Q2 2021 Melco Resorts & Entertainment Ltd Earnings Call

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Ladies and gentlemen, and thank you for participating and the second quarter.

'twenty 1 earnings conference call.

Melco resorts and Entertainment Ltd. At this time, all participants on listen only mode and after the call. We'll conduct a question and answer session. Today's conference is being recorded.

I'd like to turn the call over to Mr. Robin U N director of Investor Relations of Melco.

And because he's watch and Entertainment Ltd.

Go ahead.

Thank you all for joining us today for our second quarter 2021 earnings call.

On the call are Lawrence Ho, Geoff Davis, Evan Winkler, and our property presidents, and Macau and Manila and Cyprus.

And before.

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.

Are included in the earnings release.

Finally, please note that our supplementary earnings slides are posted on our Investor Relations website.

With that I will now turn the call over to Mr. Ho. Thank.

Thank you Robyn.

Before we begin to talk about our business performance I would like to express our sympathy for the people.

And who have been impacted by the flooding and China.

We hope for a swift recovery of the situations soon.

Our results and the second quarter continued to reflect the pandemic impact on the business. However, on a sequential basis, we experienced a progressive recovery and business levels.

And as tourists returned to Macau.

First we would like to thank for Macau and mainland Chinese government for the efficient handling of the COVID-19 situation.

And as travel restrictions loosen and visitors gradually return and <unk>.

<unk> has enjoyed a steady recovery and its integrated resorts industry and it's.

Overall economy.

And we have rolled out employee vaccination and incentive programs to support the government's efforts to meet its community vaccination go 70 per cent.

Since mid July and Macau vaccination rate has reached over 30% is on track to hit herd immunity before the end of the year.

Here at Melco and.

Our overall employee vaccination rate has reached almost 65 per cent.

We are following the COVID-19 guidelines set by the Macau government and we have dedicated substantial resources to create a safer environment for the community on customers and all colleagues.

And Macau, our mass table games operation, which contributes the vast majority of our EBITDA saw another quarter of sequential improvement.

Continuing the trend from last quarter, we delivered positive property EBITDA for our Macao operations and overall global operations.

On Macao operations registered and over 10% increase and G. G. All while property EBITDA grew by a factor of 9.

May Golden week was a success and confirmed our expectations of pent up demand for more customers.

For the first 5 days of booth and weak industry.

And I'll hit 50% of 2019 levels and.

And we experienced similar levels of strong growth driven by our premium mass market and premium direct businesses.

Highlighting on long standing focus on the premium segment.

And the Philippines on gaming and hospitality operations.

<unk> the city of Dreams Manila for clothes for the month of April due to government and post quarantine measures.

We subsequently reopened at 50% capacity on May 1 and have seen a strong recovery and pent up demand.

Especially led by mass market patrons.

As such we have repositioned.

And some of our gaming space from VIP to premium mass.

And Cypress, we were pleased to reopen on casino operations and it may after a government mandated lockdown from the beginning of the year with restrictions on Patriot and capacity and gaming position.

On June 10th the restrictions.

And as on gaming positions were lifted and.

Allowing us to accommodate on normal capacity.

We are encouraged that cypress returned to profitability and June and that Cypress has virtually breakeven and EBITDA for the quarter.

Looking ahead we're.

We're encouraged.

By the increasing vaccination rates and Macau, Hong Kong and China.

We remain optimistic on the recovery of our gaming business, especially in our premium mass and premium direct segment.

That said the safety and wellbeing of our customers and colleagues remain our highest priority and.

And Melco.

We'll take the necessary precautions to guard against the pandemic.

While COVID-19 has brought challenges.

<unk> remains committed to its global development program.

And Macau construction of studio city Phase 2 remains ongoing and we expect its completion no later than December 2022.

Upon completion the phase 2 expansion will increase studio city's hotel room inventory by approximately 60% with 2 new luxury hotel towers offering approximately 900 luxury hotel rooms and suites.

There will be additional gaming space.

And non gaming facilities, including a cineplex.

Fine dining restaurants, and state of the art Myspace and 1 of the world's largest indoor outdoor waterpark.

We launched the Grand opening of the phase 1 outdoor waterpark and May with summer season passes for the Waterpark quickly selling out.

At city of dreams, the newly renovated.

Our hotel reopened on March 31.

And we have continue building additional suites and guest rooms and on Morpheus Hotel.

The Countdown hotel closed at the end of March 'twenty, and 'twenty, 1 and is undergoing and transformation into a luxury hotel that is expected to reopen and 2023.

Hosted at studio City, we have announced a series of residency shows featuring and an incredible lineup of a lift superstars, namely Aaron Kwok Joey on and Leon lie for the next 3 years.

Such entertainment offerings will differentiate us from the competition.

And this should enhance through cities brand and entertainment proposition and represents an opportunity to drive visitation across the entire for Melco portfolio and Macau.

And they will tear off starting in the third quarter of this year, we've embarked upon a strategic shift that aligns melco first integrated.

Resorts with the company's broader focus on the high margin premium mass segment.

Consequently.

We've shut down and VIP operations at Alterra and move both its existing junket and premium direct VIP business to city of Dreams and studio city.

We will refocus some of the existing.

And VIP gaming space to cater to the.

Premium mass segment, and we reallocate non gaming assets to support that premium mass initiatives.

Although historically focused on the VIP segment.

Alterra has always enjoyed the level of premium mass site, which we will enhance and reinforce.

And with the strategic realignment.

Accordingly.

We've also reassessed the VIP cost structure at Alterra and I've made efforts to align its cost base with its new demographic positioning.

We do not believe will be necessary to incur material capital expenditures is to implement this strategic shift.

For.

We expect this transformation to take approximately 12 months to complete.

Average or transformation, we expect <unk> to emerge as a stronger higher margin more stable property and the portfolio.

And the greater Bay area Melco International.

Uh huh.

And that's the parent company recently announced they will build a theme park and Jones on city as part of a larger mixed use property development with a local partner.

The theme park is in alignment with the central government's desire to develop non gaming assets and the area.

The theme park and.

Hong Kong essentially other components of the overall development.

And I expect it to use Melco resorts, IP, which represents an excellent opportunity to highlight our brands and Guangdong.

Turning to slide for us.

The construction progress of city of Dreams Mediterranean continues.

Yes.

After completion and it will be Europe's largest integrated resorts.

With more than 500 luxury hotel rooms, approximately a 100000 square feet of mice space and outdoor amphitheater and family Adventure Park.

A variety of fine dining outlets and luxury retail.

Yes.

And Japan, we remain committed to bringing a world leading integrated resort there.

And continue to pursue opportunities within the market, where we remain actively engaged with our partners.

Covid continues to present challenges for the country in terms of process timing and travel.

But the <unk>.

The integrated resort industry, and Japan has continued to move forward.

We remain convinced that Japan represents the best potential new gaming market globally and that the quality of our assets and all focus on premium segment is a great fit for the country's tourism development.

We remain patient and continue to maintain our disciplined approach with respect to all development activities, including in Japan.

Finally, I remain optimistic and Melco is medium and long term growth prospects.

I am encouraged by the normalization of travel restrictions for all Guangdong visitors.

<unk>.

Meanwhile, our balance sheet and liquidity profile has improved thanks to recent debt financing activity and improvements and our operating environment.

And my view.

Macau remains the most attractive integrated resort market and the world.

We will overcome these near term challenges and.

And built towards a greater future with that I'll turn the call over to just to go for some of the numbers.

Thanks Lawrence.

And the second quarter of 2021, we reported group wide property EBITDA of approximately $79 million, while luck adjusted property EBITDA came in at $91 million.

On a sequential basis.

This represents a 69% increase and our luck adjusted group wide property EBITDA.

And COPD and Alterra EBITDA was negatively affected by an unfavorable VIP win rate by approximately $13 million and $6 million respectively.

A favorable VIP win.

Positively affected EBITDA at studio City, and C O D and Manila by approximately $2 million and $5 million respectively on.

On a consolidated basis overall results were negatively impacted by approximately $12 million.

Details of these adjustments can be found and the supplementary earnings slides posted on.

And <unk> Investor Relations website.

During the second quarter, we incurred 1 off expense items that impacted our property EBITDA for our Macao properties.

And May we launched the thinking of use special leave program, which allows employees to take time time off over 6 to 18 months at the trade.

And off of a reduced base salary and.

Thinking of your program reduces our overall salary expense over its duration, but accounting standards require us to take a frontloaded and $14 million charge and the second quarter net effects property EBITDA. We note that subsequent periods would be offset by reduced staff.

On our emphasis.

Also in May we launched the new chapter program, which is a voluntary exit scheme, whereby melco and provides 1 off compensation for colleagues exiting the company.

We will incur a charge of $14 million from the new chapter program for the second quarter.

That is reflected and the property charges and other line of our financial statements.

Turning to our balance sheet and May studio city utilized favorable market conditions to tap the 5% senior notes due 2029 for an additional $350 million.

The tap was priced at 1 on 1.

And 5% for par, which equated to a yield to maturity of 476%.

The transaction increased studio city is liquidity and extended its weighted average debt maturity profile.

The proceeds will be used to partially fund the studio city phase II Capex and for general corporate purposes.

At the end of June we had approximately $1.8 billion of consolidated cash on hand.

When combined with our Undrawn revolver facilities, and Macau and Manila of approximately 2 billion. This implies available liquidity of approximately $3.8 billion.

To provide more clarity on our capital.

Structure Melco, excluding its operations at studio city, the Philippines, and Cypress had cash of approximately $740 million and gross debt of approximately $4.1 billion at the end of the second quarter of 2021.

As we normally do we'll give you some guidance on non operating.

Items for the upcoming third 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% to $22 million and consolidated net interest expense is expected to be approximately 90 to 95.

$5 million, which includes finance lease interest of $7 million relating to city of dreams, Manila and $8 million to $10 million of capitalized interest.

That concludes our prepared remarks, operator back to you for the Q&A.

Yeah.

Yeah.

And the question you need to press Star 1 on your telephone.

Your question please.

And please standby, while we compile the Q&A last year.

Next question comes from the line of B and the Eng of Bank of American 9 is open. Please go ahead Sir.

Okay. Thanks.

Evening I have a couple questions for the first question is just want to get a sense of.

What's happening on the ground recently.

From the data that we receive and looks like and the last few weeks.

<unk> has been recovering.

But as you may know like there and other.

The outbreak in China right now have you seen that has already have any impact on our booking or a day the topic or anything that you can share would be greatly appreciated.

Hey, Billy it's Lawrence here.

So.

And as you said.

Ever since the Guangdong and many outbreak has been under control and the last few weeks, we've seen very strong visitation and.

In conjunction with the summer holiday period, but in terms of Dean and.

And minor outbreak and Nanjing, that's currently happening.

Maybe I hand, it over to Dave.

Sure Thanks, Laura Hi, Billy.

And so so far ability and we've really not seen much of an impact from the most recent outbreak.

<unk> June when we had the issues things slowed down dramatically for us, but boy, we really got back on track and we got to July and was very strong and and anything after that first week of July it and just to get better with each passing week.

So so far and no impact I think part of it and maybe as well as what we just did it hit the school holidays and as the school holidays come into play more and more visitors are starting to come into Macau as well so no no impact for pretty pretty happy with with resorts are gone.

Thanks and and.

Other questions I have this week.

Weeks and.

Loans, you mentioned about the vaccination rates and Macau, which is quite encouraging and but do you get a sense like.

70% I think from Hong Kong government dimension, and 70%, it's kind of like the the.

And the goal here and.

And maybe that will lead to quota for the reopening.

Do you get the sense that will be the same thing for Macau and how confident do you think that's 1 Macau got to that number and we will see a bit more boarder normalization at that stage.

Yeah, I think that is certainly what we hope for as well because from the from from the get go Melco has been the most.

Proactive in terms of having vaccination schemes and incentive programs for all colleagues because and ordered for the world to get back to normal and international to get back to you know what it was before and most importantly for Macau and our business for you know for.

Travel to ease with China.

Certainly I think we need to hit close to herd immunity and I think with the medical community around the world, saying herd immunity is around 17% on now they're asking for potentially even higher because of the delta variant.

Anything that we can do to incur.

Courage on colleagues to get vaccinated.

Protect their own family themselves and also the greater community.

That is the goal.

I do think that you know I think the vaccination rate and China is about 55% and is around 40% and Hong Kong Macau, respectively. So the sooner we can get to 70.

And <unk>.

I think and opens up a lot more.

A lot more flexibility for the various borders to ease up and I think at that point in time.

Our business can really be on a path to normalization back to the 2019 levels.

So if anything.

We're hoping that we hit that those percentage is sooner rather than later.

Oh, Thanks, a lot.

1 quick last question as well.

For jobs.

And you mentioned about the 214 million and pet by 1 and that's a 1 off charge and and so on.

And we're not that 40.

And 40 million also related to compensation, but that as you've mentioned and could be weaker and the second half of it yes.

And both together $28 million right now already reflect on the property EBITDA line.

And listen correctly.

So we've got to.

And that's $114 million charges and the second quarter..1 is above the line 1 is below the line. Okay. We wouldn't anticipate reversing either 1 of those.

Oh, okay.

Okay. Thanks, that's clear, thank you, Pat and Mike and congrats on the solid results.

And roughly.

Thank you.

Next question is from the line of Joe Greff of J.

J P Morgan.

And then.

Hello, everyone.

Laurence we're within 1 year of the congestion and renewable.

Are you surprised the government hasn't.

And you know publicly talked about the process or extending them.

Wireline on.

Hi, Joe Oh, well I guess the government has been for the last 18 months like the rest of the wealth and singularly focused on fighting Covid.

And and you know Macau government has done.

And you know really amazing job in terms of not having any local infections for I think for 180, something days, which makes Macau, probably the safest place on Earth from a COVID-19 standpoint.

Dave and publicly announced at the beginning of this year that they were going to do a public consultation and follow.

A discussion and the Legislative Council.

But they haven't really given a timeline.

And our thinking is that in order to do all of those debt and still conduct a.

Tender.

And next June and it's probably very tight.

So I wouldn't be surprised if if if the licenses get extended for a year or even 2 years I think the maximum debt they can extend the licenses.

It's 3 years, because they've already extended SRAM and mgm's licenses for too.

So at this stage.

We will.

Buffy to know what the outcome is but at the same time and I know their primary focus has been fighting Covid and now it is to open up the border between Hong Kong Macau and also to ease whether it's E visa or group tours from China. So I do agree with the government that these are way more.

We will at this stage and then the license renewal. So I think hopefully the best case scenario is they are going to extend it for a year or 2 and then at the same time, we get to have.

Open borders with Hong Kong, and China as soon as possible.

We thank you for that line.

And important on Alterra on this.

Switch from.

The key focus for more of a premium mass mass focus.

Property and that transition over the next 12 months.

Do you expect the EBITDA losses to narrow or would it go the other way how do you how do you think about the cost structure and the transition.

And then over the next 3.4 quarters Hay day.

<unk> do you want to take that and go for the details.

Sure So hi, Joe.

Couple of different things, Joe I think the first off is when we expect to see our EBITDA losses start to narrow and as we get back closer to where we were in the fourth quarter of 2019.

And theyre purchasing kind of going back to growth in terms of our mass business, we expect to jump into profitability, but the losses will definitely narrow the idea to them taking out a lot of the volatility that we saw given them and kind of the reduced volumes and we've been seeing over the last 18 months and the VIP business and that created a line of fluctuations over there and unfortunately.

And then on the negative side of the whole equation, which is really exacerbated the losses over there.

And again and just it's just too much and essentially where gambling and a way that we didn't make a lot of sense. So the idea and that's going back in and kind of rethinking our business and really focusing in on where our bread and butter is and has always been and as you.

No.

With Melco, we've always prided ourselves on developing great products, and really focusing on our premium customers, particularly our premium mass customers and our mouths customers and that's where our profitability is and we think given the product over there and the product mix and the opportunity to continue to grow that local market as well as the market that we have over there in terms of the international is really.

Knowing for us.

And are creating a boutique experience for our guests there they're looking for something.

Little by little bit different than maybe we have and cotai, but it's just a really unique opportunity for us to do that so we felt that was a good time for us and maybe make this move and.

And to move forward with this kind of this new area for our business there it Alex.

Ontario.

Great and then 1 final question. Thank you David and this 1 is probably for Jeff.

Of that $114 million second quarter charge, that's in the property level EBITDA.

Line item more embedded in and that items.

And that proportionate across properties is it mostly.

And at city of Dreams and <unk>.

Or is it is the mix different than the relative proportion of contribution of revenue and EBITDA.

It's across all all properties, but as you'd expect there's a concentration.

And at city of Dreams, So yeah, and it's more proportionate.

Net to the sort of employee base and roughly proportionate to the city EBITDA.

So if we think about.

And where that.

Could go.

Yeah.

The vast majority of it is going to be ex CRD.

Great. Thank you guys.

Yeah.

Thank you.

Next question is from the line of Praveen Choudhary of Morgan Stanley line.

Please go ahead.

Thank you Hi, Lawrence Hi, Geoff Hi, Ron Hi, David everyone and thanks, very much for taking my call.

2 questions 1 is related to the current stock performance in general there has been a lot of uncertainty around China regulation.

Do you want to give us some comfort around.

And that this is very.

Very isolated and nothing to do with Macau, both from a regulation as well as from U S. Listing perspective. The fact that Melco has only listed in the U S and the second question I have is.

And to Japan, where there has been some political uncertainty around.

The.

The election, where the.

Candidates are opposing the.

On the casino so how should we think about both the timeline and the likelihood of that going through and Melco as channel. Thank you so much.

Sure Hyper V and as Loren for let me take both of the questions on on the first 1.

On Maui.

<unk> has always been considered a local company because after all at the parent company and Melco International has listed on Hong Kong and listed there forever.

And I think we've done we have shown over the years in terms of.

Contributing to diversification on.

Gaming investment supporting small medium enterprises and.

And we've probably done more on those front ends and then anybody and.

In terms of Chinese regulatory and risk I guess for me.

Always regulatory risk is by far and away for the biggest risks and our industry bigger than any.

And national crisis, or even in pandemic.

But at the same time, considering 80% of the tax revenue from the Macau government is contributed by the gaming industry. The gaming tax and also the gaming industry and Macau effectively employees.

Over 25% of the entire.

Worker population.

It is a big industry that debt.

It's critically important to Macau. So I think it's different from industries that are very new and China that deals with a lot of sensitive customer data.

So whether it's the education industry or the.

On tech so I think on that basis.

And all the Concessionaires have been working closely with the government for over the year. So I don't expect any surprises.

Whether it is right now on during the license renewal and.

And I think.

And we'll continue to support the government and best we can.

In terms of the Japan question.

Well for from alcohol, I think first and foremost.

We have where we are and a.

Consortium, and maybe even can talk a little bit about that but in terms of the political.

Well for landscape.

Again, we're guests and visitors of the country.

And they're all a lot of things that are outside of our control and in terms of something as important as.

A mayoral election or political positions is certainly.

We just need to continue to be respectful to the market.

Political and really do the best that we can and.

And not worry too much about things that are completely outside of our control.

Thank you so much if I could.

Sorry, I haven't go ahead please.

I was just going to add obviously.

Market, we maintained our Yokohama first strategy.

To be a focus for the company on in terms of the specifics that you've mentioned the incumbent mayor has come out and it's good.

And on a per well on our platform. There are a variety of other candidates who have come out against I R. As.

Laura and her team Laurence articulated some of these things are simply beyond our control.

Troll and we will know more after the election takes place and Yokohama on August 20 seconds.

Thank you if I could just ask 1 last question for me.

Which is about cost structure.

So first of all it's been a good quarter very strong quarter for improvement.

We all want to see.

And obviously pre COVID-19 level of EBITDA. So my question is when the <unk> normalizes, but it's 2022 second half on first half.

What will be the new cost structure.

<unk> done amazing job and some of your peers have also done a good job on cost cutting we want to understand what is the permanent side.

On the cost structure versus temporary 1.

Yeah.

So praveen, it's Jeff So we and you know we've.

And then very proactive and Lawrence is mandated to for the senior management team to really focus.

And on cost cutting and and reduction of Capex as well.

So we think that about 25% of our cost savings.

It will be permanent and roughly 75 are temporary.

So.

The all things being.

And equal.

And <unk> 19 or for 2019 levels.

We think that can result in over time.

And at least 150 basis point improvement and the margin.

And while our Opex has been relatively.

Relatively flat for the last.

2 quarters I think as we start to see some of these programs.

And to take effect and you'll actually start to see our opex.

Again, all things being equal will come down a bit.

And now of course over time, we anticipate that debt.

That marketing expense and some of these normal volume related.

Expense.

And it will go up.

But on a steady state basis, when we think about.

On a payroll expense et cetera that some of the programs that we've discussed we will be successful.

And holding a line on on expenses.

Thanks, very much and it's very clear and I hope to see everybody.

Everybody lives soon and Hong Kong Macau opens up thank you.

Thank you and that's it.

And the question.

The conference back to Mr. Bob and Jillian.

And for closing remarks.

Thank you operator.

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

Yeah.

Thank you and.

This concludes today's conference call and thank you for participating.

Disconnect.

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Okay.

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