Earnings Call Transcript - MLCO Q2 2021

Operator, Operator

Ladies and gentlemen, thank you for participating in the Second Quarter 2021 Earnings Conference Call of Melco Resorts & Entertainment Limited. At this time, all participants are in a listen-only mode. And after the call we’ll conduct a question and answer session. Today's conference is being recorded. Now I'd like to turn the call over to Mr. Robin Yuen, Director of Investor Relations of Melco Resorts and Entertainment Limited. Please go ahead.

Robin Yuen, Director of Investor Relations

Thank you all for joining today for our second quarter 2021 earnings call. On the call are Lawrence Ho, Geoff Davis, Evan Winkler and our Property Presidents in Macau, Manila and Cyprus.

Lawrence Ho, CEO

Thank you, Robin. Before we begin to talk about our business performance, I would like to express our sympathies to the people impacted by the flooding in China. We hope for a swift recovery of the situation soon. Our results in the second quarter continue to reflect the pandemic's impact on the business. However, on a sequential basis, we experienced a progressive recovery in business levels as tourists return to Macau. First, we would like to thank the Macau and Mainland Chinese governments for their efficient handling of the COVID-19 situation. As travel restrictions loosen and visitors gradually return, Macau has enjoyed a steady recovery in its integrated resorts industry and its overall economy. We have rolled out employee vaccination incentive programs to support the government's efforts to meet the community vaccination goal of 70%. Since mid-July, Macau's vaccination rate has reached over 30% and is on track to hit herd immunity before the end of the year. Here at Melco, our overall employee vaccination rate has reached almost 65%. We have followed the COVID-19 guidelines set by the Macau government, and we have dedicated substantial resources to create a safer environment for the community, our customers, and our colleagues. In Macau, our mass table games operation, which contributes the vast majority of our EBITDA, saw another quarter of sequential improvement. Continuing the trend from last quarter, we delivered positive property EBITDA for our Macau operations and our overall global operations. Our Macau operations registered an over 10% increase in GGR, while property EBITDA grew by a factor of 9. May Golden Week successfully confirmed our expectations of pent-up demand from our customers. For the first five days of Golden Week, industry GGR hit 50% of 2019 levels, and we experienced similar levels of strong growth driven by our premium mass market and premium direct businesses, highlighting our long-standing focus on the premium segment.

Geoff Davis, CFO

Thanks, Lawrence. In the second quarter of 2021, we reported group-wide property EBITDA of approximately $79 million, while luck-adjusted property EBITDA came in at $91 million. On a sequential basis, this represents a 69% increase in our luck-adjusted group-wide property EBITDA. At COD and Altira, EBITDA was negatively affected by an unfavorable VIP win rate by approximately $13 million and $6 million, respectively. A favorable VIP win rate positively affected EBITDA at Studio City and COD Manila by approximately $2 million and $5 million, respectively. On a consolidated basis, overall results were negatively impacted by approximately $12 million. Details of these adjustments can be found in the supplementary earnings slides posted on our Investor Relations website. During the second quarter, we incurred one-off expense items that impacted our property EBITDA for our Macau properties. In May, we launched the Thinking of You special-leave program, which allows employees to take time off over 6 to 18 months at the trade-off of a reduced base salary. The Thinking of You program reduces our overall salary expense over its duration, but accounting standards require us to take a front-loaded $14 million charge in the second quarter that affects property EBITDA. We note that subsequent periods would be offset by reduced staff expenses. Also in May, we launched the New Chapter program, which is a voluntary exit scheme whereby Melco provides one-off compensation for colleagues exiting the company. We will incur a charge of $14 million from the New Chapter program for the second quarter that is reflected in the property charges and other line of our financial statements. Turning to our balance sheet. In May, Studio City utilized favorable market conditions to tap the 5% senior notes due 2029 for an additional $350 million. The tap was priced at 11.5% of par, which equated to a yield to maturity of 4.76%. The transaction increased Studio City's liquidity and extended its weighted average debt maturity profile. The proceeds will be used to partially fund Studio City Phase 2 CapEx and for general corporate purposes.

Operator, Operator

First question comes from the line of Billy Ng of Bank of America. Your line is open. Please go ahead.

Billy Ng, Analyst

Okay. I have a couple of questions. The first question is, just want to get a sense of what's happening on the ground recently. From the data we received, it looks like in the last few weeks, Macau has been recovering. But as you may know, there is another outbreak in China right now. Have you seen that it has had any impact on our booking or daily traffic? Anything you can share would be really appreciated.

Lawrence Ho, CEO

Billy, it's Lawrence here. As you said, ever since the Guangdong mini outbreak has been under control in the last few weeks, we've seen very strong visitation in conjunction with the summer holiday period. However, regarding the minor outbreak in Nanjing, that is currently happening, let me hand it over to David.

David Ross, COO

Sure. Thanks, Lawrence. So far, Billy, we've really not seen much of an impact from the most recent outbreak. Obviously, in June when we had issues, things slowed down dramatically for us. But we really got back on track when we got to July. It was very strong. From the first week of July onwards, it seems to just get better with each passing week. So far, no impact. I think part of it may be that we are starting to hit the school holidays. As the school holidays come into play, more and more visitors are starting to come into Macau as well. So no impact. We're pretty happy with where the results are going.

Billy Ng, Analyst

And another question I have is regarding the vaccination rate in Macau, which is quite encouraging. Do you get a sense, as I think the Hong Kong government mentioned 70% as kind of the goal here, that this will lead to further border reopening? Do you think it will be the same for Macau? And how confident are you that once Macau gets to that number, we will see a bit broader normalization at that stage?

Lawrence Ho, CEO

Yes. I think that is certainly what we hope for as well. Melco has been the most proactive in terms of having vaccination schemes and incentive programs for our colleagues. For the world to get back to normal and particularly for Macau and our business to normalize, travel restrictions must ease with China. Clearly, we need to hit close to herd immunity. I think with the medical community, herd immunity is around 70%, or now they're suggesting even higher because of the Delta variant. Anything we can do to encourage our colleagues to get vaccinated to protect themselves and the greater community is the goal. The vaccination rate in China is about 55% and around 40% in Hong Kong and Macau respectively. The sooner we can get to 70%, the more flexibility we will have for the various borders to ease. At that point, our business can really be on a path toward normalization back to 2019 levels. We are hoping to reach these percentages sooner rather than later.

Billy Ng, Analyst

And just one quick last question for Geoff. You mentioned the two $14 million impacts, one being a one-off charge, and another $14 million related to compensation, but could be reversed in the second half of the year. Is my understanding correct that both are already reflected on the property EBITDA line?

Geoff Davis, CFO

We have two roughly $14 million charges in the second quarter. One is above the line, one is below the line. We wouldn't anticipate reversing either one of those.

Operator, Operator

Next question is from the line of Joe Greff of JPMorgan. Your line is open. Please go ahead.

Joe Greff, Analyst

Lawrence, we're within one year of the concession renewal. Are you surprised the government hasn't publicly talked about the process or extending them? Why or why not?

Lawrence Ho, CEO

Joe, I guess the government has been, for the last 18 months, like the rest of the world, singularly focused on fighting COVID. The Macau Government has done an amazing job in terms of not having any local infections for, I think, 480-something days, making Macau probably the safest place on earth from a COVID standpoint. They publicly announced earlier this year that they would conduct a public consultation followed by discussion at the legislative council. However, they haven't given a timeline. Our thinking is that to complete all those steps while still conducting a tender, next June is probably very tight. I wouldn’t be surprised if the licenses are extended for a year or two. I believe the maximum extension period is three years as they’ve already extended SGM and MGM's licenses for two years. At this stage, we would love to know the outcome, but their primary focus has been fighting COVID, opening the border between Hong Kong and Macau, and easing e-Visas or group tours from China. I agree with the government that these matters are more critical at this stage than the license renewal. Hopefully, the best-case scenario is that they extend it for a year or two, while we work toward opening borders with Hong Kong and China as soon as possible.

Joe Greff, Analyst

On Altira and the transition from VIP focus to more of a premium mass focus property, over the next 12 months, would you expect EBITDA losses to narrow, or would it go the other way? How do you think about the cost structure and the transition there over the next three or four quarters?

Lawrence Ho, CEO

David, do you want to take that and go through the details?

David Ross, COO

Sure, Joe. It's a couple of different things. I think we expect to see our EBITDA losses start to narrow. As we get back closer to where we were in the fourth quarter of 2019 and start seeing growth in our mass business, we expect to jump into profitability. The losses will definitely narrow. The idea of removing the volatility from the reduced volumes we've seen in the VIP business has created several fluctuations. We've been on the negative side of things, exacerbating those losses. We're rethinking our business and focusing on where our strengths have always been. We pride ourselves on developing great products and focusing on our premium mass customers and mass customers. Given the product mix and our opportunity to grow both local and international markets, it’s a compelling opportunity for us. We see this as a good time to move forward with this new direction for our business at Altira.

Joe Greff, Analyst

Great. And one final question, probably for Geoff. Of that $14 million second-quarter charge embedded in the property-level EBITDA line item, is it proportionate across properties? Is it mostly at City of Dreams, or is the mix different than the relative proportion of contribution to revenue and EBITDA?

Geoff Davis, CFO

It's across all properties. But as you'd expect, there is some concentration at City of Dreams. Yes, it's more proportionate to the employee base and roughly aligned with EBITDA. The majority of it is at COD.

Operator, Operator

Thank you. Next question is from the line of Praveen Choudhary of Morgan Stanley. Your line is open. Please go ahead.

Praveen Choudhary, Analyst

Two questions. One is related to the current stock performance. There has been a lot of uncertainty around China regulation. Can you give us some comfort that this is very isolated and has nothing to do with Macau? Both from a regulatory and from a U.S. listing perspective, the fact that Melco is only listed in the U.S. And the second question is related to Japan, where there has been some political uncertainty around the election, with candidates opposing the casino. How should we think about both the timeline and likelihood of that going through, along with Melco’s chances?

Lawrence Ho, CEO

Sure. Praveen, it's Lawrence. Let me take both questions. On the first one, Melco has always been considered a local company since the parent company, Melco International, is listed on Hong Kong. We've done more than anyone in terms of contributing to diversification, non-gaming investments, and supporting small and medium enterprises. Regarding Chinese regulation, regulatory risk is the largest risk in our industry, more significant than any financial crisis or even a pandemic. That said, considering 80% of the tax revenue from the Macau government comes from the gaming industry, which employs over 25% of the workforce, it is critically important to Macau. I don't expect any surprises, whether right now or during the license renewal. We've always worked closely with the government, and we will continue to support them as best we can. In terms of the Japan question, we are part of a consortium, and maybe Evan can talk about that. The political landscape is outside our control, but we must remain respectful to the market.

Evan Winkler, President

I was just going to add that we’ve maintained our Yokohama First strategy, which continues to be a focus of the company. Regarding the specifics you mentioned, the incumbent mayor is running on a pro-IR platform, while several other candidates are opposing it. As Lawrence stated, some things are simply beyond our control, and we will know more after the election on August 22.

Praveen Choudhary, Analyst

I have one last question regarding the cost structure. It's been a strong quarter with significant quarter-over-quarter improvement. However, we want to return to pre-COVID level EBITDA. When the GGR normalizes, whether in the second half of 2022 or first half, what will be the new cost structure? You've done a great job cutting costs. We want to understand the permanent versus temporary aspects.

Geoff Davis, CFO

We have been very proactive on cost-cutting, as mandated by Lawrence. We estimate about 25% of our cost savings will be permanent, with roughly 75% considered temporary. From 4Q '19 levels, we anticipate at least a 150 basis point improvement in margin. While our OpEx has been relatively flat for the last two quarters, we expect to see our OpEx continue to decrease as these programs take effect. Of course, over time, we expect certain marketing and volume-related expenses to rise. However, we hope that the programs we've implemented will help keep some costs in line.

Praveen Choudhary, Analyst

Geoff, this is very clear. I hope to see everybody live soon when Hong Kong and Macau open up. Thank you.

Operator, Operator

Thank you. As there are no further questions, I would now like to hand the conference back to Mr. Robin Yuen for closing remarks. Please go ahead.

Robin Yuen, Director of Investor Relations

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

Operator, Operator

Thank you. This concludes today's conference call. Thank you for participating. You may all disconnect.