Melco Resorts & Entertainment LTD Q4 FY2022 Earnings Call

Ladies and gentlemen, thank you for participating in the Fourth Quarter 2022 Earnings Conference Call of Melco Resorts and Entertainment Limited. Today's conference is being recorded. I would now like to turn the call over to Ms. Jeanny Kim, Senior Vice President, Group Treasurer of Melco Resorts Entertainment Leader. Please go ahead.

Thank you, operator and thank you for joining us today for our fourth quarter 2022 earnings call. On the call are Lawrence Ho, Geoff Davis, Evan Winkler; and our Property Presidents in Macau, Manila and Cyprus. 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. In addition, we may discuss non-GAAP measures. A definition and reconciliation of each of these measures to the most comparable GAAP financial measures are included in the earnings release. Finally, please note that our supplementary earnings slides are posted on our Investor Relations website. With that, I'll turn the call over to Mr. Lawrence Ho.

Thank you, Jeanny. The performance of our Macau properties in 2023 has been highly encouraging so far. During the peak days of Chinese New Year this year, we saw EBITDA reach 6 million a day and our GGR exceeds what we recorded during Chinese New Year in 2019. Volume post Chinese New Year is holding up well and our daily average mass volume in February has been in line with January. This recent performance supports our continued belief in the return of pent-up demand and our view that Macau will continue to develop as a leading international destination for entertainment and leisure. I would like to express my appreciation to the Macau government for the award of a gaming concession to continue to operate in Macau for the next 10 years. We greatly appreciate the consideration given to our proposal and our investment proposition that we believe will continue to build on our existing strengths in entertainment and non-gaming attractions. We are excited to execute on our investment commitments to continue to bring best-in-class attractions and facilities to the Macau market. Construction of Studio City Phase 2 is complete. The first stage opening is targeted for the second quarter which will include one of the hotel towers along with the indoor water park, which is expected to be the largest of its kind in Asia. The remainder of Phase 2 is currently expected to open in the third quarter. In the Philippines, gaming volumes are very close to pre-pandemic levels and we expect continued growth with more international travel into the Philippines and increased junket activity. Cyprus has exceeded pre-pandemic volume and GGR and we are excited for the future as we target opening a City of Dreams Mediterranean in the second quarter of 2023. With that, I turn the call over to Geoff to go through some of the numbers.

Thanks, Lawrence. Our group-wide property EBITDA for the fourth quarter of 2022 was approximately negative $7 million. Our group-wide property EBITDA for the full year of 2022 was just above breakeven despite all of the challenges that we faced throughout the year due to COVID-related restrictions. This reflects the benefit of our diversified portfolio of integrated resorts. Luck-adjusted group-wide property EBITDA for the fourth quarter of 2022 came in at negative $4 million. A favorable VIP win rate positively affected EBITDA at City of Dreams Macau and Cyprus by close to $8 million, while an unfavorable win rate negatively impacted City of Dreams Manila by around $10 million. City of Dreams Manila was also impacted by approximately $6 million of one-off expenses. Our OpEx from Macau for the fourth quarter of 2022 came in at approximately $1.7 million per day, a slight increase from the $1.6 million per day in 3Q 2022 but in line with prior quarters. As you may recall, our OpEx per day in 3Q 2022 benefited from 2 weeks of casino closures. We continue to focus on cost control as visitation returns. Turning to our cash and liquidity. As of December 31, 2022, we had close to $2 billion of consolidated cash on hand. Melco, excluding its operations at Studio City, the Philippines and Cyprus, accounted for around $1.2 billion. Of this, approximately $176 million was restricted and includes cash collateral required for concession-related guarantees issued to the Macau government. Around $50 million of this restricted cash was released in January. We had fully drawn on the RCF by the end of the fourth quarter to fund the commitments under the gaming concession. In January, Melco International repaid the full $200 million it had drawn under an intercompany loan with Melco Resorts in 2022. Since December 31, 2022, we have reduced our leverage by approximately $500 million by repaying amounts drawn under our revolving credit facility. As we normally do, we will give you some guidance on non-operating line items for the upcoming first quarter of 2023. Total depreciation and amortization expense is expected to be approximately $125 million. Corporate expense is expected to come in at approximately $20 million. Consolidated net interest expense is expected to be approximately $100 million to $105 million which includes finance lease interest of $5 million to $10 million relating to City of Dreams Manila and around $15 million to $20 million of capitalized interest. That concludes our prepared remarks. Operator, back to you for the Q&A.

The first question, from George Choi from Citi.

First of all, congrats on the solid results. My first question is on Studio City. For Phase 2, would you please give us a sense on how many new staff you're going to hire for gaming and non-gaming operations there? My second question is probably for Lawrence. During the COVID years, was there anything that you regret that you have done, that you wish you could undo? Does that lesson you learned from COVID change anything in the operation strategy going forward? That's what I need.

George, it's Lawrence. First of all, thank you. Perhaps let me take the second question first and then I'll hand it off to David and Kevin for the first question. I guess my biggest regret during COVID was the fact that it lasted much longer than we could have imagined. In our worst nightmares, we never could have imagined COVID lasting 3 long years. At the same time, I think from a positive perspective, it has fundamentally changed the mindset of Melco. Thanks to the good work of Geoff, David and the entire senior management team, we are very cost-conscious and we eliminated all excesses during COVID. With the recovery now, we hope to have meaningful flow-through to the bottom line, and that is the focus of this company. We care about EBITDA and cash flow more than anything else. This culture was probably one of the earlier ones in terms of seeing COVID. Of course, we didn't expect it to be 3 years but we certainly thought it would be longer than the market had anticipated. I'm proud of the team for doing that. Regarding your first question about the headcount of Studio City, I will hand it off to David.

Great, George. We're very proud of the work we've done over the past few years in terms of our cost control and getting our operating leverage to a much better place. For Studio City Phase 2, we're looking to bring on about 1,000 people for the Epic tower, the indoor water park and for the W Tower. The interesting thing that Lawrence mentioned is that by the end of 2023, with all our properties in Macau open, we're going to have approximately 10% fewer FTEs compared to the end of the fourth quarter of 2019. We've done a great job of rethinking how we operate our business, and we're really happy with the leverage we expect to get and the flow-through that will reach the bottom line. So again, a good story for us moving forward.

The next question, from Joe Greff from JPMorgan.

Lawrence, some encouraging data points that you shared about the quarter-to-date. Can you talk about EBITDA per day in February versus January, and how much drop-off, presumably some drop-off there? How are you thinking about OpEx per day going forward?

Joe, if you look at February, it had 10% fewer days than January. The figures released today by the ICJ and the Macau government showed that February and January were flat. Given that the entire Chinese New Year period was in January this year, February was an amazing month. I just walked across our casino floor 5 minutes ago and it's buzzing; this year is definitely showing encouraging volume that defies seasonality. To talk about OpEx per day and additional details, maybe David can elaborate and Geoff can share his insights on OpEx per day.

Yes, I'll let Geoff deal with the numbers, but in terms of OpEx, look, we're very cost-conscious and focused on ensuring we maximize flow-through to the bottom line. As Lawrence mentioned, we've undergone a cultural change within our company. This change continues to yield dividends for us, and we expect to see flow-through in the coming year.

This is Geoff speaking. As the business rebounds and visitors return, we will maintain a strong focus on efficiency and cost containment, as we have throughout COVID. The $1.7 million per day that I mentioned previously is a solid number compared to the pre-return phase of the business. Over time, while we will focus on efficiency, we expect that number to increase as volume-related expenses return to the system. However, our mandate is to retain as many of those cost savings as possible and bank those as permanent savings moving forward.

That's helpful, Geoff. I have two quick clarifications. When you compare February mass performance to the pre-pandemic period, are we at 65% or 70% of those levels? Could you share some insights on our flow-through percentages moving forward with potential revenue increments?

Sure, Joe. Looking at where we are now compared to pre-COVID levels, I'd estimate around 20% of that is likely to be permanent. When we consider margin along with the mix shift towards mass and away from VIP, I anticipate at least 150 basis points of margin improvement due to these cost savings.

Joe, regarding your earlier question, we're about 70% of the volumes we expected back in the fourth quarter of 2019. It does slow a bit midweek, but it picks up on weekends. We've been quite pleased with the swift recovery and remain optimistic for the future.

The next question is from Luis Ricardo Vargas from Deutsche Bank.

Could you comment on whether there is a migration from VIP business into direct and premium mass components following what you observed during the Chinese New Year? Any insights on the VIP junket presence in the current market would be helpful.

Thanks for the question. I will hand it off to David, but we have maintained our status as the undisputed market leader in premium direct VIP business. We have seen that even during the Chinese New Year and quarter to date, the junket business seems to integrate into the premium direct sector rather than into the mass sector.

We made a concerted effort a few years ago in 2019 to transition some of that junket business to premium direct. Our team worked hard on this, which has paid dividends as we enter recovery in 2023. Additionally, our premium direct play has been returning from both Hong Kong and Southeast Asia, which continues even today. The efforts to migrate play from junkets to premium direct seem to have maintained our market leadership position.

Could you also comment on your capital expenditures in both the restricted group and outside of that for the remainder of 2023 and possibly into 2024, considering your commitments with the Macau authorities?

Sure. The expected spend in Cyprus for 2023 is approximately USD 60 million to USD 65 million. For the remainder of Studio City Phase 2, we estimate that to be between $75 million and $80 million, alongside maintenance costs of $150 million to $160 million.

The next question from Praveen Choudhary from Morgan Stanley.

Geoff, quick question. I'm focused on the mass business. You've added many rooms in Studio City Phase 2 but lost a few tables with the new concession. How does this interplay of rooms versus tables affect your market share compared to pre-COVID levels?

Praveen, this is Lawrence. We received the exact number of tables we requested as part of our investment proposal. We didn't lose tables. Before the new concession, we had 900 tables, but 300 to 400 of those tables were allocated to junkets. With the junket market diminishing, we felt it unnecessary to retain all those tables. Moreover, it's challenging to fit 900 mass tables within our properties. So we are satisfied with our current model and believe this will successfully re-position Studio City with the new indoor water park and revamped retail spaces to be more mass-focused.

That's very helpful. To summarize, we're seeing EBITDA-positive results, and the outlook is that there should not be an equity offering for debt reduction in the near future?

Praveen, our primary focus is indeed on deleveraging and paying off debt over the next 2 to 3 years. Given our current growth trajectory, I do not foresee the need for an equity offering on the horizon. Nevertheless, we always keep all options available.

Regarding your previous mention of mass business performance similar to January, can you confirm that we were operating around 60% to 70% of 2019 levels in February? I may have missed that.

Praveen, it's David. We are approximately at 70% of the volumes seen back in the fourth quarter of 2019. Midweek numbers do slow slightly, but weekends show a nice uptick. We're very optimistic as we look towards the future.

There are no further questions at this moment. I would hand back the conference to Ms. Jeanny Kim for closing remarks.

Thank you, operator and thank you, everyone, for participating in our call today. We look forward to speaking to you next quarter. Thank you.

This concludes the conference for today. Thank you for participating. You may all disconnect.