over 144 days here in Macau. I think, within the China bubble we're in, we're in a good place. However, I think China will continue to be cautious, much like Macau. Short term, we've had a pretty bumpy road. But I think as we head into the mid-term and the long-term, we think there’s a lot of pent-up demand out there for our customers. I believe as we begin to see an increase in visitation, we will start to see a smoother road on the horizon.

Thank you. We have the next question from the line of Praveen Choudhary from Morgan Stanley. Please go ahead.

Thanks very much. Thanks for taking my call. I have two questions. The first one is related to the OpEx number. So, congratulations on getting OpEx down significantly. I was wondering, when we get back to revenue levels of, let's say, 50%, whether it's fourth quarter or next year’s first quarter, what would that OpEx be? Because it must be going up. The second part of the same question is what happens when we get back to 2019 levels, so 100% back to revenue or let's say 2Q, 3Q 2021? The second question is related to visitation. If you look at the last 4 or 5 weeks of tourist visitation, we used to be bottoming at 300 or 500 people a day; now, we are tracking around 8,000 visitors a day, clearly not picking up the IVS yet. But, are you still tracking down 95%? We haven't seen any significant move despite the increase in visitation. Could you talk about what kind of visitation these numbers represent before IVS, which is currently not helping revenue? Thanks very much.

Maybe, Geoff, if you can take the first question; and David, if you can take the second one?

Sure. On the first question, Praveen, on our last call, I indicated that about 75% of our cost reduction was volume related, and about 25% was through management initiatives. That's closer to 50-50 now. Of course, the quantum has increased, but the percentage is now shifted to something closer to 50-50. Of that total amount, I would conservatively say that 10% to 15% of those savings altogether, I would characterize as permanent savings. For the volume-related savings, those would come back fairly uniformly as our operations start to recover.

Hi, Praveen. It's David. Regarding visitation, even though you've seen the visitation improve, we really haven't seen that in the properties yet. While the visitation is certainly better, it’s still quite light, and we're coming off an incredibly low number. There are many times when you walk through the casinos, and you notice less than 20 people in the casino. Starting from such a low base means that while we’re 95%, 96% down from where we were, we feel pretty good about our properties and the way we’ve built them and our players and customers. We skew again much more towards premium mass; we are not a mass-mass type of place, so we don't necessarily need those larger volumes that some of the other concessionaires may depend on. We're very premium mass focused with the product we have. Our efforts are directed towards getting our premium players and our mass plus players back into our properties. We believe we can achieve that over the next few months here.

Yes. Thanks very much. I appreciated the answer. And good job on the cost reduction. Hopefully, things improve from here.

Thank you. We have our next question from the line of Edward Engel from Macquarie. Please go ahead.

Hi. Thank you for taking my question. I know it might be early, but I was just wondering if you have evidenced conversations with your customers or even forward room bookings, is there any evidence that your premium mass and VIP, I guess direct VIP customers are interested in returning to Macau by October?

Lawrence, do you mind if I take that one?

Evan.

Okay. We've been talking to our customers, and one of the things we've done is to maintain a really strong relationship with them. Our marketing team is constantly reaching out, making sure that if they need masks or any type of sanitizing implements or whatever they may need, we're working hard to maintain those relationships with our players. We notice a lot of pent-up demand from our players. It’s more about them being able to get the visa to come across. It's also about making them feel as safe as we possibly can. One of the bigger issues we had initially was many players wanted to come, but they had to essentially quarantine for two weeks when returning to their home province. If you're a businessman trying to go back and forth, wanting to come for a week, it's not very effective for running your business in China. We do see things improving. We believe we will gradually get to where we want to be. But, again, it's going to take time here. There are positives on the horizon as we hear good things from our customers.

Great. Thank you for that. I also recall that earlier in the year, the DICJ was restricting you from using more than 80% of your tables. Is that restriction still in place?

No, the restriction now basically is you have to maintain a meter between the tables or seats. Not to overstress this point, but with the way our operations are set up, we're able to spread out more. We only want to keep players on a table; we're focused on velocity, and getting our premium players on a table so we can increase table productivity. For us, that setup allows us to keep more tables open, which gives us the ability to increase hand counts per hour. So, it's not a big deal from the standpoint of VIP, where you can open up as many tables as you want, as long as you maintain a level of separation.

Great. That's really helpful. Thank you.

Thank you. We have our next question from the line of Jared Shojaian from Wolfe Research. Please go ahead.

Thanks for taking my question. To revisit this point a little more, Lawrence, you discussed a gradual recovery, not a V-shaped recovery. If we look at travel inside of China right now, inter-China domestic travel, hotel occupancy is close to pre-COVID levels, and you've seen that improvement come back. Can you elaborate a bit more on the gradual recovery you expect in Macau? Is that more due to consumer hesitation to cross the border, or do you think China may limit visa issuances as a way to manage the virus?

Again, I believe it's going to be a combination of both factors you mentioned. Different places and regions within China are recovering differently. Additionally, in the medium to long term, as we mentioned earlier, the infrastructure improvements already in place will assist recovery. Recently, there have been further improvements, including the opening of the Hengqin Port checkpoint and the subway connection from Zhuhai to Hengqin. However, there will be bottlenecks created with these improvements. Although domestic travel has recovered nicely in China, Macau is part of China and is the first stop before exiting. Thus, recovery will take longer than we had hoped, regardless of the infrastructure in place.

Great. Thank you. Do you think China will limit visa issuances comparably to a year ago?

It's hard to tell right now. As David mentioned earlier, they've instituted a manual process, creating potential bottlenecks in the process. This gradual approach is understandable due to COVID. However, as the situation smoothens, and barring any new cases, I'm sure that will instill confidence in the Macau government and the Chinese side to proceed with openings comparable to previous levels.

Thank you very much for your time.

As there are no further questions, I would like to hand the call back to Mr. Richard for any closing remarks. Thank you.

All right. Thank you everyone for dialing in today. We look forward to speaking with you again next quarter.

Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you for participating. You may all disconnect. Thank you.