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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 management update for the second quarter and interim results of 2022. Joining us today are Mr. Michael Mecca, GEG Board's Nonexecutive Director; Mr. Robert Drake, Group CFO; 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.
Thank you, operator, and greetings, everyone, and thank you for joining us for the update call on GEG's Q2 2022 results. The GEG team joining me here on today's call include Mike Mecca, a member of the GEG Board of Directors; and Peter Caveny, Assistant Senior Vice President of Investor Relations.
Copies of our media release, Hong Kong Stock Exchange announcement and PowerPoint presentation are available on our website, which also include our customary disclaimers.
On behalf of the entire GEG family, we greatly appreciate everyone's continued perseverance in battling the COVID-19 pandemic as well as the aftermath that is impacting the global economy. We remain confident that the world, including Greater China, will continue to successfully navigate through this traumatic period where we remain upbeat and positive that brighter days are indeed ahead.
As you know, Macau has continued to be impacted by sporadic COVID-19 outbreaks throughout 2022, where the Macau Government continued to react incredibly swiftly to minimize public health and safety risk as they have throughout the entire crisis. We again applaud the Macau Government for its proactive, decisive and effective leadership during the pandemic, including, most recently, during the local outbreak in Macau, which included the temporary closure of casinos.
Despite these sporadic outbreaks over the past 2 years, 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 are certainly cause for optimism. Unfortunately, the sporadic outbreaks in Greater China have resulted in very low visitation and very low revenue as well as elevated pressure on profitability, balance sheet and liquidity.
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. We'll remain as confident as ever in its medium- and longer-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, including during the recent local outbreak where the continued containment of the virus remains the highest priority.
Despite the pandemic, Macau has been very active on a highly publicized regulatory front. Since we updated you this past May on our Q1 results call, Macau passed the revised Gaming Law in June, extended all 6 gaming concessions until the end of December 2022, which then paved the way for the Macau Government to formally launch the gaming concession tendering process in July 2022.
We are working diligently on our tender submission, which is due less than 1 month from now on September 14, 2022, where we anticipate that the Macau Government will complete its process by the end of the year. We believe that we are well positioned to compete for one of Macau's new gaming concessions and hopefully continue to contribute to Macau achieving its objective of becoming a World Centre of Tourism and Leisure.
Let's move on to our Q2 2022 performance where our effective cost control efforts continue to yield positive results as we navigate through a very choppy revenue environment and basically control what we can control. On the development front, we also continued to make progress with our enhancement project at our existing properties as well as with our game-changing development projects in Cotai Phase 3, which is virtually complete, and move forward with the construction of Cotai Phase 4.
GEG reported a Q2 2022 EBIT loss of $384 million versus Q2 2021's positive $1.1 billion and Q1 2022 positive $575 million. Our normalized EBITDA loss in Q2 was $408 million where we experienced some good luck, which benefited EBITDA by $24 million. We invite you to refer to the table on Page 6 of our press release at your leisure for additional details.
We also continue to work hard at managing our cost structure. To that end, our Macau OpEx burn rate has declined by nearly 40% from approximately USD 3.4 million per day under normal operating conditions to the $2.1 million range in Q2, which also represents a 6% reduction relative to Q1 2022. The real test that we have said before is converting as much of the temporary savings to permanent ones where we are confident that we will create sustainable operating leverage as business gradually improves.
We would like to pause here, as we usually do, and make a very important point about fiscal management, especially during these challenging times that distinguishes Galaxy from the rest of the Macau market and, for that matter, the global industry. 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 in Q2 2022 was a little over USD 200,000 per day. If you deduct the $200,000 per day of net interest income from the $2.1 million per day in OpEx burn, we get $1.9 million to $2 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 its stakeholders.
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 over the 2-plus years by contributing to our cost management programs where everyone's support has truly been inspiring. We've also contributed millions of dollars to the COVID-19 relief efforts to support the community, as we previously reported. We also invite you to review some of our more recent CSR efforts noted in our press release.
Let's move on to our development update, beginning in Cotai where we continue to invest in Macau as well as Galaxy's future. We are pleased to report that we have virtually completed the construction of our Cotai Phase 3, including Raffles at Galaxy Macau as well as the Galaxy International Convention Center in Andaz Macau.
As we have previously reported, we intend to align the opening in Cotai Phase 3 with the recovery of the Macau market. We are also proceeding with the construction of Cotai Phase 4, Macau's only next-generation integrated resort, which will complete our ecosystem 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. In fact, we invested approximately $1.5 billion in Cotai Phases 3 and 4 during Q2 for a little over $22 billion to date against our $50 billion project, where we are doubling our footprint in Cotai.
Our Cotai development activities, along with our existing property initiatives, also demonstrate our support of Macau during the pandemic by continuing to invest in the economy, providing jobs and supporting local SMEs during these challenging times as well as our long-term commitment to help Macau achieve its vision of becoming a World Centre of Tourism and Leisure.
Let's move on to our balance sheet, which continues to remain strong, liquid and virtually unlevered. Cash and liquid investments decreased from $35 billion at the end of March 2022 to $29 billion at the end of June. Our net cash position declined from $24.5 billion to $20.3 billion as investing in our development projects, including Cotai Phases 3 and 4, paying our dividend and funding operating losses was partially offset by net interest income.
Total debt decreased from $10.5 billion to $8.7 billion, which primarily reflects $8.3 billion of borrowings associated with our treasury yield enhancement initiative. Our core debt remained minimal and virtually unchanged at $350 million, which includes 0 debt associated with our Macau operations. Yes, to be clear, we said 0 debt with our Macau operation.
Our next topic is our outlook where we continue to remain optimistic that Macau recovery will be gradual, managed and choppy, and are very confident that Macau will continue to navigate through the pandemic. We're also [ concurs ] that we see strong signs of healthy demand and are very confident that the leisure and tourism sector will indeed bounce back.
In the interim, we will continue to control what we can control as we remain well capitalized to invest in our development initiatives, including our game-changing Cotai Phases 3 and 4, and navigate through the pandemic operationally. We also remain upbeat and very positive about the long-term prospects for Macau where the underlying fundamentals continue to remain incredibly compelling.
In closing, we would also like to extend our sincere appreciation to the Macau Government for their admirable performance as well as the community, which has rallied under their leadership during the pandemic. We would also like to thank all 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 I'm happy to turn it back over to you for the Q&A session.
[Operator Instructions] Our first question is from Billy Ng at Bank of America.
I have 2 questions. First question is regarding the government recommendation or directions. I think they openly talk about how to attract more foreign customers to Macau that could be the priority for the license renewal or for the next license requirement. So I guess I just wonder for Galaxy, what's the strategy and direction? Are there any specific plan that you can share about how you can help Macau to improve on that front? Will that be more on the hardware and infrastructure or more on event organization? And I think one of your peers talked about sport event, but I just want to get some ideas or color from you guys, yes.
Thanks for the question, Billy. Of course, we're very supportive of Macau achieving its objective of becoming a World Centre for Tourism and Leisure. As you can see that the evolution of the market has been quite remarkable. The initial tender 20 years ago was more focused on investment, and now it's really shifted towards developing out non-gaming and attracting foreign business and expanding and diversifying the economy.
We think with our track record over the past 20 years and, most notably, in Cotai with Galaxy and Macau and then when you add today and then when you add Phase 3, which includes the Galaxy International Convention Center, the Arena which can hold up to 16,000 folks, another 700-room tower with Andaz Macau, plus the Cotai Phase 4, really position us to help them drive other segments of the economy, including the MICE segment and entertainment, which are certainly becoming pillars of the future of the Macau economy. As well as, hopefully, we're quite confident that our hardware can help attract more foreign visitation as well.
So overall, I think we're in a really solid position to compete for a license. There's many other criteria that the government is focusing on, and we'll do our best to satisfy all of those and hopefully compete for one of those valuable licenses come the end of the year.
My second question is just I want to get the guideline for the CapEx. How much CapEx will you spend for the second half of the year and next year? And also, how much flexibility on those CapEx? Like, let's say, if things are still worse than expected or better than expected, how much you can scale up or scale down for those CapEx, assuming that are for mainly for the Phase 4 development?
Sure. As we mentioned in our opening remarks that we spent about $1.5 billion for Cotai Phases 3 and 4 in the second quarter. I would say we'll do just between $3.5 billion and $4 billion for the balance of the year. So that would get us up to close to maybe $24 billion, $25 billion, which would be half the project by the end of, basically, the end of December of this year. One of the things that's always flexible is CapEx. So if this goes on, if the pandemic continues on in phenomenon, that's one of the levers that, not only Galaxy, but everybody else in the market and other industries as well can pull that trigger and potentially delay that. But we're moving forward with Cotai Phase 3, both Raffles and the Convention Center. As we said, they're virtually complete now. We just need about 90 days just to open up once we see that the recovery is gaining some momentum.
We're moving forward with Phase 4. So it's -- as you can see, unfortunately, not a lot of you have been in Macau, but if you look at the press release, you can see that Phase 4 is really coming out of the ground and coming to life. So having some -- it's remarkable to see how fast these things get moving once they're out of the ground. So we think that really solidifies our position in Cotai. We're essentially doubling our footprint. And I think that really differentiates us not only from the size and scope, but we'll have the only next-generation integrated resort in Macau.
And one last thing to follow up is, you mentioned about 90-days window, like that's all you need if you think the market is ready. But what benchmark are you using? Like I mean, are you waiting for a specific policy? Or are you seeing if GGR is reaching a certain level, you feel comfortable and then you can move forward to preparing the opening of Phase 3?
The primary -- or the highest priority is public health and safety, first and foremost. And then on the back of that, as you can see, there continue to be sporadic outbreaks. As soon as Macau navigated through its local outbreak and then just across the border, you have more outbreaks in China, and it's highly publicized and the like there.
So the real signal about the market opening would be integration policy. But first, we want to get the pandemic behind us. And you can see that they're gradually reducing the quarantine requirements, whether it's Hong Kong, even Macau as recently as today. And -- but there's -- they'll flex up and flex down.
What we have seen since -- even notwithstanding the recent outbreaks in China across the border, that when business comes back, it comes -- we can -- it really helps us. And we don't have to get back to 50% of what we used to do, even ex VIP. If we just get to 30%, we hit the breakeven at 25% to 30% for someone like Galaxy to break even at the EBITDA line, a little bit more for us to get to the breakeven at the NPAS line.
So that's the beauty of this model. So that gives us a lot of confidence that we can bounce back. And we also look at other markets within the region that had opened up recently, and you can see what their results are as they bounce back very quickly. So that's a long-winded answer to your question, but I think it really comes down to immigration policy and knocking the pandemic out of the park.
The next question is from George Choi at Citi.
Bob, I just want to reconfirm that the daily cash burn figure that you mentioned, does it always include the staff costs regarding City Clubs? And if Waldo ceases operations by the end of this year, do you have plans to also reassign those staff to GM and StarWorld?
Well, we did close 2 City Clubs during the quarter, in the month of June. That would have been the Rio and the President, and we did absorb those employees into our existing -- gaming employees into our existing operations. Not a lot of that was included, and it's not a lot of employees on a relative basis. But to be specific, it was not part of our OpEx burn because of our Party B assuming that.
So we do expect a little bit of uptick in OpEx burn, but at the same time, we're generating savings in other areas going forward. And we'll evaluate where we are in -- with Waldo at the end of the year. So we all know that, that model has changed as well. But we don't expect a material increase in our OpEx burn.
We will now take our next question from D. S. Kim at JPMorgan.
I actually have only one question on the cash position. Can I check why our net cash dropped $4 billion during the second quarter? The reason why I'm asking is I think that you just mentioned $1.5 billion CapEx and our recurring cash burn is about -- I think our second quarter was minus $400 million. So it should be less than $2 billion total, but I'm just trying to narrow the gap between $2 billion here versus a $4 billion drop there. I guess it could be from our liquid investment performance, but could you elaborate a little bit of details here?
We would be delighted, my friend. Yes, as we said -- and good for you for asking the question. And well, we did invest in capital expenditures, $1.5 billion of that was for Cotai. Overall, we probably did $1.6 billion in CapEx. We did pay a $1.3 billion dividend. And then unfortunately, we did have a market value decline in the Wynn equity investment, and that was almost $1 billion. But that, thankfully, that has bounced back somewhat so far post June 30. And then, of course, we had to fund the operating loss. So that gets you to the $20.3 billion.
That was my oversight. I missed the dividend payment.
Glad our shareholders didn't.
We will now take our next question from Simon Cheung from Goldman Sachs.
I have 3 questions. One, I remember 1 or 2 quarters ago, there's all these talks about visa restrictions being imposed by the Chinese government at the time when there's obviously a lot of city lockdown going on in China. I know the COVID situation is still a bit uncertain up there, but can you maybe share with us what you're hearing on the ground? What sort of visa restrictions now they have imposed against anyone going into Macau, if there's any changes? Then I think I had 2 more follow-ups.
Sure. As far as to the best of my knowledge, not a material change basically because Macau has been locked down. So -- and they've raised their hurdle. And then as you can see, they've changed some of the quarantine -- not the quarantine policy, but the NAT is required to come in by sea and air. It used to be 7 days, and that's been reduced so that when you enter Macau, it requires a test when you enter and then another test within 2 days. And then the same thing on the return going to Zhuhai, it requires more tests.
So I think it's more about NAT test and the -- which is really the biggest obstacle through getting into Macau. And that with -- I think there's over 20 cities and districts and provinces that are on a medium to high alert, which makes it difficult to travel not only within to Macau, but within Greater China. So it's more about containing the pandemic and associated quarantines and NAT requirements.
Understood. And then my second question, related back to the CapEx number. You did mention earlier that there may be some costs that you're going to bring it back to your accounts because of the City Clubs closure. Can you elaborate a bit more how much would that be in debt?
And obviously, you've done very well over the so many quarters on the cost-cutting front, and you cut further now in the second quarter. Now given third quarter, we have virtually almost a month of closure, of casino closure, so what should we be thinking in terms of the OpEx run rate now or even in the third quarter?
Well, it's a great question. I don't -- there is no CapEx associated with the City Clubs. And then although we did absorb the amount of employees, it's not a material change to the OpEx burn, as I mentioned in the other question -- response to the other question.
And then the OpEx burn, although we were -- had the casinos closed for about 12 days in the month of July, that's more from a cost standpoint, it will -- obviously, it reduces your cash burn for the month, but we expect to recover some of that, which is a good thing. So it's the -- now that we're open. So it would be in the range of where we are today. Even though we were at the $2.1 million, and we do have a net interest income there, it should be directionally the same as far as there's not much more we can do, to be honest with you.
But we're always peeling back the onion, especially on controllable expenses, whether it's on marketing spend, other initiatives, utilities, maintenance contracts, to drive that down. So I think everyone in the market would have reported reduction in OpEx burn for the month of July. But in my opinion, if we bounce back, that's not a bad thing. You want OpEx burn to start increasing because that means business is coming back.
Understood. And then one last thing on the City Club. Obviously, you closed 2 down. And you also mentioned that Waldo, you are reviewing some sort of structure by the end of the year. Can you remind us what sort of structure are you looking into?
And the second thing is, should we be mindful if there's going to be any, I don't know, impairment losses or outstanding payments, receivable, impairment losses, that sort of things, to be recognized, if any?
Nothing on the impairment front. The -- as far as Waldo is concerned, what happened was the -- our original deal was that we essentially collect a fee for the GGR that is generated at the City Clubs, and Party B is responsible for the operational expenses. That model has shifted for us, whereas Waldo, basically, it's a rental agreement and we shoulder all the operational expenses. So hopefully, that will get to a break -- that will be a breakeven proposition for us, if not, maybe a modest loss, but not a material impact on our results.
We will now take our next question from Angus Chan from UBS.
So just -- I guess most of my questions have been asked, but maybe a couple more. Firstly, on Phase 3, is it reasonable to assume that it's unlikely to open this year? So we're looking -- probably looking into 2023?
And secondly, in all these hotels, so we have some relaxation in the policy, so i.e., no more quarantine requirements going back to China. Have you seen a notable pickup in your gaming revenue since then?
Well, since the outbreak in Macau has been essentially contained, we have seen some, thankfully, some modest uptick in visitation and, of course, some revenue, much welcome revenue, I might add. But it's bouncing back to where we were probably right towards the middle part of June, but it's going to be a choppy recovery here.
And until we see -- to the answer to your first question on Phase 3, it's basically until we see a sustainable recovery that will give us confidence that when we take on the associated operating cost of opening even a new hotel tower, let alone a new integrated resort, that we want to make sure that we're going to get a return on that investment.
So it probably takes about 90 days to ramp up. And of course, that's mostly non-gaming labor in order to service our customers. And of course, we have certainly capacity on the gaming front to service that. So it would take about 90 days. And timing, it's not unreasonable to think it will happen beyond 2022.
There are currently no more questions in the queue.
Well, great. Thank you very much, everyone, for participating on today's call. We look forward to updating you on our Q3 results probably in the early part of November. Until then, stay safe. Thank you very much.
This is the end of the GEG's conference call. Thank you for joining us today. You may now disconnect.