Q3 2019 Earnings Call

Ladies and gentlemen, today's conference call is due to begin shortly until such time your line will remain on music.

Please standby thank you for your patience.

Once again today's conference call is due to begin shortly.

Till such time your line were made on music.

Lease could do standby with thank you for your patience.

Ladies and gentlemen, thank you for participating into third quarter 2019 earnings conference call all Smelko resorts in interesting limiting.

At this time all participants are in listen only mode. After the call. We will conduct a question answer session. Today's conference is being recorded I would know lucky turned to go over to Mr., Richard <unk> director of Investor Relations of Melco Resorts and Entertainment limited.

Thank you operator, thank you for joining us today <unk> fourth quarter at 29 <unk> earnings call on the call today, Although we're told Jeff Davis in a property precedence in Macau in Manila people would get socket. Please note that today's discussion may contain forward looking statements made under the safe Harbor provision.

No security small actual results could differ from anticipated results I'll now turn to cope with the Orange.

Thank you Richard.

<unk>.

First before I proceed.

I would like to congratulate the sale thing on his election as the chief executive the Macau as they are.

For more than one decade.

We have been collaborating with the government in developing cold tie into a world class must see attraction.

Going forward, the Melco team and I remain extremely bullish on Macau long term growth prospects.

For two assisting them account government and further enhancing yes, there Oscar session has a leading travel entertainment destination.

Moving on to our results.

I'm very pleased with our third quarter performance, we bought luck adjusted property EBITDA growing 11% sequentially and 25% year over year to an all time record high 439 million, despite third quarter market why gaming revenues experiencing a modest decline in Macau.

The strong set of financial results was driven by a robot mass market mass table revenue growth of 22% year over year in spite of macro headwinds and events in Hong Kong.

During the third quarter, our mass table volumes and spot volumes, both reached an all time record Holly.

The third quarter also represents our 16th consecutive quarter [laughter] positive mass table volume growth.

The consistently strong mass gaming performance highlights not only strengths in Macau mass gaming market, but also melco leadership position in the city's mass in premium mass gaming site.

City of Dreams, Macau continue to flourish with yet another quarter of significant market share gain in both the mass and VIP gaming site.

Together with our strong cost discipline drove EBITDA, 58% higher year over year.

Studio City also continued its fraud with record mass table and slot volume driving property EBITDA growth of 19% year over year.

Our luxury boutique casino resorts Altira experienced the same mass gaming strength with mass table gaming revenue expanding 40% year over year.

Our third quarter performance demonstrates the resilience of our even though highlighting the strength of our award winning integrated resorts and benefit from our industry, leading earnings mix with over 90% of on Macau EBITDA contribution by non VIP segment.

Remove remain as confident as ever and Macaos mass market group, which right on the growing Chinese middle class, New integrated resort openings and significant infrastructure upgrades, including the recently opened Hong Kong through on the coverage. The soon to be open Macau light rail transit.

And the upcoming extension of China's high speed rail network as it as a result of which Macau will become even more sensible.

To leverage off the robust steadily growing mass gaming market, we will continue to invest responsibly in Macau to further upgrade our resorts and to expand our asset footprint.

At city of Dreams, we opened a new premium mass gaming area in October well upgrade work currently ongoing to further expand our premium mass gaming spaces.

We on the process of adding more villas to Morphea <unk> and the renovation of nuance is also expected to commence in 2020.

[noise] over it still city, the 50000 square feet Legend Heroes VR Park opened in August .

Instruction work for the new ice rink is also well underway with the opening anticipated in mid 2020.

Our next major project in Macau would be the further expansion of studio city.

We hope to commence construction before year end and have budgeted 1.35 to 1.4 billion for the studio city expansion, which is expected to have to deal with Howard is cineplex one of the worlds largest indoor waterpark and additional gaming space.

Moving to the Philippines.

City of Dreams, Manila luck, adjusted EBITDA increased 16% quarter over quarter, driven by extend that mass gaming strength and improved VIP volumes post opening of the new VIP area.

In Cyprus, we continue with our efforts to wrap up on temporary and our satellite casinos with EBITDA from the Cypress casinos growing 42% year over year to 9 million.

Turning to the balance sheet.

Our net debt to EBITDA leverage ratio remains low and approximately two time.

And they both us to continue of our recurring dividend program, while retaining ample financial flexibility to reinvest in our existing properties and to pursue new development opportunities.

Finally, we continue to work diligently in Japan.

MACOM Melco has been a longtime supportive Yokohama suit suitability to host one of Japan first integrator resort and has demonstrated its commitment and support to Yokohama through a series of local events across the city throughout 2019.

In July we announced a partnership with the Yokohama asked Marino and the Manchester City football club to create and implement community programs and events in Japan and around the world.

In September we announced our Yokohama first policy as we focus our Japan team on bringing to Yokohama, the best IR the world has ever seen.

Our focus on the Asian premium segment.

Portfolio of high quality assets.

Option to craftsmanship dedication to world class Entertainment offerings market, leading social safeguard systems established track record of successful partnerships.

Culture of exceptional guest experience and commitment to employee development will put melco in a strong position to help Yokohama realized the vision of developing a world leading IR with a unique Japanese touch.

With that I'll turn the call to jump to go through some of the numbers. Thank you Lawrence.

I would like to start by highlighting that the acquisition of the 75% equity interest in IC, our Cypress for Melco International was completed on the 30 Onest of July .

The historical financials have been restated to include the financial results of the Cypress group, which is the required accounting treatment.

Moving onto the highlights of our third quarter results, We reported group wide property EBITDA of approximately 418 million in the third quarter of 2019, increasing by 39% from the third quarter of 2018.

Our luck adjusted property EBITDA increased 25% year over year to an all time record high a 439 million.

And unfavorable VIP win rate negatively affected EBITDA at Cod, Macau and Cod Manila by approximately 20 million and 10 million respectively.

At Altira and that studio city EBITDA was positively affected by a favorable win rate VIP win rate by approximately 4 million and 3 million respectively.

On a consolidated basis overall results were negatively impacted by approximately 21 million.

In addition to the VIP win rate fluctuations. Our performance was also affected by our bad debt provision during the third quarter of 2019, we incurred a bad debt provision of 10 million as compared to a bad debt reversal of 3 million in the third quarter of 2018.

A year over year basis.

The change in the bad debt provision negatively affected consolidated EBITDA by approximately 13 million.

In the third quarter.

The luck adjusted property EBITDA margin in Macau was approximately 29% increasing by approximately a 120 basis points quarter over quarter end up by approximately 430 basis points year over year.

In the Philippines Cod Manila delivered luck adjusted EBITDA of approximately 60 million, representing a decline of 11% year over year.

The luck adjusted EBITDA margin at Cod, Manila increased by approximately 290 basis points quarter over quarter, but declined by approximately 330 basis points year over year to 40%.

Moving on to capital management. The board has declared another quarterly cash dividend of 16, and a half cent per adss.

To provide more clarity regarding our capital structure within our core wholly owned group, we had cash of approximately 670 million in gross debt of approximately 3 billion at the end of the third quarter of 2019, excluding studio city in the Philippines.

As we normally do we'll give you some guidance on non operating line items for the upcoming quarter.

Total depreciation and amortization expense is expected to be approximately 165 to 170 million.

Corporate expense is expected to come in at approximately 32 to 34 million and consolidated net interest expense is expected to be approximately 80 to 84 million, which includes finance lease interest of 10 million relating to city of Dreams Manila.

For the upcoming quarter, we do not anticipate any capitalized interest.

For those that follow city of Dreams Manila more closely our building lease payment for the third quarter of 2019 was approximately 10 million.

That concludes our prepared remarks, operator back to you for the Q in it.

Ladies and gentlemen, we will now begin to question and answer session.

Which will ask the questions. Please press star one on your telephone now and we laid for going into the enterprise.

I wish to cancel your question please press the pound or Homescan.

Your first question comes from the line of Joe Greff of JP Morgan. Please ask your question.

Hello, everybody.

Obviously, the the mass table results that.

Dreams was impressive and it's tough not to ask about the.

33% hold percentage there.

Can you talk about what's driving that exactly.

Next versus premium answers is based math.

I'm sure it to some degree of duration of play, but you can give us some specifics there and I do think about.

How to think about normal hold percentage going forward.

How do you view that right now and then I have a quick follow up after that.

Sure Hi, Joe It's David Haye, So its things we've talked about in the past I mean, we've got an incredible facility with more PS with the wonderful renovations that we've done the way we laid out before we've also got some amazing employees both in our operation our marketing staff, which essentially creates a happy environment for our customers happy customers stay.

Longer at play longer they roll more.

Excuse me they play longer and they just stick around where switch I think contributes to our higher hold on in response to your second question looking or hold I think we've said in the past we think it's still in the low thirtys. There's been nothing that we seem to change that we're still fairly confident in that.

What percentage of your math is would you characterize is premium that how does that compare to your adapt.

You know I think premium mass is kind of change typically have always kind of looked at it more from a geographical basis as we've gone through interviews to have the birdcage as we had to close down the birdcage.

Last year, you might remember July and August we had some challenges there what the smoking I am now it's kind of migrated out of that what's called the Hyatt area in kind of more cards.

Mauritius, so really it's kind of combining now down to where we just opened up the NIM Pip 76 area, which used to be no premium direct yet and where we have what we call. It 95, which is part of the closest to Morphea, some new out, but we really don't the finally find it more geographically in that sense not necessarily by just by players.

And then if you look at our players now to our players if you walk around our work the goal over the place the doubts back and forth on that name for they bounce into the premium areas, it's really difficult to say, yes, what constitutes premium mass I think right to think of ourselves is 100% premium mass with our players.

Great and then.

My follow up.

Based on what a couple of your competitors have needed October has been a relatively.

Stronger more of a a rebound months can you talk about your experience so far in October and.

Maybe you can listen detailed on mass and VIP, which is I think generally been encouraging.

Relative to maybe were beaten down expectations have been thank you.

Yeah.

We've been really pleased with our results in October we had a good golden week.

We've seen really nothing that makes us think that the those numbers in that.

That good play is not going to continue.

Alright, thanks, guys.

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

Hey, good morning, everybody just a quick follow up on Joe's question.

What do you think is if 33 was to hold percentage in the third quarter is that do you consider that that normal is that is that.

Low enough in the low thirtys range to for you to believe that its bids.

There was not a huge Holden factor or luck fact or other.

Yes, I think that low thirtys is probably where we should be I think again thats, probably the normal part of our range.

Alright.

And then a quick comment.

Quick question.

Related to Lawrence's.

Comment on the rail spur.

As we understand it will probably.

Coming to operation.

Perhaps connecting the Lotus bridge.

Perhaps late in the second quarter can you discuss that as well as.

Any.

Expectations that you have for an increase visitation through the Lotus Bridge, which I think I guess, what it what is get three dogs in five five caps a month through through there.

No.

Oh, hi, so you're talking about the high speed rail from handset, yes exactly.

No and then they I think theres a lot of movements in terms of and positive movement from the integration of the greater they think starting with the the light rail and in Macau and I know that the Macau Guffman is pushing is going to manage the border and they're going to simplify.

The border crossing so I think all of these are going to be positive.

For Cotai and this has been something that we've been lobbying and pushing for the last five years and I think a primary beneficiary of that is naturally all the cotai operators, but even more importantly.

Studio City, the studio city, the our investment thesis from day, one was always because of its proximity and connection to the noticed first border. So we're quite excited by all the or the recent news.

Of more and more movements pushing to load as much.

Very good and then.

Just had a.

Kind of a clarification story or question the.

The crown investment as I.

Discuss it with investors seems to be.

Using investors it's.

There's a there's a there seems to be some.

Great deal of questions about why and where we stand on it and and and so at the moment it seems to be a bit modeled and and Lawrence perhaps you can spend a few minutes.

Helping us understand what the strategy is.

Sure I think we've we've been partners of ground for a long time and the two organizations.

DNA and culture, a very similar and I think most importantly, we believe crown has great assets.

Even on a on a world stage.

And Royal Crown Melbourne is probably one of the Best example, a successful urban revitalization. So and also quite importantly in terms of all global expansion.

Australia has some of the best in class regulatory regime. So we believe that once we get through the probity process there.

It will continue to help us as we expand globally. So I think one oil.

The best in class assets to the regulatory regime.

At war chest of both in terms of where we want to expand.

And if you get the probity, probably through the probity process do you have some estimate on its accretion to your free cash flow.

So.

I think net of.

Any debt service related to the acquisition as you know we've closed on the first tranche. The second tranche is spending each one is about roughly half of the total amount.

That the dividend would more than than service the debt. So.

Net cash positive on an ongoing basis.

Okay. Thanks very much.

Your next question comes from the line of building long from Bank of America concede ask your question.

Hi, good evening warm and congratulations on solid results I asked two questions one.

I know, it's hard to quantify but.

You see or do you feel there any impacts from the Hong Kong.

Sounds like that.

Direct impact.

The two numbers or potentially and not so bad small on if he can give us any insights that will be appreciate.

The ability as Lawrence here, let me I don't think across our portfolio of resorts in Macau, we haven't really seen any.

Impacts from from the Hong Kong protests, I don't know, but David Jeff.

Seen anything.

No.

It's David we've not seen anything at this point, if anything we've actually seen a little bit of traffic coming in more front from Hong Kong as people, maybe Wanna get away from the protest a little bit.

Right.

Our second questions regarding Japan.

The new Oklahoma only strongly.

As much as you can share that would be appreciated just like you were.

Where's the.

Oh, well exactly in terms of.

The identify potential partners and how far away because we understand that and the pause there were some focus on on Santosh and Yokohama in terms of timeline in terms of congrats if you can share anything that will be accretion.

Sure village Laurence there. So Yokohama has kick started their RF RFC process.

And that's due before right before Christmas.

And I think the reason that Melco, clearly stated our preference and AUR.

Prioritization of Yokohama is the fact that we feel.

Yokohama is the best location given this geography.

Infrastructure accessibility.

For a successful urban integrated resort and this is an area that we really have in all in all opinion.

That's where we can best contribution.

And so and also the effort that we've spent and Yokohama in terms of engaging with local associations logo, and then and as I mentioned earlier on or.

Community sponsorship and support of the Yokohama Marinos.

We felt that that's where we've made the most.

And ladies and so I think thats why.

Hi, My first strategy.

As a very important one.

And in terms of.

In terms of next step in terms of partnership building.

We're having a lot with had a lot of conversations with potential partners and the partners on naturally choosing among various global operators.

We are an active discussion and unfortunately, we don't control the timetable on that basis does.

That is more based on the domestic consortium.

Okay.

Thanks, a lot going that accretion for the insights.

Your next question comes from the line of George Soi Citigroup. Please ask your question.

Hi, guys Lauren mentioned earlier about a new premium aspirin being opened in October at Cod.

Just wondering if you can share of us.

Okay.

New club differs from the other two existing cheat on clubs. Thank you.

Sure Hi, George its David So this new cloud is meant to be more of an Uber a much higher level of experience you had a chance to go into and it's a really beautifully designed club on the bat limits are much higher in there it's done for our exclusively more for our Dragon players, although given the betting on as we certainly would anybody another wants to play but.

It's really meant to be much more exclusive and much more unique and have an element of luxury that our other two areas don't have.

Yeah, David that's out there that's a reasonable as I was not allow bands that [laughter] Venezuela.

Hi battery.

That's ever that's a good day.

[laughter] rollout Ed.

Uh huh.

Thank you very much.

Your next question comes from the line of Ricardo Chinchilla of Deutsche Bank. Please ask your question.

Hey, guys.

Housekeeping for me can you please.

For my your thoughts on capital expenditures for their mystery to group for next year.

Sure so for for next year our.

Total capex is roughly 275 million for maintenance and.

Ongoing development work at the existing properties.

And another 385 million.

Development Capex, mostly for studio city phase two.

And for city of Dreams, Mediterranean, obviously, those two would sit outside of the of the restricted group.

And most of what I mentioned in the 275 Wood said.

Inside the restricted group.

Perfect and have you guys.

Have any further details on how to fund the second part of the French when it closes have you guys to explore anything different.

We've explored a number of different options and.

When we have a better understanding of the timing of the completion of the the second tranche of the of the transaction.

Then we will again survey the markets and see what.

As the most advantageous approach to financing the second tranche, but there isn't interested in using the asset itself to help fund.

The second part of the of the acquisition.

Thank you so much.

Your next question comes from the line of Provine Chaudhry from Morgan Stanley . Please ask your question.

Hi, Thank you very much I Lawrence.

My questions related to the rule.

VIP business.

Overall the market is suffering.

Last few quarters, and we're not seeing any recovery.

Anytime soon I knew you guys aren't taking share.

New capacity added in city, you dream, but I wanted to skew much broader question on the.

Likelihood of any recovery in the overall VIP business.

Mitch.

Down that view hearing.

Junkets and when do you think is now thank you very much.

Previously so I think broadly the VIP market.

They have started to stabilize really in at least in the beginning of the fourth quarter in my view.

And then ultimately I think the gaming market on the VIP market in Macau is very much driven by the Chinese economy, and Chinese policies and.

I think the sooner that the trade more.

Some sort of resolution and the renminbi.

Is more stabilized install devaluing.

It is going to have.

Positive impacts to to Macau gaming and also to the VIP market I think during the third quarter and over some are there was noise about sun city et cetera, et cetera. So I think that was I think that was probably a shot too.

The market initial two to some of the guess says confidence.

So I think hopefully with a lower base now as well.

Hopefully, we'll start seeing some I wouldn't say growth, but a moderation in terms of the decline and on a half to recover.

That's.

Great News and there was some carry that the VIP slow.

Down could have impacted premium mens, but so far the numbers that we've seen this quarter from you of course has been as your peers suggest that that's not the case has been pretty mass has been doing well so.

How do you explained that would you see that.

Just be again for your mass or completely different and pretty much continues to do well and should could you do well in future.

Or do you have some other times. Thank you that's my last question.

Maybe I'll hand, it over to David but I think generally the reason that weren't doing well with one.

No we up morphine is and we have we have.

Don significant reinvestment into the various areas at city of Dreams, Macau, but at the same time studio city and Altira is also done very well and I think that has really attribute to all the hard work of our colleagues and some of the.

Organizational and.

Improvements that we've made so I.

I don't know of David you have any yeah, sorry, cravens, David So I think it's a couple of things, it's kind of alluding to what I'm more in Sabadell, one of the big things is our people worked really really hard they really go after customers and we really try to build those really strong relationships on the other thing that doesn't get talked about as much is that as the Chinese economy as grow.

And any gotten more and more people that are getting wealthier, we're starting to see more of those people come into Macau. So I think the opportunity for premium mass to grow rains really really robust here going forward.

That's very helpful. David and thank you very much Lawrence.

Zones.

Hey here.

Your next question comes from the line of Edward Ingles from Macquarie. Please ask your questions.

Hi, Thank you for taking my question Congrats on Awesome quarter I was wondering if we get an update on the timeline for the new a hotel renovation next year and just maybe how that product might fit into the rest of your portfolio.

And then I also think you mentioned something about 'em suites in Morphea <unk>, maybe being added key touched on that as well.

Sure Edward it's David So I think the first thing on new as we're looking to start the renovation on what should take place I've ever got a 15 month period will take place starting right. After Chinese new year. The idea that price again is to make sure. It appeals to our very best of the IP players and our very best premium mass player. So it'll be a.

Really nice five star experience. If you think about new I knew has always been kind of a traditional kinda classic hotel, we're going to continue to maintain that maybe try to contemporize out a little bit in regards to your question regarding morphea looking to add three though as we had some space that we have show that when we built morphea. So we had space for three those we've also got another space working to add to arch. So.

Weeds I'm the work on that were under design right now that should be pretty spectacular when it comes to the market again, a very contemporize design on the designer for that is the same designer who did do cost for us and Paraguay Arash. So it's a very dynamic guy out of France.

That we're probably looking to see built out probably towards the end of 2020, hopefully in time for Chinese new year or 2021.

Great. Thank you.

There are no further question at this time I would like to handle on things back to Mr. Huang. Please go ahead.

Thank you all for dialing in we look forward to speaking with you again exploded.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.