Melco Resorts & Entertainment Limited. (NASDAQ:MLCO) Q3 2020 Results Earnings Conference Call November 5, 2020 8:30 AM ET

Company Participants

Richard Huang - Director, IR
Lawrence Ho - Chairman and CEO
Geoff Davis - CFO
Evan Winkler - President
David Sisk - COO

Conference Call Participants

Joe Greff - JPMorgan
Edward Engel - Macquarie
Ricardo Chinchilla - Deutsche Bank

Operator

Ladies and gentlemen, thank you for standing by. Thank you for participating in the Third Quarter 2020 Earnings Conference Call of Melco Resorts & 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 Mr. Richard Huang, Director of Investor Relations of Melco Resorts & Entertainment Limited.

Richard Huang

Thank you for joining us today for third quarter 2020 earnings call. On the call today are Lawrence Ho; Geoff Davis; Evan Winkler; and our Property Presidents in Macau and 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 anticipated results. In addition, we may discuss non-GAAP measures; a definition and reconciliation of these measures to the most comparable GAAP financial measures are included in the earnings release. Finally, please note that supplementary earnings slides are posted on our investor relations website.

With that, I’ll turn the call over to Lawrence.

Lawrence Ho

Thank you, Richard and hello everybody. During the third quarter our integrated resorts experienced gradual recovery in business levels help out the resumption of the IVS visa issuance in Guangdong in late August and nationwide resumption of visa issuance in late September.

Despite increased inbound visitation, thanks to the Macau and the Mainland Chinese government and prudent approach towards border reopening, we have not seen any new COVID cases after the relaxations of the travel restriction measures.

Benefitting from the resumption of visa issuance, our Macau mass table games operation which contributes vast majority of our EBITDA in pre-COVID times saw notable sequential improvements from 2Q to 3Q. Business trends have also improved in the Phillipines with gaming and hospitality operations at City of Dreams, Manila operating on a limited trial run basis as authorised by PAGCOR.

In the middle of June, operations at Cyprus casinos partially re-opened. We saw a swift return of domestic gaming demand which drove the return of our third quarter gaming revenues to approximately 75% of last year’s level.

Looking ahead, while we're encouraged by the resumption of visa issuance, and growing inbound visitation, ensuring the safety and wellbeing 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 benefit Melco’s portfolio of luxury integrated resorts.

To further strengthen our leadership in premium mass, we have made good use of the past few months to accelerate various upgrade projects at COD. With the fully renovated Nuwa Hotel tower currently anticipated to reopen before the Chinese New Year. Despite COVID-19, Melco remains committed to its global development program.

Our next major project in Macau will be Studio City Phase two, where construction is going full steam ahead. Upon completion, the Phase two expansion will increase Studio City's hotel room inventory by approximately 60% with two new hotel towers offering approximately 900 luxury hotel rooms and suites.

Gaming space will be extended. New non-gaming attractions will also be added which includes a Cineplex, one of the world's largest indoor outdoor waterpark, fine-dining restaurants, and state-of-the-art MICE space.

In Cyprus,, we're making good progress with development of City of Dreams Mediterranean, which upon completion, will be Europe's largest integrated resort, offering over 100 Gaming tables, 1000 slot machines and 500 hotel rooms.

Turning to Japan, we remain unwavering in our commitment to bring to the country, the world's leading IR. Our global team continues to monitor the process at a local and national level and engage with key stakeholders. We remain convinced that Japan represents the best potential new gaming market globally. At this time, we remain patient, and we will maintain our disciplined approach with respect to all development activities, including Japan.

Last, while I expect demand recovery in Macau to be gradual, I remain confident in Macau’s medium and long term growth prospects. I believe Macau is still the most attractive, integrated resort market in the world. Our balance sheet was also strengthened by our recent capital market transactions, enabling us to overcome near term challenges while investing for the future.

With that, I'll turn it over to Geoff to go through some of the numbers.

Geoff Davis

Thank you, Lawrence. In the third quarter of 2020, we reported negative group wide property EBITDA of approximately $77 million, while luck-adjusted EBITDA came in at negative $89 million. A favorable VIP win rates positively affected EBITDA at COD Macau, COD Manila, Studio City, and Altira by approximately $8 million, $2 million, $1 million and $1 million respectively.

On a consolidated basis, overall results were positively impacted by approximately $12 million. Details of these adjustments can be found in our supplementary earnings slides posted on our Investor Relations website. In addition to the VIP win rate fluctuation, our performance was also affected by our bad debt provision. During the third quarter of 2020, we incurred a bad debt charge of approximately $32 million as compared to a bad debt charge of approximately $10 million in the third quarter of 2019.

On a year-over-year basis, the change in a bad debt provision negatively affected EBITDA by approximately $22 million. Last, to reflect challenges that the company and the global integrated resort industry faced in 2020, we reversed a previously booked bonus accrual which positively affected third quarter 2020 EBITDA by approximately $27 million.

On our second quarter conference call, we indicated that our Macau operations could achieve breakeven adjusted property EBITDA upon reaching approximately 30% to 35% of our historical gross gaming revenue levels, which was based on pre-COVID revenues and mix of business. With improving revenue mix and successful cost controls, we now expect our Macao operations to achieve breakeven adjusted property EBITDA upon reaching the mid-to-high 20% range of our pre-COVID gross gaming revenue levels.

Turning to our balance sheet to optimize our capital structure, Studio City had in July, issued $500 million of 6%, senior notes due 2025 and $500 million of 6.5% senior notes due 2028. In August, Studio City completed a series of private share placements, raising approximately $500 million of proceeds to strengthen their balance sheet.

Traditionally, Melco in August, issued 500 million of five and three quarters senior notes due 2028. Taking advantage of favorable market conditions Melco subsequently tap the 2028 notes for another $350 million, which brought the blended average yield for the entire 2028 notes offering to 5.68%. Aided by these capital market transaction as of the end of September, we had approximately $1.9 billion of cash on hand in undrawn, revolving facilities in Macau and Manila, of approximately $1.7 billion.

To provide more clarity regarding our capital structure, within our wholly owned group, we had cash of approximately $960 million and gross debt of approximately $4.1 billion at the end of the third quarter of 2020 excluding Studio City, the Philippines and Cyprus.

As we normally do, we’ll give you some guidance on non-operating line items for the upcoming quarter. Total depreciation and amortization expense is expected to be approximately $145 million to $150 million. Corporate expense is expected to come in at approximately $20 million to $22 million and consolidated net interest expense is expected to be approximately $94 million to $98 million, which includes finance lease interest of $11 million related to City of Dreams Manila, and $3 million have capitalized interest.

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

Question-and-Answer Session

Operator

[Operator Instructions] Thank you. First question comes from the line of Billy [Indiscernible] of Bank of America. Please go ahead.

Unidentified Analyst

Thanks a lot. Good evening. I have a couple of questions here. Like first of all, would you mind to provide a bit more color of what you have seen on the ground recently, in the last few weeks, especially some of your peers keep mentioning that they see more pickup of signaling volume in the last few weeks. And also follow up on that is like we also heard the recovery is actually premium mass driven. And can you provide a bit more color, whether the high end premium mass, or the low end premium mass are doing better right now?

Lawrence Ho

Hi Billy, it’s Lawrence here. As we predicted on the last earnings call we've always anticipated the recovery to be very gradual, and I think it is plotting out to be exactly what we had anticipated. I think for details of what we've seen on the ground, why don't I pass it over to Davis to give more color.

Geoff Davis

Sure. Thanks Lawrence. Hey Billy. So what we've seen essentially, it's more of our what's called our premium mass more of our higher in premium mass players coming back. A lot of our players are coming out of the non-Guangdong region. Guangdong is still kind of messed up. And we're still having some trouble, as you've kind of heard about probably in some of the other calls. And I think it's been pretty well, well noted in a lot of the writings and a lot of things have gone on in terms of IVS, and how IVS is currently working right now. But we've been fairly pleased with what we've seen come back, we're probably about 35% of our volumes from what we've had before. But overall, it's actually worked out fairly well for us in terms of what's come back.

Again, I think where the players we're seeing a little bit right now just to get maybe a little bit more color is the players are playing down a little bit, meaning that their average bets are a bit lower. They seem to be a bit more cautious. Playing time has not changed that much. One of the other kinds of things that we've seen a little bit is that the players don't move between the properties as much now. So I think that's probably more of a reaction to COVID. And just the difficulty as you go through each of the properties and having to go through kind of a check as you're going from property to property or in and out of the casinos.

Unidentified Analyst

Alright, I see thanks. Really appreciate the color. But just follow up on that. As you mentioned, volume wise, it's getting back to 35%. Does that means the company is already back to profitability given that I think Geoff mentioned the breakeven point is lower now.

Geoff Davis

So this is Geoff. Yes, we played a bit unlucky, but for the month of October, on a theo [ph] basis, we are marginally in positive EBITDA territory. And that includes roughly $10 million of bad debt expense.

Unidentified Analyst

Thanks. And just final question, given the headline news or news flow about Chinese government cracking down on probably junket activities in China? So like, is the company changing the strategy for obstacles COVID? Will you reallocate resources to more premium markets or other segment and takeaway tables or rooms from the junket operations?

Lawrence Ho

Hey, Billy it’s Lawrence. So I think, over the last 10 years, plus, we've been very focused in anything, we pioneered the premium mass segment, less anticipating the market to shift. So I think we have, a very great team and well suited thought up to cater to that segment. And, at the current moment in time, of course, with that anti gaming campaign or anti junket campaign, I think there'll be some long term positives for Macau, because after all, they're focusing on overseas gaming. And so in due course, I think we'll see some of that traffic come back to Macau and be diverted to Macau. But I guess, on the operational level, David and his team and his senior team have always done a great job in terms of managing for what the market is. I don't know, David if you have more color to add.

David Sisk

Yeah, I think a couple of things. I think the first thing is, we've always, if you look at our profitability, the junket business or that VIP business represents about 10% of our profitability. So it's not a huge portion of where we drive our revenues. As Lawrence mentioned, we've always made big investments towards our premium mass, in our mass class players. And certainly that's no exception during this downtime that we've had for the COVID. We've made a big investment back in our casino and improving it. And again, creating great experiences for our players, both in our rooms and our dining. Lastly, I'd say to you, as Lawrence was kind of alluding to, we think net, it's a net positive for us overall.

Now, whether that business comes back from these other places through the junkets or it comes through our premium direct business. We think overall and long term we're net beneficiary of this.

Unidentified Analyst

Thanks so much.

Operator

Thank you. Next question is from the line of Joe Greff of JPMorgan. Please go ahead.

Joe Greff

Hello, everyone. If two sets of questions. One Lawrence, or David or Jeff, for whoever wants to answer it. Can you talk about what you're hearing in terms of Mainland Chinese China's efforts to maybe reduce some of the bottlenecks and timelines for Mainlanders to get visas under IVS? And maybe what's gone on incrementally more recently?

Lawrence Ho

David, you want to give more detail?

David Sisk

Sure, I’ll take that one. Sure absolutely. So Joe, it's kind of funny because it's incredibly inconsistent in China, between the provinces and the cities. One of the things you can see is you can go to a non-Guangdong Province, and it can take a day. If in Guangdong, sometimes it can take 14 days. We still haven't seen a real consistent pattern other than just the incredible inconsistency that seems to go on. And that would be kind of the inconsistent application of what happens here. A lot of our Guangdong players that came in early October have been told basically, they can't come back for two months.

So we've really been focusing on trying to get our players back as quickly as we can. We continue to kind of maintain our contacts, but it's really kind of hit and miss. So we are we are working feverishly, but it really just depends on the Province of the City and honestly, even between the Province in the cities, they can get one answer one day that says it's going to be two months and get another answer and then come back in a day. It's just -- it's incredibly inconsistent at this point.

And I think again, it's somewhat I think that's just going to be the way it works for a while and sooner or later, I think things will return to a normal period. But it's just going to be inconsistent for a while.

Joe Greff

Okay, great. Thank you, David. And, Geoff, it's in your comments at the sort of new threshold for EBITDA breakeven. What's the math behind the assumptions with respect to incremental, bad debt from here? I know, it's something that's been sort of eating away at the EBITDA the last few quarters, obviously, you mentioned October, sort of same level of monthly run rate as the 3Q, what's the assumption behind that mid-to-high 20% threshold for breakeven?

Geoff Davis

So I would say on the bottom end of the range, that's excluding bad debts and towards the top end of the range, that's including bad debts.

Joe Greff

Do you think at this point? I mean, obviously, depends on collections. But when you look back at what you've done, the last seven, eight months, you think you've sort of taken, most of the hits or, or that sort of maybe an assumption that is maybe quixotic from someone like me from the outside?

Geoff Davis

Well, as you know, I think for the majority of this year, we've been very conservative in our provisioning. At some point, as we see, visitors come back. We do think that that starts to reverse we start collecting, but that has not been assumed in our breakeven GGR guidance.

Joe Greff

And just one final question on the provisioning, how much of that is direct versus junket?

Geoff Davis

Predominantly direct.

Joe Greff

Great, thank you.

Operator

Thank you. Next question is from the line of Edward Engel of Macquarie. Please go ahead.

Edward Engel

Hi, thank you for taking my question. Of the 35% cover you've seen in October. Have you seen the mass business outperforming the VIP business overall? Or have they been generally similar?

Geoff Davis

Lawrence, I’ll take that one.

Lawrence Ho

Yes, please go ahead.

Geoff Davis

Okay, sure. So honestly, the junket business and that VIP business has been somewhat challenged by the visa process, Hong Kong being closed. So of the 35% that we're seeing that is coming out of our mass, and particularly premium mass.

Edward Engel

Okay, thank you for that. And then I mean, did you start to see visitation plateau by the end of October? Or were you seeing momentum kind of throughout the month, week by week and then into November?

Geoff Davis

So what we've seen is that visitation is slowed. I won't say it's plateaued, but it has slowed. We saw a period is right after we opened up in October, once the Guinness Golden Week started. We saw a nice pickup, it slowed back that second week, and then started picking up in the third week. I think that was more resolved. Honestly, a lot of the visas coming through for the non-Guangdong. We noticed when we had when we opened up in September. As we came up for the Guangdong there's about a two or three week lag before the visa started coming through. So we saw that happen somewhat again, with a non-Guangdong when it opened up. It we're still seeing good visitation, better visitation on the weekends, but it has slowed somewhat.

Now again, that again, someone who's timing typically after we get out of that October period it does slow down a bit. So it may just be more just a function of the calendar and how the calendar works as well. But we're still seeing a small pickup and it's certainly has slowed.

Edward Engel

Great. Thank you for the color.

Operator

Thank you. Next question is from the line of Ricardo Chinchilla of Deutsche Bank. Please go ahead.

Ricardo Chinchilla

Hey guys, thanks for taking the question. Just looking to I know that's probably still a little bit early. But just looking into CapEx flow in 2021, can you provide some color with regards to the wholly-owned group and the plan source GCD [ph]?

Lawrence Ho

Sure, so for 2021 we anticipate roughly a billion of CapEx, approximately 250 of that will be for Cyprus, and about 525 of that would be for Studio City Phase two.

Ricardo Chinchilla

And thinking about the maintenance for the wholly-owned property. It's the balance of address, right?

Lawrence Ho

Combination of maintenance, mostly maintenance then also small growth projects.

Ricardo Chinchilla

Great. And can you please comment a little bit on what you have seen from the junket side? Do you guys are seeing any liquidity issues or any, impact from some of the capital curves outside of outside of China?

Lawrence Ho

Hey David, can you take that?

David Sisk

Sure, again, kind of we're seeing still is it from the IVS standpoint, it's still difficult for players to get in here and with Hong Kong being closed. So I think the junkets are just being cautious with the players that they are getting in. I think they are struggling in terms of they're doing some collections a little bit. But overall, I think it has more to do with IVS and has more to do with Hong Kong being closed.

Ricardo Chinchilla

Perfect. Thank you so much.

Operator

Thank you. And I'd now like to hand the conference back to Mr. Richard Huang. Please go ahead.

Richard Huang

All right. Thank you for filing in for our conference call today. We look forward to speaking with you again next quarter.

Operator

Thank you, ladies and gentlemen, that concludes the conference for today and thank you for participating you. You may now all disconnect.