Melco Resorts & Entertainment Limited (MLCO) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for participating in the Fourth Quarter 2019 Earnings Conference Call of Melco Resorts & Entertainment Limited. [Operator Instructions] Today's conference is being recorded. I would now like to turn the call over to Mr. Richard Huang, Director of Investor Relations of Melco Resorts & Entertainment Limited. Thank you. Please go ahead.

All right. Thank you for joining us today for our fourth quarter 2019 earnings call. On the call today are Lawrence Ho; Geoff Davis; Evan Winkler; and our Property Presidents in Macau and Manila. 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 anticipated results. I'll now turn the call over to Lawrence.

Thank you, Richard, and hello, everyone. Before I get into our quarterly results, I'd like to take a moment and send our heartfelt sympathy to the people of Wuhan and Hubei and all those who are impacted by the new strain of the coronavirus. Melco has donated HKD 20 million to purchase medical supplies and to support the local community in Hubei. We have also donated HKD 5 million to the Macau Federation of Trade Unions to help members of the Macau community with unstable incomes who are particularly impacted. We will continue to work closely with the government to ensure the safety and well-being of our customers, colleagues as well as their families and the community. I would also like to thank the Melco team for continuing to support the company and the community by coming to their workplace, serving our customers and making sure our properties remain safe and operational. I cannot thank these colleagues enough for working through this very difficult time. Lastly, I would like to express my sincere gratitude to the Macau SAR government for their proactive and decisive response to contain the spread of the virus. I would also like to thank the Chief Executive for his leadership, which is what we need in these challenging times. Turning to our results. I'm pleased to report that we have finished the year strong with our fourth quarter and our full year 2019 luck-adjusted EBITDA, both reaching all-time record highs. In 2019, despite macro headwinds and the events in Hong Kong, we increased our Macau mass table revenues by approximately 17%. We also enjoyed modest growth in VIP revenue, despite the significant market-wide VIP decline, which allowed Melco to expand its total GGR market share by approximately 180 basis points year-over-year to approximately 16%. Benefiting from the opening of the award-winning Morpheus, City of Dreams luck-adjusted EBITDA grew 19% year-over-year in the fourth quarter to $249 million. Studio City's fourth quarter luck-adjusted EBITDA grew 22% year-over-year to $114 million (sic) $117 million, driven by strong mass table revenue growth of 19%, which outperformed the market significantly. The strong financial performance was a result of Melco's commitment to excellence and determination to push boundaries with our portfolio of award-winning integrated resorts attaining a record-breaking total of 107 stars in the 2020 Forbes Travel Guide. Morpheus was honored as the world's first and only establishment to attain 4 5 stars across its entire hotel, spa and dining facilities after a year of its grand opening. The Morpheus Spa also won the Forbes Spa of the Year Award. To strengthen Melco's leadership position in the city's premium mass gaming segments, we will continue to upgrade our resorts and to expand our asset footprint. At City of Dreams, we opened a new premium mass area in October last year with another new premium mass gaming space opened just ahead of the Chinese New Year. At Morpheus, we are in the process of adding more villas, which have been extremely well-received by customers since we opened in June 2018. The renovation of Nüwa has also recently started. Our next major project in Macau will be the further expansion of Studio City. Construction has recently commenced, and we have budgeted $1.35 billion to $1.4 billion for the expansion. The Phase 2 expansion will increase Studio City's hotel room inventory by approximately 60%, with 2 new hotel towers offering a total of approximately 900 luxury hotel rooms. In addition to gaming space expansion, Phase 2 will also offer non-gaming attractions that are highly complementary to those in Phase 1, including a Cineplex, one of the world's largest indoor/outdoor water parks, fine dining restaurants and state-of-the-art MICE spaces. Moving to the Philippines. COD Manila's mass table game operations saw strong double-digit growth in the fourth quarter, while VIP operations continue to be impacted by the market-wide VIP decline and increased competition in and around Entertainment City. In Cyprus, we continue to ramp up our temporary and our satellite casinos, with luck-adjusted EBITDA from Cyprus more than tripling year-over-year to $9 million. Construction of City of Dreams Mediterranean is progressing well with opening anticipated around year-end 2021. Our strong fourth quarter performance demonstrates the resilience of our EBITDA, with over 90% of our 2019 Macau EBITDA contributed by non-VIP segment. That, combined with our modest net debt-to-EBITDA leverage ratio, allows us to maintain our regular dividend while retaining ample financial flexibility to reinvest in our existing properties and to pursue new development opportunities. We continue to work diligently in Japan. In September last year, we announced our Yokohama First policy as we focus our Japan team on bringing to Yokohama the best IR the world has ever seen. In December, we submitted our response for Yokohama RFC, and we will continue to actively engage with the Yokohama officials to discuss our plan. Finally, the coronavirus outbreak has severely impacted the tourism industry and integrated resort facilities in Asia. Given the uncertainty, we have prudently chosen to focus on our core operations and not to pursue the second tranche of Crown Resorts shares. We will continue to develop Studio City Phase 2 and City of Dreams Mediterranean as planned. But for other discretionary CapEx spend, we will closely review them and prioritize them so as to preserve capital. 2019 was a great year for Melco as we grew our EBITDA to record high levels despite the Macau market experiencing modest decline in gaming revenues. Taking a longer-term view on things. We remain optimistic of the future of Macau, as we anticipate the Macau mass gaming market to continue to benefit from the expanding Chinese middle class, significant infrastructure improvements in the Greater Bay areas and the new integrated resort openings in Cotai, including our own Studio City Phase 2. With that, I'll turn the call over to Geoff to go through some of the numbers.

Thanks, Lawrence. We reported group-wide EBITDA of approximately $383 million in the fourth quarter of 2019, declining by 5% from the fourth quarter of 2018, while luck-adjusted EBITDA increased 15% year-over-year to an all-time record high of $413 million. An unfavorable VIP win rate negatively affected EBITDA at COD Macau by approximately $39 million. At Altira and at Studio City, EBITDA was positively affected by a favorable VIP win rate by approximately $6 million and $4 million, respectively. On a consolidated basis, overall results were negatively impacted by approximately $30 million. In the fourth quarter, the luck-adjusted property EBITDA margin in Macau was approximately 29%, increasing by approximately 170 basis points year-over-year. In the Philippines, COD Manila delivered luck-adjusted EBITDA of approximately $54 million, representing a decline of 12% year-over-year. The sequential EBITDA decline was due mostly to a $4 million hit from union-related accruals and an increase in the bad debt charge. Moving on to capital management. The Board has declared a quarterly cash dividend of $0.165 per ADS, flat with the prior quarterly dividend. To optimize our capital structure, Studio City paid down its $350 million 2019 senior notes in November of last year. Also in November of last year, Melco or the City of Dreams Macau Obligor Group issued, $900 million of 2029 senior notes, with the proceeds used to pay down essentially all of our Melco Macau credit facility. Melco's next bond maturity is in 2025. To provide more clarity regarding our capital structure within our core group, we had cash of approximately $900 million and gross debt of approximately $3 billion at the end of the fourth quarter of 2019, excluding Studio City and Cyprus. As we normally do, we'll give you some guidance on nonoperating line items for the upcoming quarter. Total depreciation and amortization expense is expected to be approximately $160 million to $165 million. Corporate expense is expected to come in at approximately $32 million to $34 million. And consolidated net interest expense is expected to be approximately $83 million to $85 million, which includes finance lease interest of $10 million relating to City of Dreams Manila. For those that follow City of Dreams Manila more closely, our building lease payment for the fourth quarter of 2019 was approximately $10 million. That concludes our prepared remarks. Operator, back to you for the Q&A.

[Operator Instructions] Your first question comes from the line of Joe Greff of JP Morgan.

Lawrence, can you just talk about sort of maybe what the fixed operating expenses were or are as your -- in Macau as your properties have been closed? That will give us a sense of how to think about modeling it as we think about different recovery scenarios. That's my first question. And then my second question, can you talk about CapEx this year? I guess, how much maybe potentially gets pushed out from what you thought previously, just given sort of maybe a slowing recovery in Macau in terms of just construction bodies and getting materials, things of that nature? That's my second question. And then my third question relates to your existing investment in Crown and how do you think about, sort of, I guess, monetizing that or liquidating that position, if you could talk about that. And that's all for me.

All right. Hey, Joe. I think why don't I start answering the first couple of questions and then hand it off to Geoff Davis and also David Sisk, respectively, to add more color and get more details. We had a phenomenal -- I think similar to the other operators' calls, we had a phenomenal start to 2020. We had a great 2019. We had record highs in all the key KPIs for ourselves, in mass. And that really led into 2020. And I think we had our record high market share as well as a company. And of course, as the coronavirus started to spread, the bottom really fell out. And so I think unlike some of the other operators, our view is that the situation is going to take -- will have a much longer ramp-up period to get the business back to where it was because too, David can you share a lot more details in terms of we've been open with -- quite a lot of properties have reopened for the last close to 24 hours, but we anticipate Macau to be very, very quiet for quite a long time because there's still a lot of details that hasn't been reviewed. So for instance, how people get -- go from China to Macau, whether they need to be quarantine, how long is that, there's still a lot of details to be worked out. And so our main daily operating cost, maybe Geoff can shed more details on that?

Sure. Thanks, Lawrence. So our run rate overhead, so those are our expenses, excluding gaming taxes and commissions, were about $3 million a day in Macau, $2 million at City of Dreams, Altira and Mocha and $1 million at Studio City. Through some cost-cutting efforts and reduction in variable costs associated with business levels, we've been able to reduce that to about $2.5 million per day.

And David, maybe you can talk about -- oh, go ahead, Geoff.

Well, I was just going to answer the CapEx question. So as Lawrence mentioned in his remarks, we're continuing to push forward with Cyprus and Studio City Phase 2, but we're reevaluating other maintenance and small growth CapEx. We've identified approximately $100 million of deferrals or eliminations to that sort of -- of that sort of capital expenditure. And for 2020, we are looking to spend roughly $830 million of CapEx, including the capital for City of Dreams Mediterranean or Cyprus and Studio City Phase 2.

How do you break that out between maintenance, Cyprus and Studio City?

So City of Dreams in Cyprus is about $180 million. Studio City Phase 2 is approximately $300 million. And then you can back out the remainder for small growth and maintenance CapEx.

Got it. Okay. And then maybe the Crown question.

Hey, Joe, it's Lawrence again. So we've mutually decided together with Crown to cancel the Tranche 2. And so we don't have any financial commitments on Tranche 2. In terms of what we currently own in Crown Resorts, which is about 9.99%, we will -- Crown has amazing assets but given the severity of the coronavirus and the impact to our business, we've taken a very detailed look at all of our capital expenditures. And so given that wasn't considered part of our core investment, core management assets, I think that's why that decision was made. We will continue to -- for the foreseeable future, we will continue to take a look at that stake and see what happens going forward. But I think our immediate focus right now is really the stability of our Macau business and the stability of our staff and the safety of our staff and colleagues in Macau. But David, I think it'd be helpful, actually, to maybe shed a bit more color on what's happening in Macau in the last 2 weeks because there's been quite a lot.

Yes, sure, Lawrence. So I think there's been several things that have occurred here. I think one of the biggest things to getting into Macau has just been an extreme challenge as I think everybody is aware. Really, the only way to get across now from Hong Kong is to come via the bridge. We've got basically anywhere from 1 to 3 flights a day. They're coming in from the Macau airport. Getting across the border depends on if you're going to get quarantined or not or the questions you have to ask -- or the questions are being asked, excuse me. It's just a big challenge for people as they're going through. Even traveling within China has proven to be rather difficult. Kind of going back to maybe a point that Lawrence was making as well, and that is, as we look out towards the future, we kind of see things not recovering quite as quickly. We see things maybe taking more time. One of the things that we've seen that has not been maybe mentioned is given all the time the kids have been out of school to this point, typically, July and August are the school holiday periods. We think that a lot of the kids in China will probably be going to school during that July, August period, which we think is going to have an impact on our visitation, whether it be for hotel occupancy or just customers coming to see us during that period. So we're not as, let's say, hopeful in the next, let's say, 4 to 6 months. We think it's going to be challenged through Macau. We opened up last night, as I think everybody is aware. There was a trickle of customers. I think as we opened up at Studio City, we had about 10 customers that came in. As we opened up at City of Dreams, there were maybe 10 to 12 customers that were in there. When I left the casino outside at 2 in the morning, we had 20 customers at City of Dreams. It's just going to take some time given the safety protocols that we have in place. It's just not the most comfortable environment to come into right now. So again, I don't think we want anyone to walk away from the call thinking that everything is going to be just perfect and rosy coming out of this going forward.

Your next question comes from the line of Billy Ng from Bank of America.

Actually, some of the questions already answered, but I just want to follow up with David. And you mentioned about, like, maybe 10, 20 customers. I know it's a little bit too early to gauge what kind of so-called normal activities we can achieve right now after the casino reopen, but in terms of, like, maybe can you provide a bit more color as, in the next month or 2, let's assume if the IVS visa is not going to be there or the bridge is -- or the country is not going to reopen, do you see, actually, we would have a loss-making situation still continue even though the casino reopen? Or how should we look at the next month or 2?

Well, I think a couple of things on that real quickly, Billy. One is obviously, as you know, the group visas and the IVS have basically been shut off by China. We don't see those getting turned on, best case maybe April, probably more likely in May. And again, I think that's going to go very slow as they turn that back on. Most of the customers that we're seeing coming in now, either have business visas, or basically, they've got -- they're coming from Hong Kong or Southeast Asia. As you're aware now, Southeast Asia is starting to experience problems with the coronavirus as well. We just think it's going to be incredibly slow and it's going to take some time for us to get back to the momentum that we had kind of going in through January. And kind of going back to your question in regards to what we think is going to happen from a profitability standpoint, I'm going to let Geoff answer that, but I think our revenues are going to be impacted in a great way. Obviously, we're going to try to minimize our costs as much as we possibly can, but we are going to be challenged. And obviously, we're not the only one out there that's going to be challenged through the future of the next, let's say, 4 to 6 months.

Billy, in the scenario that David just painted, it is certainly possible that we could have loss-making days in the casino, even when the casinos open.

So kind of back to Geoff's point, we're actually kind of really in the gaming business now where we've got volatility in a big way again.

Can I follow-up with that? The $2.5 million daily loss during the closure and/or the daily operating expense during the closure, will that increase back to $3 million right away after you reopen? Or what is the run rate during this period?

The $2.5 million is a good run rate for where we are with the casino closed and with minimal business levels. As business levels ramp up, some of those variable costs will start to creep back into the business, as you'd expect. I don't think we get all the way back to $3 million a day for some time just because some of the cost-cutting initiatives that have been put in place by David and the team. But for right now, $2.5 million is okay, but it will ramp up as the business ramps up.

Okay. And 1 last question for me is in terms of the Phase 2 Studio City construction. I understand that before the virus breakout, we were waiting for the government approval to start. But can you tell us a bit more now with the situation? Will we -- or should we expect more delay, potentially construction worker could be a big problem if everyone, foreign labor coming to Macau need to be quarantined, and also the government approval process, whether it will take longer because of the focus on the virus now?

Hey, Billy, it's Lawrence here. I think maybe Geoff Andres can add more details, but I think naturally, we will -- we got the approval to get started and we're actually quite happy in January. But I think naturally with the coronavirus presenting -- and a lot of the construction workers naturally are from Mainland China and so we do expect that there's going to be a slowdown, a significant slowdown of those workers coming in. Then in terms of government approval, as you can expect during this unprecedented time, the Macau government's 100% attention is on stopping the spread and curing the virus. So you can expect that approvals to slow down as well, but I don't know if Geoff Andres has more color.

Well, it's nice to see that we have piling going on at the Studio City Phase 2 site and the site is busy every day. I think it is still too soon to try to tell if there's any long-term ramifications. But for right now, the piling is happening and there's activity on a daily basis.

Your next question comes from the line of Harry Curtis of Instinet.

Two quick questions. First, going back to the question on Crown. Lawrence, if you wouldn't mind giving us a sense of the intention -- your intention behind your current investment. Is there an opportunity for liquidity over the next 6 to 12 months?

Hey, Curtis. Why don't I hand the question over to Evan, our President, to shed more detail.