Melco Resorts & Entertainment LTD Q1 FY2023 Earnings Call

Ladies and gentlemen, thank you for joining the First Quarter 2023 Earnings Conference Call of Melco Resorts & Entertainment Limited. Today's conference is being recorded. I would now like to introduce Ms. Jeanny Kim, Senior Vice President, Group Treasurer of Melco Resorts & Entertainment Limited. Please proceed.

Thank you, operator and thank you, everybody, for joining us today for our first quarter 2023 earnings call. On the call are Lawrence Ho, Geoff Davis, Evan Winkler and our 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 law. 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 now turn the call over to Mr. Lawrence Ho.

Thank you, Jeanny. We have seen a very encouraging start to the recovery in Macau during the first quarter of 2023 following the relaxation of border restrictions in early January and the recovery has progressed faster than we had anticipated. We continue to see improving momentum into April and solid performance during the May Golden Week. Mass drop and mass GGR during this closing week period exceeded the same period in 2019 and the turnover in our premium direct segment more than doubled. We launched some exciting new initiatives in April. We started Macau's first-ever series of residency concerts at Studio City and opened Studio City Phase 2 starting with the opening of Epic hotel tower and the indoor water park. We also plan to open the W Hotel tower in September which will round out our hotel portfolio in Macau. These initiatives reinforce our long-standing commitment to bringing unique world-class entertainment and hotel offerings to Macau. We have a diverse range of events that are being planned for the future that we believe will continue to drive international tourism and position Macau as a leading destination for leisure and entertainment. We've seen strength in the Philippines with a solid recovery underway. Adjusted property EBITDA at City of Dreams Manila for the first quarter of 2023 surpassed the first quarter of 2019. Performance in Cyprus has also been strong with both GGR and adjusted property EBITDA exceeding 2019 levels. The operational results of our temporary and satellite casinos have proven that there is strong demand in Cyprus. We're excited to open City of Dreams Mediterranean in mid-June and showcase our expertise with the first integrated resort of its kind in the region. With that, I turn the call over to Geoff to go through some of the numbers.

Thank you, Lawrence. Our group-wide adjusted property EBITDA for the first quarter of 2023 was approximately $191 million. Luck-adjusted group-wide property EBITDA for the first quarter of 2023 came in at $197 million, a favorable win rate positively affected City of Dreams Manila by around $14 million, while in Macau, City of Dreams and Studio City were negatively affected by close to $20 million due to unfavorable win rates. Property EBITDA at City of Dreams Macau and Studio City were also negatively affected by mass hold which was lower than our historical average. If we normalize for both mass and VIP, Macau property EBITDA for Q1 2023 would have been $192 million compared to our reported results of $121 million and the hold-adjusted property EBITDA margin would have been approximately 28.5%. We have been able to achieve significant cost savings over the last few years and this continues to be a focus as we hire staff to support the recovery. We estimate that we will have approximately 2,000 fewer full-time employees compared to 2019 once we are fully ramped up, including the FTEs needed for the opening of Epic, the W and the water park at Studio City. We remain disciplined on cost management and expect to retain at least 20% to 25% of the savings we achieved through the COVID period as permanent savings. Turning to our cash and liquidity. As of March 31, 2023, we had close to $1.5 billion of consolidated cash on hand. Melco, excluding its operations at Studio City, the Philippines and Cyprus accounted for around $750 million. Of this, approximately $125 million was restricted and includes cash collateral required for concession-related guarantees issued to the Macau government. Total debt declined by around $550 million during the first quarter of 2023 with the repayment of our revolving credit facility. As we normally do, we'll give you some guidance on non-operating line items for the upcoming second quarter of 2023. Total depreciation and amortization expense is expected to be approximately $140 million. The higher amount compared to previous guidance is due to the recognition of the new Macau gaming concession as an intangible asset on January 1 and the related amortization costs. Corporate expense is expected to come in at approximately $20 million and consolidated net interest expense is expected to be approximately $120 million to $125 million. This includes finance liability interest of around $5 million related to fees payable in relation to the Macau gaming concession, finance lease interest of $5 million to $10 million relating to City of Dreams Manila and around $5 million to $10 million of capitalized interest. That concludes our prepared remarks. Operator, back to you for the Q&A.

We have a question coming from George Choi with Citi.

On Studio City Phase 2, any more color on how it has been doing since the opening would be very much appreciated. And also, would you please remind us of your target ROIC on Phase 2, please?

George, it's Lawrence. So I think we've been very pleased with the opening of Studio City's Phase 2. Maybe I'll give David and Kevin a chance to talk about the details. But since we opened in early April which was around the same time as the start of the residency series, we have seen Studio City is much busier and we see the gaming results correspondingly as well. On the ROI question, maybe I'll hand it over to Geoff. But maybe David, Kevin want to add some color to what you guys have seen with Phase 2 so far.

Sure. We opened on April 6, starting with about 100 rooms and gradually increasing to 338 rooms and suites by the end of the month before Golden Week. We aimed for a soft opening to ensure our processes and services were well-aligned. Since then, we've received positive feedback from customers, highlighting a unique product differentiation for Studio City, striking a balance with the Epic tower, Morpheus, and Nuwa. This development is set to enhance our premium mass customer base at Studio City and leverage the attractions we have developed in recent years. Additionally, our residency series launched in April has gained significant popularity. Currently, we've seen volumes increase by about 40% from a drop standpoint due to the combined offerings of Epic and the indoor water park. We're pleased with these early results and anticipate even better outcomes moving forward.

And our next question comes from Praveen Choudhary.

Congratulations on a great set of results. May I ask about the mass market business that you're seeing in terms of premium versus base mass? Are you seeing the spending per capita to be better than 2019? Are you seeing more rated customers coming in? Any color on the kind of customers who are coming, that will be useful. And the second question is, since Golden Week is over, have you seen business tapering down as usual. Or has it been holding on very strong?

Thank you for the question, Praveen. This is Lawrence. I'll let David provide more detail. So far, the recovery has surpassed our expectations, occurring more quickly and effectively than we anticipated. However, it mainly reflects a premium mass-led recovery. In terms of visitation numbers across all of Macau, they remain below 2019 levels. Specifically for Golden Week, all our key volume metrics—mass, slots, and premium direct—have all surpassed 2019 figures. Consequently, spending per customer is also higher than before, which we are quite pleased about. As infrastructure improves and makes it easier for people to travel to Macau, given the current high travel costs, we believe that base mass will also increase. This gives us encouragement. David, would you like to add anything?

Sure, Praveen. I believe it is a premium mass-led recovery at this moment until the transportation infrastructure improves. I don't expect to see the base mass return just yet. However, the level of play from our premium mass customers is significantly higher per player compared to 2019. We are very pleased with the returning players and their performance, and we expect this trend to continue. At this point, we don't see any signs of a slowdown. Regarding Golden Week, we typically see a slight decline during major holiday periods before returning to normal patterns. After Golden Week, we anticipate a pick-up, and we are observing some of that in our reservations and demand for the rest of May. Therefore, we don’t expect this dip to last long; it’s simply part of the usual pattern.

Can you clarify what specific restrictions are preventing us from reaching 100% visitation, especially since mass is performing at much higher levels? I understand that air travel is not fully recovered yet. Do we expect visitation in Macau to return to 2019 levels? If so, can we anticipate mass revenue or EBITDA to exceed 120%, 130%, or even 140% of the 2019 figures, assuming that spending per capita continues to be high? I'm not looking for a precise projection, just your thoughts on the possibility of full visitation recovery in the next few quarters.

Well, Praveen, it's Lawrence. I believe the next critical period will be summer, around July and August. Currently, the airlift into Macau is at about 30%. At the moment, travelers from Guangdong province, which has easy access to Macau, are coming in. However, there’s definitely potential for growth from other provinces that require more flights. The recovery in the initial months has included a significant number of visitors from Hong Kong, which is higher than usual. I am optimistic that Macau will approach the visitation levels of the past within the next few months of this calendar year. Based on our current numbers for mass, slots, and premium direct, I expect that we will exceed the figures from 2019 sooner rather than later.

And our next question coming from the line of Angus Chan with UBS.

Lawrence, a couple of questions on the Q1 results. I guess very strong results that we've seen. I think it's above expectations. Can you talk about the phasing of that? I suppose March will be the strongest month and then April further improved just based on, I guess, industry gaming revenue numbers. And I guess, secondly, were you restricted in terms of capacity in Q1? And therefore, in Q2, then, we look for growth in capacity on a Q-on-Q basis.

Let me pass it on to David for more details. You're right that starting after Chinese New Year, we have observed increases each month. In fact, not just monthly, but we're noticing an uplift every weekend compared to the previous weekend. This is quite encouraging, and David can provide further insights on this.

Certainly. Angus, our primary challenge has been with the availability of hotel rooms. At the beginning of the first quarter, we were aiming to reach about 70% to 80% of our hotel room availability. This was largely due to the significant loss of staff during the pandemic, which delayed our ability to recruit and train new employees. The situation in Macau has been particularly difficult because of labor constraints and the procedures involved in reintroducing the workforce. This has created some limitations for us, which you may have heard mentioned in other discussions regarding various concession areas. The positive news is that we've managed to recover to approximately 70% availability, and we reached about 80% in April and May. During the Golden Week, we were up to 90%, and we expect to reach full availability of our hotels, including the new Epic with its 338 rooms and suites, by the end of June. We are progressing rapidly in this regard. The government has supported us in bringing our staff back and has been very cooperative. Our main focus now is to ensure all staff are properly trained, service levels meet our standards, and we can move forward effectively.

Got it. Can I just clarify? So you mentioned that you started at 70% in January and then ramping up to expecting 100% by end of June. Is that correct?

Yes. I'd say we were at 70% capacity through the first quarter, and we expect to reach full availability by the end of June.

And then, of course, Angus, it's Lawrence. We will open in September before Golden Week in October. That's going to be another 550-plus rooms for us.

We have 158 rooms in suites, which represents a shift in our target demographic towards a younger audience. This segment, particularly those aged 25 to 35, tends to have high spending habits. We are very excited as we prepare for the W opening.

And our next question comes from Simon Cheung with Goldman Sachs.

I have two questions. Earlier this morning, during the Wynn call, management mentioned that if the industry GGR were to reach $26.5 billion, they would see the EBITDA return to historical levels. I realize there are many assumptions regarding the mix and cost savings. However, since Geoff suggested that you could maintain approximately 20% to 25% of the cost savings, could you provide some insight on what level of mass market GGR would be necessary to restore your EBITDA to that level? Additionally, Geoff, could you share what your daily operating expenses were for the quarter?

Sure. So for the first question, what sort of mass GGR as a percentage of 2019 do we need to get to have similar EBITDA to 2019, that's in the ballpark of 110% to 115%. And then from an OpEx perspective, for the first quarter of 2023, we were at about 2.0. That's up from 1.7 in the fourth quarter.

Okay, that's great. And then I have one more question. I think that's for Lawrence. We've been being asked by investors about your 2-layer structures, your ownership in Melco International and then Melco International into MLCO. I also understand that the parent company and Melco International do need some cash from time to time. And we have seen you've been doing a bit of share buybacks to uplift some of the cash to the parent company. How are you thinking about the structure for the time being? And how are you thinking of the 2-layer structure resulting in maybe some of the cash being retained at the MLCO level? Would you be considering dividends earlier than expected or some other way to maybe get some cash out to support the parent company?

I believe that with the transactions completed earlier this year and last year, Melco International doesn't have any immediate cash needs. Given the strong recovery in the Macau business, our primary focus is on reducing debt at Melco Resorts and working towards restarting the dividend. This is our top priority right now. However, if we find ourselves with more flexibility, we would consider ways to simplify our structure, which would be beneficial. But in the immediate term, our focus remains on debt reduction and getting dividends back on track.

And I'm showing no further questions in the queue. I will now turn the call back over to Jeanny Kim.

Thank you, operator and thank you for joining us for the call today. We'll see you next quarter. Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.