Melco Resorts & Entertainment LTD Q3 FY2023 Earnings Call

Ladies and gentlemen, thank you for standing by in the Third Quarter 2023 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 call 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 Limited. Thank you. Please go ahead.

Thank you, operator, and thank you, everybody, for joining us today for our third quarter 2023 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 it over to Mr. Lawrence Ho.

Thank you, Jeanny. Macau's recovery continued to grow from strength to strength into the third quarter of 2023, especially during the summer months, with our property visitation and casino player hours benefiting from this growth. We had solid performance over the October Golden Week and saw a robust recovery during the remainder of October, with GGR excluding junkets reaching close to 2019 levels. Both gaming and non-gaming revenues improved, and this was reinforced by our commitment to invest in world-class entertainment and enhance our non-gaming amenities. Our market-leading design standards were recognized last month by Prix Versailles, with Morpheus being the only hotel in Macau to have the honor of being included as one of the World's Most Beautiful Hotels. Studio City has been the center of entertainment for us in Macau. The opening of Phase 2, the addition of the Epic Tower and W Macau hotels, the Residency Concerts, and an ongoing schedule of events drove gaming volume and contributed to a 65% increase in adjusted property EBITDA quarter-to-quarter. We expect further growth in Studio City as Phase 2 continues to ramp up. In the Philippines, City of Dreams Manila continues to generate solid earnings with a strong margin profile. City of Dreams Mediterranean in Cyprus has been severely impacted by the conflict in Israel. Our teams are working on realigning our marketing strategy there. With that, I turn the call over to Geoff to go through some of the numbers.

Thanks, Lawrence. Our group-wide adjusted property EBITDA for the third quarter of 2023 was approximately $281 million. Luck-adjusted group-wide property EBITDA for the third quarter of 2023 came in at $291 million. A favorable win rate had a positive impact on COD Manila of around $9 million, while in Macau, unfavorable win rates at COD and Studio City had a negative impact of approximately $19 million. Details of these adjustments could be found in the supplementary earnings slides posted on our Investor Relations website. Macau OpEx increased to approximately $2.5 million per day in the third quarter of 2023 from approximately $2.4 million per day in the second quarter. The increase in OpEx was largely due to the addition of full-time employees across our properties, including the opening of the W Macau in September and increased marketing costs. Despite the increase in cost, our EBITDA margin increased slightly quarter-to-quarter. Turning to our balance sheet, we continue to focus on reducing debt and deleveraging. We repaid $100 million in debt during the third quarter of 2023 and repaid another $100 million at the end of October. We currently have approximately $1.2 billion drawn on our RCF, which gives us around $750 million of undrawn and available committed revolving credit facilities. We will continue to closely monitor our free cash flow, which will drive further debt reduction. As of September 30, 2023, we had around $1.5 billion of consolidated cash on hand. Melco, excluding its operations that Studio City, the Philippines, and Cyprus accounted for around $800 million. Of this, approximately $125 million was restricted as collateral required for the concession-related guarantees issued to the Macau government. As we normally do, we'll give you some guidance on non-operating line items for the upcoming fourth quarter of 2023. Total depreciation and amortization expense is expected to be approximately $145 million to $150 million, corporate expenses are expected to come in at approximately $20 million, and consolidated net interest expense is expected to be approximately $130 million. This includes finance liability interest of around $7 million relating to fees payable concerning the Macau gaming concession and the Cyprus gaming license and finance lease interest of approximately $6 million relating to City of Dreams, Manila. That concludes our prepared remarks. Operator, back to you for the Q&A.

The first question comes from George Choi of Citi.

I have a couple of questions, if I may. Firstly, how should we think about OpEx installation in Macau going forward? I mean although naturally, the favorable VIP mass GGR means there will be a boost to margins. Should we be worried about inflation in marketing costs, player investments or costs for upgrading non-gaming offerings, including concerts? And my second question regards the latest GGR trends. The share prices in Macau seem to be reflecting investors' concerns about the sustainability of GGR and EBITDA recovery in Macau. Do you guys see any signs of moderation in gaming demand and non-gaming revenues? That's all for me.

George, it's Lawrence. Thanks for the question. I think why don't I address the second question first, and then we'll have Geoff talk about the first question, and maybe David can supplement on that as well. On the second one, obviously, we're feeling good about Macau. Travel and tourism are the leading sector in China right now. I think after three years of being unable to travel during COVID, people are returning to Macau in force. October was our best month in Macau and the best month for us since the reopening. So we're feeling very good. Even the rest of October has been good. It has not been soft and November has started off strong as well, so we're not concerned about it. Of course, we understand the investor appetite over the last six months of the year and the so-called China risk or decoupling, that's something we can't control. All we can do is really put our heads down and make sure that we continue to deliver the earnings. I think on the first question, maybe I'll hand it off to Geoff.

Thank you, Lawrence. I'll take the first part of the first question. So on OpEx, we came in at about $2.5 million in Macau for the third quarter, in line with the guidance that we had provided on the second quarter call. We anticipate in the fourth quarter that number looking more like $2.6 million. As we think about how that could change going into next year, the one thing I would highlight is the reopening of The House of Dancing Water show. That would add about 0.1 per day when that happens. Subject to decisions in regard to other entertainment, I think that's a pretty solid run rate.

So I think the only other thing I'd probably add to that is, as you look at some of the non-gaming attractions and amenities that we have, including the House of Dancing Water coming back, we've started to advertise a little bit more in market, let's say, in Hong Kong or in China to, again, let people know we have these assets out there. So that's been a bit of a change that we didn't have before as much other than House of Dancing Water. Those concerts and attractions that we have will continue, but I think we will still stay within the number and the guidance that Geoff just gave you.

In respect to our savings initiatives that were a key focus during the COVID years, no change in our guidance there. We still anticipate that 20% to 25% of those savings would be permanent. We'd endeavor to ensure that they remain intact going forward, with that inherent margin benefit starting to show through along with operating leverage going into next year as we continue to drive the business and drive incremental operating cash flow.

Next question is from the line from Joe Greff of JPMorgan.

Lawrence, just going back to your comments about Golden Week and then the subsequent period in October and being close to 19%, excluding the junket business, does that imply EBITDA in October was, at least on a hold-adjusted basis in excess of October 2019 levels?

Maybe I'll let Geoff.

Yes, I think we had provided some guidance in the past that we would need to see mass and slots and non-junket business return to something more in the 115% range to be at par or parity with 2019 or pre-COVID EBITDA.

Okay. And then just a broader question. Can you just talk about either your levels or where you think the market is in terms of premium mass reinvestment levels? How does that compare to levels in 2019? Is that slightly elevated?

Maybe, David can talk about that.

Sure. So Joe, I think what we've seen a little bit now as we have kind of come out of the COVID period, we've seen a lot more marketing going on, whether that be with some of the other concessionaires relative to their new hotel rooms or other new assets that they've brought online. Additionally, as we kind of see a shift in the business where right now, it's very much a premium mass market-driven economy. What we're seeing is there's more comps related to that. So the reinvestment rates have climbed a bit. That doesn't mean that as we see more of that mass kind of coming back and a smoothing out of things as a lot of these new products come online in the market that we won't see a return back to, let's say, more of what we saw in the fourth quarter or throughout 2019. But for right now, it is a bit more elevated than we've seen in the past, and again, it's for the reasons I just mentioned.

Got it. And then, David, the mass market table game hold percentage at COD in the third quarter was 32.1%. Do you look at that as sustainable, as normal or do you think of that as sort of the mix between premium mass and mass as something that's outside the range of a normal mass against hold percentage?

No. I think we're within the normal range of mass table game from a hold percentage. What we haven't seen yet is that complete mass coming back to smooth things out a little bit. But I think we're within our normal range there, it might be a little bit higher sometimes. But again, we're probably on that, let's say, that 31% to 33% like we've talked about before, but we're right within that normal range.

Next question comes from the line of Ricardo Chinchilla from Deutsche Bank.

I was just wondering if you could comment a little bit more on the promotional environment and how you guys are reacting? Do you think that the current reinvestment levels are sustainable? Or is this a lot of, as you mentioned, your competitors trying your clients to test some of the product before going back to City of Dreams? How do you guys envision the promotional environment? And if there's a lot of trying versus going back to what they like?

Yes. So Ricardo, it's David. So look, I think you're spot on when you say I think there are a lot of people going out there being a little more promiscuous and trying other properties, understanding what may be out there. So that's contributed a little bit to that, let's say, rise in the promotional or reinvestment rates. Also, with some of the new products and some of the other things out there, I think again, in order to get people into that new product a little bit to get people to try that product, whether that's us or the other concessionaires, you also need to be a little bit more aggressive. What we've seen too is that we've had a lot of pent-up demand relative to a lot of our room product, particularly at Studio City, where now we have the opportunity that we didn't have before because we had far fewer rooms, so with the addition of approximately 900 rooms, that's given us the opportunity to go deeper into our database to go out and be a little bit more aggressive, which is also driving some of our reinvestment rates as well. But I think over time, that will moderate, as I said, and we'll probably get back to those 2019 levels.

Got it. You guys provided great color on operating expenses for the Macau operation. I was wondering if you could detail for us how much of that amount is related to Studio City just for our modeling? Why should we? Out of some of the costs that you are adding back, how much is specifically related to Studio City?

Well, maybe to highlight the delta on Studio City. We do anticipate that the incremental cost of having a full quarter of the W in the quarter should be roughly similar to the reduction in Residency Concert Series expenses. So that largely washes out at about 0.2 per day of expense.

Next question comes from the line from John DeCree from CBRE.

I think you may have started to touch on this, but wondering if you could provide a little bit more color on the ramp at the W and then even maybe back to the Epic Tower opening? Are you starting to be able to improve segmentation? How has customer reception been to the new hotel towers and pricing, etc., if you kind of think about using those to work through and yield up your mix?

John, it's Lawrence. I think we're very excited about Studio City Phase 2. But at the same time, the reason we've opened this kind of piece meal is we're gradually rolling more and more product into the market. I think anybody who's been to Studio City right now knows there's a major retail renovation going on. Over the next 2 or 3 months, most of those retail tenants will be open. So we've been waiting for that. In due course, probably sometime in the first quarter of next year or early second quarter, we will try to do a major property relaunch Phase 2 opening. But I think that is an area that we're continuing ramping up on. So maybe David can add more color or Kevin?

Sure. So look, I think from when we opened up Epic back in April, it finally allowed us to develop that premium mass since the more VIP business that we really didn't have with the Star Tower at Studio City. The opportunity to really start putting more of those premium players and shifting some of that business away from some of our competitors and bringing that into Studio City is something that's pretty exciting for us. The team over there continues to do a good job as we build that business. Regarding the W, what we've seen from the start is, we started off at about 70% occupancy during the month of September. We're now in October, we probably got into about 80%. We're looking to try to build that back up to about 90% by the time we get to December. But there's a mix there, it's a little bit different between what we have, let's say, probably about 15% casino business, 85% cash where we're relying on the Marriott Bonvoy system to bring in some different players or different customers for us. The W also skews to a much different demographic and is particularly popular with women. We think that this, hopefully over time, will allow us to continue to expand our database, allowing us to attract new customers that ultimately will grow into that premium mass segment and become long-term customers for us. Again, both Epic and W, we've seen a nice pickup within our business, and we continue to see growth. In fact, for the month of October, we had our biggest drop month ever for Studio City as well as our biggest coin-in month regarding slots. Again, we've seen a nice pickup. We're absorbing the product well, and we look forward as we go forward in December and beyond.

Awesome color. Maybe a follow-up on October. You guys gave us a little bit of color, which is really helpful. Curious if you've made any observations relative to 2019 about seasonality or customer behavior before the holiday week after Halloween. Are customers behaving the way you'd expect? Or is it a little different now that we're in 2023 post-pandemic? Any thoughts on that would be helpful. And that's all for me.

Yes. So look, when we got into the Golden Week, typically, this year was a little bit early because it started on the 30th of September and rolled into those first 5 days of October. So a little bit different than we normally see in terms of that. But it was pretty typical as we got towards the end of the Golden Week. You typically see a drop-off, and then after a few days, it starts picking up again as you get into that next weekend. So it played out like we thought it would. What I think has been nice though is, again, not so much a surprise, but kind of a return to normal, where we saw that continued play in action going through the whole month and coming into November as well now. It dropped off a little bit like it used to and then picked right back up again, which is again, very similar to what we would have seen in 2019.

I think October, our Studio City drop was an all-time high in the history of the property.

And in Cotai as well.

We are seeing traction with the water park and the new hotels. Once the whole property is completed and opened, we're quite excited about it.

Next question comes from the line of Praveen Choudhary from Morgan Stanley.

Good to hear that Macau recovery is ongoing. I have three quick questions. The first one is simple. Did you give a timeline for House of Dancing Water opening? Is it in the first half of '24 or Q2 '24? That's the first one. The second question is about the spending per capita trend. We got two data points. One, package tour numbers are coming up strongly after being very slow initially. Then someone said that in the second half of October, the overnight visitors dropped off, and hotels are easily available versus day-trippers. So these are two suggesting grind might be doing a little bit better than premium. So I'd love to hear your thoughts. And the last question is, again, Lawrence, what's going on in Thailand and how is it different from Japan from your perspective if you want to put new money there? Obviously, it's not a next year's question, but I'm sure you're working on it.

Praveen, maybe I'll take my last question first. My memory isn't great, so I'll tackle this one first. I think we've been looking at Thailand for many years. After the Japan experience, which was rather unpleasant, I think we're going to be very conservative. We'll see. Thailand has reestablished another gaming committee to assess this. We'll continue to analyze it and see what we can do. But certainly, at this stage, we're not going to be spending many resources and definitely no money whatsoever on that. But if it does open up, it is probably the most exciting market aside from Japan right now. After three years of COVID, our main focus is going to be on deleveraging and reducing debt. That is our #1 objective. Our #2 objective is returning money back to shareholders, either through dividends or buybacks. At these levels, it's becoming very attractive, but we are disciplined in the goal of reducing debt at this current stage. Regarding the first and second questions, maybe I'll hand it off to David.

Great. So right now, Praveen, we're looking to open the House of Dancing Water for the relaunch, probably late in the fourth quarter of 2024. We're currently going through the remount process. We've been doing a lot of work on the House of Dancing Water theater to prepare it. We have just started doing our first shows there and towards the middle of November, we'll get back to that and start back on the remount for the House of Dancing Water. Regarding your other question about room rates and availability, I think a lot of the inventory is coming to the market, whether that be with what we brought in with Epic, or what we brought in with W or now with the Galaxy and their new hotels. So where you may be seeing availability in some of the older hotels, it seems that the lack of 5-star hotels continues. But we have been able to maintain very high occupancy percentages.

Our next question comes from the line of Antonio Luiz Gomes from Ninety One.

I just wanted to understand on the GGR for Macau figure, it seems like from a quarter-on-quarter basis, it was pretty similar to the previous quarter. From my understanding, looking at your presentation, it seems like it came from City of Dreams VIP GGR. But I wanted to understand what the barriers are to growth and what's led to below-average industry GGR levels relative to 2019 levels?

So I think from the barrier standpoint we're dealing with a strange world here. There are fewer players in the VIP business, which has created a lot more volatility. We have much larger players in our property, which can also lead to volatility. If we get one-sided on that, it does have an impact on us at times quarter-to-quarter. Years ago, when we had junkets, that would offset that, reducing the volatility. I think that will continue for a long while. I don't expect that to change since the VIP market has fundamentally shifted without junkets smoothing things out. But long-term, I believe you'll see us get back to beyond where we were in 2019, at least from a premium direct standpoint from the VIP business.

Okay. So going forward, over the next couple of quarters, you expect it to kind of normalize relative to industry averages, maybe beat that. Is that kind of the expectation?

The expectation is that it will return to our historical averages, which again is around that 3% level. But the volatility will remain for some time. The next quarter could be a bit higher and potentially a bit lower. However, over the long-term view, we will get back to that 3%.

Okay. And then everything else seems to be ticking along regardless from your perspective?

Yes, I think everything is moving forward. Again, as we get more customers in, as Macau continues to recover, and we improve airlift and transportation, all these factors will contribute to the market's strength. We believe there's much more growth potential, and we're optimistic about what's ahead.

We have no more further questions at this time. I would like to hand the call back to Ms. Jeanny Kim for closing remarks.

Thank you for participating in our call today. We look forward to speaking with you again next quarter. Thank you.

Ladies and gentlemen, that does conclude today's conference call. Thank you for your participation. You may now disconnect your lines.