Melco Resorts & Entertainment Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 10, 2023

There are 9 speakers on the call.

Operator

Ladies and gentlemen, thank you for participating in the First Quarter 2023 Earnings Conference Call of Nelco 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 is being recorded. I would now like to turn the call over to Ms.

Operator

Jeannie Kim, Senior Vice President, Group Treasurer of Melco Results and Entertainment Limited. Please go ahead.

Speaker 1

Thank you, operator, and thank you everybody for joining us today for our first quarter 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 law. Our actual results could differ from our anticipated results. In addition, we may discuss non GAAP measures.

Speaker 1

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 now turn the call over to Mr. Lawrence Ho.

Speaker 2

Thank you, Jeannie. We have seen a very encouraging start to the recovery in Macao during the first quarter of 2023 following the relaxation of order restrictions in early January and the recovery has progressed faster than we had anticipated. We continue to see improving momentum into April and solid performance during the May Golden Week. Massdrop and Mass GGR during this Golden Week period exceeded the same period in 2019, and the turnover in our premium direct segment more than doubled. We launched some exciting new initiatives in April.

Speaker 2

We started Macau's first ever series of residency concerts at Studio City and opened Studio City Phase 2, starting with the opening of Epic Hotel Tower and the indoor water park. We also plan to open the W Hotel Tower in September, which will round out our hotel portfolio in Macau. These initiatives reinforce our long standing commitment to bringing unique world class entertainment and hotel offerings to Macau. We have a diverse range of events that are being planned for the future that we believe will continue to drive international tourism and position Macau as a leading destination for leisure and entertainment. We've seen strength in the Philippines with a solid recovery underway.

Speaker 2

Adjusted property EBITDA at City of Dreams Manila for the Q1 of 2023 surpassed the Q1 of 2019. Performance in Cypress has also been strong with both GGR and adjusted property EBITDA exceeding 2019 levels. The operational results of our temporary and satellite casinos have proven that there is strong demand in open City of Dreams Mediterranean in mid June and showcase our expertise with the 1st integrated resort of its kind in the region. With that, I turn the call over to Jeff to go through some of the numbers. Thank you, Lawrence.

Speaker 3

Our group wide adjusted property EBITDA for the Q1 of 2023 was approximately 191,000,000 dollars Luck adjusted group wide property EBITDA for the Q1 of 2023 came in at 197,000,000 dollars a favorable win rate positively affected COD Manila by around $14,000,000 while in Macau, COD and Studio City were negatively affected by close to $20,000,000 due to unfavorable win rates. Property EBITDA at COD Macau and Studio City were also negatively affected by mass hold, which was lower than our historical average. If we normalize for both mass and VIP, Macau property EBITDA for 1Q 2023 would have been $192,000,000 compared to our reported results of $121,000,000 and the hold adjusted property EBITDA margin would have been approximately 28.5%. We have been able to achieve significant cost savings over the last few years and this continues to be a focus as we hire staff to support the recovery. We estimate that we will have approximately 2,000 fewer full time employees compared to 2019 once we are fully ramped up, including the FTEs needed for the opening of Epic, The W and the water park at Studio City.

Speaker 3

We remain disciplined on cost management and expect to retain at least 20% to 25% of the savings we achieved through the COVID period as permanent savings. Turning to our cash and liquidity. As of March 31, 2023, we had close to $1,500,000,000 of consolidated cash on hand. Melco, excluding its operations at Studio City, the Philippines and Cypress, accounted for around $750,000,000 Of this, approximately $125,000,000 was restricted and includes cash collateral required for concession related guarantees issued to the Macau government. Total debt declined by around 550,000,000 dollars during the Q1 of 2023 with the repayment of our revolving credit facility.

Speaker 3

As we normally do, we'll give you some guidance on non operating line items for the upcoming Q2 of 2023. Total depreciation and amortization expense is expected to be approximately 140,000,000 dollars The higher amount compared to previous guidance is due to the recognition of the new Macau gaming concession as an intangible asset on January 1 and the related amortization costs. Corporate expense is expected to come in at approximately $20,000,000 and consolidated net interest expense is expected to be approximately $120,000,000 to $125,000,000 This includes finance liability interest of around $5,000,000 related to fees payable in relation to the Macau gaming concession, finance lease interest of $5,000,000 to $10,000,000 relating to City of Dreams Manila and around $5,000,000 to $10,000,000 of capitalized interest. That concludes our prepared remarks. Operator, back to you for the Q and A.

Operator

Thank you. And I'm showing we have a question coming from the line of George Joy with Citi. Your line is open.

Speaker 4

Hey, guys. Thank you very much for taking my questions. On Studio City Phase 2, any more color on how it has been doing since the opening would be very much appreciated. And also, would you please remind us of your target ROIC on Phase 2, please? Thank you very much.

Speaker 2

Hi, George. It's Laurence. So I think we've been very pleased with the opening of Studio Cities in Phase 2. Maybe I'll give David and Kevin a chance to talk about the details. But since we opened in early April, which was around the same time as the start of the residency series, we have seen Studio City overall is much busier and we see the gaming results correspondingly as well.

Speaker 2

On the ROI question, maybe I'll hand it over to Jeff, but maybe David, Kevin want to add some color to what you guys have seen with Phase 2 so far?

Speaker 5

Sure. So look, it's been a few things, George. I think one is we look at it, obviously, we opened up on April 6. We opened up kind of softly, opened about 100 rooms when we opened it up. And then we've kind of gone out to at the end of the month, right before the Golden Week, Week, we got it up to 338 rooms and suites.

Speaker 5

Again, we wanted to do it softly trying to get our processes and procedures and services, so they're all aligned and being in a really good place. As we've opened it though, we've seen really good feedback from our customers. It's a nice product differentiation for Studio City. It strikes a really nice balance with the Epic Tower between what we've done with Morpheus and what we have with NUWA. So again, it's going to allow us to really grow our premium mass customers over at Studio City as well as taking advantage of all the attractions and things that we've developed over at Studio City over the last few years.

Speaker 5

Additionally, we launched our residency series in April, which has proven to be very, very popular. What we've seen right now between what we opened with Epic, the indoor water park and with the concert series, we've seen our volumes rise about 40% from a drop standpoint. So again, we're quite pleased with the early results of what we've seen so far. We're anticipating better results as we go forward.

Speaker 4

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

Operator

Thank you. And our next question coming from the line of Praveen Choudhary. Your line is open.

Speaker 6

Hi, thank you very much. Congratulations on great set of results. May I ask about the mass market business that you're seeing in terms of premium versus base mass? Are you seeing the spending per capita to be better than 2019? Are you seeing more rigid customers coming in?

Speaker 6

Any color on the kind of customers who are coming that will be useful? And the second question is, since Golden Week is over, have you seen business tapering down as usual or it has been holding on very strong? Thank you.

Speaker 2

Hey, Praveen. Thanks for the question. This is Lawrence. So again, maybe I'll let David add more color. In terms of I think so far the recovery has exceeded all of our expectations.

Speaker 2

It's been much faster and better than we had hoped for. But it's very much a premium mass led recovery because in terms of the visitation numbers, I think across all of Macau, it's still down from 2019. But in terms of for Golden Week, especially all of our key volume metrics at mass, slots and premium direct are all exceeding 2019 levels. So I think naturally the spend per customer is higher than previously. So we're quite pleased with that.

Speaker 2

And I think as the infrastructure and when it becomes easier for people to come to Macau because right now, the cost to travel here is still quite high, I think that's when the face mask will come in. And so we're encouraged by that. So I don't know, David, you want to? Sure, President.

Speaker 5

Look, I think it is a much as Lawrence said, it is a premium mass led recovery at this point until that infrastructure for the transportation kind of gets straightened out, I don't know, we'll see that base mass coming through. With that said, the level of play that we've seen from our premium mass customers is that from a theoretical standpoint, per player is significantly higher than what we've seen in 2019. So again, we've been very pleased with the players that we've seen coming back, the level of play that they've exhibited. We think that will continue as we go forward here. We don't see any slowdown in that at all at this point.

Speaker 5

In terms of the Golden Week, typically, obviously, you go through these big holiday periods, you see it taper down for a little bit and then kind of recover to normal. We're kind of seeing that normal pattern. If you look at the last week here in terms of we got out of the Golden Week, we are expecting things to pick up and we were seeing that somewhat in all these center reservations and the demands and some of the things that we have going on for the rest of the month of May. So don't anticipate that will be down for very long. Again, it's just following the normal pattern.

Speaker 6

Very helpful. Thank you. Can I just have a follow-up on what you just mentioned? In terms of the visitation running at 50%, 60%, even though mass is running at much higher level, What are the specific restrictions which are not allowing us to go back to 100% of visitation? Some of these I understand air is not fully recovered and so on.

Speaker 6

But the key question is, do we expect back to 2019 kind of visitation to Macau? And if that's the case, would we expect mass revenue or EBITDA to go back to 120%, 130%, 140% of 2019 level, assuming that spending per capita continues to remain higher. I'm not trying to I'm not asking for the projection, just the thought that maybe we recover in terms of visitation fully in the next several quarters. Thank you.

Speaker 2

Praveen, it's Lauren. So I think the next key period is going to be summer, so around July, August. And if you look at the airlift into Macau right now, the Macau Airport is still only doing about 30%. And so right now, of course, the Guangdong province and the province that can visit Macau very easily are coming. But in terms of provinces that require more airplane and stuff like that, I think that's certainly a growth area.

Speaker 2

And so far, the recovery, the 1st few months have been there's been a lot of Hong Kong. Hong Kong is a bigger portion than usual. So I certainly think Macau will hopefully get back to close to the visitation levels of the past in the next few months within this calendar year. I think in which case, just judging from where our mass and slots and premium direct numbers are, we'll exceed that of 2019 sooner rather than later.

Speaker 6

Extremely helpful. Thank you, Lawrence. Thank you, David, and all the best.

Operator

Thank you. And our next question coming from the line of Angus Chen with UBS. Your line is open.

Speaker 7

Hi, good evening, Lawrence.

Speaker 6

Couple of

Speaker 7

questions on the Q1 results. I guess, very strong results that we've seen, I think it's above expectations. Can you talk about the phasing of that? I suppose March will be the strongest month and then April further improved just based on, I guess, industry gaming revenue numbers. And I guess secondly, were you restricted in terms of capacity in Q1?

Speaker 7

And therefore, in Q2 then, we look for growth in capacity on Q1, Q2 basis? Thank you.

Speaker 2

Angus, so again, let me hand it off to David to add more color. But yes, you're right. I think every month starting after Chinese New Year, every subsequent month, we have seen increases. I think that's why we I think not just every month, kind of every weekend, we're seeing kind of a uplift from the previous weekend. And so very encouraged by that.

Speaker 2

But maybe David can share more details on the ground.

Speaker 5

Sure. So Angus, if you kind of look in terms of where we've been impacted the most is probably our availability with hotel rooms. When we started off in the Q1, essentially, we were working to basically get back to 70% to 80% of our availability of the hotel rooms. Some of that was due to just we've lost so much staff during the pandemic that it took time to hire staff back, get them trained up again, and just kind of working our way back through the systems. And it takes time, as you know, in Macau because of DSAL and some of the waiver kind of constraints that we have in the process in terms of how you go back and you bring new waiver into the market.

Speaker 5

So that's had a constraint on us, which impacted us to someone. I think you probably heard that on some of the other calls and obviously through some of the other concessionaires as well. The good news for us is we've got basically back to about 70%. We're about 80% in April. And to May, for the Global Weekly, we got to 90%.

Speaker 5

We're looking to be about 100% back of our availability for our hotels, including obviously the Epic now with our new 338 rooms and suites by the end of June. So we're moving through that pretty quickly. The government has been really helpful in terms of us getting staff, and they've been very cooperative with us. So we've been very fortunate in working to get our staff back. And the key part for us now is to get everybody trained up, get the service levels where they need to be and move forward here for us.

Speaker 7

Got it. Can I just clarify, so you mentioned that you started at 70% in January and then ramping up to expecting 100% by end of June? Is that correct?

Speaker 5

Yes. I'd say 70% through the Q1, Angus, and then basically getting to 100% by basically that 100% availability by the time we get to the end of June.

Speaker 8

Perfect. Thank you very

Speaker 6

much. And

Speaker 2

then of course, Angus, this is Lawrence. And then of course, W will open in September before Golden Week in October. So that's going to be another for us at least, that's another 550 plus rooms.

Speaker 5

5 58 rooms in suites, so that's also again kind of a nice changer for us from a demographic standpoint too and the people that all attract. So from a 25 to 35 year old demographic, it was a fairly high spending. So we're very excited as we're excited to get the W open.

Speaker 8

Great. Thank you. Thank you.

Operator

Thank you. And our next question coming from the line of Simon Cheng with Goldman Sachs. Your line is open.

Speaker 8

Hi, everyone. Thanks for taking my question. I have two questions. I remember in the wind call earlier this morning, there were some comment by management saying that if the industry GGR going to like $26,500,000,000 then they would see the EBITDA back to his local level. I understand there's a lot of presumptions on how the mix as well as the cost saving.

Speaker 8

But hearing that Jeff was saying that you'd be able to maintain like 20%, 25% of the cost saving. Wondering if you can give us a sense, perhaps not to that extent, maybe what sort of mass market GGR would you need in order to get your EBITDA back to the local level? And maybe also on that point, perhaps you can Jeff, maybe you can share with us what your daily OpEx in the quarter as well? Thank you.

Speaker 3

Sure. So for the first question, what sort of mass GGR as a percentage of 2019 do we need to get to, to have similar EBITDA to 2019? That's in the ballpark of 110% to 115%. And then from an OpEx perspective, for the Q1 of 2023, we were at about 2.0. That's up from 1.7 in the 4th quarter.

Speaker 8

Okay. That's great. And then I have one more question. I think that's for Laurence. We've been being asked by investor about your 2 layer structures, your ownership into Malco International and then Malco International into MLCO.

Speaker 8

I also understand that the parent company, Malco International, do need some cash from time to time. And we have seen you been doing a bit of share buyback to uplift some of the cash to the parent company. How are you thinking about the structure for the time being? And how are you thinking of the 2 layer structure resulted in maybe some of the cash being retained at the MOSO level. Would you be considering dividend earlier than expectation or some other way to maybe get some cash out to support the paying company?

Speaker 8

Thank you.

Speaker 2

Hey, Simon. So I think with the transactions that were done earlier this year and also last year, I think Melco doesn't Melco International doesn't have any immediate cash needs. And given the strong recovery in the Macau business, our primary focus is really on paying down debt at Melco Resort and also hoping to restart the dividend. So that's by far that's our number one and only motivation and objective right now. Of course, at the same time, if we have more breathing room, we would have we would look at how to simplify our structure.

Speaker 2

I think that's always a nice to have. But again, I think in the immediate near term, we're still paying down debt and hoping to restart dividends.

Speaker 8

Okay. That's clear. Thanks a lot for taking my questions.

Operator

Thank you. And I'm showing no further questions in the queue. I will now turn the call back over to Jenny Kim.

Speaker 1

Thank you, operator, and thank you for joining us for the call today. We'll see you next quarter. Thank you.

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Earnings Conference Call
Melco Resorts & Entertainment Q1 2023
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