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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and welcome to today's Galaxy Entertainment Group Third Quarter Results 2022 Investor Conference Call. This conference is being recorded.
At this time, I'd like to hand the call over to Bob Drake. Please go ahead, sir.
Greetings, everyone, and thank you for joining us for the update call on GEG's Q3 2022 results. 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 the entire GEG family, we greatly appreciate everyone's continued tenacity in battling the enduring COVID-19 pandemic as well as the aftermath that continues to leave its mark on the global economy. We remain confident that the world, including Greater China, will continue to successfully navigate through this dramatic period where we'll remain upbeat and positive about a much brighter future.
As you know, sporadic COVID-19 outbreaks have continued throughout 2022, where the Macau Government continued to react incredibly swiftly to minimize public health and safety risks, 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, the local outbreak in Macau in late October.
Despite these sporadic outbreaks over the past 2-plus 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 is certainly cause for optimism. Unfortunately, the sporadic outbreaks in Greater China have resulted in very low visitation and very low revenue, which has significantly elevated financial 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, but we remain as confident as ever in the 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 outbreak where the continued containment of the virus remained the highest priority.
Another prime example of our long-term confidence in Macau happened this past September 14 when we submitted our tender for the new Macau gaming concession, where we are well positioned to support the long-term development of Macau and its vision of becoming a World Centre of Tourism and Leisure.
Let's move on to our Q3 2022 performance, where our effective cost control efforts continue to yield positive results as we navigate through a very choppy and challenging revenue environment where we can basically only control what we can control. GEG reported a Q3 2022 EBITDA loss of $580 million versus Q3 2021's positive $503 million and Q2 2022's loss of $384 million. Our normalized EBITDA loss in Q3 2022 was $561 million where we played unlucky, which reduced EBITDA by $20 million. We invite you to refer to the table in our press release at your leisure for additional detail.
We also continue to work hard at managing our cost structure. To that end, our Macau OpEx burn rate has declined by 40% from approximately USD 3.4 million per day under normal operating conditions to the $2.1 million range in Q3, which also represents a 4% sequential reduction, which unfortunately benefited from the casino closure in July. The real test, as we've said many times before, is converting as much of these 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 on 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's certainly more to the overall cost picture than that. Daily cash burn is more indicative of the cost structure as it includes interest...
[Technical Difficulty]
Hello, Bob?
I'm afraid we lost Bob. One moment, please, until we reconnect his line.
Okay.
Unfortunately, it's not possible at this time to redial Bob. Bob, you may continue.
Thank you. And apologies for the technical challenges on our end here. So it's -- let me resume our opening remarks, beginning with -- we were talking about our OpEx burn rate, and I just want to go into it. We've also contributed millions of dollars to the COVID-19 relief efforts to support the community, as we have previously reported. We also invite you to review some of our recent awards, including for our CSR efforts, among others, 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 and Andaz Macau. As we have previously reported, we intend to align the opening of 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 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. In fact, we invested approximately $900 million in Cotai Phases 3 and 4 during Q3 and a little over $23 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 continued to remain strong, liquid and virtually unlevered. Cash and liquid investments decreased from $29 billion at the end of June 2022 to $22.5 billion at the end of September. Our net cash position declined from $20.3 billion to $19.3 billion as investing in our development projects, including Cotai Phases 3 and 4, and funding operating losses was partially offset by net interest income.
Total debt decreased from $8.7 billion to $3.2 billion, which primarily reflects $2.9 billion of borrowings associated with our treasury yield enhancement initiative. Our core debt remained minimal and declined slightly to approximately $325 million, which includes 0 debt associated with our Macau operations. Just to be clear, we said 0 debt with our Macau operations.
Our next topic is our outlook where we continue to remain optimistic that Macau's recovery will be gradual, managed and choppy and are very confident that Macau will continue to navigate through the pandemic. We are also encouraged that we see strong signs of healthy demand, and we are very confident that the leisure and tourism sector will gradually bounce back. This, of course, includes China's recent reinstatement of the e-IVS program, which will be followed by packaged tours to Macau in the near future, which are certainly positive signals indeed.
In the interim, we will continue to control what we can control as we remain well capitalized and 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] Now the first question comes from Billy Ng from Bank of America.
I have 2 quick questions. One is just wonder, have you noticed about more inquiry, more potential demand since the reopening of the electronic visa? I know like there's still a lot of cases in Guangdong Province, so like maybe it would take a little bit more time. But any color will be appreciated.
Sure. Billy, as you know, as we continue to say, we've been saying for quite a long time that we believe that the recovery will be gradual and choppy. And certainly, the news about the gradual reinstatement of e-visas and then the forthcoming opening of packaged tour visitation in Macau are certainly a very positive signal.
But it's a little early. It's going to take some time for it to ramp up, as you kind of remarked in your question. But we view that as a positive development. It will take time to implement, and it's just another positive signal that we're moving in the right direction, albeit gradually.
But one of the comforting factors is that we know that Macau can bounce back rather quickly. And if you look at the breakeven points where we need to be about 30% of what we did in 2019 ex VIP to break even, that we're -- then the market could also bounce back very quickly. So we have to be patient.
Yes. And my second question is just I just wonder, based on your presentation or PowerPoint, it looks like Phase 4 is progressing very well. And I just wonder, are there any specific non-gaming element that, maybe from Phase 3 or Phase 4, that you think that could help Macau Government to attract foreign customers and also satisfy their diversification and non-gaming requirement down the line?
Great question. We're very excited about Phase 3 and Phase 4, which actually doubles our footprint here in Cotai. Of course, Phase 4 completes our ecosystem, as we said in our opening remarks. And we're very fortunate that it will be the only next-generation integrated resort in Macau. So what we're doing is taking all the changes in consumer behavior over the years and incorporating that into our design, which we help -- which we believe will help support the Macau's overall economy, visitation to Macau and through innovative developments that we will be well positioned for future success.
So it's -- we're very excited about that. And again, we're trying to be a good partner here with the Macau Government, helping achieve our objectives, providing an outstanding customer experience for our guests to come back over and over again.
[Operator Instructions] There are currently no further questions in the queue. [Operator Instructions] And we have a question from George Choi from Citi.
I know you talked about -- so Phase 3 opening, I know you said you aligned it to market condition and other factors. But I just wanted to give -- or perhaps if you can give us some more specific concrete guidance. I remember last time you were saying that all you need is like 90 days to get it ready to open. Is that still the guidance?
Yes, it's -- when you look at the -- what we're doing with Phase 3, particularly with Raffles at Galaxy Macau, it's not a new integrated resort where you may obviously require more time to open the doors. So by virtue of being another -- essentially another hotel at Galaxy Macau, we can ramp it up very quickly. The same -- and although the convention center and the arena in Andaz is a separate property right across the street, it's one where the hotels wouldn't take long to ramp up. And with the variable nature of our MICE business and the arena and programming the arena and the labor, more importantly, associated with operating that, it's more variable and albeit casual, if you will, that it doesn't take as much time to get the staff up and do some simulations and the like there.
So we're sticking to our 90 days to open once we see that there's strong evidence that the market is going to recover. And again, we want to see strong evidence that the market is going to recover. And even though it doesn't take a lot of time to ramp this up, we don't want to incur incremental OpEx that is just going to dilute our returns. We just need strong evidence that the market is going to recover, and so we'll just continue to align the opening of Phase 3 with the recovery of the overall market.
And another question from me, if I may. I know it's already 1 month ago, but do you have any -- do you see any positive data points from the Golden Week?
Yes, Golden Week was -- there's always a silver lining here that although we wish it would have been a much stronger Golden Week, and as we said, it's going to be a gradual and choppy recovery, but one of the highlights for us during Golden Week is that, again, the silver lining here throughout the pandemic has been the performance of our retail business. And we actually reported record tenant sales during the Golden Week of October.
So it's not Chinese New Year, and it's not per se, but it's still a strong signal that demand is -- remains very strong. And we'll take that as a positive signal that when the market recovers, there's just strong demand out there across all segments. But retail has been particularly strong for us.
That's encouraging. And one final housekeeping question, if I may. Bob, you got cut off earlier. I heard you saying daily OpEx is about $2.1 million per day, and that is 4% sequential decline. What was the cash burn?
Our cash burn is -- let's see, what we do, George, is you take -- we're very fortunate that we generate net interest income rather than interest expense. So if you take the $200,000 a day that we're making in Q3 and deduct that from the $2.1 million, it gives you a burn rate of about $1.9 million before investing in any capital expenditures. So it's -- there are some round numbers in here. And the -- so we're very conscious of not only controlling our costs, but not taking on any incremental OpEx, if you will, before there's a strong evidence of the recovery.
So it's -- we're just trying to be disciplined operators, and a lot of the management team here has been through multiple, multiple downturns. We're just applying all the lessons learned to the current situation. And we're -- not only that, we're quite confident that we'll emerge a much more...
[Technical Difficulty]
I'm afraid we lost Bob again. One moment, I'll try to reconnect Bob's line. One moment, please. Ladies and gentlemen, you will hear a music until we get Bob's line back into the conference. Please stand by. Please continue, Bob.
Apologies for the technical challenges. George, I didn't mean to get cut off there, but I'm not sure what you heard or what you didn't hear.
No. So you commented the $200,000 interest income already. So I guess that's all we need.
Yes. And then, of course, we believe that this is -- we'll translate and we'll convert as many of these temporary savings into [ some of the lines ], and we believe that's going to turn into operating leverage to the tune of 1 to 2 points on margin ex any shift in revenue mix.
So again, we have a management team that's been through multiple downturns. We're just very disciplined operators, at least we hope we are. And we'll continue to apply the lessons learned and emerge a more efficient operator when we come out of the pandemic.
Simon Cheung from Goldman Sachs, please go ahead with your question.
Hello, can you hear me?
I do, Simon. How are you? I hope you don't get cut off.
I'll ask quickly, just in case. I have a couple of questions. Just you mentioned that the breakeven is about 30% mass of the 2019 mass market GGR. Can I just try to understand, on that assumption, what are you assuming for non-gaming? And is that a cash flow breakeven? Or is that EBITDA breakeven? And if so, I also heard that you mentioned $1.9 million being the burn rate. What if you include the, let's say, maintenance CapEx as well? If you can give us some guidance on that. That's, I think, the first one. I have 1 or 2 more follow-ups.
Let's see. As far as the -- I'm sorry, can you just repeat that? I just want to make sure I heard them correctly. It's breaking up.
So several -- yes, several things. One is you mentioned that the breakeven level would be when you have mass market come back to about 30% of 2019. One, is that cash burn cash breakeven? Or is that an EBITDA breakeven? That's one.
And then what is your assumptions, indeed, for non-gaming? Is that also the same thing for 30%? And also, you mentioned that the cash burn is about $1.9 million, inclusive of $2.1 million OpEx and a positive $200,000 on the net interest income. I wonder whether there's any so-called maintenance CapEx which we should take into consideration. If so, any number you could share with us?
As far as breakeven is concerned, it's more of the -- what we used to say was it was in the low 20s, including VIP. But of course, we don't believe that VIP is going to come back like it did in 2019. And if it does, if ever, it will take a long time to get there. So if you adjust for the absence of VIP, the breakeven for an EBITDA number is about 30%. So it's -- and what we're trying to do with OpEx is really disclose to you or to explain to you guys what it is on stuff that we can control, and CapEx can always be controlled. You can either turn that on, turn it off, delay things and the like there.
So it's -- what we can tell you, I'll give you some guidance on, kind of pivoting here, on to our spend for Phase 3 and Phase 4 because what we're trying to do is really we're investing in the future in Phase 3 and Phase 4, and the majority of our capital expenditures is allocated to that number. So we spent about $900 million in -- or I should say, invested about $900 million in Q3 for a total of just a little over $23 billion, as we said. Maybe some forward guidance here, which we haven't had in the past, if you look for the balance of 2022 and all of '23, I would say that we invest around $8 billion, primarily in Phase 4, to be honest with you, given that Phase 3 is virtually completed.
Understood. That's helpful. The second quick question is on the table. Understandably, government set their target 6,000 table in the foreseeable future. So I understand Galaxy, obviously, has some spare table. Can you share with us any -- where are the sources of spare table? And obviously, the question is in the longer run, how should we think about when you have all these projects kind of up and running, obviously, you need more table, how should we think about it?
[Technical Difficulty]
Apologies, I'm afraid that we lost Bob again. One moment, please, until we reconnect Bob's line.
Back again. Apologies. Simon, what did I -- I hope you heard some of that.
I missed -- I was trying to ask about table that the government have set a cap at 6,000. And given you have Phase 3, 4 and maybe some other projects on the pipeline, where are the source of table? And if you can share with us spare table capacity at your existing property and maybe where are those tables?
Well, as you know, with the 6,000 tables that the government has come out with, there's -- we're just a long way from being at a capacity -- a decent capacity utilization rate. It's going to take some time to get there. So we continue to be comfortable with our current table allocation and we'll be -- we are working with the government as we move forward here.
You do know that they are implementing a minimum revenue target per table, which I think, overall, we feel comfortable with, especially if you look back at the first quarter. But they also did agree -- did introduce the concept of flexibility should the market conditions persist around these minimum targets. So we'll just continue to work along here, but we're a long way from being capacity constrained from tables.
Okay. Understood. My last question is just on dividends. Last time, you paid, I think, $0.30. I'm trying to understand, what's the dividend policy now?
Our dividend policy hasn't changed. We evaluate dividends on a case-by-case basis. We always review our capital allocation strategy with our Board. And right now, we think the -- given the prevailing market conditions that it's -- we'll continue to invest in -- our capital allocation strategy will be based on investing in Cotai Phases 3 and 4. And we'll evaluate dividends in the normal course of our business and on a case-by-case basis. Nothing has changed.
Our next question comes from Terry Ng from Daiwa Capital Markets, Hong Kong.
So actually, I wanted to ask about Golden Week again. So actually, so the official statistics from the government has mentioned that occupancy rate and position were actually relatively strong actually in between the May 2021 Golden Week -- sorry, the Labor Day Golden Week as well as the October 2020 Golden Week. But it seems that hasn't really translated into a strong GGR for the month. And you mentioned that the retail was strong. So have you noticed any changes in the consumer spending habits or motivation during this Golden Week pivoting towards more non-gaming rather than gaming? And do you think this is like more of a temporary phenomenon?
Well, I think what it does is really signal that there's just strong latent demand for Macau and what we offer here. And it's -- the gaming market is the gaming market, and you see the numbers. And Terry, as we've always said, it's going to be a gradual and choppy recovery. We had a challenging weekend last weekend. And hopefully, occupancy will pick up. But at the same time, there are outbreaks in Guangdong.
So we just have to really focus on what we can control, which is basically our cost structure. And we take the silver linings, like the strength of our retail business, as positive signals. And then, of course, on the back of that, you do see relaxation of policy, particularly around like with the IVS as well as the forthcoming packaged tour resumption.
So it's -- they're all positive signals, and you just have to be patient. Our primary focus has always been the public health and safety. And we're quite confident that we can navigate through this very tumultuous storm, and we're very fortunate to be well capitalized to weather through the storm. And we're really excited about the long-term prospects for Macau. We'll get through this.
Our next question comes from Andrew Lee from Jefferies.
Could you give me a little bit of guidance in terms of the City Clubs going forward, right? Because obviously, 2 casinos ceased operations. You have Waldo Casino left. Could you just give us a little bit of guidance going forward in terms of what's the plan? And how do we should look at the -- like the contribution in terms of EBITDA?
Sure. As you know, we closed the Rio and President in the second quarter, and we totally exited. Those deals are closed. And as far as Waldo is concerned, we're currently talking to Waldo about what the plans are around their continuing operations there, and we'll update you as we move forward.
As you know, City Clubs has been an important opportunity for the company to really -- if you look at the history, it's the opportunity for the company to learn the market, and certainly we apply the knowledge from our City Clubs and the StarWorld and applied that into Galaxy Macau. As you know, we're very disciplined. We always walk before we run. But City Clubs was a relatively small contributor to the group, an important one nonetheless, and we'll continue to work with the Waldo folks and see where -- and that's an ongoing conversation, and we'll update you next quarter.
Okay. And then my final question is, your cost came down 4%, like you mentioned earlier, right, in terms of OpEx. Do you -- will that trend continue into next quarter? Or is that as much as savings as you can get going forward?
We're constantly looking at our cost structure and looking at new things like, not only labor, we've had some flexibility with our labor force and where everyone has been contributing. And then looking on the supply, from a supplier standpoint, things like maintenance contracts. So we're looking -- we're turning over every stone that we can, and we're quite confident that we can convert some of these temporary savings into permanent.
But we've been at this for the last couple of years. We'll keep trying. But I think the number in Q3 may have been a little artificially low for not good reasons. It was the casino closure in the month of July for 12 days. And actually, when the market starts bouncing back, we want our OpEx to increase because that's variable cost. And we will only want to incur that incremental OpEx when we see the market recovering. So it's accretive to the bottom line.
So we're doing as much as we can on the kind of cost control standpoint. But at the same time, we still have customers visiting the property. We don't want to compromise our service standards, and we certainly haven't. So it's a combination of those 2 things and ultimately translate into sustainable operating leverage once we emerge from the pandemic.
And our last question in the queue is from Richard Bruce from Trinity Street Asset Management.
So just a question on the need to be promotional once the market reopens. I mean I think it's clear that at some stage, people will be able to come back to Macau in volumes. What do you expect in terms of how much promotion you will need to get people back? Or do you think it's a situation whereby once you open, the demand will be very strong and, therefore, the yields will be very high? In other words, once we get through this period of uncertainty, should we get actually very high yield per visitor? That's my first question, really.
Sure. We believe that the recovery will be led by the Mass business. And you can see that the customer preferences have evolved and changed over time, have definitely become more sophisticated. So it's very important that we offer this truly integrated experience, not about gaming, but certainly more about the hotel experience with the -- from the Broadway to the Ritz-Carlton and all the leisure experiences, food and beverage, retail, as we talked about, we got cut off there a couple of times. And this is a holistic integrated resort offering.
Now as far as promotion is concerned, we don't want anyone to forget about Macau here. So we're working with the MGTO, which is the Macau Government Tourism Office, in doing these road shows in China just to help make sure that our brand is out there and trying to attract people to come here. But when we look at the performance of our retail business and the proximity of our customers, we don't need like millions and millions of customers to come in every day. We just need a few to get started and get the ball rolling again.
As you can see, the visitation stats are directly correlated with our revenue and the like there. So with the mass revenue and the promotional activity associated with that, by definition, it's a much higher-margin business. So once the group travel starts up again and we start getting some more foot traffic through here, we're quite confident that we can, at least from a margin standpoint, by virtue of the revenue mix shift, generate higher margins. And we're sure the absolute dollars will follow at some point.
Okay. Great. And then just, sorry, a second question. I missed part of the -- earlier part of the call. Was there any update on the license renewals?
Sure. As you know, it was one of the highly publicized topics here in Macau is the Macau tendering process for the new gaming concessions.
And there are currently no further questions in the queue. With this, I'd like to hand the call back over to Bob for any additional or closing remarks.
Operator, I think Bob fell out again.
Yes, indeed, we lost Bob again.
So look, if there's no more questions, thank you very much for the time. I appreciate it very much. I do apologize, there were some technical issues there. And we look forward to updating you in the new year. Thank you, and have a good evening.
Thank you. This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.