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Thank you for standing by and welcome to the Galaxy Entertainment Group's Management update for the Third Quarter Results of 2019. 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 of Investor Relations. [Operator Instructions]
I would now like to hand the conference over to your first speaker today, Mr. Drake. Thank you, sir. Please go ahead.
Thank you, operator, and greetings, everyone, and thank you for joining us on today's call. We are pleased to report GEG's third quarter results for the period ended September 30, 2019. 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. A copy of our media release, stock exchange announcement and PowerPoint presentation are available on our website, which also includes our customary disclaimers. We believe that the Macau market delivered a solid set of results in Q3 2019, where the overall trends experienced in the first half of the year continued into Q3 and so far into Q4. Macau reported a 4% year-on-year decline in revenue in Q3 2019 was $68.7 billion based on DICJ reporting, but we are confident that the growth in Mass partially offset the decline in VIP. Once the dust settles after the Q3 reporting season, which is today, we are confident that Macau will have reported its 13th consecutive quarter of EBITDA growth as the profitability of Mass more than offset the decline in VIP. If you dissect the market by type of customer, we believe that the story continues to be about the strong, core and middle market segments, which are arguably noncyclical and continued pressure in the premium segments. We're encouraged by some improving market fundamentals, including Macau's 13th consecutive quarter of year-on-year visitation growth, but at the same time are conscious that the slowing global economy may impact consumer sentiment and spending habits. We are also encouraged by the central government's escalating support of the Greater Bay Area, which includes 9 cities of Southern Guangdong, Hong Kong and, of course, Macau. We are also excited by new and forthcoming enhancements to the infrastructure network, including the future under publicized enhancements to China's all important high-speed rail network, which will make Macau even more accessible. More specifically, we look forward to the extension of the intercity rail from Gongbei Gate to Lotus Bridge and the associated new integration facility and train station, which will be the second-largest underground train station in all of China. Further, we look forward to the opening of the Taipa-Cotai leg of the Macau Light Rail Transit system by the end of 2019, which will make it easier to travel within Macau. This all translates into a winning combination for all stakeholders, including the Greater Bay Area; Macau government; the local community at large; our customers; concessionaires; and, of course, the broader financial community. We continue to believe that Macau's investment thesis remains sound, especially in the longer term. We believe that Galaxy is uniquely positioned to capitalize on this once in a lifetime opportunity with Macau's largest land bank. Let's move on to GEG's results, where we delivered a solid performance in Q3 2019 given the prevailing market condition -- economic conditions in a very competitive market. Our results were driven by near-record Mass win and record nongaming revenue, which partially offset the decline in our VIP business. GEG's Q3 2019 EBITDA grew 6% year-on-year to $4.1 billion, but declined 5% quarter-on-quarter. Our results benefit from a little help from Lady Luck, which increased EBITDA by approximately $184 million primarily in VIP in our premium direct businesses. Luck-adjusted EBITDA declined 7% year-on-year and decreased a more modest 1% quarter-on-quarter to $3.9 billion. Our latest 12-month EBITDA grew slightly year-on-year to $16.8 billion, which is still over USD 2 billion. Our results reflect our continuous effort to optimize our portfolio where Mass delivered a very solid performance, which, as I said, partially offset the decline in our VIP business. We're particularly pleased with our Mass performance despite the softness in the premium segment, which represents a higher-quality and more predictable earnings stream, which is consistent with the Macau government's objectives. GEG's statutory revenue in Q3 2019 declined 2% year-on-year and was down 4% quarter-on-quarter to $12.7 billion. The group's total gaming revenue on a management basis decreased 10% year-on-year and declined a more modest 6% sequentially to $14.3 billion, where we played lucky, primarily in VIP and premium direct. Mass table revenue grew 11% year-on-year and was up modestly quarter-on-quarter to a near-record $7.3 billion, where we played modestly lucky on the back of one of our best volume performances ever of $30.4 billion. Our market-leading VIP business reported volume of $164 billion, which declined 38% year-on-year and decreased 9% quarter-on-quarter, as expected. This translated into VIP revenue of $6.4 billion, which was down 26% year-on-year and decreased 13% quarter-on-quarter. Please note, that we recently completed the upgrade of 2 major VIP rooms at Galaxy Macau and StarWorld towards the end of the quarter and reduced VIP table capacity by 10% year-on-year. Further, our EG win grew 3% year-on-year and 6% sequentially to $0.6 billion. Our year-end results -- year-on-year results certainly demonstrate the impact of new capacity on our numbers, where on a sequential basis we are more than holding our own. Moving on to nongaming. We are pleased to report that our revenue grew 4% year-on-year and 7% sequentially to a record $1.4 billion, which excludes Construction Materials. Our nongaming revenue performance reflects our continuous efforts to optimize our operations, where our portfolio of 7 hotels was among the market leaders with virtually 100% occupancy. We maintained a high casino mix in our hotels, delivered solid cash ADR and our retail business posted record results. Let's turn to the Q3 property financial review, beginning in Cotai. Galaxy Macau's net revenue of $9.3 billion was flat year-on-year and declined 2% quarter-on-quarter. Our results were driven by our second best Mass performance and record nongaming revenue just [ playing ] lucky. Hotel occupancy remained high at virtually 100% across Galaxy Macau's 5 hotels. Galaxy Macau maintained a healthy casino mix year-on-year and reported a slight decline in cash ADR in a more competitive market. Our mall delivered a 15% year-on-year increase in revenues to a record $310 million. Tenant same-store sales increased modestly year-on-year despite prevailing market conditions. EBITDA in Q3 2019 grew 7% year-on-year to $3.2 billion, but declined 2% quarter-on-quarter. Our gaming operations played lucky in Q3, where we played lucky in junket VIP and premium direct, which in the aggregate increased EBITDA by approximately $171 million. EBITDA on a normalized basis decreased 9% year-on-year and grew 1% quarter-on-quarter to $3 billion. Actual EBITDA margin improved year-on-year to 34% and was consistent quarter-on-quarter. Further, we are pleased to report that Galaxy Macau continued to lead the market in every major property gaming revenue metric, including total gaming revenue, VIP, Mass and EG as well as ranked #1 in property EBITDA. You may also be interested in knowing the Galaxy Macau's LTM ROI was 36%. We are particularly pleased about Galaxy Macau's performance given the fact that we have consistently exceeded The Street's expectations by defending against 3 major integrated resort openings in Cotai, one major hotel opening in Cotai and significant upgrades across the market in a very competitive environment. Next up is StarWorld, where we continued to see solid demand for the financial experience despite a challenging market. Net revenue declined 14% year-on-year and slid 9% quarter-on-quarter to $2.5 billion, driven by near-record Mass win, which partially offset a decline in VIP. We are pleased to report that Mass delivered a very solid volume performance, which translated into near-record win of $1.7 billion. StarWorld's hotel occupancy was virtually 100% for the quarter. Q3 2019 EBITDA declined 11% year-on-year and was down 12% quarter-on-quarter with $828 million. Our gaming operations played lucky in Mass and unlucky and VIP, which increased EBITDA by approximately $15 million. EBITDA on a normalized basis declined 13% year-on-year and was down 4% quarter-on-quarter to $813 million. EBITDA margin improved year-on-year to 33%, a [ slip ] slightly versus 34% in Q2 2019. Finally, StarWorld's LTM ROI was 88%.
Our Construction Materials division reported quarterly EBITDA of $321 million, which grew significantly year-on-year, but declined 12% quarter-on-quarter. This was due primarily to strong demand for cement and slag in China which was offset by a decline in Hong Kong due to reduced demand and increased competition. Next up is development, where we're continuing with our $1.5 billion property enhancement program for Galaxy Macau and StarWorld. This program is designed to upgrade our amenities and strengthen our competitive positioning, including the upgraded 2 major VIP rooms I just mentioned, where we anticipate completing this entire program in mid-2020. Let's move on to our update on Macau's largest land bank in Cotai. We continue to finalize the plans for Cotai, The Next Chapter, which will focus on hotel, MICE, entertaining and gaming. We continue to move forward with our MICE-focused Phase 3, where we've recently launched the Galaxy International Convention Center and Galaxy Arena at the IBTM China in Beijing this past August. The GICC includes a world-class venue with total MICE space of 400,000 square feet and a 16,000 seat Galaxy Arena. The GICC 100,000 square feet pillar-less Exhibition Hall can host 7,000 guests lecture style or 2,400 guests banquet hall style. In addition, there's an auditorium with 650 seats. We are also pleased to welcome Hyatt Hotel's first Andaz Hotel to Macau and the Galaxy Resort Precinct which will consist of 700 high-end lifestyle and family rooms. Phase 3 also includes the new hotel tower, Galaxy Macau, where construction continues to build momentum. We target to begin opening the GICC, the Galaxy Arena, the Andaz Macau Hotel plus a new hotel tower at Galaxy Macau in the early part of 2021.
We have also begun site preparation work and completed the majority of the piling on our Phase 4, which will be Macau's only next-generation integrated resort. Phase 4 consists of approximately 3,000 hotel rooms with high-tech, state-of-the-art gaming supported by, of course, gaming and the traditional array of nongaming amenities. We look forward to sharing more detailed information with you in the future. We also continue to make progress with our conceptual plans in Hengqin. We continue to actively pursue new opportunities to strategically expand our brand into overseas markets. First up is Japan, where the momentum continues to build and GEG continues to strengthen our team. We are certainly encouraged by the continued progress in Japan, where regulatory progress continues at the national level and [ interest ] in IR continues to build at the local level. We continue to actively pursue all opportunities throughout Japan with our partner, SBM of Monte Carlo. We are very fortunate to have gaming's most definable development pipeline with Cotai Phases 3 and 4, which is supported by new overseas initiatives such as Japan. We still believe that Macau continues to represent the best medium- and long-term investment potential in the world. Again, we believe that Galaxy is uniquely positioned to capitalize on this with Macau's largest land bank, where we will be the only company in the market to develop a next-generation integrated resort. This of course translates into definable, not speculative, future earnings potential where we truly remain a growth company. This clearly distinguishes us from our competitors. Our balance sheet continues to be one of the strongest in global gaming. Cash and liquid investments decreased from $50.4 billion at the end of June 2019 to $49.2 billion at September 30, 2019. Our net cash position improved from $43.9 billion to $47.2 billion. Total debt decreased from $6.5 billion to $2 billion due to the repayment of $4.5 billion of debt associated with our treasury yield enhancement initiative. Our strong balance sheet, which remains virtually unlevered, coupled with generating solid cash flow from operations, creates significant flexibility in funding global gaming's most definable development pipeline in Macau and other value-creating projects such as Japan. Moving on to dividends, where we paid the previously announced special dividend of $0.46 per share in late October 2019. Our special dividend certainly demonstrates 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. Moving on to our outlook, where Q4, our toughest comp of the year is off to a soft start, despite October being the best month of the year so far. Further, like everyone else, we continue to closely monitor the highly publicized macroeconomic and geopolitical issues including, among others, global trade tensions, but believe it's prudent to remain cautious. The next key indicator for the market will be the Christmas and New Year's holidays in December. Looking further forward, GEG remains cautiously optimistic about the prospects for Macau in general and GEG specifically. We're definitely a growth company where we have a very definable pipeline of future growth projects. Our confidence is supported by the improving fundamental drivers for growth, such as the increasing domestic consumption due to a growing affluent Chinese middle class; low penetration rates; infrastructure improvements; and increasing demand by Chinese for tourism, leisure and travel, all of which will drive increased visitation to Macau. This of course is supported by the highly publicized Greater Bay Area initiative, where Macau will continue to play a key role. Having said that, we do acknowledge that competition has increased with recent new property openings and enhancements to existing ones and will continue in the future with additional new openings, including regional markets as well as a tightening regulatory environment closer to home. We believe in healthy competition and believe that GEG continues to rise to the challenge. GEG is well positioned in the current market with our world-class, differentiated resorts, combined with our renowned World Class, Asian Heart service to deliver memorable customer experiences, coupled with an exciting future with Cotai Phases 3 and 4, Hengqin and our international initiatives, including Japan among others. And finally, we'd like to thank all of our GEG team members who deliver World Class, Asian Heart service every day. That concludes our opening remarks. Thanks for listening. Let's turn it back to the operator for Q&A.
[Operator Instructions] Our first question is from [indiscernible], who's from Goldman Sachs.
Sorry, it's Simon from Goldman Sachs. Good results, as always. I have 2 quick questions. You mentioned that, just as a double check the number. You mentioned that the opening of the [ Suncity ] Room in both StarWorld and Galaxy Macau, actually at roughly about 10% of capacity to your VIP people. Is that correct? And that -- can you perhaps even qualitatively kind of comment the trends so far this quarter? Have you seen the volumes bouncing back to the prior level?
Thanks for the question, Simon. As far as the recent trends in VIP, I think, we've seen some signs of stabilization. The first -- especially, in the first and second quarters. But we did see a dip if you do the aggregation for the Q3 numbers of -- in Q3. But as far as in Q4 so far, we had our best -- arguably our best month of the second half of the year, which is kind of expected being in October. And as far as the individual performance of the rooms. We're pleased with the deep performance of new VIP rooms, one opened towards the end of the quarter and one essentially or officially opened towards the -- in early October. So we're pleased with the performance so far. Just to be clear, on capacity, our VIP capacity year-on-year in terms of tables declined 10% year-on-year. So what we're doing is, of course, sticking to our mantra of allocating our capacity to its highest and best use. And of course, those tables were reallocated to the Mass business. So we're very pleased with the results so far, and we'll just continue to be cautiously optimistic about the balance of the year.
Sure. Understood. So in other words, your table capacity has not really increased, let's say, it's just that maybe the table you guys improve after the opening, given the better property qualities of [ Suncity ]?
Well, it's -- again, it was total table capacity for VIP. Our VIP table capacity declined 10% year-on-year. It's actually down modestly quarter-on-quarter. So we see -- with our -- the major junkets, they're off to a good start. We're pleased with the performance, and we'll take some time to ramp up. But we're so far so good.
Understood. And then my second question is, I guess -- which is related to Japan, we have seen quite a few operators pulling out from Osaka and putting their emphasis into the greater Tokyo area. I'm not sure whether you have any comment. I hear that you are very interested in basically [ these ] locations. Would you be able to comment a bit more what you're thinking now that given all the other company had refocusing their efforts to elsewhere?
As I said on -- in our opening remarks that we're making progress around the regulatory front on the national level with the introduction of the basic policy and formation of certain committees and the like. That as far -- and of course, there's a lot of interest at the local levels positioned for the national auction. But I think Mike is probably better prepared to answer this question than I am.
Thanks, Bob. Hello, Simon. We believe that GEG has all the important building blocks and [indiscernible] philosophy. We needed to be the ideal [ person ] to realize the government's goals for IR independent. As you know, these include a strong balance sheet and reputation [ out going into proven -- ] our ability to develop and operate World Class resorts and experiences getting stated by our flagship property guests in the South, which has everyone knows is one of the most successful and profitable IRs in the world. And our commitment to partnerships with both commercial entities such as Okura Hotels and Resorts, SBM Monaco as well as many SMEs, local businesses and NGOs in showing a success of the IRs with the community. We also share the government's vision to increase tourism overall with 60 million inbound visitors by 2030. And through our track records, we believe GEG, along with our partners, are ideally positioned to help achieve the goals of Japan. Thanks, Simon.
Yes. Mike and Robert. And can you remind us, just for [indiscernible], can you remind us what is your hurdle rate, if any, for the Japan project?
Of course, I think everyone is going through that exercise right now, Simon. With sharpening the pencils where everyone is very excited about the potential of Japan as we look at all these individual markets. And of course, we're doing this with our partner, SBM and Monaco, as Mike said, that we're sharpening our pencils as we speak. Everyone's preparing for the forthcoming RFP and the national auction process.
Your next question is from Gavin (sic) ]Praveen], who's from Morgan Stanley.
Thanks for the new name.
Hey Praveen, how are you?
So my question -- 3 questions. The first one, would you be able to comment on premium Mass and growing Mass trend, both for third quarter as well as in October. Because most of the competitors or peers have spoken about either stabilizing or improving premium Mass in the third quarter. But in your prepared remarks, you were still saying that [ grind ] is doing better, premium growth in Mass as well as VIPs grow weaker. So just trying to get some sense on that? And then I have 2 more questions.
Okay. Great question, and thank you. When we talk about our premium Mass business, we talk about our premium Mass customers. Others in the market may talk about geographic areas, we talk about customers. So what we've seen in our Q3 results as far as our database is concerned, our database continues to grow in every segment and specifically geographically outside of Guangdong, so Greater China. However, the value associated with those customers is down modestly, and that is due primarily to the softening premium segment being partially offset -- almost offsetting the decline in the premium segment. Let me say that once more, said another way our -- the strength of our Mass business right now is our mid-tier and lower segments, which is offsetting the softness in our premium segment.
So what's the -- what we've seen so far, and the trend has continued so far into Q3 and to Q4 that we experienced in the first half. Customers are coming to Macau, they are not -- just not spending as much time or as much money. But we're very, what -- where we're more upbeat and positive about is the overall growth of the database, including our premium segment as well as growth outside of Guangdong, which translates to higher value customers. So as we go through cycles and we always do. So when we're coming out of this cycle, if you will, we're well positioned to take advantage with a stronger database.
That's very clear. My second question was related to Phase 4. You did mention that it's on a filing stage. As you know, this is a very, very big, large differentiated product. Would you have some sense of timing by saying, at least, or it would not be ready in 2022? Or it can only be ready by 2023? Or any such timing indication?
It is a huge project for us. And we really think it's a game changer for all of Macau. It really, truly will be the next-generation integrated resort here in Macau. Having said that, that on the back of our openings to Phase 3 in early 2021, we still are on -- our target is to open Phase 4 in 2022. So we haven't changed our timing as of yet.
Okay, got it. So it's probably simultaneously working on it. And so my last question is on your CapEx plan and your net cash. I mean, your net cash is $47 billion, as you mentioned, and you're still generating a lot of cash, and you're doing the right thing by keeping a lot of that with you. So the special dividend there was still around 30%, 35% of your total net profit. What I'm trying to say is that there's a lot of cash on your balance sheet, even after building whole Phase 3 and Phase 4, you will be left with lot of money. So what's the use of cash? And should we expect some kind of payout ratio increase in the next couple of years?
Great question, and thanks. Of course, we discussed at length our capital allocation strategy, including dividends and capital investments and projects like Phases 3 and 4 and, of course, Japan. The strength of our -- the financial strength of Galaxy really helps us differentiate ourselves competitively as it creates a lot of flexibility in developing anything, whether it's in Macau, Japan or any other market. So we're -- we view that as a strength, and we're still viewed as a growth company. I think as we march forward here with the executions of Phases 3 and 4 that will take a hard look at our capital allocation strategy, again, including everything, like dividends and future projects and potential uses of cash at that time. But for the foreseeable future, we're focused on Phases 3 and 4 and Japan.
[Operator Instructions]
Okay. Well, thank you, everyone, for listening. We wish you all the best, and we'll update you on our Q4 results in early 2019 (sic) [2020]. Thank you very much.
Thank you. Ladies and gentlemen, that concludes our conference call for today. Thank you all for your participation. You may all now disconnect.