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

Ladies and gentlemen, thank you for participating in the Fourth Quarter 2020 Earnings Conference Call of Melco Resorts & Entertainment Limited. [Operator Instructions] 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.

Thank you for joining us today for our fourth quarter 2020 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 is 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 Lawrence.

All right. 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 the Mainland Chinese governments' measure and prudent approach towards border reopening, we have not seen any locally transmitted COVID cases in over 300 days. Benefiting from the resumption of visa issuance, our Macau mass table games operations, which contributed the vast majority of our EBITDA in pre-COVID times, saw notable sequential improvement from the third quarter to the fourth quarter. We reported 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 removal of the remaining 2 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 restriction for those Mainland Chinese citizens who are returning from Macau. In Macau, while we continue to see improvements in our business volumes, ensuring the safety and wellbeing of our colleagues, customers and the communities in which we operate remains our highest priority. We continue to expect a faster rebound and faster growth in both the premium mass and premium direct segment, which will benefit Melco's portfolio of luxury integrated resorts. Our current expectation is that we'll 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, with our gaming and hospitality operations running on a limited trial run basis as authorized by PAGCOR. While there was a slip return of domestic gaming demand in 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 13 and a full closure from December 1. Despite the global pandemic, Melco remains 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 2 new hotel towers offering approximately 900 luxury hotel rooms and suites. Gaming places will be expanded, and new non-gaming attractions will also be added, including a Cineplex, one of the world's largest indoor/outdoor water parks, fine-dining restaurants and state-of-the-art MICE space. To further strengthen our competitive advantage in the premium mass segment in Macau, our upgraded work continue at City of Dreams. And the fully renovated Nüwa is expected to open at the end of March. We plan to close the cap down in the near to medium term, reducing the key count and transforming the tower into an all-suite 5-star product with a targeted reopening in 2023. The renovation at the Countdown will give us 5-star offerings across all towers at City of Dreams, further enhancing our position as the leading premium property in Macau. In Cyprus, our development of City of Dreams Mediterranean continues to progress. After completion, it will be Europe's largest integrated resort with over 500 luxury hotel rooms, approximately 10,000 square meters of MICE space, and also amphitheater, a family adventure park, a variety of fine-dining outlets and luxury retail. Turning to Japan, we want to highlight our commitment to bringing a world-leading IR there and continue to pursue opportunities within the market. While the process in Japan has been delayed and remains complex, it has renewed momentum as jurisdictions are again initiating RFP processes. We remain convinced that Japan represents the best potential new gaming market globally. At the same time, we remain patient and will maintain our disciplined approach with respect to all development activities, including Japan. Finally, I remain confident in Melco's medium- and long-term growth prospects. I believe Macau is still the most attractive integrated resort market in the world. Our balance sheet was further strengthened by our recent capital market transactions, enabling us to overcome near-term challenges while investing for the future. With that, I'll turn the call over to Geoff to go through some of the numbers.

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 COD Macau and COD 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. In addition to the VIP win rate fluctuation, our performance was also affected by our bad debt provision. During the fourth quarter of 2020, we incurred a bad debt charge of approximately $23 million as compared to a bad debt charge of approximately $12 million in the fourth quarter of 2019. On a year-over-year basis, the change in the bad debt provision negatively affected EBITDA by approximately $11 million. Additionally, our fourth quarter 2020 EBITDA was positively impacted by a $16 million bonus reversal. Turning to our balance sheet. To optimize our capital structure, in January, Studio City issued $750 million of 5% senior notes due in 2029. The proceeds were used to refinance the $600 million of 7.25% senior notes due in 2024, with the remainder of the proceeds raised to be used for Phase 2 CapEx and general corporate purposes. The transaction reduced our average borrowing rate and extended our maturity profile with Studio City's next material debt maturity not until 2025. Also in January, Melco utilized favorable market conditions to tap the 5.375% senior notes due 2029 for an additional $250 million. The tap was priced at [ 103.25 ] of par, which resulted in an effective borrowing rate of approximately 4.9%. At the end of December, we had approximately $1.8 billion of cash on hand. Pro forma for the capital markets transactions in January, our cash balance would have been approximately $1.9 billion. When combined with our undrawn revolver facilities in Macau and Manila of approximately $2 billion, this implies pro forma available liquidity of approximately $3.9 billion at the end of December. To provide more clarity on our capital structure, Melco, excluding our operations at Studio City, the Philippines and Cyprus, had cash of approximately $900 million and gross debt of approximately $4.1 billion at the end of the fourth quarter of 2020. 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 $145 million to $150 million. Corporate expense is expected to come in at approximately $20 million to $22 million. And consolidated net interest expense is expected to be approximately $94 million to $98 million, which includes finance lease interest of $11 million relating to City of Dreams Manila and $4 million of capitalized interest. This concludes our prepared remarks. Operator, back to you for the Q&A.

[Operator Instructions] We have the first question from the line of Joe Greff from JPMorgan.

Lawrence, your tone today is probably, at least to us, is the most optimistic in at least a year and your comments about your expectations for increased visitation in the near term and more recovery in the mid to late part of March has caught our attention. Can you talk about what's rooting this increased optimism relative to just 3 months ago? And how much -- I mean we obviously had some clear positives recently with travel restrictions easing. How much of this optimism is rooted in, I guess, more traction or ease coming from visa issuance from Mainland China?

Sure. Joe, why don't I give like a high level, and I'll pass it on to David to give more of the details. Well, I think our optimism really comes from seeing what happened with the tail end of Chinese New Year and seeing how strongly that pent-up demand was coming back even last week. And also as there are no more cities on the quarantine list from Mainland China, and beginning of March is always a major political Two-Session meetings. I think after that, there are just many pieces that are getting incrementally better. And with the vaccine rollout happening in China and the rest of the world, I honestly see -- and I think a year ago, when we did this call, for the Q4 2021, we were the very first one to say this is going to be very, very slow and very, very gradual. And so I think finally, we are seeing the light at the end of the tunnel. And when we look at the consumption behavior in China, it is very impressive given how successful China and also, Macau has controlled the virus. So I think with all of those pieces together, and even today, there was a little bit of news that Taiwan has resumed its the route between Taiwan and Macau. So all of these little pieces added together. And I think the main thing we're seeing how strong the tail end of Chinese New Year was. I don't know, David?

And Joe, a couple of things. I think one of the things, as Lawrence mentioned, the tail end of the Chinese New Year, going in, we had pretty low expectations on what was going to happen because of the restrictions that Macau put out there. As these restrictions started dropping, we -- just the arrivals that came in for Chinese New Year, it was pretty incredible, much more than we thought was going to happen. And then the quality of [indiscernible] that we started here for Chinese New Year. So we were seeing a buildup in the fourth quarter, then the restrictions starting pulling in and out, [indiscernible] first since in January, and we started seeing it kind of drop off. But how fast it returned once those restrictions drop, and now that's when travelers started coming back. As IVS comes back, and there's other -- visas and other things start coming into play more, we know the customers want to come. And just one of the other things that really made us pretty happy that we started seeing a lot more customers coming in Guangdong, that region, which we hadn't seen before. We also saw customers that we had in Singapore in our premium direct for at least a year. So we know the demand is out there. The people want to come here. So if these things continue to improve like we think they're going to, as the vaccines rollout, as the number of travelers who are able to come and starting to make it -- so it's easier for them to come, we know that the things are going to improve. So again, we think that hopefully, we'd turn the corner here.

So -- and then, Joe, one more thing I'll add on to -- and David reminded me of something. And then speaking to various levels of the government, they all are very proactively talking to China and the relevant bureaus in terms of restarting the e-channel for the visas, restarting group tours. So there's a lot of incremental positive that they're working on. And with the -- with COVID being under control in China, we do think that once visitation returns and it's easier for people to get into Macau, the appetite is definitely there, and we saw it firsthand, last year.

We have our next question from the line of Billy Ng from Bank of America.

And I think just wanted to follow up with the previous comment regarding the border normalization. I know the situation is still quite fluid, but Lawrence, would you mind to give us some -- your personal thoughts about, like, the following border normalization, timing of the following border normalization, including the e-channel that you mentioned, Hong Kong, Macau reconnection and also, like, other type of users, including group travel and transit visa. What should we expect in terms of seeing a bit more relaxation? Will that be a bit -- like, next couple of months or it will be more realistically, still 3 to 6 months away?

Again, Billy, I think we were very -- we've been the most realistic, and for the last year, we probably feel like the most pessimistic and debbie downer. But I honestly believe seeing how the vaccine roll out in China, Hong Kong, and at the end of the day, if you look at Macau, Greater China, Hong Kong, Macau, Taiwan and China is over 90% of our business. So I think that's the key to restart. I feel like the restarting some of the e-channel stuff, and again, this is ultimately up to the discussion between Macau and the Chinese government. But assuming vaccine rollout is going smoothly, and Macau has started, Hong Kong has started, I do think it's really 2 or 3 months rather than -- for the last year, we've been looking longer and longer. So I do think it's probably 2 or 3 months. So hopefully, sometime in Q2, maybe end of Q2, we'll see some normalization. And Macau, Hong Kong and China has taken a very scientific approach. So even Hong Kong, which is about 20% -- over 20% of our business. I think Macau has clearly told Hong Kong that if they start having the health code, the thing that Macau and China is sharing right now, and that they have fewer than, I think, 10 daily locally transmitted cases, I think that corridor will reopen. And so there are a lot of incremental positives because Hong Kong is really close to that number now. So again, for the first time in really 12 months, we see a lot more positive than negative.

That's very helpful. And my second question, just want to get a bit more color about the Chinese New Year traffic. And as you guys just mentioned, you see some of the new customers that haven't been back for quite some time and also their spending power. Can you tell us a bit more -- have you seen like the recent traffic and compared to the Golden Week, do you see, they spend a lot more? Or it's the same type of customers, but they just spend -- the behavior changed a bit? Or it's different type of customers? Any color that you can share will be appreciated.

I think -- look, I'll let David go into the details. But I think we compare very favorably to Golden Week, surprisingly, especially the last week. But...

Yes, we definitely exceeded the goal of the Golden Week in October of 2020. I think maybe a couple of things to take away. Obviously, this is being led right now because -- by our premium segments, both our premium mass and our premium direct. We've not seen the mass-mass return yet. You can see that obviously in the visitation numbers that the government had posted, but it's been on the premium. I think one -- maybe one other thing to take away from this is if you look at the room nights -- I mean we weren't sold out in our hotels. But if you look at our occupied room nights, and you get a feel right across the room and the players that we had coming in, it's the best we've seen since the fourth quarter of 2019. So again, we're optimistic as we look out into the future here. We think things are freeing up more and more. Like I've said before on many calls, we know that customers want to come. We know the demand is there. They just need to be allowed to come, and we think things will just jump from there. So it was pretty amazing when you go back and look as they started dropping the number of cities and provinces, as they started moving them off the list, the number of people that came in. Traditionally, Macau has got a very late booking window. We had so many day of arrivals, and players that have either canceled or have said they weren't coming, that ended up coming. It was pretty extraordinary for us. So again, we weren't sold out. It wasn't like it normally is before a Chinese New Year, but it was much better than we've seen at the October's Golden Week, and we think there's again room for optimism as we go forward here. We know that the customers want to come.

We have our next question from the line of Praveen Choudhary from Morgan Stanley.

Quick question for me. One is on Hong Kong opening, which I think is obviously the most important in the near term to help Macau. And then second, I have some numerical questions. On Hong Kong opening, in December, we were trying to open up with Singapore, and there were some comments made that Hong Kong needs to show 0 number of local cases for a consecutive 7 days before either Macau or China opens up. Could you just update us if that's changed or things are looking a lot better because of vaccination? And what's your realistic assumption of all the people of Hong Kong and Macau getting vaccinated? Is that when we'll get a full-fledged easy access to these 3 regions, please? And then I have some numerical questions.

Praveen, I didn't hear the question perfectly, but so let me try to guess what. So I think what has changed between Hong Kong and Macau is from Macau's angle, and in my prepared remarks, Macau is nearing the first anniversary of 0 locally transmitted cases. So for Macau government, and I am 150% agreement with them, is that the most important lifeline to Macau is obviously the Mainland Chinese market. And so Macau is not going to risk that with Hong Kong if -- and the definition in Asia and Greater China about controlling COVID is very different from the West. Controlling COVID in this part of the world is almost the elimination of it. In the West, I think it's always going to be like a [indiscernible]. So even though Macau -- I mean even though Hong Kong had under 100 cases, that was considered way too much for both China and Macau. And so Macau wasn't going to risk closing the China corridor for Hong Kong that way. But I think given some of the more drastic measures that the Hong Kong government has taken in the last few months to control their so-called fourth wave, I think now that the numbers are coming down, and that's why Macau and Hong Kong are having those discussions. And again, as I reiterated, it's a very scientific approach in terms of how they look at it. So again, given these numbers, and hopefully, Hong Kong doesn't have any other major outbreaks, and with the vaccination program started, I think that addresses what David talked about, which is if people can come, it certainly is apparent to us now that they will come. So there isn't any permanent change in behavior. People are still longing for that excitement and entertainment that Macau has to offer.