Q2 2020 Melco Resorts & Entertainment Ltd Earnings Call

I'm glad also to report that McHale was largely on by typing Eagles are properties remained open with no loss of power.

However, some parts of the city were affected within 24 hours Malcolm was the first to reach out to the community and in conjunction with the government to provide Aid where needed

moving on to our results during the second quarter are operating in financial performance with severely impacted by covid-19 to mitigate its impact we have been quick to formulate strategies to preserve liquidity and to improve the state of health of our balance sheet.

Recently, we further optimize our capital structure and increased our liquidity on hand with a series of Capital Market transactions, which Jeff will go through in detail. Later.

Over the past month we've been excited to see some early signs of normalization in our integrated Resort operations.

In the middle of June operations at Cypress casino is partially resume.

Beginning in the middle of July. We began to see a gradual relaxation of travel restrictions between China and Macau with travelers from McHale permitted to enter our cities and Guangdong without being subject to 14-day mandatory quarantine that loosening of travel restrictions was extended to the entire Guangdong Province on July 29th.

On August 12th Chinese authorities resumed issuance of IBS and tourist visas zhuhai residence.

We look forward to the resumption of IDs Visa issuance expanding to cover Guangdong on August 26th, and to cover the entire nation on September 28th.

It will also likely take a week or two for the logistics to be worked out. So we expect benefits from these relaxations to start flowing through from September onwards.

While we were eager to resume our integrated Resort operations 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 faster growth in the premium gaming segments, which benefits malco's portfolio of luxury integrated wage.

It has also enabled Malco to meaningfully outperform you today in 2020 setting us up nicely for the expected recovery in the second half of the year.

To strengthen our leadership and premium. We have made good use of the past few months to accelerate various upgrade projects at City of Dreams with the fully renovated non-hotel power currently anticipated to reopen by year-end.

Despite covid-19 melker continues remains committed to its Global development program.

Our next major project in Macau will be Studio City phase II.

Upon completion the phase two expansion will increase Studio City hotel room inventory by approximately 60% with two new hotel Towers offering approximately 1900 luxury hotel rooms and Suites.

In addition to an extension of the gaming space days to also offer new non-gaming attractions that are highly complementary to those in Phase One including a Cineplex off one of the world's largest indoor outdoor water parks fine dining restaurants and state-of-the-art Myspace.

In Cyprus, we're developing City of Dreams mediterranea construction restarted on May 6th upon completion Mediterranean with Europe's largest integrated Resort offering over a hundred gaming tables 1000 slot machine and 500 hotel rooms.

Returning to Japan we continue to believe that Japan represents the best new integrated Resort development opportunity outside of Macau and we are unwavering in our commitment to bring the world's leading I on to Japan.

We know that a number of our Global competitors have abandoned efforts in Japan. I'm pleased to differentiate Malco and demonstrate our long-term commitment to Japan.

When I entered this race more than a decade ago, I knew it was a marathon and not a Sprint.

Frankly while covid-19. Based on all the news flow out of the medical community covid-19 in the rearview mirror when I are actually open in Japan in the back half of this decade.

A global team continues to work and plan remotely and our local Japan team continues to diligently work and meet with key stakeholders to discuss and refine or integrate Resort divorce, but hopefully covet permitted. I will be able to visit Japan again soon in person.

Lost I want to reiterate all bullishness on Malcolm's medium and long-term growth prospects.

McHale Remains the most attractive integrated Resort Market in the world benefiting from the expanding Chinese middle class and infrastructure development in the greater Bay Area including the long-awaited Hang Port checkpoint in the extended train line from zhuhai, which commenced operations just a few days ago.

We have one of the most exciting Global development pipeline that will allow us to reap the benefits of favorable market dynamics.

Recent Capital Market transactions have also strengthened our balance sheet enabling us to overcome near-term challenges while investing for the future but that off turn two jobs to go through some of the numbers.

Thanks Lawrence in the second quarter of 2020. We reported negative group-wide property ebitda of approximately 156 million while luck adjusted ebitda came in at negative $178 million a favorable VIP win rate positively affected ebitda at Macau Alterra and Manila month approximately twenty 1 million three million + 1 million respectively at Studio City. Ebitda was negatively affected by an unfavorable VIP by approximately 3 million.

On a Consolidated basis overall results were positively impacted by approximately 22 million.

In addition to the VIP win rate fluctuation. Our performance was also affected by our bad debt provision during the second quarter of 2020. We incurred a bad debt charge of approximately twelve million this compared to a bad debt reversal of approximately half a million in the second quarter of 2019 on a year-over-year basis the change in the bad debt provision negatively affected ebitda by approximately 23 million.

On our first quarter conference call we discussed how we had reduced our daily fix topics run rate in Macau from approximately 3 million per day prior to the emerging covid-19 to approximately 2.2 million per day in April.

With further cost reduction efforts are second quarter daily fix topics run rate for our operations came in at approximately 1.9 million per day, which was a month or 12% lower than April.

In July, we have further reduced our run rate to approximately one point seven million per day which represents an over 40% reduction from pre-k levels.

With successful cost controls we expect our Macau operations to achieve break-even adjusted property ebitda upon reaching approximately 30 to 35% of our historical gross Gaming revenue levels.

To bolster our balance sheet in April. We enter it into a new senior facilities agreement and sold the shares we held and crap in May the board suspended the company's quarterly dividend program to optimize our capital structure Studio City had in July issued five hundred million of 6% senior notes do 20 25 and 550 million of six and a half percent senior notes due 2028 the proceeds of which were used to retire the $850 million of twenty Twenty-One seen your notes and to partially fund them to expansion of Studio City.

In August Studio City completed a series of private share placements raising approximately 500 million of proceeds to strengthen the balance sheet.

Additionally Melco recently issued five hundred million of 5.75% senior notes due 2028 the proceeds of which were used to repay the drawn amount of approximately $350 million from the revolver. And for General Corporate purposes taking advantage of favorable market conditions, Melco subsequently tapped the 2028 notes for our R350 million which brings the Blended average yield for the entire 2028 notes offering to 5.68%

These transactions significantly increased malco's liquidity while meaningfully improving Studio City's ability to fund its face to expansion. They also push out Studio City's next material debt maturity to 24 and malco's to twenty twenty-five as of the end of June. We had approximately 1.2 billion of cash on hand pro forma for the aforementioned transactions are cash balance would have been approximately 2 billion which combined with our underground revolver facilities in Macau and Manila of approximately 2 billion months implies Pro former pro forma available liquidity of approximately 4 billion as of the end of June.

Do you provide more clarity regarding our capital structure within our wholly-owned group we had cash of approximately 670 million and gross debt of approximately 3.4 billion month at the end of the second quarter of 2020 excluding Studio City the Philippines and Cyprus.

As we normally do will give you some guidance on non-operating line items for the upcoming quarter total depreciation and amortization expense is expected to be approximately 150 to 185 million corporate expense is expected to come in at approximately 20 to 22 million and Consolidated net interest expense is expected to be approximately $94 to $98, which includes Finance lease interest of ten million relating to City of Dreams Manila and two million of capitalized interests that concludes our prepared remarks operator back to you for the Q&A.

Definitely a ladies and gentlemen, we will now begin the question-and-answer session. If you wish to ask a question, please press star one on your telephone keypad and wait feeling to be announced off. Thank you.

We have the first question from the line of Griff from JP Morgan, please go ahead.

Well on your end two quick questions Lawrence, you mentioned about the premium segments, you know, seeing the biggest type of the fastest type of wage and can we just talk about the VIP segment for for a second? Um, are you anticipating on focusing on that more relative to the past or anticipating more directly off and using my own Capital? Can you give us a sense of you know, how your major Jungkook Partners balance sheets and loop liquidity positions are and is this potentially a constraint that you and others in the market should be worried about

So why don't I take the first part of the question and then perhaps David six and and and Jeff Davis and can find in on on the details page melkor has always focused on, you know, I've always done well and and we built our portfolio of assets focusing on the premium mask and and also with the premium segment so the the directly IP segments and and so we expect that those segments to really lead the way on the recovery. And you know, of course, there are there there always are issues with regards to you know, what's happening with the young kids and and their health and so maybe I'll let David and and and just give more details

Sure. Hey, Jose David. So when we look at the junkets those that are proven direct way. We're really not seeing anything out there that gives us a lot of concern. We do spend a lot of time friend understand from a from a credit standpoint. It's actually payment to make sure that we we feel pretty comfortable with what the junkets and the credit that we given but so far we've seen nothing that has any concern we've done very well, you know because of the assets that we built we've got good Partnerships with our junkets and we also have really good Partnerships with our players and our product that we've got that we've done and certainly on the renovations that we've done over the last month or last couple of years and was Morpheus opening up we've got super product that is very attracted to the players under the junket. So we always think we get more than our fair share with that. We think we like I said, we've got good relationships. We're not concerned on the club at this point. We've seen nothing out there in the market. We're cautious when we do give credit. So I think on a kind of going forward, I think as soon as the market actually would see the IDS and the other things. Yep.

Whether we think going forward we're party. We got a pretty good business model. We're pretty happy with it.

I'm presuming The Experience out of zhuhai any high potential visitation list, since the 12th has been minimal was it has been coming out of the market. Can you comment on maybe what I've seen more recently on that or just confirm maybe that that data point and then just kind of looking out to the September 3rd presumption for the the rest of of the country long. Do you anticipate any bottlenecks or or a slowing in process relative to the past and I know Lawrence you mentioned that one or two week time frame to to see the benefits of of diseases being issued, but quite simply is that enough time to to see an impact of a major bouncing visitation for the golden week holidays. Thank you.

Hey Gerald again. What do I hand it over later on to David? But you know as we talked about we do believe that the processing time is going to be around seven to ten days. And so I think in a few days you might start seeing something on the zhuhai resumption, but I think the key will really be Guangzhou. But in any case we're given so much uncertainty in the world. We we we certainly see long-term medium-to-long-term positives considering that is probably the safest place on Earth without a single Global case for quite a few months now and also the lack of travel options and destinations Mainland Chinese got so I think those are medium to long-term positive in terms of the short-term. I do think it's going to be a gradual. It's not going to be a V shape recovery because dead

At the end of the day people are still will be traveling outside the country for the very first time I guess David. Do you want to fill in on what you're seeing on the month? Yeah. So I think you know this there's kind of to process is when people go get the the visa application for the IDS one is essentially there's what they call a manual process and there's no other ones off automated. Unfortunately, it turned off the automated so effectively a person who wants to come to Mccalla have to essentially make an appointment. It takes about 7 to 10 days to process is there is there is a bit of a long as they go through there and they've got to go ahead and get a code that test before they can come across the border from you you asked about perhaps, you know, the testing and things we've expanded the testing them and calendars them on your site. Now, this is really the best insights in in China. So I don't anticipate that being a problem but like warrants I think there is going to be a wag. So if you go from zhuhai to Guangzhou, I don't think there's no

In out there that we know of where that we've seen that says ones. You'll probably is not going to have the same deliberate process that was put in place through high and then as we get out there on the 23rd of September when we look at it for the rest of China, I think it'll probably a similar process is once said, you know, we haven't had a a case to a local case number 144 days here on McDowell.

I think you know the China bubble that we're in. I think we're in a good place but I think China is going to continue to be cautious much like in Cal going to continue to be cautious. So I think over the short-term, you know, we've been on a pretty bumpy but I think as we head out into the the midterm in the long-term, we think there's a lot of pent-up demand out there for our customers and you know, I think for the first time we get out a little bit more I think we're actually starting to see some some some smooth Road out there on the horizon.

Great, and and that leads your life, They're at least to my next question about the resumption of issuing I vs vs.

Thank you guys. Appreciate the thoughts.

Thank you. We have the next question from the line is Praveen Chaudhary from Morgan Stanley, please go ahead.

Thanks very much. Thanks for taking my call. I have two questions. The first one is related to the fax number. So congratulations on getting topics down significantly. I was wondering when we get back to revenue level of let's say fifty percent of whether its fourth quarter or next year first quarter, what would that wage be because it must be going up and the second question. Sorry, the second part of the same question is what happens when we get back to 2019 level so hundred percent back to revenue. Let's say 2021. The second question is related to visitation. If you look at the last four or five months of visitation do us to visitation. We used to be bottom wage at three hundred five hundred people a day. Now. We are tracking around eight thousand visitors a day clearly not picking up the ideas yet, but the GM is still off.

Talking, you know down 95% We haven't seen any significant move despite so much increase in visitation. Could you talk a little bit about what kind of visitation these before i v s which is not helping to the revenue. Thanks very much.

Hey, maybe Jeff. If you can take the first question and David if you can just a second one.

Sure. So on the first question for being on our our last call indicated that about 75% of our cost reduction was volume related and about 25 per month was through management initiatives that's closer to 50/50. Now, of course, the quantum is increased but there's percentage is now shifted to something closer to fifty fifty thousand and of that total amount, I would conservatively say that ten to fifteen percent of those savings all together. I would not as permanent savings for the volume related savings. Those would come back fairly ratably as the play came back.

I promised David so on the visitation even though these kind of seeing the visitation kind of pick up really haven't seen that in the properties yet, you know, so well the good life is a bit better in the properties. It's still really light and we're coming off an incredibly low number. I mean there are many times when you walk through the casinos and if you walk over to our competitors, you'll find less than 20 people in the office, you know, so we're starting from very very well number. So when we say we're down ninety-five ninety-six percent from where we work we're starting from such a low day. We feel pretty good about a property in the way. We've goes our properties and the players that we have on our customers. We we see you again much more towards a premium Mass. We are not a mass mass type of place. So we don't necessarily need those big volume that if some of the other concessionaires may need to see we we are very premium Maps focus with the product that we have. So our goal in our our our our work is towards getting our premium packages.

Plus players back into our properties. We think we're going to be able to do that over and over the next few months here, but it's again. Our model is a bit different than the other guys where the other issue, you know, there's perhaps more on tour and travel and a lot

More about that big part of the traffic coming across the border. We're not as much long as towards that we're very premium Maps or and as you know,

yeah, thanks. Thanks very much. I appreciate it answer and good job on the cost reduction and hopefully things improve from here.

Thank you. We have our next question from the line of Edward angle from McCleary, please go ahead.

Hi, thank you for taking my question. I know it might be early. But I was just wondering if you had evidence whether that conversations with your with your customers or even former bookings any evidence that your premium asking VIP. I guess direct VIP customers are even interested in returning to Macau by October.

So we you know, we've been talking to our customers think one of the things we've done in tried to maintain a really strong relationship with our customers and our customer guys have been out in constantly. We're we're reaching out to our customers making sure that you know, if they need masks or they need any other type of uh sanitation or sanitizing, um implements or whatever they may need but just really working hard to maintain those relationships with those players. We we know there's a lot of pent-up demand for our players. I think it's more a matter of them being able to get the the visa to come across I think again, it's trying to make them feel as safe as we possibly can but we we do know that they want to come it's just it's it's timing and I think they've got to make sure that they feel safe and one of the bigger issues that we had in the very beginning was awful lot of players wanted to come they when they went back to their home Province. They had to essentially quarantine for two weeks. Well, if you're a businessman and you're trying to go back and forth you want to come for a weekend it's not going to be very effective but to be able to run your business.

In China, so we we do see things getting better. We do see things over time getting to where we want to be but it's again it's it's going to take time here, but there are good things in life. You hear good things from our customers.

Great. Thank you for that. And then if I have a call correctly earlier in the year the dicj was jerking you from using more than 80% of your tables. Is that restriction still in place.

Know what the Restriction now basically if you have to basically have a meter between the let's say let's say the tables are the seats, you know, again, not not to keep belaboring this too much. We want to really like it from our operation is setup. We're able to spread out more so we only want to keep one or two players on a table. We're about velocity and getting our premium players on a table so we can kind of crank it up and get more hands out per hour or so off. We kind of wiped that model on the sense that it allows us to spread out and have more tables open which allows us to get more decisions out. So for us, it's not a big deal from the standpoint of again somewhat the icj's you can open up as many tables that you want you to have to make sure you maintain a level of separation.

Great, that's really helpful. Thank you.

Thank you. We have our next question from the line of George from Wolf research, please go ahead.

Evening to you. Thanks for taking my question. Maybe just to go back to this point a little bit more Lawrence. You talked about a gradual recovery. Not a v-shaped recovery. If we look at Travel inside of China right now in China domestic travel Hotel occupancy is close to pre-owned. You've seen that Improvement come back. So can you elaborate a little bit more on life recovery you would expect in Macau is is that more because of consumer hesitation to cross the border or do you think China May limit Visa issuance has as a way to manage the virus.

Well again, I think it's a it's going to be a combination of both of the factors that you mentioned. And again, I think even in China it's different places different regions are experiencing the the recovery quite differently and again, medium-to-long-term as we mentioned earlier on all the infrastructure would have been put in place and as recent as the last few days, there's been further infrastructure improvement with the opening of the engine check point the subway connection from zhuhai to hang Chang. So there's a lot of improvement there, but at the same time there will be inevitably with these new Improvement. There's going to be other bottlenecks that might be created and although within China travel has has recovered very nicely dead.

And although Michaela's part of China, it's still considered to be you know, we would still be the first time people are exiting China. And and so we do expect that whether it's from a process standpoint or from a psychological standpoint. It's it's a little bit different. So we we we still think the the the recovery will be very nice, but it's going to take a little bit longer than we had hoped.

Great. Thank you. And just to follow up on that that last point do you think China will limit Visa issuance has compared to maybe what they were doing, you know a year ago off and then just as a a separate unrelated question. It's been some news reports out. Can you just talk about how you utilize we chat and what sort of an advantage is for you guys if some of your competitors and in the US won't have access to that platform.

Sure. I I guess I'll maybe David can fill in on on more details. But you know at Malco is a we're a Chinese company. We're we're headquartered and McHale and and so I'll call leagues use, you know, Chinese devices and and we've had a number of the you know, all of those available devices to us and I don't know David you want to try Min? Sure. Yeah God what if you don't use WeChat in China, you're not communicating with anybody. It's not like everyone's got a bunch of laptops at home. It's kind of a silly thing in terms of the statements. I think that was made to you're going to take that off you got over a billion people and and we check the primary device in which they communicate and primary device in which a lot of Commerce is is done as well. So our guys are marked off.

everybody here uses

I mean it is it must be dick what is saying from a communication device in in terms of a communication method and in the market here so long we've got great people in terms of how they go out reach out to our customers via that they check up on our customers via WeChat people. Send video to send voicemails all kinds of his life is pretty much done through WeChat all your social media. Everything comes through. I mean, it's just there's no way you'd ever exist without here.

Oh, okay. Thank you. It just the first part of the the follow-up. Do you think China will limit Visa issuance has a way to manage the virus in any way?

No, it's it's hard to tell right now and David alluded to earlier on there all they've they've made it a manual process. So I think even then there's going to be a bit of a bottleneck on that front. But with this with covet it's highly understandable that it's going to be gradual process. And you know, if everything is smooth, there are no new cases and I'm sure then that will give everybody whether it's the cow government. The Chinese scientists have been to to to just open up to to where where it was previously.

Okay. Thank you very much for the time.

Thank you. Is there no further questions? I would like to hand the call back to Mister Richard for any closing remarks. Thank you.

All right. Thank everyone for calling in today. We look forward to speaking with you again exporter.

Thank you. Ladies and gentlemen that does conclude your conference for today. Thank you for participating in the old disconnect. Thank you.

Dead dead dead dead.

Dead dead dead dead.