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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 Fourth Quarter and Annual Results of 2019. Joining us today are Mr. Michael Mecca, GEG Board's Non-Executive Director; Mr. Robert Drake, Group CFO; Mr. Roland To, Senior Director of Strategic Planning; and Mr. Peter Caveny, Assistant Senior Vice President of Investor Relations. [Operator Instructions]
I would now like to pass to Mr. Drake for his presentation. Mr. Drake, please go ahead. Thank you.
Thank you, operator, and greetings, everyone, and thank you for joining us for GEG's Q4 2019 results call. The GEG team joining me here on today's call include Mike Mecca, a member of the GEG Board of Directors; Roland To, Senior Director of Strategic Planning; and Peter Caveny, Assistant Senior Vice President of Investor Relations. A copy of our media release, stock exchange announcement and PowerPoint presentation are available on our website, which also include our customary disclaimers.
Before we discuss our results, we would like to extend our sincerest regards to everyone around the world who has been affected by the coronavirus. Crises unite communities where they bring out the best in humanity. We applaud the Macau government for their proactive, measured and decisive handling of the coronavirus crisis where their primary focus has always been the public's health and safety.
We are also proud that all the concessionaires have actively supported Macau and China during this difficult period as we are committed as ever to the health and safety of the community, our team member and our guests.
As you know, Macau's casinos reopened on February 20 after 15-day suspension. We remain extremely vigilant during this crucial period and will continue with our elevated hygiene and preventive efforts in full support and compliance with the government's directives to contain the spread of the virus. We are hopeful that this situation continues to improve, fully knowing that it will take time to recover from this transitory event. We're confident that brighter times are ahead of us, but we'll need to carefully navigate through this difficult interim period. We thank you for your support and patience where social responsibility is truly the highest priority and order of the day.
Let's move on to our Q4 2019 results. We believe that we delivered a solid set of results in Q4 2019 in a challenging market. Group revenue in Q4 of $13 billion declined 8% year-on-year and grew 2% quarter-on-quarter, while EBITDA of $4.1 billion was down 6% year-on-year and dipped slightly quarter-on-quarter. We played lucky in Q4, particularly in VIP and premium direct, which increased EBITDA by approximately $180 million. Normalized EBITDA declined 9% year-on-year and was down modestly for the quarter to $3.9 billion.
We continue to move forward with our development plans in Macau and Japan. We reaccelerated construction of our Cotai projects on February 20 as well. We have also entered the homestretch of our property enhancement program for Galaxy Macau and StarWorld, where we have identified and are currently reviewing additional enhancement opportunities. We will do our best to meet our opening targets under the circumstances and will provide update on our time lines as we move forward.
We also continue to actively pursue opportunities in Japan with our partner, SBM of Monaco. We look forward to continued progress at the national level as we enter a critical period at the local level in anticipation of the national selection process in 2021 for up to 3 IR licenses.
Next up is our balance sheet, which continues to remain strong, liquid and virtually unlevered. Cash and liquid investments increased from $49.2 billion at the end of September 2019 to $52.3 billion at December 31, 2019. Our net cash position improved from $47.2 billion to $51.7 billion. Total debt decreased from $2 billion to $550 million due to the repayment of $1.5 billion of debt associated with our Treasury yield enhancement initiative.
Moving on to dividends, where we paid the previously announced special dividend of $0.46 per share in late October 2019, and the Board announced today another special dividend of $0.45 payable in April 2020. Our special dividend certainly demonstrate our continued confidence in the Macau market and GEG's future performance as well as our commitment to return capital to shareholders while, at the same time, maintaining our status as a growth company.
Moving on to our outlook, where we have limited visibility as we navigate through the coronavirus crisis. Therefore, it's extremely difficult at this point, if not impossible, to assess the financial impact, especially if the crisis continues for a prolonged period. As we said earlier, it's difficult to predict when business will return to normal, but we remain highly confident that it will return to normal.
We continue to move forward with phases 3 and 4 in Cotai as well as Hengqin island plus Japan. We remain optimistic about the medium- and long-term prospects for Macau and the Greater Bay Area, where the underlying fundamentals continue to remain incredibly compelling.
And finally, we would like to extend our sincere appreciation to the Macau government and all the emergency and medical personnel who have worked tirelessly to assist the community in this challenging time. We'd also like to thank the GEG team members for their assistance during this period. And thank you for -- very much for your support as well.
So with that, let's turn it back to the operator for Q&A.
[Operator Instructions] Your first question is from D.S. Kim from JPMorgan.
Quick 2 questions, obviously, regarding virus. So first of all, when we say we try our best to meet our target opening for the Phase 3, are we talking about like March first quarter time line or more like first half is our guidance about the Phase 3?
Secondly, have you observed any drastic behavior changes at the player or the junket levels because of the virus in the past few weeks, i.e., anyone aggressively pulling out their chips and like chip balances and whatnot? Anything -- any color that you can share with us on the business on the ground?
Sure. As far as our construction projects in Phase 3 in particular, we're assessing our time lines as we speak. Really, the key is getting enough construction labor and, of course, the supply chain as well. But we're going to do our best to maintain our target time lines of early next year, which may slip a little bit, but we're really going to work hard and diligent to stick to the original time lines of early '21. Again, we're really excited about these projects, and hopefully, we can open when we're -- against our targets.
As far as the overall situation in Macau, directly answer your question about chip balances and runs and the like there, there hasn't been any of that. It's been very rational. So with -- since the reopening, as you might expect, business has been very modest. It has been somewhat volatile, and it will take time to ramp up over time. But -- and it's difficult to understand exactly when business will return to normal. And as I just said, we're highly confident that it will.
And we're very fortunate that we're -- we have a strong balance sheet at this point in time. We're also working very closely with the Macau government, where the first priority is health and safety of the community, our guests and our employees. So we're working very closely just to help restore public order and maintain public order and go from there.
If I may, one follow-up question. But in terms of our cost containment effort, I understand we may have encouraged some of the unpaid leaves and whatnot, just like any other players in the market. How much OpEx run rate, cash run rate that we are thinking for this period, like first quarter, second quarter, if possible, by property would be really appreciated.
Sure. As far as our OpEx burn rate for Macau, it's about USD 3 million a day. Of course, the majority of that's labor, pushing almost 80% of that. And a majority of that $3 billion (sic) [ $3 million ] would go to Galaxy Macau, just a little over $2 million a day, followed by StarWorld, which is probably about $0.5 million a day. So as you rightly said with our labor situation, we're managing with a lot of support from our line employees and employees across the entire group, including our Construction Materials division, where we've introduced these packages. We're essentially using, on a voluntary basis, your leave during this transition period. And one program in particular that's worked very well is our flexi family home packaging leave, where for every day that you -- it's a volunteer program where for every day that you take an unpaid day, we give you a full-pay day. So a great example of that would be that you take 2 weeks off, you get paid for 1 week. So -- and it's been incredibly well received. The cooperation we're seeing across-the-board from suppliers, the government, our employees, local businesses has been just incredibly supportive.
Congrats on the good set of results.
Cheers.
Your next question is from Edward, representing Macquarie.
I was hoping you can update on Japan and more specifically Galaxy's decision not to bid for Osaka. Was there something about that market which made it look less attractive? And can you remind us which markets Galaxy is interested in?
That's a great question. We're continuing to be very interested in Japan, and we'll let Mike handle that one.
Thanks, Bob. Edwin (sic) [ Edward ], we remain very interested to invest in Japan and are fully committed, along with our partners in the principality of Monaco, to create an IR that is spectacularly unique and one that people of Japan will be very proud of. Japan remains our #1 international priority market and has our full attention and focus. We've spent many years, as you know, in Japan leading many stakeholders involved in this process, listening to and learning about what the community would like to achieve through responsible and sustainable IR development. And we continue to expand our development team in Japan as well as strengthening our local partner resources.
In recent years, we have participated in multiple dialogues and formally submitted requests for information, request for concepts to numerous cities and prefectures. Throughout the process, we've been very impressed by the enthusiasm and professionalism shown by the cities and business community. We have greatly appreciated being able to play an active role and enjoy the in-depth discussion this afforded us.
Recently, as you said, we decided to withdraw from Osaka and that our focus should be on other potential locations in Japan. After detailed and careful consideration, we think that other cities in Japan would be more suitable for GEG's future development in Japan. Our integrated resort in Japan will be the one that can attract a certain type of guests, which will benefit Japan, GEG and our partners.
We are continuing to be very interested in a Japan license. Other cities offered better opportunities for GEG, but today, we're not going to disclose our strategy. We believe GEG's healthy balance sheet and track record in developing and operating the world's most successful IR, combined with SBM's 150-year track record in creating the world's first IR destination in Monte Carlo, can make the real difference. I hope that helps out, Edward.
Great. And then I guess just one more. Regarding the dividend, in response to the difficult first half of year and then a ramp in CapEx, Phase 3 and 4, can we generally still expect, just given your balance sheet, a generally similar dividend as we've seen kind of the past 1, 2 years?
Great question. As we're working through this process, we'll assess the financial impact. And at the -- during the summer when we sit down with the Board and the Board decides what our next steps are, we'll be the first to share it with you.
So again, one of the strengths of the company is a very solid balance sheet, and it's incredibly liquid and unlevered, as we said, and we're quite confident we can navigate through this transitionary period. But again, it's a special dividend and affords us flexibility as it always has. So we look forward to updating you about this in the future.
Your next question is from [ Josh ] from [ Phillip Research ].
Not getting any response, we'll be moving on to the next participant.
Your next question is from Bank of America, Mr. Ling Ng.
Congrats on the solid results. Actually, most of my questions are already answered, but just one follow-up. Bob, can you tell us what you have observed so far for the last 7 days since the casino reopened? Have you seen trends improve a little bit? I know like probably it's still very difficult to get into Macau, so as a result, like, we are not expecting much. But any color there can help. And also, in different segments, do you see behaviors or customers respond to the situation quite differently?
As I said earlier, the -- and as you would expect, that the results have been pretty modest so far. And you've seen the visitation numbers that's disclosed by the government into Macau and the occupancy rates as well. But again, it's -- we're in that initial transition period. I would say that the only insight, and it's again very preliminary, and it's almost just like an opening of a property that we expect VIP to ramp up a little faster than mass, and it's more along the lines of the traditional property opening and that has actually come to fruition so far. Again, it's a very limited dataset. But what we've seen is that VIP volume is more along the lines of the traditional opening. And we are experiencing quite a lot of volatility given the relatively modest amount of players in both segments, so we're getting a lot of volatility in mass and in VIP. But we'll continue to move forward in the process. And we've been very fortunate in the last 3-plus weeks of no new cases reported in Macau and 7 recoveries. So let's just knock on wood and then we continue on a positive path here.
And can I ask, if the pace is more like a ramp-up of a new property, should we expect improvement week-over-week? Meaning like we're getting into the second week now, should we expect a bit better than last week? Or in March, we will continue to see even a very modest improvement?
It's really too early to tell, Billy. I'm sorry, I didn't mean to interrupt, but it really is too early to tell. We're watching this on a daily basis, and looking forward, interest in coming to Macau is still there. I think people are still really focused on dealing with this crisis, especially at the government level and the concessionaires, where we've really elevated our hygiene and sanitation and sanitizing initiatives. And I can't tell you how many -- 10, 20 different types of initiatives that we're doing just to improve the level of hygiene throughout our properties and helping the economy here as well. So the -- it's just a little too early to tell.
[indiscernible], if you got no more calls, just let us know. Operator? [Technical Difficulty]
My apologies, ladies and gentlemen, there was a technical difficulty.
Okay. We're ready for the next question if there's one in the queue.
Your next question is from Kevin (sic) [ Praveen ] from Morgan Stanley.
Two quick questions, if I may. One is related to the balance sheet. I noticed one of the numbers on chip liabilities went up significantly from $4 billion last year-end to $5 billion first half and then $9 billion by the end of December. I know it's a balance sheet number which can move a lot. So I just want to understand how should we read it in terms of VIP business, junket business. Are you talking [ with Q ] or the business is expected to go up or any such thing? That will be great.
And the second question for me would be this recovery, as I think Billy also asked this question. Week-over-week, what we are tracking is the number of visitors coming to Macau is almost flat at 5,000 people per day. And then ID scheme is currently stopped and so as the group travelers as well. So do we need those things to come back before we see the real run? Or could we see improvement even without that?
Thanks for the question, Praveen. On the redeemed chips and stuff, no that -- those numbers move up and down. So we're not concerned about that. It's actually a nice source of cash for us as the -- as you can imagine. So it's a working capital adjustment. And you know historically, well, we've had some ups and downs on a quarterly basis when we report this. And so we're not overly concerned about it, and I wouldn't read too much into it as well.
As far as the week-on-week performance, again, the government is disclosing visitation statistics. you've seen the occupancy statistics. I think, just moving forward here, as they're gradually reducing some of the restrictions in Mainland China, that hopefully that they'll reduce some of the restrictions as far as accessibility to Macau. So it's the -- we're up and running. We're adjusting our cost structure as much as we can. And then we'll just work through this process.
And the -- as far as our construction projects are concerned, as we mentioned, that we're ramping that up as well on February 20. So we're doing our best to adhere to the previously disclosed deadlines for Phase 3 in particular. But we still need time to assess this. And remember, it's a marathon, not a sprint, and that we can see that there's been a gradual improvement in Mainland China, that hopefully, that will trickle down into Macau. It's very difficult to predict how this is going to work out. But in the long run, we're quite confident that we'll be fine.
[Operator Instructions] Your next question is from [ Natalia ] from Bernstein.
It's Vitaly. My name also got botched.
I know who you are.
I've got 2 questions. Yes. the I just had 2 questions. The first is, if you look at your current customers that are in the casinos today, I know it's a very small number, are these mostly Hong Kong customers? Or do you still have residual China customers? And are you actually getting any China business coming in at this stage? As Praveen said, there are some people filtering in, but are these players or is most of your business just relying on holdovers that have been here for a couple of weeks or people coming in from Hong Kong? But that's question one.
And question 2 is, in kind of the conversations you guys have had with your junket partners, are you getting any sense of their own kind of financial condition in terms of their own liquidity and how they're thinking about collections that they might have incurred over the past month or 2 and how that's going forward and whether they're going to actually have liquidity problems? Those are kind of the 2 questions, I think, and I may have a follow-up to that in a sec.
Sure. Sure. First, on customer profile. Initially, there's some more local play, but believe it or not, over the week, it turned out that a majority of our customers were coming from China. And believe it or not, the majority of them were from outside -- Greater Guangdong. But at the same time, we're getting visits from -- in Hong Kong and then some from -- locally in Macau.
So as far as collections are concerned, even with the -- since the end of the year, and I can talk about our JinMen business, and that's the only line that we extend our patron credit, that we've seen some slowing, but they're still very manageable. So I think during this period, that we've mitigated our risk, especially in JinMen. As you know, we do more cash than we do credit. We do anticipate some slowing of the receivables not just because of the economic conditions and the like there, it's harder to move money exacerbated by the crisis.
The one thing I would take away from the last crisis that we dealt with is that the junkets have become more vigilant about how they're running their business as well and not as aggressive with credit. And some of these guys do more cash than they do credit business, so I think it wouldn't be surprising to hear that some of their collections are getting extended during this period. But I think for the most part, they're pretty liquid. And that would apply to some of the major junkets. Of course, the smaller you are, the less wherewithal you have, and hopefully, they can work this through. And in the spirit of partnership, we look forward to working with everybody on -- during this very interesting time.
Great. Just, Bob, just one more question. On your City Clubs business, the 3 casinos that you're partnered with, in terms of the shutdown and the costs associated with the shutdown and kind of the slow business environment, all the costs being incurred at those casinos is still being borne by your partners, not by yourselves, is that right?
Yes. We get paid a management fee, and they're technically responsible for -- that we get reimbursed for the cost of the -- of our employees managing the casino. And we're working -- we're in constant dialogue with these guys. We have 3 City Clubs, and we're working with them through these issues. Yes, they are smaller, and some of them are very well capitalized.
Your next question is from [ Josh Wilson ] from [ Phillip Research ].
Oh, yes. I'm [ Xi Min ] with [ Josh Wilson ], sorry. First of all, good numbers.
Oh, [ George ], [indiscernible].
Yes. The name's [ George ].
[ Fairbank ], right?
[ George ], yes, [ Fairbank ], correct, correct. A few questions from me. First of all, on Galaxy Macau Phase 3. How much CapEx have you spent to date? And how much more do you need to spend before you open?
Secondly, are you facing any difficulty getting the necessary labor given the current self-quarantine policy for reaccelerating your construction works at Phase 3?
And finally, you mentioned your daily OpEx right now is roughly USD 3 million per day. How does that compare to where you were before the coronavirus hit?
Thanks for the questions. Let's tackle Phase 3 and the CapEx and including Phase 4. So we haven't really disaggregated to them. It's between $5 billion and $10 billion. We really haven't changed the target spend. We've got about plus or minus $50 billion for these projects. Again, given that -- our history of generating significant operating cash flow, we're quite confident that will return In the future. You know what the strength of the balance sheet. And we are trying to move forward with our projects as we ramp up here coming out of the post-February 20 period.
Are we having challenges with labor? I think it's just part of the natural process when some of our laborers come in across the border. They have to go through a quarantine process, and we'll hope in the next 2 weeks that we'll do a full complement of labor and be able to move forward. And then, of course, we have to deal with the supply chain as well. So we're going to do our best to diligently adhere to the deadlines of Phase 3 in particular of early '21. There may be some slippage, but it's a little too early for us to tell. So I think we'll provide more visibility when we have our Q1 call in probably early May.
And as far as the composition of our labor cost, it's the -- or the pre and post, a large part of our daily, nod if you want to look at it that way, is labor. And you get modest upside from things like your utilities and the like, even though you're not 100% occupied and you're using as much water and feeding as many people, but it really comes down to labor. And I just went through with the program and -- that we've described, and it's been very well received by all of our line employees and as well as our corporate employees. So we're doing our best to manage that. But I know you understand a -- on Macau P&L, a lot of it's labor. So -- and we're supporting the government and paying our team through this period, and we'll hopefully navigate through this and come out at the other end just healthier than ever.
Your next question is from Kenneth Fong from Crédit Suisse.
Congrats on the solid set of results. I have one quick question on the luck adjustment. I noticed that VIP luck had been gradually going up over the past few quarters. For example, for GM, the VIP luck last year was actually around like 4.2. I know that they will fluctuate year-over-year. But it could also be due to like mix change like Lucky 6 and also mix shift between your JinMen and then junkets. I'm just trying to say that if -- when the VIP luck seems to be structurally going higher, when we do the luck adjustment, do we take into consideration of that, i.e., your true luck adjusted EBITDA could be higher than your reported $3.82 billion (sic) [ $3.2 billion ]?
Yes. It's a great question. And in Q4, we -- as I mentioned in my opening remarks, the big luck factor happened in premium direct. We held over 4% in JinMen. And to your point about the influence of these exotic bets, if you want to call them that, Lucky 6 and tie bets and the spin and the like there, when we calculate our normalized win rate, whether you look at like to date or even over the last 12 months or last 2 years, it doesn't change that much. And when you do the normalized calculation, understanding what the flow-through is on that, it doesn't have a material effect. But when you hold in JinMen over 4%, it really does impact our normalized numbers. And we actually played unlucky in mass, so it was -- the net number was about $180 million for the quarter. And -- but it's a great question. We have seen that on the -- with the exotic bets, it does influence our hold rates. And of course, that flows through to the bottom line but maybe not as much as you think.
My next question is on the mix between junket and JinMen. Have this changed over the past few quarter? Because I noticed that for junket volume, they have dropped quite a lot since the third quarter last year. So in term of the mix, has JinMen performed relatively better than the junket business, i.e., they lift your overall VIP margin?
Well, it did in Q4 in the -- because we had depressed volumes because we held so high. So the mix was kind of out there. But the win -- if you look at the -- when you do the normalized number, if you hold a little over 4%, it really does influence the overall normalization number.
Oh, got it. Congrats again. Stay safe.
Cheers. Stay safe as well.
Your next question is from William from Overlook Investments.
Just to -- I think there's a question on dividends. I mean to me, I don't really try to differentiate between ordinary and special. But I just want to ask, what are the factors that would stop you from paying out a steadily rising dividend? Doesn't matter they're called special or ordinary because we saw that you have the financial capability doing so. So I just want to hear about your thoughts on those.
Sure. It's a great question. And when we -- we've -- the Chairman and the Board have elected we have special dividends for a reason. It retains flexibility. And when -- but by definition, the Board and our Chairman is very conservative and have set our "payout ratio" at a very manageable level. So we just prefer flexibility. And in times like this, we're very fortunate to have a very strong balance sheet. And we can evaluate this on a case-by-case basis like we do every half year, and we'll continue to do so when we see the impact of the current situation on our financial results and the overall health of the company. So it does preserve a lot of flexibility for us, and we're quite comfortable -- at least the Board is quite comfortable with maintaining this approach.
Okay. And so I -- do I expect that the total dividend would still fluctuate according to the profits?
We will evaluate it on a case-by-case basis like we do every half year.
Your next question is from Edward, who's from Macquarie.
Just one follow-up, please. Over the past week, have you seen any players that are from Guangdong just given the extensiveness of the health checks from -- just for that market?
Yes, we have and in China as well. So with -- the players have to go through a medical check coming into Macau, and they're -- and actually, the government reports how many patrons go through this every day. So it's all publicly available information. And yes, we're getting our players from China.
[Operator Instructions] Your next question is from Robin from UOB.
I'd like to ask what is the daily OpEx during the 15 days of casino shutdown versus now after you have reopened. Just want to see the sensitivity, how much additional OpEx you carry and see what the net is. I mean right now, we have some players playing around whether this additional GGR income would be -- would more than offset the additional OpEx just for this current period. I know GGR would be better when the virus results are out for -- so far since shutdown to now.
Ex the variable cost associated with gaming tax and commissions, the OpEx wouldn't have changed very much because we -- the occupancy still remains low. We have opened more food and beverage outlets. We do have everyone on the payroll still, so we continue to pay them. So that's more recent to near-term fixed costs. So it really -- it wouldn't have changed materially.
Your next question is from [ Gary ] from GF Securities.
I just have a quick one on the Galaxy Phase 3 and Phase 4. I noticed that the room count has been reduced to 4,000 from 4,500. May I know what's the rationale behind that? And what's the current room counts peak between Phase 3 and 4 now?
Good catch. It's the -- we've reduced the room count from approximately 4,500 to approximately 4,000. It's not about the type of room or how many rooms we're opening, it's about the quality of room that we're opening across our results -- resorts. And you can see with the Andaz coming into the Galaxy International Convention Center, we're introducing a new brand. We're building a new tower at Galaxy Macau. It's not about the number of hotel rooms. It's the type and quality associated with that to attract the type of high-end customer that we're pursuing. And as far as the room counts on -- by -- as far by phase, it's plus or minus 1,400 or 1,500 rooms in Phase 3. So that would -- if you subtract that out from the 4,000, it's about 2,000 to 2,500.
Well, thank you very much, everyone, for participating in today's call. We look forward to updating you on the Macau situation and our results for Q1 in May of this year. Thank you very much.
Thank you. Ladies and gentlemen, this concludes our conference call for today. Thank you for joining us. You may now disconnect.