Earnings Call Transcript - MLCO Q4 2020

Operator, Operator

Ladies and gentlemen, thank you for participating in the Fourth 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 Q&A session. Today's conference call is being recorded. I would now like to turn the call over to Mr. Timothy Mazik. Thank you. Please go ahead, sir.

Timothy Mazik, Executive

Thank you for joining us today for our fourth quarter 2020 earnings call. On the call today 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 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 is included in the earnings release. Finally, please note that our supplementary earnings slides are posted on our investor relations website.

Lawrence Ho, CEO

Alright, thank you Tim and hello everyone. During the fourth quarter, our integrated resorts continued to experience a gradual recovery in business levels despite increasing COVID cases throughout the world, thanks to both the Macau and Mainland Chinese government measures and a prudent approach towards border reopening. We have not seen any locally transmitted COVID cases in over 300 days. Benefitting from the resumption of visa issuance, our Macau mass table games operation, which contributed the vast majority of our EBITDA in pre-COVID times, saw notable sequential improvements from the third quarter to the fourth quarter. We reported all top positive property EBITDA for both Macau operations and our overall global operations. We remain optimistic on the recovery in Macau and continue to expect increased visitation in the near term. Earlier this week, with the renewal of the remaining two cities on Macau’s medium risk list, all quarantine restrictions were lifted for those traveling from Mainland China to Macau. More notably, there are no quarantine restrictions for those Mainland Chinese citizens who are returning from Macau. In Macau, while we continue to see improvements in our business volume, 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 growing faster in both the premium mass and premium direct segments, which will benefit Melco’s portfolio of luxury integrated resorts. Our current expectation is that we will begin to see the benefits of pent-up demand starting in mid-to-late March. Business trends continue to improve in the Philippines, and City of Dreams Manila generated positive property EBITDA without gaming or hospitality operations running on a limited trial run basis as authorized by PAGCOR. While there was a swift return of the domestic gaming demand at Cyprus casinos in the third quarter of 2020, an increasing number of COVID cases led the Cyprus government to announce a second lockdown during the fourth quarter. This resulted in a partial closure of our casinos from November 13th and a full closure from December 1st. Despite the global pandemic, Melco remained committed to its global development program. Our next major project in Macau is Studio City Phase 2, where construction is ongoing. 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.

Geoff Davis, CFO

Thanks, Lawrence. In the fourth quarter of 2020, we reported group-wide property EBITDA of approximately $53 million, while luck-adjusted EBITDA came in at $49 million. A favorable VIP win rate positively affected EBITDA at City of Dreams Macau and City of Dreams Manila by approximately $9 million and $1 million respectively. At Studio City and Altira, EBITDA was negatively affected by an unfavorable VIP win rate by approximately $4 million and $1 million respectively. On a consolidated basis, overall results were positively impacted by approximately $5 million. Details of these adjustments can be found in the supplementary earnings slides posted on our investor relations website.

Joe Greff, Analyst

Good evening to you guys. Thank you for taking my question. Lawrence, your comments today are probably the most optimistic we have heard from you, and your expectations for increased visitation in the near term, along with more recovery in the mid-to-late part of March, have caught our attention. Can you talk about what's fueling this increased optimism relative to just three months ago? We obviously had some clear positives recently with travel restrictions easing; how much of this optimism is rooted in more traction or ease coming from visa issuance from Mainland China?

Lawrence Ho, CEO

Sure. Hi, Joe. Let me provide a high-level overview, and then I'll hand it over to David for more specifics. Our optimism is largely influenced by the strong demand we noticed at the end of Chinese New Year, which continued even last week. With no cities under quarantine in Mainland China anymore, we're observing several factors gradually improving. The vaccine rollout in China and globally is also significant. Last year during this time, we anticipated a slow and gradual recovery, but now we are finally seeing promising signs. Consumer behavior in China has been notably robust, especially considering how effectively China and Macau have managed the virus. All of these factors, along with the recent announcement that Taiwan has reopened its route to Macau, bolster our optimism. The close of Chinese New Year demonstrated considerable strength. David, do you have anything to add?

David Sisk, Executive

Yes. As Lawrence mentioned, one of the key insights from the tail end of Chinese New Year gave us clarity on expected demand. We anticipated a strong turnout based on the restrictions that Macau had previously implemented. As those restrictions started to ease, we saw a surge in late arrivals for Chinese New Year, much more than we had anticipated. The quality of play we experienced during this period was also impressive. In the fourth quarter, we experienced a slight dip in arrivals post the first week of January, but once restrictions were eased, we observed a rapid resurgence in demand.

Lawrence Ho, CEO

In addition, I wanted to mention that, based on discussions with various government levels, they are actively communicating with China regarding restarting the e-channel for the visas and group tours. There are many incremental positive aspects they are working on. Given the control over COVID in China, we believe that once visitation returns and it becomes easier for people to enter Macau, the appetite will certainly drive the return.

Billy Ng, Analyst

Hi, good evening, and thanks a lot for hosting the call. I just want to follow up on the previous comment regarding the normalization of orders. I know the situation is still quite fluid, but Lawrence, would you mind sharing your personal thoughts on the timing of the following border normalizations, including the e-channel you mentioned, Hong Kong-Macau reconnection, and other types of visas such as group travel and transit visas? What should we expect in terms of seeing more relaxation? Will it be in the next couple of months, or realistically, is it still three to six months away?

Lawrence Ho, CEO

Billy, I think we have been realistic. Over the past year, we've probably been the most pessimistic. But honestly, based on the vaccine rollout in China and Hong Kong, I believe that both Macau and Greater China are seeing over 90% of business impacted by these factors. The most important lifeline for Macau is the Mainland Chinese market, and we’re not going to jeopardize that with Hong Kong’s current situation.

Billy Ng, Analyst

Thanks. That's very helpful. My second question is about the Chinese New Year traffic. Have you seen any new customers or customers that haven’t been back for quite some time, and their spending power? Can you tell us if the traffic has changed compared to the Golden Week? Are they spending more, or is it the same type of customers, but they just have different spending behavior?

Lawrence Ho, CEO

Let David elaborate on the details. We compared very favorably to Golden Week, especially during the last week.

David Sisk, Executive

In terms of our performance during Golden Week in October 2020, I can say that this period is being driven primarily by our premium segments. We have yet to see a mass/mass return, but the premium mass and premium direct segments are performing well. Although we weren't sold out in our hotels, the occupancy and theoretical per room for players were the best we've seen since Q4 2019. So, we are optimistic moving forward as we see things opening up more and more. Customers want to come to Macau; they just need to be allowed to.

Praveen Choudhary, Analyst

Thank you. Quick question for Lawrence, Geoff, and also David. One is regarding Hong Kong's opening, which is critical to assist Macau. Also, could you provide an update on the situation? In December, it was said that Hong Kong needs a consecutive seven days of zero local cases before any openings could commence. Has that changed, and what’s the realistic assumption for Hong Kong and Macau regarding vaccinations leading to access to those areas?

Lawrence Ho, CEO

I didn’t fully catch your question, but regarding Hong Kong-Macau relations, I believe that from Macau’s perspective, we are nearing a year of zero locally transmitted cases. In Macau, the priority is the Mainland Chinese market, and we won't risk that with Hong Kong. Given the recent measures the Hong Kong government has implemented, the situation is improving, and we are in discussions regarding potential reopening.

Geoff Davis, CFO

For the last point on our bad debts, we provide transparency every quarter, and yes, it is elevated due to the operating conditions over the past year. We expect it to normalize throughout 2021. As for OpEx, the daily number was approximately $1.7 million in Q3 and increased to about $1.9 million in Q4 as volumes returned. We expect OpEx to continue rising as volume increases and those variable costs arise.

Praveen Choudhary, Analyst

That’s great. Thank you. What about cash flow from Manila? Is it EBITDA positive, or is the cash flow negative after considering other costs?

Geoff Davis, CFO

You're correct that we recorded property-level EBITDA of about $17 million in Manila, but after factoring in other charges such as rent payments, the net amount is slightly less than breakeven.

Lawrence Ho, CEO

Yes, it's all minimal.

Simon Cheung, Analyst

Hi, everyone. Thanks for taking my question. Lawrence, you sound quite optimistic about potential relief in restrictions. I wanted to get a sense of how you think about the pent-up demand. If you were to quantify the pent-up demand, what percentage maybe 20% or 30% would you expect to see returning? And regarding Studio City Phase 2, is there any flexibility to speed up construction, and do you have any updates?

Lawrence Ho, CEO

We haven't slowed down construction on Studio City Phase 2. We believe that around the end of 2022 or early 2023, the market will have fully recovered, making it a great timing for a new property opening. Currently, we are committed to the project, and the building is already up to seven floors. Regarding pent-up demand, 2021 will likely be a year of rebuilding and recovery as we slowly bring back demand; however, I expect that by the end of 2021, the market will be operating very close to fourth-quarter 2019 levels, excluding the VIP segment.

Unidentified Analyst, Analyst

Thank you for taking my question. Just to follow up on your previous comments regarding the increasing optimism for this year, could you provide a sense of how you're looking at historical GGRs and annual visitations as we exit this cycle?

Geoff Davis, CFO

We won’t provide specific figures, but we definitely anticipate a meaningful ramp-up in visitation and GGR over the course of the year, continuing the momentum we saw towards the end of last year. We believe that 2021 will be a significant year for rebuilding and ramp-up as visitation and GGR increase.

Timothy Mazik, Executive

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

Operator, Operator

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