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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 Second Quarter and Interim Results of 2021 Conference Call. Joining us today are Mr. Michael Mecca, GEG Board's Nonexecutive Director; Mr. Robert Drake, Group CFO; Mr. Roland To, Senior Director of Strategic Planning; and Mr. Peter Caveny, Assistant Senior Vice President and Investor Relations. [Operator Instructions]
I would now like to pass to Mr. Drake for presentation. Mr. Drake, please go ahead. Thank you.
Thank you, operator, and greetings, everyone, and thank you for joining us for GEG's Q2 2021 Results Update 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.
On behalf of our Chairman, Dr. Lui, Francis Lui and the entire GEG family, we greatly appreciate everyone's continued contributions and sacrifices throughout the pandemic. as well as our heartfelt sympathies to everyone globally who have been impacted by this crisis.. We are confident that the world, including Greater China, will successfully navigate through the ups and downs of the pandemic in the near term, where we remain upbeat and positive that brighter days are indeed ahead.
As you know, Macau recently experienced 4 COVID-19 cases in early August, when the Macau government demonstrated, yet again, its ability to react incredibly swiftly to minimize public health and safety risks as they have throughout the entire crisis. We, again, salute the Macau government for its proactive, decisive and effective leadership during the pandemic.
Despite sporadic outbreaks in Greater China in '21, Macau has demonstrated an ability to bounce back quickly in a choppy market, while at the same time, supporting the all-important public policies, which has certainly caused for optimism. No one ever said this would be easy or that the recovery would be like a light switch or a straight line.
As we have mentioned many times before, we continue to believe that the Macau market recovery will be gradual, managed and choppy in the near term where the green shoots we spoke about last quarter are well positioned for continued growth and remain as confident as ever in its medium- and long-term future. To be clear, GEG remains as committed as ever to the health and safety of the community, our team members and our guests as well as the economic and social stability of Macau where the continued containment of the virus remains the highest priority.
Let's move on to our Q2 2021 performance, where our effective cost control efforts introduced throughout 2020 continue to yield results in a gradually improving but choppy revenue environment, while at the same time, we continue to make progress with our enhancement projects at our existing properties as well as with our game-changing Phase 3 and Phase 4 development projects in Cotai. GEG's Q2 2021 EBITDA improved by $2.5 billion year-on-year from a $1.4 billion loss in 2020 to a positive $1.1 billion in 2021 and grew 32% sequentially.
The group also played lucky in Q2 2021, which benefited EBITDA by $74 million. And as a reminder, also played lucky in Q1 2021, which improved EBITDA by $169 million and modestly lucky in Q2 2020. If you adjust for luck, normalized EBITDA grew 53% quarter-on-quarter to $1.1 billion and also improved significantly versus prior year's $1.4 billion loss.
We mentioned earlier that there were some cause for optimism during a choppy second quarter, and that is our mall operations, which where we delivered an all-time record performance. This is certainly -- this is certainly an important KPI, which indicates strong demand and bodes well for an overall market recovery.
We also continue to work hard at leveraging our cost structure as business gradually improves. To that end, our Macau OpEx burn rate has declined by 30% from approximately USD 3.4 million per day under normal operating conditions, but ticked up very modestly to the $2.4 million marked in Q2 2021 even as business ramped up where we are certainly generating operational leverage.
We would like to pause here like we have previously and make a very important point on fiscal management, especially during these challenging times. We certainly acknowledge that OpEx burn rate is an important part of the expense equation, but there is certainly more to the overall cost picture than that. Daily cash burn is more indicative of the cost structure as it includes interest expense.
We are very fortunate that we are the only concessionaire in Macau that generates net interest income, not interest expense. In fact, our net interest income also remained virtually unchanged in Q2 2021 at approximately USD 300,000 per day. If you deduct the USD 300,000 per day of interest income from the $2.4 million per day in OpEx burn, you get approximately $2.1 million per day in cash burn, excluding CapEx.
It's a powerful example of how conservative balance sheet management really pays in challenging periods in general and, in our case, significantly differentiates us from the competition as well as contributes to making prudent decisions which are, in the long-term, best interest of the company. And just for the record, we will be the only concessionaire in Macau to report positive NPAS for the first half of 2021.
We would like to thank everyone on the GEG team as well as our valued suppliers who continue to support the company in these difficult times by contributing to our cost management programs. Everyone's support has truly been inspiring. We have also contributed millions of dollars to the COVID-19 relief efforts to support the community as we previously reported, including, most recently, to the Henan flood relief efforts in China.
Let's move on to our development update, beginning in Cotai, where we continue to invest in Macau as well as Galaxy's future. You may recall that back in early March 2021, we announced that we will be welcoming Accor's legendary Raffles brands in Macau with Raffles at Galaxy Macau, which will feature a 450 all-suite tower and is targeted to open in early 2022. We intend to follow this with the opening of the Galaxy International Convention Center and Andaz Macau in anticipation of the recovery of the MICE and entertainment markets. And finally, we are proceeding with the construction of Cotai Phase 4, Macau's only next-generation integrated resort, which will complete our ecosystem here in Cotai.
As you can see, we remain highly confident about the future of Macau as we continue to invest literally billions of dollars into our business. Our Cotai development activities, along with our existing property initiatives, also demonstrate our support of Macau during the pandemic by continuing to invest billions of dollars into the economy, providing jobs and supporting local SMEs as well as our long-term commitment to help Macau achieve its vision of becoming a World Centre of Tourism and Leisure.
Next up, attention in the Greater Bay Area, where we note that the Central Government is currently viewing the strategic master plan at Hengqin, which was revised by the Zhuhai and Macau governments. We are also expanding our focus to potentially include opportunities within the rapidly expanding Greater Bay Area.
And finally, Japan, where we continue to pursue opportunities with our partner, SBM of Monaco. We're also monitoring the impact of the pandemic in Japan, which has also caused highly publicized delays to their IR process, and we'll continue to update you as the situation moves forward.
Let's move on to our balance sheet which has been strong, liquid and virtually unlevered. Cash and liquid investments increased modestly from $42.4 billion at the end of March to $43 billion at June 30, 2021.
Our net cash position declined from $33.6 billion to $31.6 billion due primarily to investing in our development projects, including Cotai Phases 3 and 4 and a reduction in our gaming chip liability. Total debt grew from $8.8 billion to $11.4 billion, which primarily reflects an $11 billion of borrowings associated with our treasury yield enhancement initiatives. Our core borrowings remain virtually unchanged between $400 million and $500 million, which includes 0 debt associated with our Macau operations.
Moving on to our outlook, where we continue to remain very optimistic that Macau's gradual and managed recovery will continue despite the recent choppiness. If Greater China continues to remain diligent in effectively containing COVID-19 outbreaks and execute vaccination programs, then we are very confident that our green shoots will continue to strengthen as we navigate through the pandemic. We are also encouraged by the rebounding Chinese economy and are quite confident that the leisure and tourism sector will continue to recover on the back of the overall economy.
In the interim, we remain well capitalized to invest in our development initiatives, including our game-changing Cotai Phases 3 and 4 as the fundamentals of Macau and our operating businesses continue to improve and generate cash. We also remain upbeat and very positive about the long-term prospects for Macau and the Greater Bay Area, where the underlying fundamentals continue to remain incredibly compelling.
And finally, we'd 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 pandemic. We would also like to thank all of the GEG team members again, who have been extraordinarily supportive of the community and the company during this challenging period.
Operator, that concludes our opening remarks, so let's open up the lines to Q&A.
[Operator Instructions] Our first question is from Sharon Chang from Bank of America.
Actually, this is Billy. First of all, congratulations on a very solid season results. And I have a few questions.
First question, just wondering, Mike, about the Japan bidding process and situation right now. We understand Galaxy has mentioned that they may not be interested in the Yokohama bidding. So can you tell us the latest situation there and also the company's strategy in terms of Japan, whether you guys will continue to focus on big cities and potentially Tokyo or when you look into other smaller prefecture or cities?
Billy, thanks for the question. While we have not participated in the current RFPs, Galaxy continues to remain interested in Japan. And we believe that Japan does offer a good long-term opportunity. Our Japan-based team remained active in their efforts and we are just keeping a very close eye on all the opportunities in the market.
All right. And another question. Just wondered, a little bit short term, but just curious, we understand that, like, Macau went through some cases last week. And as a result, the border was trying to lock down, in a semi-lockdown mode. And so I guess my question is, have you seen some turnaround, given that we saw from the news some of the border restrictions have been relaxed and it no longer require 40 -- sorry, 12 hours of negative test certificate in order to cross-border? In another words, do you think the worst is behind us? And have you seen a little bit of recovery of the traffic?
Thanks for the question, Billy. And of course, as you know, and we've said this many times before, the primary focus of Macau and including the concessionaires is always public health and safety. And again, we applaud the Macau government for doing an outstanding and very commendable job throughout the crisis, including the most recent challenge of executing a mass testing program where they screened 700,000 people. Thankfully, there were no positive cases.
I think just to be judicious, they want to continue to monitor the situation very diligently and daily -- they give us daily updates as well. And you're right, they did relax one of the entry requirements by extending the validity of the NAT from 12 to 48 hours. It's going to take some time for that to trickle down into visitation. But we remain -- continue to remain very vigilant and hopefully we can bounce back pretty quickly here.
And as you can see that even after -- it's a very choppy recovery, as we've been saying all along, so even when there are mild cases in Guangdong and it impacts visitation, you can see that the -- we had -- in the quarter, we had our best month the pandemic post-IVS reinstatement in May. And unfortunately, with the cases in China that broke out in late May, it had an impact on June's results. But you can see that we quickly bounced back in July. But it's one of our best performances in the -- during the pandemic.
So we still think it's going to be choppy. It's going to take some time. We're -- but I think we're -- in Galaxy's case, we're well capitalized right out the storm. We've really been creating a lot of operational leverage here in that we're -- you can see it in our results. So, a, our business mix has been shifting from VIP to mass. We're leveraging our cost structure. We've used this time to really focus on processes and procedures, and it just translates into operational efficiency.
And then one of the highlights of the quarter was the fact that our retail business' reported all-time record results was materially above our record performance in Q4 of '19. So it's the -- that's actually a strong -- a key KPI and a strong indicator that there's a lot of demand out there and that certainly bodes well for the overall recovery of the market.
So we're looking at this through the long term. We continue to invest billions of dollars in Cotai Phases 3 and 4. So although it may be choppy in the near term, our outlook for the medium and longer term remain very bright.
And my last question. Just wondered, the company's net positive in the first half. So again, congratulations on that. And I don't think there's any expectation on dividend, but I'm just curious, are there any threshold there before the company can get to a certain level of profitability and then they will consider resume the dividend?
Yes. As you know, we're -- the Chairman and the Board run a very conservative balance sheet and operation from that perspective when it comes to fiscal management. And yes, we're very proud that we're probably the only -- we are the only concessionaire to report positive NPAS for the first half of the year for a lot of different reasons that we just talked about in my opening remarks.
But having said that, even the Chairman said at the press conference that, at some point, if we have more clear visibility on the recovery, then we would be more than delighted to pay a dividend, and that would be a great signal to the market.
So -- but in the interim, we're going to be very conservative and not surprisingly -- unsurprisingly so, given the pandemic, that we just want to be conservative during this period. But as we had more clear visibility on navigating through the final stages of the pandemic, I'm sure the Board will be supportive of the dividend.
Our next question comes from D.S. Kim from JPMorgan.
I just have a quick one regarding the competitive landscape. How do you see today's promotional environment given where the volumes are? And what do you think would be the most important driver for the -- especially for the premium mass, if and when the border is open and recovery kicks in?
As I said earlier, we've seen some positive indications. And I think our retail business in the second quarter was just very encouraging for us on many levels. So it reinforces that, a, there's strong demand. We continue to believe it's going to be a premium mass-led recovery, which we've actually seen filter down into the middle and to the lower segments as well, which is equally is encouraging.
And given that everyone is pretty well capitalized in Macau, there's certainly a lot of pressure on everyone's balance sheet. We don't -- I don't mean to assume that we're not feeling it as well. As you can see, our cash balances are -- although they're healthy, they are declining somewhat. But -- so it does create financial pressure, but. It's not enough to really -- given the current state of the market, to really start acting irrationally.
And D.S., you're always going to have some. But -- and we hear a little bit here, we hear a little bit there. But given the visitation levels, it's not going to move the needle and we encourage everyone to act rationally.
Ultimately, given the market structure that we're, essentially, the only legal place in Greater China where you're trying to -- you can game, that's very unique. And we don't want to compete on price. We want to compete on the experience that we offer here in Macau which is world-class. So there's really no real reason to start buying business.
That's really helpful. Just a follow-up on our modeling. Can you share the level of the debt provision over the past few quarters? And how does it compare to pre-COVID level? And could you also share how many employees, staff, we have at the moment versus, I think, we had about 18,000 at the end of last year. And that's it for me, and congrats again on the quick results.
Yes. Bad debt hasn't really changed, D.S., so it's -- we're adequately provisioned. When you look across the business lines where we extend credit, let's start with premium direct, that's our in-house. It's the only house where we actually offer patrons credit. We still do way more cash than we do credit. And we're more than adequately provisioned there, and that really didn't change materially over the quarter.
VIP, yes, we still lend our balance sheet, but I think everyone in the market has learned from previous experiences that they've dialed that down and our VIP exposure is very manageable. So we're very comfortable with that and have not adjusted the reserves there.
And then on the nongaming side, it's not really material. So it's the -- so we feel pretty comfortable with that. And I'm sorry, your second question?
Employee headcount hasn't really changed that much. It's a little -- it's down a little bit. We were down. You said 18,000, we're in the high 17. So it's -- but again, part of being a concessionaire and promoting economic and social stability, we're very protective and supportive of local staff. And at the same time, they've been very cooperative and supporting a lot of the programs that we've introduced. They are 100% voluntary. So they've been -- and we're very pleased with the cooperation. And it's inspiring that -- the sense of teamwork that we're getting across the community, whether it's the government, the concessionaires and the locals as well. So -- and we're also supporting local SMEs and we're all in this together. And we're quite confident we can navigate through this.
If I may follow up one thing about retail all year. Can I ask how was the actual turnover tenant level sales compared this quarter versus second quarter '19 or fourth quarter '19?
Yes. it was very strong. And the -- we've had some of our best months. I think -- I did a little analysis here the other day. Of the -- of our 10 best months, 5 of them have been in 2021. And we had an all-time -- the top of the market was May. And so we've had a strong July. We had a strong April. We had a strong May. As I said, it was a record. And it was well north of 20%. And we're doing that with less tenants.
And I think what we're also doing is using this as an opportunity, as everyone is, to really focus on the existing properties and introducing new enhancements. One of the things that we've done is really changed the whole profile of our mall. We've added some very attractive brands. We've repositioned the whole portfolio and performed some upgrades. And if you were here and walking around, if you were in our Diamond lobby -- or -- I'm sorry, or in our old -- right where our Phase III is going -- where Raffles is going to be in the -- you can see that we've introduced some new products there. And we're just very excited.
So everyone is using this time to the highest and best use. And a lot of the stuff is normally disruptive. And so given the state of the business, this is really the time [ for ] more disruptive things that won't really impact your business.
And our next question comes from Praveen Choudhary from Morgan Stanley.
Bob, first of all, congratulations. Great results. As you mentioned, the only one with net profit in first half '21, I hope everybody gets to net profit eventually.
I have two questions. One is related to Shanghai. Sorry, not Shanghai -- no, no, what I meant is Hengqin. So in Hengqin Island, you have a big piece of land. I am not sure how much money you have already spent on it, but there was a news article, I just wanted you to confirm whether that was a correct article or not. It talks about how Hengqin will be given under the provision of Macau Government to run it. And so first of all, is it true? Second, if it's true, how does it impact your decision to expedite the process of building there the project? And what is the realistic time line of that project? That's the first question.
The second question is related to the Raffles Hotel, which we are all eagerly awaiting to open. Could you tell us what may have driven the opening from end of this year to early next year? Is it proactively looking for the right market? Or is it some construction delay?
Thanks, Praveen, for the questions. Let's take the last one first on Raffles and the construction. Now we're just trying to align more to the prevailing market conditions. And whether we open in the latter part of the year or the early part of next year, in the long run, really doesn't matter. We want to get the experience right. We are not experiencing construction delays. So it's more about aligning with the overall market. And of course, we want to introduce new capacity in an accretive way to the market. And longer term, we're quite confident, not only Phase 3, but Phase 4, will be accretive to the market as well. So we're very excited about that.
And of course, once the MICE and the entertainment market bounces back, we'll follow Raffles up with the opening of the GICC and Andaz Macau as well. And then if you were here, you would see that Phase 4 is moving right along. So we're -- you can see that it will -- definitely, were the only next-generation product in Macau. And we're very excited because it really does complete our ecosystem here. So -- and that really, for folks on the call, translates into future earnings potential. So we're very excited about that.
In other projects like Hengqin that you mentioned, we read the same stuff in the paper that you guys do about what the CE came out. We're awaiting yet a further update on the overall relationship between Macau and Hengqin and -- but all of that sounds to me is it's something that's very positive. So -- and the impact on our project remains to be seen, but we're waiting to hear the feedback as you guys are. It will definitely be a nongaming development. We have not invested a lot of capital there as of today. So we continue to pursue the project, and it's an evolving situation, and we'll just continue to update you.
May I follow up with one question? Would you be able to tell us if there is any number of tables or slot machines which are inactive? Meaning you are trying to keep it closed simply because you can save some more extra cost of labor and so on. Is that 10% less than the peak or 20% less than the peak or any such number?
Yes. Tables are still a very valuable commodity here in Macau. I'm sure you saw that another concessionaire opened up and we [ frantically ] need the market tables. So you can see how dear commodities they are here.
We are a long way from operating at optimum capacity. The market basically was -- in the quarter, we're doing 24% of -- 35% of what revenue we did in the fourth quarter of 2019. So it's not a huge leap of faith to think that we have a long way to go until we hit the optimal capacity level.
We are not taking tables out of service. We value them highly. And we just have to be patient. And we continue to pay the tax on them, especially if we're carrying the local labor as well. So it's -- we still have spacing constraints that we're dealing with. So it's -- but we're a long way from hitting that rubric on where we have to add accretive new capacity.
Our next question comes from Julie Zhang from Sunbridge Capital Partners.
I just got one question. Would you like to share August to-date GGR versus same period in 2019? And also share current hotel vacancy if the data is available? And how the situation would it be to recover to at least July level? How's the visibility? And what would be the key driver or key concerns before we get there? These are my questions.
Okay. If I missed some, just remind me what you asked. But as far as Galaxy's gaming revenue performance, we're operating at basically 35% of what we did in '20 to the fourth quarter of '19. So it's -- you can do the math and figure it out. So it's the -- and as far as hotel occupancy, obviously, we used to run at virtually 100% occupancy all the time. So right now, Galaxy was in the 50s. And I think StarWorld was in the 70s during the second quarter. Of course, when we had the recent outbreak, occupancy has declined significantly. So as you can see, throughout 2021, we've had a very choppy performance. And it's tied, with all due respect, to integration policy and visitation.
And of course, that leads -- we believe that, in time to navigate through the pandemic, it will probably be a gradual managed recovery. And we still believe it's going to be choppy. But we're being very supportive of the government which has done a great job. And if we can continue to contain the pandemic in Greater China and certainly here in Macau and execute vaccination programs, I think, hopefully, it will be over sooner than later. But at the same time, I think Macau, in general, and Galaxy specifically are well capitalized to weather the storm. We're certainly supportive of all the local government policies. And it really comes down to the primary focus is public health and safety.
And longer term and in the medium term, we're very upbeat and positive and bullish on Macau. We continue to invest billions of dollars into the market. Cotai Phases 3 and 4 is a $50 billion commitment by the company and the Lui family to Macau. So longer term and medium term, we're very bullish about the prospects for Macau. Just have to make it through the pandemic.
[Operator Instructions] Next question comes from Alpha Wang from Goldman Sachs.
Can you hear me?
Yes, sir.
Yes. I have two questions. The first one is, could you please share some updates regarding the gaming license renewal?
As far as the gaming license renewal process is concerned, you're seeing more about it in the press lately. The concessions expire technically in June of next year. The government has said they would intend to launch the first step of that process or the public consultation of the gaming law, to be followed by the tender process for the reissuance of the gaming licenses.
We wish there -- what we can assure you is that it certainly appears that there's a lot of work going behind the scenes. But you're -- we read in the papers as what you guys do. And all we can do in the interim is continue to do what we've been asked to do under our existing concession, is really support Macau as far as employment and local SMEs as well as assist them in achieving their vision, become a world-class tourism destination, and we continue to do that. So continue to watch the news wires like we do, and we'll update you as we move forward.
And the second question is regarding the Hengqin and Greater Bay Area development. Besides the island, you mentioned that there will be about nongaming development. Do you have some other initiatives around this area? And if so, what is the potential investment time frame?
Thanks. Great questions. And the -- as far as Hengqin is concerned, again, we'll wait to hear when the -- we get some feedback on -- from the central government on the revised master plan for Hengqin Island. It's been in the news lately a lot and seeing how Macau and Hengqin can potentially work together. And so we'll continue to pursue our project there, as I just stated.
As far as the GBA is concerned, we're out looking at deals and exploring different opportunities. It's a rapidly growing area. It would definitely be nongaming, as you rightly pointed out. So we think it's one of the highest growth areas on the planet. And we're certainly out there looking at deals. And when we have something to announce, we'll be happy to share it with you.
And just to be clear, so far, we don't have like concrete investment time frame yet? So the updates will be...
We're very flexible. We're very opportunistic. One of the things that's unique about Galaxy is that we're not chasing growth. So we have Cotai Phases 3 and 4. We're essentially doubling what we have in Cotai in terms of GFA. And we're very excited about the future.
So as with Hengqin Island, that's a longer-term development opportunity. The Greater Bay Area is certainly part of that mix as well as other international opportunities that we continue to look at. So our plate is pretty full. We're very excited about the future prospects organically here in Macau, which we still think represents the best return potential in this industry on the planet. And we're also exploring other things. So the Board is keeping us very busy.
There are currently no further questions in the queue. [Operator Instructions] And we have a question -- a follow-up question from Sharon Chang from the line of Bank of America.
Just as a follow-up question. Just wonder if you are willing to share a little bit more detail about second quarter. I just wonder if we can break down into the monthly contribution of EBITDA. I imagine we will see a very different picture from April to June. So my question is, how bad June was and how big of a drag because of June outbreak in Guangdong? And how much, hence, drag the overall EBITDA? I just want to see if things were okay, what kind of run rate of EBITDA the companies are achieving?
Sure. Billy, as you can see that, with the market numbers for the second quarter in terms of monthly GGR in the first month of the third quarter, we went from $8 billion to $10 billion to $6 billion to $8 billion. So certainly, our EBITDA kind of mirrors that trend.
I would say that given our cost initiatives and the performance of our retail businesses, our breakeven point is significantly lower than it was historically, so it's probably in the 20% range. So we continue to make money in June and July. So it's -- so we'll kind of mirror the trend there. And again, we are carrying a lot of labor, as you know. So we're doing our best to manage through that.
But it's -- and hopefully, at some point, that as we navigate through this little hiccup here in the -- in Macau, that we'll bounce back, just like we have historically. Because you see that even in June to July, we bounced back very quickly. So it's the -- and then hopefully, as we navigate, hopefully, the final stages of the pandemic that we could get back to normal here.
I see. And I just wanted to clarify, you guys were able to breakeven even in June.
Yes. More so, we made money.
There are currently There are currently no further questions in the queue.
That's great. Operator, thank you very much for leading the call here, and thanks, everyone, for listening. We look forward to updating you on our Q3 results sometime during the early part of the fourth quarter. Thank you very much, and stay safe.
This is the end of GEG's conference call. Thank you for joining us today. You may now disconnect.