Melco Resorts & Entertainment Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2023

There are 11 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by in the Q3 2023 earnings conference call of Melco Resorts and Entertainment Limited. At this time, all participants are in a listen only mode. After the call, we will conduct a question and answer session. Today's conference call is being recorded.

Speaker 1

I would

Operator

now like to turn the call over to Ms. Jenny Kim, Senior Vice President, Group Treasurer of Melco Resorts and Entertainment Limited. Thank you. Please go ahead.

Speaker 2

Thank you, operator, and thank you everybody for joining us today for our Q3 2023 earnings call. On the call are Lawrence Ho, Jeff 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.

Speaker 2

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'll turn that over to Mr. Lawrence Ho.

Speaker 1

Thank you, Jeannie. Macau's recovery continued to grow from strength to strength into the Q3 of 2023, especially during the summer months, with our property visitation and casino player hours benefiting from this growth. We had solid performance over the October Golden Week and saw a robust recovery during the remainder of October, with GGR excluding junkets reaching close to 2019 levels. Both gaming and non gaming revenues improved, and this was reinforced by our commitment to invest in world class entertainment and enhance our non gaming amenities. Our market leading design standards were recognized last month by Prix Versailles with Morpheus being the only hotel in Macau to have the honor of being included as one of the world's most beautiful hotels.

Speaker 1

Studio City has been the center of entertainment for us in Macau. The opening of Phase 2, the addition of the Epix Tower and W Macau Hotels, the residency concerts and an ongoing schedule of events drove gaming volume and contributed to a 65% increase in adjusted property EBITDA quarter to quarter. We expect further growth in Studio City as Phase 2 continues to ramp up. In the Philippines, City of Dreams Manila continues to generate solid earnings with a strong margin profile. City of Dreams Mediterranean in Cyprus has been severely impacted by the conflict in Israel.

Speaker 1

Our teams are working on realigning our marketing strategy there. With that, I turn the call over to Jeff to go through some of the numbers.

Speaker 3

Thanks, Boris. Our group wide adjusted property EBITDA for the Q3 of 2023 was approximately 281,000,000 dollars Luck adjusted group wide property EBITDA for the Q3 of 2023 came in at 291,000,000 dollars A favorable win rate had a positive impact on COD Manila of around $9,000,000 while in Macau, unfavorable win rates at COD and Studio City had a negative impact of approximately $19,000,000 Details of these adjustments could be found in the supplementary earnings slides posted on our Investor Relations website. Macau OpEx increased to approximately $2,500,000 per day in the Q3 of 2023 from approximately $2,400,000 per day in the 2nd quarter. The increase in OpEx was largely due to the addition of full time employees across our properties, including the opening of the W Macau in September and increased marketing costs. Despite the increase in cost, our EBITDA margin increased slightly quarter to quarter.

Speaker 3

Turning to our balance sheet. We continue to focus on reducing debt and deleveraging. We repaid $100,000,000 in debt during the Q3 of 2023 and repaid another $100,000,000 at the end of October. We currently have approximately $1,200,000,000 drawn on our RCF, which gives us around $750,000,000 of undrawn and available committed revolving credit facilities. We will continue to closely monitor our free cash flow, which will drive further debt reduction.

Speaker 3

As of September 30, 2023, we had around $1,500,000,000 of consolidated cash on hand. Melco excluding its operations at Studio City, the Philippines and Cypress accounted for around $800,000,000 Of this approximately 125,000,000 was restricted as collateral required for the concession related guarantees issued to the Macau government. As we normally do, we'll give you some guidance on non operating line items for the upcoming Q4 of 2023. Total depreciation and amortization expense is expected to be approximately 100 $45,000,000 to $150,000,000 Corporate expense is expected to come in at approximately $20,000,000 and consolidated net interest expense is expected to be approximately $130,000,000 This includes finance liability interest of around $7,000,000 relating to fees payable in relation to the Macau gaming concession and the Cypress gaming license and finance lease interest of approximately $6,000,000 relating to City of Dreams Manila. That concludes our prepared remarks.

Speaker 3

Operator, back to you for the Q and A.

Operator

Thank you. We will now begin the question and answer First question comes from the line of George Choi of Citi. Please go ahead.

Speaker 4

Thanks for the presentation. I have a couple questions, if I may. Firstly, how should we think about OpEx inflation in Macao going forward? I mean, although naturally the favorable VIP mass digital shift means that there will be a boost to margins. Should we be worried about inflation in marketing costs, player investments or costs for upgrading non gaming offerings including concerts?

Speaker 4

And I have a second question and that's about as regarding the latest GGR trends. The share prices in Macao seem to be reflecting investors concerned about the sustainability of DGR and EBITDA recovery in Macau. Do you guys see any signs of moderation in gaming demand and non gaming revenues? That's all from me. Thank you.

Speaker 1

Hey, George, it's Laurence. Thanks for the question. I think why don't I address the second question first and then we'll have Jeff talk about the first question, and maybe David can supplement on that as well. On the second one, obviously, we're feeling good about Macau and travel and tourism is the leading sector in China right now. I think after 3 years of being not being able to travel during COVID, people are coming to Macau in force.

Speaker 1

And we have seen that October was the best month in Macau and also the best month for us since the reopening. So we're feeling very good. And even the rest of October has been good. It has not been soft and November has started off strong as well. So we're not concerned about it.

Speaker 1

Of course, we understand the investor appetite over the last 6 months of the year and the so called China risk or decoupling, that's something we can't control. And we all we can do is really put our head down and make sure that we continue to deliver the earnings. I think on the first question, maybe I'll hand it off to Jeff.

Speaker 3

Thank you, Laurence. I'll take the first part of the first question. So on OpEx, we came in at about $2,500,000 in Macau for the Q3 in line with the guidance that we had provided on the Q2 call. We anticipate in the Q4 that number looking more like 2 point 6. And then as we think about how that could change going into next year, the one thing I would highlight is the reopening of the House of Dancing Water Show and that would add about 0.1 per day when that happens.

Speaker 3

Other than that subject to decisions with respect to other entertainment etcetera, etcetera, I think that's a pretty solid run rate.

Speaker 5

So I think the only other thing I'd probably add to that is, as you look at some of the non gaming attractions and amenities that we have, including House of Dance and Water Coming Back, We have started to advertise a little bit more in market, more in, let's say, Hong Kong or in China. So again, let people know we have these assets out there. So that's been a bit of a change that we didn't have before as much other than House of Dancing Water. So those concerts, those attractions that we have, that will continue. But I think it will still stay within the number

Speaker 3

and the guidance that Jeff just gave you. And in respect to our savings initiatives that were a key focus during the COVID years, no change in our guidance there. We still anticipate that 20% to 25% of those savings would be permanent. We'd endeavor to make sure that they remain intact going forward with that inherent margin benefit starting to show through along with operating leverage going into next year as we continue to drive the business and drive incremental operating cash flow.

Speaker 4

Thank you very much guys. That's very good color. Thank you very much.

Operator

Thank you for the questions. One moment for the next question. Next question is from the line of Joe Greff of JPMorgan. Please go ahead.

Speaker 6

Hi, guys. Thanks for taking my questions. Laurence, just going back to your comments about Golden Week and then the subsequent period in October and being close to 2019 excluding the junket business, does that imply EBITDA in October was at least on a hold adjusted basis in excess of October 2019 levels?

Speaker 3

Hey, Robert, it's Charles. Yes. I think we had provided some guidance in the past that we would need to see mass and slots and non junket business return to something more in the 115% range to be at par or parity with 2019 or pre COVID EBITDA.

Speaker 6

Okay. And then just a broader question. Can you just talk about either your levels or where you think the market is in terms of premium mass reinvestment levels? How does that compare to levels in 2019? Is that slightly elevated?

Speaker 1

Maybe David can talk about that. Sure.

Speaker 5

So, Joe, I think what we have seen a little bit now is just kind of come out of the say out of the COVID period. We've seen a lot more marketing going on whether that be with some of the other concessionaires relative to their new, let's say, new hotel rooms or other new assets that they've got brought on that have been brought online. Additionally, as we've kind of seen a shift in the business where this right now, it's very much a premium mass market driven economy basically. What we are seeing is, there is more comps related to that. So the reinvestment rates have climbed a bit.

Speaker 5

That doesn't mean that as we see more of that mass mass kind of coming back and kind of a smoothing out of things as a lot of this new product comes online in the market that we don't see a return back to, let's say, more of what we saw in the Q4 or throughout 2019. But for right now, it is a bit more elevated than we've seen in the past. I think again, it's for the reasons I just mentioned.

Speaker 6

Got it. And then David, the mass market table gain hold percentage at COD in the 3rd quarter was 32.1 Do you look at that as sustainable as normal or do you think of that as sort of with the mix between premium mass and mass as something that's outside the range of a normal mass table gains hold percentage?

Speaker 5

No. I think we are within the normal range of a mass table gain for hold percentage. What we haven't seen yet is kind of that complete mass mass coming back that kind of smooth things out a little bit. But I think we are within our normal range there. It might be a little bit higher sometimes, but again, we are probably in that, let's say, that 31 to 33, which we talked about before.

Speaker 5

But we are right within that normal range.

Speaker 6

Great. Thanks guys.

Operator

Thanks for the question. One moment for the next question. Next question comes from the line of Riccardo Chinchilla Pargas from Deutsche Bank. Please go ahead.

Speaker 7

Hey guys, thank you so much for taking my question. I was just wondering if you could comment a little bit more on the promotional environment and how you guys are reacting? Do you guys think that the current reinvestment levels are sustainable? Or that this is a lot of, as you mentioned, your competitors trying clients to test some of the product before going back to City of Dreams or how do you guys envision the promotional environment and if there is a lot of trying versus going back to what they like?

Speaker 5

Yes. So, Ricardo, it's David. So, look, I think you are spot on when you say, I think there is a lot of people going out there being a little more promiscuous and going out and trying other properties, understanding what may be out there. So, that's kind of contributed a little bit to that, let's say, rise in the promotional or reinvestment rates. Also with some of the new products and some of the other things out there, I think, again, that in order to get people into that new product a little bit, to get people to try that product, whether that's us or the other concessionaires, you also need to probably be a little bit more aggressive.

Speaker 5

What we've seen too is that we've had a lot of pent up demand relative to a lot of our room product, particularly at Studio City, where now we have the opportunity that we didn't before, because we had far fewer rooms. So with the additional of approximately 900 rooms, that's given us the opportunity to go deeper into our database to go out and be a little bit more aggressive, which is also driving some of our reinvestment rates as well. But I think over time, that will moderate as I said and we will probably get back to those 2019 levels.

Speaker 7

Got it. You guys provided great color on operating expenses for the Macau operation. I was wondering if you could detail us how much of that amount is related to Studio City just for our modeling? Like what should we out of some of the costs that you are adding back, how much is specifically related to Studio City?

Speaker 3

Well, maybe to highlight the delta on Studio City, we do anticipate that the incremental cost of having a full quarter of the W in the quarter should be roughly similar to the reduction in residency concert series expenses. So that largely washes out at about 0.2 per day of expense.

Speaker 7

Got it. Thank you so much for taking the questions.

Operator

Thank you for the questions. One moment for the next questions. Next question is we have the line from John DeCree from CBRE. Please go ahead.

Speaker 8

Hi, everyone. Thank you for taking my questions. I think you may have started to touch on this, but wondering if you could provide a little bit more color on the ramp at the W and then even maybe back to an Epic Tower opening. Are you starting be able to improve segmentation? How has customer reception been to the new hotel towers and pricing etcetera as you kind of think about using those to work through and yield up your mix?

Speaker 1

Hey, John, it's Lawrence. I think we're very excited about Studio City's Phase 2. But at the same time, we've the reason we've opened that kind of piecemeal is we're gradually rolling more and more product into the market. And I think anybody who's been to Studio City right now knows there is a major retail renovation going on. And over the next 2 or 3 months, most of those retail tenants will be open.

Speaker 1

So we've been waiting for that. And I think in due course, probably sometime in the Q1 of next year or early Q2, we'll try to do a major property relaunch Phase 2 opening. But I think that is an area that we're continuing ramping up on. So I think maybe David can add more color or Kevin?

Speaker 5

Sure. So look, I think from when we opened up Epic back in April, it finally allowed us kind of a really nice product to go out and develop that premium mass and more VIP business that we quite frankly really didn't have with the Star Tower at Studio City. So the opportunity to really start putting more of those premium players and shipping some of that business away from some of our competitors and bringing that into Studio City is something that's pretty exciting for us. And the team over there continues to do a good job as we build that business. In regards to the W, what we've seen from the start is, we start off at about 70% occupancy during the month of September.

Speaker 5

We are now in October, we probably got it at about 80%. We are looking to try to build that back up until, let's say, the low 90s by the time we get to December. But that's kind of a mix there. It's a little bit different between what we have, let's say, it's probably about a 15% casino business, 85% cash where we are really looking to try to rely on the Marriott Bonvoy system to bring in some different players or different customers for us. The W also skews to a much different demographic and it's particularly popular with women.

Speaker 5

So we think again that this hopefully over time will allow us to continue to expand our database, allow us to continue to attract new customers that ultimately those customers will grow into that premium mass segment and become long term customers for us. But again, the allowance of both Epic and with W, we have seen a nice pickup within our business and we continue to see growth. And in fact, for the month of October, it was our biggest drop month ever for Studio City as well as our we had our biggest coin in month as well in regards to slot. So again, we've seen a nice pickup. We are absorbing the product well and as I said, look forward as we go forward in December and beyond.

Speaker 8

Awesome color. Really appreciate that. Maybe a follow-up on October. You guys give us a little bit of color, which is really helpful. Curious if you made any observations relative to 'nineteen about seasonality or customer behavior before the holiday week, after the holiday week?

Speaker 8

Are things or customers kind of behaving the way you'd expect? Or is it a little different now that we are 2023 and post pandemic? Any thoughts on that would be helpful. And that's all for me. Thank you, everyone.

Speaker 5

Yes. So look, when we guided to the Golden Week, typically, this year over year was a little bit early because it started on the 30th September and kind of rolled into that, let's say, those 1st 5 days of October. So a little bit different than we kind of normally see in terms of that. But it was pretty typical as we got towards the end of the Golden Week where you typically see a drop off and then about a few days after that, it starts picking up again as you get into that next weekend. So it's pretty much played like we thought it would.

Speaker 5

I think what's been nice though is, again, they are not so much of a surprise, but again, kind of return to normal where we saw that continued play in action going through the whole month and actually coming into the month of November as well now. So it dropped off a little bit like it used to and then picked right back up again, which is again very similar to what we would have seen in 2019.

Speaker 1

I think October, our Studio City drop was all time highest in the history of the property. So And coin in as well. And coin in as well. So I think we are seeing the traction with the water park and the new hotels. And I think once the whole property is completed and hoarded, we're quite excited about it.

Speaker 8

Great. Thanks so much guys. Congratulations on the ramp. Good quarter.

Operator

Thank you for the questions. Next question comes from the line of Praveen Choudhary from Morgan Stanley. Please go ahead.

Speaker 9

Hey, thanks so much. Hello, and Jeff, David. Good to hear that Macauro cover is ongoing. Thank you for taking my question. I have three quick questions.

Speaker 9

The first one is simple. Did you give a timeline for House of Dancing water opening? Is it first half 'twenty four or Q2 'twenty four? That's the first one. The second question is about the spending per capita trend.

Speaker 9

We got 2 data points. 1, packaged tour numbers are coming up strongly after being very slow initially? And then someone said that in October second half, the overnight visitors dropped off. Hotels are easily available versus day trippers. So these are the 2 suggesting grind might be doing a little bit better than premium.

Speaker 9

So love to hear your thoughts. And the last question is again, Laurence, what's going on in Thailand and how is it different from Japan from your perspective of if you want to put new money there? Obviously, it's not next year's question, but I'm sure you're working on it. Thank you.

Speaker 1

Hey, Praveen, maybe I'll take the my memory sucks, so I'll take the last question first. I think Thailand, we've been looking at it for many, many years. But after the Japan experience and pretty unpleasant experience, I think we're going to be very conservative and we'll see. Thailand, they've reestablished another gaming committee to look at it. We'll continue to analyze it and see what we can do.

Speaker 1

But certainly, I think at this stage, we're not going to be spending too much resources and definitely no money whatsoever on that. But if it does open up, the other than Japan is probably the most exciting market out there. Because at the end of the day for us after the 3 years of COVID, our main focus is going to be on delevering and reducing debt. That's our number one objective. And number 2 objective is returning money back to shareholders, whether it's through dividend or buyback.

Speaker 1

At these levels, it's becoming very attractive, but we are very disciplined in the goal of reducing debt at this current stage. I think on the first and second question,

Speaker 5

maybe I'll hand it off to David. Great. So look, so right now, Pravin, we're looking to open up house financing water for the re launch probably late in Q4 of 2024. We are just now going through the process of the remount. We have been doing a lot of work on the House of Dancing Water Theater to get it up and ready.

Speaker 5

We just have started doing our first shows there. We are doing a production right now with Zhejiang TV where we are doing some musical things in there right now on a weekly basis. And towards the middle of November, we will get back out of that and get started back on the remount for the House of Dancing Water. To kind of maybe go through your other question regarding room rates and room availability, I think a lot of inventory is coming to the market, whether that be with what we brought in with Epic, what we brought in with W or now we've seen new product coming in with the Galaxy guys, with Amdaz and with, again, escaping me right now, the name of the hotel. But with the new product coming in, as well as I think there is an opportunity for these other hotels to kind of go through and to poach customers from some of the other hotels.

Speaker 5

So where you may be seeing some availability, maybe in some of the older hotels, let's say, the lack of 5 star hotels out there. So I think, again, we've not seen that problem. We've been able to backfill our hotels with the existing. And as I said, we've gotten to have 80% occupancy now with the W. We expect that to get into the low 90s as we get to the end of the year.

Speaker 5

We've had no trouble filling Epic. Our hotels continue to be very strong. We continue to maintain very high occupancy percentages.

Speaker 9

Thank you so much. This is very detailed, very helpful. Appreciate it.

Operator

Thank you for the questions. One moment for the next question. Our next question comes from the line of Antonio Luis Gomez from 91. Please go ahead.

Speaker 7

Hi, there. Thank you for

Speaker 10

your time. I just wanted to understand on the GGR for Macau figure, it seems like from a quarter on quarter basis, it was pretty similar to the previous quarter. From my understanding presentation, it seems like it came from City of Dreams VIP GTR. But I just kind of wanted to understand what the barriers are to the growth and what's led to below average industry GGR levels relative to 2019 levels?

Speaker 5

So I think from the barrier standpoint, as we are going through here a little bit, I think, look, we are kind of in a strange world here a little bit where, because we've seen, there is fewer players now in the sense for the VIP business. So that's created a lot more volatility. We have a tendency to have much larger players in our property. So that does create more volatility. So if we get one-sided on that, that does have an impact on us sometimes from quarter to quarter where years ago when we had the junkets, that would offset that and basically allow us to not see those impacts quite as much as we seem a little bit more now.

Speaker 5

So I think that will continue for a long time here. I don't think that's going to change, because I think the BICB market has fundamentally changed now without the junkets to smooth those things out. But long term, I think, you will see us get back to beyond where we were in 2019, at least from a premium direct standpoint from the VIP business.

Speaker 10

Okay. So going forward, the next couple of quarters, you expect it to kind of normalize industry averages, maybe beat that. Is that kind of the expectation?

Speaker 5

Well, I think the expectation is we will return back to our historical averages, which again, is that right around that 3% level. But again, the volatility will remain sometime. So the next quarter could be a bit higher, could be again a bit lower. But I think over the long term view, we will get back to that 3%.

Speaker 10

Okay. And then everything else seems to be ticking along regardless from your perspective?

Speaker 5

Yes. I think everything is moving forward. Again, as we get again, as the growth of the database, as we get more customers in, as Macau continues to recover and we get more air lift and the transportation corridor gets a little bit better, all these things will contribute to the market just getting stronger and stronger. But I think we are well on our way and it will just continue. We think there is a lot more juice left in this thing to keep going well beyond where we are today and into the next year and beyond.

Operator

Okay. Great. Thank you. Thank you for the questions. We have no more further questioner at this time.

Operator

I'd like to turn the call back to Ms. Ginny Kim for closing remarks.

Speaker 2

Thank you for participating in our call today. We look forward to speaking with you again next quarter. Thank you.

Operator

Ladies and gentlemen, that does conclude today's conference call. Thank you for your participation. You may now disconnect your line.

Powered by Quartr
Earnings Conference Call
Melco Resorts & Entertainment Q3 2023
00:00 / 00:00