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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Thank you for holding, and welcome to the Galaxy Entertainment Group's management update for the first quarter results of 2020. Today, joining us are Mr. Michael Mecca, GEG Board, Nonexecutive Director; Mr. Robert Drake, Group CFO; Mr. Roland To, Senior Director of Strategic Planning; and Mr. Peter Caveny, Assistant Senior Vice President of Investor Relations. [Operator Instructions]
I would now like to pass to Mr. Drake for a presentation. Mr. Drake, please go ahead.
Thank you, operator, and greetings, everyone, and thank you for joining us for GEG's Q1 2020 Results Call. The GEG team joining me here on today's call include Mike Mecca, a member of the GEG Board of Directors; Roland To, Senior Director of Strategic Planning; and Peter Caveny, Assistant Senior Vice President of Investor Relations. Copies of our media release, stock exchange announcement and PowerPoint presentation are available on our website, which also include our customary disclaimers.
First and foremost, on behalf of Dr. Lui, Francis Lui and the entire GEG family, we would like to say a heartfelt thank you to everyone globally for their efforts and restraints during the unprecedented COVID-19 crises. We would also like to express our sincere sympathy to anyone who's been impacted by this pandemic. It's difficult to predict when this epic battle will end, and it will end, where it's certainly inspiring to see humanity stand together and unite against a common cause.
Our hats are off to the Macau government for their outstanding, proactive and decisive handling at such a dramatic crisis, where the focus has always been the public's health and safety, while successfully galvanizing support and unity from the community.
You may be interested in knowing that Macau has experienced only 45 cases to date with no community outbreaks, 42 discharges and, thankfully, no fatalities. Further, Macau has not experienced a new case for over a month since April 8, which is very impressive indeed. As you know, the Macau market is definitely facing a challenging period but is well prepared to navigate through the storm, including the government and all the concessionaires, so the coming months will be a critical period for us and the rest of the world.
We are as committed as ever to the health and safety of the community, our team members and guests. We remain extremely vigilant during this crucial period and will continue with our elevated hygiene and preventive efforts and full support and compliance with the government's directives to contain the spread of the virus. We are hopeful that the situation continues to improve, fully knowing that it will take time to recover from this character-building event. We are confident that brighter times are ahead of us, but we'll need to carefully navigate through this difficult interim period. We thank everyone for their support and patience where health and safety and social responsibility continue to be the highest priorities and orders of the day.
Let's move on to Q1 2020 results, where we have been adapting our operations as best we can to the current operator environment, while at the same time, ramping up our Cotai development projects.
You will not be surprised to hear that EBITDA was down 93% year-on-year to just under $300 million in Q1. This, of course, is due to the impact of the pandemic. We have been working very actively to adjust our cost structure to a very low revenue environment. We have experienced several crises over the past decade or so, but never anything like the pandemic, where GEG has always emerged stronger, nimbler and a more efficient operator.
We are particularly proud of all of our team members who have been extremely understanding and supportive of the community and GEG through this challenging period. We would like to thank everyone on the GEG team, who supported the company in these difficult times by contributing to our cost control program. We are proud to report that virtually all team members made voluntary contribution, including the Board of Directors, which waived their directors fee, management who participated in our nonpaid leave program and the many team members who joined our Flexi Family Care program.
At GEG, we have tried to spread the impact of COVID-19 fairly across all team members, as we prefer not to engage in redundancies. This truly has been inspiring. Let's move on to our development update, where we continue to move forward with our development initiatives in Macau, Hengqin and Japan.
You may recall from our briefing this past February that we reaccelerated construction of our Cotai project after the casino closures in February.
We will do our best to meet our opening time lines, which under the circumstances may be impacted by the COVID-19 crises. We will provide updates on our target schedules as we move forward. We are also using this period as an opportunity to perform additional maintenance and enhancements to our properties.
Our Cotai development activities, along with our existing property initiatives also demonstrate our long-term commitment to Macau, as we also help to support the economy by continuing to invest billions of dollars. We also continue to pursue our project in pension. We are encouraged by the Macau CE's positive comments and it's inaugural policy address about the future role of pension in the further development of Macau as well as the Greater Bay Area.
And finally, Japan, where we continue to pursue opportunities with our partner, SBM with Monaco. We are also monitoring the impact of the pandemic in Japan, and we'll update you as initiatives evolves.
Next up is our balance sheet, which continues to remain strong, liquid and virtually unlevered. Cash and liquid investments decreased modestly from $52.3 billion at the end of December 2019 to $51.9 billion at March 31, 2020. Our net cash position declined from $51.7 billion to $47.5 billion. Total debt increased from $550 million to $4.4 billion due exclusively to borrowings associated with our treasury yield enhancement initiative.
Moving on to dividends, where we paid the previously announced special dividend of $0.45 per share a few weeks ago in late April 2020. Our special dividend certainly demonstrate our continued confidence in the Macau market and GEG's future performance as well as our commitment to return capital to shareholders, while at the same time, maintaining our status as a growth company. Our Board of Directors, as always, will continue to evaluate our approach to the dividend on a case-by-case basis.
Moving on to our outlook, where we continue to have limited visibility, as we navigate through the COVID-19 crisis. Therefore, it's extremely difficult at this point, but not impossible, to assess the financial impact, especially if the crisis continues for a prolonged period, other than to say that it's likely to have a material adverse effect on our financial results.
As we said earlier, it's difficult to predict when business will return to normal, but we remain highly confident that it will return to normal. Having said that, we do see some encouraging signs that life and the economy are gradually and systematically recovering in a disciplined way, including expanding hours of operation at some Macau immigration points; loosening of Macau entry requirements and nonresident workers, living in Zhuhai; some macau students actually returning to school and domestic travel in China over the recent May holiday.
We also see some positive signs from our construction materials business that China is indeed gradually going back to work. We continue to move forward with the Phases 3, 4 in Cotai and as well as Hengqin Island plus Japan. We remain optimistic about the long-term prospect in Macau and the Greater Bay Area, where the underlying fundamentals continue to remain incredibly compelling.
And finally, we would like to extend our sincere appreciation to the Macau government for their outstanding performance as well as the community, which has rallied under their leadership during the epic crisis.
We would also like to thank all the GEG team members again, who've been extraordinarily supportive of the community and the company during this challenging period. We are all standing strong together.
And with that, let's open up the lines to operator for some Q&A.
[Operator Instructions] The first question we have is from Billy Ling from Bank of America.
I have a few questions. Maybe focusing on the longer term, I'm wanting to ask about the Japan and also Phase 3, Phase 4. And for Japan, given the current situation, the COVID-19 disruption and then also one of your major competitors deciding to drop off, what's your view on Japan opportunity now? And that's question number one. And then I will ask the other questions, yes.
Thanks for the questions, Billy. Why don't we let Mike handle Japan, and then I'll tackle Cotai.
Thanks, Bob. Thanks for the question. And as always, it's not appropriate for us to comment on another concessionaire and their strategies. However, we certainly wish to confirm that Galaxy Entertainment remains very interested in developing a world-class integrated resort in Japan, and we continue to evaluate the opportunities in Japan on a case-by-case basis.
In Japan, we look forward to receiving more information on the Japan's integrated resort policies and guidelines as they're still, as everyone knows, a work in progress. And we remain, of course, respectful of the government's efforts and look forward to learning more as we move forward in the process. But despite whatever any of our competitors do, we remain very interested in Japan.
And Bob, on to you.
Okay. Thanks, Mike. Billy, [ you take ] for the Cotai.
Yes, yes. And then for the Cotai Phase 3, Phase 4, would you mind to provide a little bit more update in terms of Phase 3? We understand there are different components. So like in terms of the target opening date, do you get a sense like how far it will spread over 2021? And also a quick update on Phase 4. Our understanding is like, I think, Phase 4, you guys have done some [ piling ] already that have you resumed or accelerate Phase 4? Or will you be slowing down Phase 4 and will only focusing on that after Phase 3 completes?
Thanks for the questions, Billy. First and foremost, in our opening remarks, we said we're kind of adjusting our day-to-day operational model through this lower revenue environment, while at the same time, ramping up our efforts in our development projects, particularly Cotai Phases 3 and 4. If you were on-site today, it's a very busy construction site. You can see from our PowerPoint presentation that we're beginning to extend both the convention center and the new tower at Galaxy Macau. But notwithstanding what's going on with the COVID crises it wouldn't be unreasonable to think that the opening time lines might slip a little bit.
So last quarter, we said it would be hopefully in early '21. We will do our best to maintain those time lines, but it wouldn't be unreasonable to see that slip to at least the mid-2021. We are experiencing some modest supply chain disruptions, but we're working our best to -- working our hardest to mitigate as best we can. So as far as Phase 4 is concerned, we're working in tandem here. The focus is definitely Phase 3, and then that will be followed by Phase 4.
So we look forward to updating you on our continued updates, and we're really making a lot of progress on both projects. The only other comment I would make is on the positioning of the project with the convention center, we think, will be a gamechanger for Macau. It will be the most modern and technologically advanced facility in this part of the world. And we really believe that a new tower at Macau will redefine hospitality and leisure here in this part of the world.
So again, we're very excited about the long-term prospects for Macau, and we're really putting our money where our mouth is.
That's very clear. And just one last quick question on the current situation. As you mentioned, the border has somewhat normalized, not completely, but to some extent, opened up for the workers and some inside people. And do you see the daily traffic pickup -- the casino daily traffic because of that? And also in terms of the OpEx daily run rate and maybe cash burn run rate, I think you guys provide some guideline last quarter, has that number changed at all during this quarter?
Yes. The -- thanks for the question. As far as visitation is concerned, it's just jammed a tremendous amount. If you've seen the results for both February and March, they haven't released April to at least the best of my knowledge. But I think it was down 90-plus percent now with -- and the government actually publishes how many tourists are entering Macau on a daily basis. So we're used to doing 100,000 a day, it's less than 1,000. So the real key there is the relaxation of immigration policies. Having said that, we do see these little green shoots, where we think about Macau workers, who reside in Macau can come across the border, which is a great sign. If you saw the traffic over the May holiday, it was down reported 40%, now we're down almost 100%. So that means that people are traveling. So we hope there's some pent-up demand, and we're possibly optimistic that over time, that we'll get back to normal. And I think what we'll see is some gradual relaxation of policies, and you can even see that from the CE's recent inaugural policies that he's going to request an expansion to the IVS City and hope Macau gets back on its feet by allocating marketing dollars to help out the cause.
So I think we're all working together on this, and we'll move forward. As far as the OpEx is concerned, the burn rate, what we described on the February call was that we were running at about USD 3 million a day. I would say that's in round numbers. And then right now, we've reduced that maybe another 6% down into the $2.8 million range with upside. So a lot of the cost control initiatives that we launched were mid-quarter, and we'll get the full benefit of that, particularly in Q2. So we'll update you on what the Q2 run rate is when we report our results, but we expect it to be lower than $2.8 million. So we've been very conscious about controlling our costs in a very disciplined and systematic way. We've had tremendous support from the -- our -- all the team members, starting with our Board of Directors, management and my employees, whether it's contributing to the nonpaid leave programs or from an executive standpoint, or Flexi Family programs, which have been very well received by just about everyone.
So it really is inspiring to see how everyone, including the community, is rallying around Macau.
The next question is from D.S. Kim from JPMorgan.
Just to follow up on your last point. When we say $2.8 million, that is OpEx run rate, not cash burn rate, right? So we do have some cash income from the deposits. So actual cash burn should be lower than $2.8 million. Is it fair understanding?
Yes. That's a fair comment, yes. Because what we're trying to do is that there's no standard definition of OpEx run rate. So we know that our brothers have reported what their OpEx run rate is, which we assume is just down to the EBITDA line. One of the strengths of Galaxy is, of course, with our balance sheet is, we really don't have any interest expense. What we do have with interest income, and that's to the tune of about HKD 100 million [ a month ]. So -- although at the same time, that's on the operations side. And then we're also investing in our long-term future by investing quite a bit of capital in Phases 3 and 4. So we're in that unique position where we remain unlevered and can continue with our development program, which I really think that translates into a distinctive competitive advantage.
That's great. And I have a couple more follow-ups, if you don't mind. First one is if -- I'm not sure if I read it correctly, but from the presentation, we now say 3,500 hotel rooms and villas. I understand last time, we said 4,000 and before that 4,500. So is it -- so 3,500 is the final number or like current revised down number? Is it...
You're a very astute analyst here. Yes, we've actually ratcheted down the scope of Phase 3 and 4. And you can see that we disclosed how many rooms that we have at the Andaz, with the convention center, it's about 700. And just doing some reverse engineering there. But one of the things that we've learned in Macau is the one of the most precious commodity is hotel rooms. And it's not about how many you have, it's about how many high-quality hotel rooms you have. So it's not about the number, it's about the quality associated with that. So you can see that the other competitors are building up certain types of products, and we're really positioning ourselves with a higher quality offering targeted towards the premium segment. And that's what we ultimately decided to do. Sure, we can build more hotel rooms. But if they're not quality hotel rooms, it kind of defeats the purpose and would minimize the potential upside of -- on our ROI.
So I think we've made a conscious decision to adjust our programming to where we see the market going, where you need higher quality hotel rents. And we're quite confident that with Andaz, the Phase 4 and the new tower, Galaxy Macau, that we'll hit that mark.
Final question is a little bit medium term. As we come out of COVID-19 downturn, hopefully sooner, the VIP segment is probably going to lead the recovery at the initial phase of this. And I was wondering if we have any plans to capitalize on this opportunity, say, for instance, if we may revisit commission scheme or level or something of the nature? And that's my last question.
Great. And no, there's still a market clearing price for VIP, with the exception of one operator in the market that's adjusted the pricing. I think we're all pretty much at the same level now. We don't compete on price. So it's the -- having said that, if you look historically back in the global financial crisis, the VIP did lead the recovery. And it's not -- and I think that we would take it one step further in saying that the premium segment of VIP, mass and premium direct will lead to recovery. Why? Because we have higher-value customers and it takes lower headcount to achieve that. So it's the -- and then over time, we see that mass will fall off behind VIP with more traffic and lower spend. So it's the -- but I think it will be almost like a traditional property opening.
The next question we have is from George Choi from Citi.
So a couple of questions from me. First of all, as you highlighted, Galaxy has been building GM Phase 3 without raising any debt. Can you remind us your target debt-to-equity split for funding the CapEx? Or do you plan to go the distance without any debt?
My second question is related to your balance sheet. With plenty of cash in hand, you probably never need to do it, but in case you need to draw down from your bank facilities for your daily working capital, would you please tell us the available amount that you can draw down from your credit line?
Sure. First, on the capitalization of -- for Phases 3 and 4, our current plans remain unchanged that we expect to use existing cash and internally generated funds. To fund this -- we're in a very unique position where we don't have to tap the credit in order to fund these developments, whether it's capital markets or bank financing.
And then given that we have so much cash and a strong liquidity position, we do have additional insurance in the form of uncommitted credit lines. And the net to the tune of about HKD 13 billion. So that really helps us. And of course, that's how we funded the treasury enhancement initiative that we just talked about. That's like in the neighborhood of almost $4 billion that we did. So -- and that's all funded under those uncommitted lines.
We have very strong relationships with our banks, and we'll -- and it's just additional insurance for us.
The next question we have is from Chelsey Tam from Morningstar.
I think you talked -- you updated the timing of Phase 3 and 4. And I just want to maybe get an update on the budget of Phase 3 and 4, just in case there is any change. And I also want to get an update on the number of labor that you will be able to transfer to Phase 3 and 4, respectively, and the number of new hires for Phase 3 and 4? I just want to see if there are any changes.
Let's see here. As far as like the labor issue is -- it's a little premature to go through that, but it's -- we'll try to leverage with economies of scale across the property. We're just adding a hotel tower at Galaxy Macau, so we don't expect a lot of incremental labor there. Phase 3 component is being the convention center, we'll add some folks there, but not as many as you think. So it's not like we're opening a brand-new property where you've virtually 0 employees. So it's the -- it's more extensions of what we're doing. So I wouldn't expect that we have as many people as you think, and we'll provide more details on that as to moving forward.
As far as the budget and stuff for Phase 3 and 4, really remains unchanged at about $50 billion. And hopefully, we can do a little bit better than that. So that remains unchanged.
Actually, sorry, I want to ask one more follow-up question. I just wanted to see -- sorry. I just want to see if there are any comments from perhaps the sales team about the pent-up demand? What have you been hearing from the customers?
We've done some informal surveys and certainly redepressed like everyone else's. And we do see some positive signs coming out of China, a, from our construction materials business, which is -- aggregates some cement in China. You can see that China is gradually going back to work. So that's very positive. They actually had a decent quarter everything considered. When we talk to our customers and you read about the same travel surveys that we do, that the silver lying is that international travel being [ severely ] curtailed. And then it really goes to strength of the Macau market is we need some accessibility. So we're -- virtually this is more a local's market than it is a destination market like -- from an overseas perspective. But we're confident there's pent-up demand. And you can just look at the overall travel pattern over the May holiday when we reported that overall domestic travel was down 40%. It didn't go down 100% through the segment. People were still wanting to travel, and we see that as a positive sign.
The next question we have is from Edward Engel from Macquarie.
Just a follow-up on the number of hotel rooms for Phases 3 and 4. Can we still expect about 50 to 100 rooms at Phase 3 combined? And then that would imply about 2,000 at Phase 4?
Yes. That will be in that direction, sure.
Okay. And then more recently, there's been a bit of discussion about M&A in the industry. And just given the strength of GEG's balance sheet, I was hoping to hear your latest views on M&A alongside your broader strategy?
Yes. It's a great question, and we appreciate it. First and foremost, we're really focused on Phase 3 and 4. We're not really chasing growth like other folks are potentially. Having said that, we're always willing to look at deals, and we are actively looking at deals, but it has to make sense for us. When we look at the allocation of capital, I don't think there's any more higher potential return than Macau for us in the near term. We're still interested in Japan in the longer term. And in that intervening period, other potential deals to be done? Absolutely. But we'll be very selective about that. So when we talk about our capital allocation strategy to the Board, we talk about our development initiatives in Macau, Japan, some other projects that we're considering. And then looking at M&A, we'll be very selective about that. So it will have to be the right wheel on the right turn as well.
The next question we have is from Charlene Liu from HSBC.
I have two questions. I wanted to know, in light of COVID-19, what has Galaxy done on the CSR front? And then I have a follow-up question on Japan.
Well, I think CSR, we'll hand it over to Mr. Mecca.
Thanks, Bob, and thank you for the question. Our initial effort to prevent, MOP 25 million contribution to fight against COVID-19. This will include the MOP 20 million to Hubei province and MOP 5 million to Macau. In April, GEG announced an additional donation of MOP 75 million to support the development of long-term preventive measures against to COVID-19. GEG also subscribed HKD 100 million for the SMEs themed COVID-19 impact alleviation social bonds that were issued by Bank of China, the Macau branch. GEG's total contributions exceed MOP 200 million.
Additionally, we provided full pay to our staff during the casino suspension. We offered a one-off subsidy of MOP 30,000 to over 30 schools to carry out necessary disinfection measures. On a one-off subsidy of MOP 2000, the children registered at Macau's 20 nongovernment subsidized nurseries with support over 900 children. We also donated 1 million masks to Macau in China. And further, I'd like to share with you that our -- Francis Lui, our Vice Chairman, personally, donated his 2019 remuneration. This includes a salary, bonus and director fees. In total, just Francis' personal donation is approximately HKD 33.5 million. We've been very involved with community and our team numbers during this pandemic.
I have a follow-up question on Japan. I just wanted to know, given the COVID situation, how much delay do you expect to see on the Japan time line? Could you give us a little bit more guidance on that front?
Yes. That's a great question, Charlene. And if you look -- let's do the bottoms-up analysis, you see some of the local prefectures that had delayed their RFP process. But the -- and it's to refocus on the matter and with the COVID-19 crises. I wouldn't be surprised if the national government plays along with that. We're very respectful of what they're doing there and certainly have a lot of empathy for what they're experiencing. But we're in this for a long haul. So whether it's the move forward on the current schedule at the national level, we'll be prepared to go. If it's delayed a little bit, we're certainly in understanding of that, and we'll be prepared to go. And I think we remain interested, as Mike said, in Japan and look forward to learning more as the process evolves.
The next question we have is from Simon Cheung from Goldman Sachs.
I have a couple of questions. I appreciate that you -- there's a lot of lack of visibility on the pace of recovery. But last couple of cycles, we noticed that the recovery was generally quite quick and fast. Based on what you have to observe, as you mentioned earlier, how should we think about the pace of recovery maybe going up in maybe 1 or 2 years? Do you expect things going to be normalizing within 1.5 years, 1 year or even 2 years? Just wanted -- would love to hear your thought on that.
Yes. That's a great question. And I think everyone is looking into a crystal ball. And of course, Macau is very heavily dependent and correlated with immigration policy with China and Hong Kong. So I think as you can see, walk before you run, they're doing some gradual relaxation of policies. We talked about the nonresident Zhuhai employees coming across into Macau, some other initiatives that we've talked about earlier. But as far as the recovery, we still believe it will be led by the 3 new segments, followed up by the other segments. It's going to take some time. What does that mean? Is it 6 months, 9 months, a year, we'll wait and see, but we're in this for the long haul. And I think one of the beauties of our market is that every concessionaire is well-capitalized to weather the storm, supported by a very well-capitalized Macau government. So I think we always want to do the right thing. We are totally focused on public health and safety and -- of our guests, our employees and the community. And we just want to do it in a measured and systematic way that it's sustainable.
So we'll continue to update the street. And as we move forward in this process and please pay close attention to immigration policy in North China, Hong Kong and Macau are doing.
Understood. And the second question on Japan. You've been in Japan for quite some time. And given the interaction with the government, I understand, there's still a lot of uncertainty. But for the time being, what are some of the criteria you think the government putting more emphasis in? Like obviously, you have a very strong balance sheet and experience in Macau, but what are some of the other things that you think the government are looking at when they choose which going to be departments for them?
Well, I don't think anything's fundamentally changed there, Simon. I think while financial strength is certainly one of them, it's about our ability to work with in a very cohesive and cooperative manner to develop what the Japanese want in terms of what their IRs are. And then to us, it's finding out what is the best match between what Galaxy can deliver and partnering with one of our global partner or prefectures or city. So I think certainly, financial strength is one of them. Development execution is just one of many that we're considering. And then I think we'll get more guidance out of this once the basic policy, although it's in draft form, we don't expect it to change a lot. But we'll wait and see what the final verdict is from the Japanese perspective on the basic policy, which is a critical document.
So we look forward to receiving more information as the process marches on here, and we're very respectful of what they want to accomplish. And we remain very interested in working with them.
Understood. And then my very last question. Again, we got with your Wynn stake, Wynn Resorts stake, I understand so far, you have been of passive investor's view. Have you thought about further developments or any interaction with the Wynn management team on any future trends or anything along that line?
We have a very strong relationship with our friends at Wynn, both in Macau and in Las Vegas at the corporate level. And -- but our position has not changed one iota. We are a passive investor as of today.
The next question is from Angus Chan from UBS.
I have a question on social distancing. I guess to the extent these measures stay for a long time, at what point does it, I guess, become a bottleneck to your demand? Whether it's, I guess, in terms of visitors or gaming revenue, along those lines, do you have to kind of do some reconfiguration of your casino floor? And anything that you can share would be great.
Yes. First and foremost, our focus is always our employee and guest health and safety. So we want to work closely with the government on implementing whatever directives that they see fit that certainly promote that. Having said that, that I think there's a lot of capacity in Macau, so I think it would take some time to ramp up given the social distancing measures, but at some point we would cross that Rubicon where hopefully, it doesn't -- hopefully that we can get back to normal sooner rather than later and not rely as much on all these social distancing measures. But it will take some time. We're very conscious of that. We've adjusted our operating model, so when we are working on our recovery plans and the like, just like everyone else is concerned, we're elevating our hygiene standards, and we just, of course, are focused on health and safety first. And at some point in time, we're highly confident that Macau will return back to normal.
At this time, there's no further questions in queue.
Okay. Thank you very much, everyone, for participating in today's call, and we'll update you on our Q2 results probably in August. Until then, stay safe and healthy.
Thank you. This is the end of GEG's conference call. Thank you for joining us today. You may now disconnect your lines.