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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 for 2022. 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 presentation. Mr. Drake, please go ahead.
Thank you, operator, and greetings, everyone, and thank you for joining us for the update call on GEG's Q4 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. What a difference a quarter makes where sentiment turned immediately positive with the highly publicized relaxation of China's COVID policy, which certainly signaled the beginning of the economic recovery across the region, including Macau. This important development, coupled with the issuing of the new Macau gaming concession effective on January 1, 2023, marks the beginning of a new and exciting chapter in Macau's history.
On behalf of the entire GEG family, we are eternally grateful for the proactive support of the Macau Government, the community, our team members and all stakeholders as we all navigated through the pandemic for the very challenging past 3 years. We are confident that the market recovery has begun and are even more confident about the intermediate and long-term prospects for Macau, as evidenced by the MOP 28.4 billion commitment to the Macau Government under our new 10-year gaming concession.
Let's move on to our Q4 2022 performance where our effective cost control efforts continue to yield positive results in what is hopefully the last quarter of the COVID-19 pandemic era, where, as we have said before, we continue to basically control what we can control. GEG reported a Q4 '22 EBITDA loss of $163 million versus Q4 '21's positive $1 billion and improved sequentially relative to Q3 2022's loss of $581 million. Our normalized EBITDA loss in Q4 2022 was $123 million where we played unlucky, which reduced EBITDA by $40 million. We invite you to refer to the table in 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 32% from approximately USD 3.4 million per day under normal operating conditions to the $2.3 million range in Q4, which also represents a 10% sequential increase after a dismal Q3 as business somewhat rebounded during Q4.
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 the business gradually improves. Now is the time to actually prove that we can deliver sustainable operating leverage, and we look forward to sharing our progress on this important initiative in the future.
While we're on the subject of driving efficiency, please allow us to reiterate a very important point on fiscal management 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 actually -- 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 Q4 2022 was just under USD 225,000 per day. If you deduct the $225,000 per day of net interest income from the $2.3 million per day in OpEx burn, you get $2.1 million per day in cash burn, excluding CapEx.
It's a powerful example of how conservative balance sheet management really pays in challenging periods in general and, in our case, significantly differentiates us from the competition as well as contributes to making prudent decisions, which are in the long-term best interest of the company and 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 past 3 years by contributing to our cost management programs. Everyone's support has truly been inspiring. We've also contributed millions of dollars to the COVID-19 relief efforts to support the communities, as we 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 where we have some very good news to report. We're scheduled to progressively open Cotai Phase 3 beginning in April '23. We're excited about opening the Galaxy International Convention Center in April, where we will be hosting our first MICE event followed by the Galaxy Arena with our first world-class concert in April with the K-pop group, TREASURE, followed by the very popular BLACKPINK world tour in May.
We'll also be opening Raffles at Galaxy Macau during early Q2, which is positioned to serve our premium customers; and finally, Andaz Macau, where we will continue to monitor the pace of the recovery before announcing a firm opening date for our eighth world-class hotel in Cotai.
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 $800 million in Cotai Phases 3 and 4 during Q4 and approximately $24 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 demonstrated our support of Macau during the pandemic like continuing to invest in the economy, providing jobs and supporting local SMEs during the pandemic 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 increased from $22.5 billion at the end of September 2022 to $26.4 billion at the end of December due primarily to the funding of our MOP 5 billion capital requirement associated with the new Macau gaming concession. Our net cash position declined slightly from $19.3 billion to $18.9 billion as investing in our development projects, including Cotai Phases 3 and 4 and funding operating losses, was partially offset by net interest income and the appreciation of our Wynn Resorts shares.
Total debt increased from $3.2 billion to $7.5 billion, which primarily reflects approximately $7.1 billion of borrowings associated with our treasury yield enhancement initiative. Our core debt remained minimal, increased slightly to $350 million, which includes 0 debt associated with our Macau operations. Yes, to be clear, the amount of debt associated with our Macau operation remains 0.
Our next topic is our outlook where Macau's new chapter is off to a very encouraging beginning in '23, including a very respectable Chinese New Year holiday. Although we usually wait to combine the results of January and February to normalize the timing of Chinese New Year, we are very pleased to welcome back visitors to Macau.
We have also said that Macau can bounce back quickly, but let's put that into perspective. Macau reported monthly GGR of $11.2 billion in January, which was higher than each individual quarter of Q2, Q3 and Q4 2022 and exceeded almost half of the 12 quarters of the pandemic. We're also encouraged that we continue to see strong signs of healthy demand, which certainly contributed to our decision to begin to progressively open our Cotai Phase 3 in Q2.
Having said all of that and not to get too far ahead of ourselves, we are cautiously optimistic that the recovery will continue where the only real question is the pace of the recovery. We also remain upbeat and very positive about the intermediate and long-term prospects for Macau where the underlying fundamentals continue to remain incredibly compelling.
In closing, we would like to extend our sincere appreciation to the Macau Government for their proactive and decisive performance during the pandemic as well as the community, which has rallied under their leadership. We'd also like to thank all the GEG team members again, who have been extraordinarily supportive of the community and the company during these challenging periods and look forward to a very exciting future.
We have one final note for you. The company earlier this week announced that I will be stepping down after 15 years as Galaxy's Group CFO. Please note that I'm not stepping out. I'm stepping back where I will be serving as a senior adviser. I will be succeeded by Ted Chan on March 1, who many of you know already.
Ted is a 20-year industry veteran who is no stranger to Galaxy, having joined us 5 years ago to lead the charge in Japan. You should also note that my good friend and colleague, Mike Mecca, will also step back from our investor call. And to be clear, Mike will remain on the Board. I'd like to thank Mike for his many and continued contributions over many years as well as his advice, guidance and friendship, especially as Ted will take the helm from Mike and I on the call moving forward. As you can see, Mike and I will certainly remain behind the scenes supporting the team.
Operator, that's a wrap. So back to you to begin the Q&A session.
[Operator Instructions] We will now take our first question from Praveen Choudhary from Morgan Stanley.
So a quick question for me. Would you be able to tell us more about -- I know you don't provide actual data on January, February this year, but some of your peers have provided some numerical data, just to understand how strong has it been for you to take the decision, as you mentioned, to open Raffles earlier than expected.
And the second question was related to in terms of how much of the CapEx for Phase 4 has been spent versus how much is remaining over the next several years.
Thanks for the questions, Praveen. We're all very pleasantly surprised with the abrupt shift in the COVID policy of China, which certainly signaled the, hopefully, the beginning of the recovery, and January is the prime indication of that. As you saw the results for Chinese New Year, although visitation was down 60% for the market, we posted very strong GGR of $11.2 billion. For Galaxy specifically, that -- we had a very strong Chinese New Year on many fronts. So it's definitely been premium-led.
We -- as far as our performance, we actually achieved our 2019 GGR for Chinese New Year in Mass. And that was also some -- another positive sign was our retail business, where we posted an all-time record tenant sales performance in the month of January. And what does that translate -- and this actually is carried forward into the -- to February as well, where we've seen that the volume post 2 weeks of Chinese New Year is actually ahead of the pre-Chinese New Year volume. So it's a -- there was a nice tail, and we have seen it drop off a little bit.
But what does all that mean in terms of EBITDA? We rarely do this, but I think it's really good news to report, and hopefully the momentum continues, that we're tracking it for so far in February, not through the close of February, we are comfortably north of $1 billion in EBITDA. So we're really encouraged about this, and there's an opportunity to really take advantage of all the hard work that operations has put in over the last 3 years in creating some operating leverage.
So we're still managing our cost very aggressively. It's been highly publicized that we had some labor challenges in Macau during Chinese New Year. I think everywhere in this region has had some labor challenges. And -- but we're working very closely with the government to resolve those. It really comes down to labor quota. And we are less than 60 days out from opening the Galaxy International Convention Center and having our first concert. So we're ramping up. And soon, we'd be going into simulation mode, and we're very excited about that. And we can only do this with the cooperation of the Macau Government.
So it's all these signals that gave us a lot of confidence and Francis, in particular, that pulled the trigger and moved forward with booking our first convention and our first 2 concerts. So we're very excited about the future. And as I said, it's just -- the only question now is the pace of the recovery. And we are also encouraged in early February by the resumption of group travel. So it's...
CapEx.
And as far as CapEx is concerned, we did, what I said, about $800 million in the month -- or in the fourth quarter. Our target for this year is a little over $7 billion. And of course, the lion's share of that would be dedicated towards Phase 4. So we really don't provide a breakdown between Phase 3 and Phase 4. Knowing where we are in the development cycle, it's not a huge leap of faith. I think that the majority of that spend is allocated to Phase 4.
And yes, we'll miss you in these calls. So hopefully, we can still catch up in Macau. Just to follow up on the comment that you made, which is very, very helpful, when you said north of $1 billion in EBITDA, was that from Feb 1 to 23rd Feb? Or was it this quarter-to-date?
It's quarter-to-date through like today.
Okay. Okay, very helpful.
Yes, we have another week to go in the month. So we're off to a good start.
Yes, absolutely. Congratulations, and well done.
We'll now take our next question from George Choi from Citi.
Firstly, Bob, I want to thank you for everything that you have done for the investment community. Your insights and commentary will be missed. I have a couple of questions, if I may. First of all, would you please give us a sense on how many new staff you need to hire for Phase 3, both in terms of gaming and non-gaming operations? And my second question is more a strategic one. For the past 3 difficult years, what was the biggest lesson that Galaxy learned? And what will the management team do to translate that lesson learned into operational strategy, especially in light of the impending opening of Phase 3?
Sure. Well, I'll handle the staffing question first. We're very consistent that we need approximately 700-plus folks to -- new additions to the team to open Phase 3, including the Convention Center, Raffles and the Arena. Again, it's a new hotel tower at Galaxy. It's not a separate integrated resort. We will be transferring some folks across. And with all due respect, it's all pretty much non-gaming labor. We're still far away from being capacity-constrained on gaming labor. So we're -- again, as I was saying earlier, that we're working closely with the Macau Government on labor quota. They're also helping SMEs, which is just a signal across the board in Macau supporting the broader business community and getting back on our feet.
So -- and I think -- and that really goes into one of the biggest lessons learned is when you're running all-out operation 24/7 all the time, you really don't -- you really focus more on effectiveness than you are efficiency. So what we did throughout the 3-year period is go back and look at productivity targets, really employ more data analytics to help the operators run their business more efficiently.
So with the HR support and the finance's support, we really spent the time on how do you really drive operational efficiency. And I said in our remarks, it's really time to put up or shut up. We're quite confident that we'll deliver operating leverage, and we can only prove that through our results as we move forward into '23 and beyond. And we're not relying on the shift in revenue mix from VIP to Mass to drive margin. We're quite confident, as we said throughout our -- the pandemic, that we can deliver 1 point or 2 in incremental organic margin just from just doing more with less and driving efficiency.
So that's where we spend a lot of lessons. And then, of course, we're always trying to apply and learn from a development standpoint, listening to our customers. We continue to see that our consumer preferences continue to evolve. We've seen the demographic profile of Macau change. It's moving younger and even more towards females.
So we're trying to address all that in our projects and not only exist in our new development projects like Phase 3, but into our existing facilities where we're opening new restaurants, refining our retail mix, refining our room mix and upgrading our product there. And ultimately, the test of that will be in Phase 4, which will be Macau's only next-generation integrated resort.
[Operator Instructions] Our next question comes from Ronald Leung from Bank of America Global Research.
Yes, I have 2 questions. First of all, the company has been very successful in carrying our property refurbishment program across the properties. Can I ask if the company has any plans for refurbishment program over the next 1 year or 2? That's the first question.
The second question is about the labor shortage. So as we know that there is some kind of labor shortage across different properties in Macau, can I ask how many labor the company still need to get in order to fully operate? And also what are the capacities, for example, room or F&B capacity, that have not yet been opened now? Yes.
Thanks for the questions, Ronald. On refurbishment, we spent a lot of time over the last 3 years really upgrading our product, refreshing it. We're about finished with the room refurbishment program for the most part. So we don't foresee a lot of ongoing projects for maintenance capital type things. But at the same time, we're introducing new restaurants. For those of you who visited Macau, you'll see that we'll be opening some new restaurants. We have some additional projects on the -- in the pipeline to do that because we're always continuously innovating.
So if you're differentiating between maintenance capital and growth capital like new product, we're always going to introduce new product into the mix because that's the beauty of our business. We generate lots of cash, and things work or don't work. We just always want to be as responsive to consumer trends as we can and address our customers' needs. So -- but on the maintenance side, we'll continue to do that, but we've done a lot of that over the last 3 years.
As far as labor is concerned, yes, it's basically a shortage of non-gaming labor. It's anywhere from room attendants to public area cleaners to waiters and waitresses, cooks, so on and so forth. So we're working actively with the government to -- now that the recovery is happening a lot faster and sooner than we expected, that we're being as responsive as we can. It's just not limited to Macau. It's virtually everywhere in this region. So it's -- again, we're working closely with the Macau Government to secure the labor quota. And hopefully, we'll rectify this within the next 60 days or so.
Okay. Got it. Thank you very much, Bob, and thank you very for your support to [ Billy ] and me in the past 15 years, and wish you the best of luck.
Fastest 15 years of my life.
And our next question comes from Simon Cheung from Goldman Sachs.
Bob, I want to echo what George is saying, really, thanks for all the insights that you provide us over the years. So I'm sure I would catch you in Macau pretty soon.
But anyway, I have 3 questions. One, I just can't help -- when you mentioned that $1 billion, which is roughly, call it, 1.5 months of run rate, if I remember correctly, back in -- I think before the COVID, you were running at perhaps closer to $4 billion, and that's on the back of Mass Market GGR, now you mentioned during the Chinese New Year hovering at about 100%.
So I wanted to get a bit sense about what sort of a GGR run rate would you need in order to achieve perhaps going back to the EBITDA run rate of the peak over level? And also whether I'm missing anything. It looks like you're running at perhaps 50% or so in terms of the EBITDA run rate so far.
Yes, it's a great question. And time will tell because one of our biggest -- it's still early days, Simon. We're really shut out of the gates here in January. Remember, we had Chinese New Year. We had a peak holiday. So like I said in our remarks, you have to look at really January and February on a combined basis to normalize for the time you'd see and [ why ].
But having said that, we're pretty encouraged about where we are so far. And as we said, with Chinese New Year, we really did achieve what we -- in 2019's Mass GGR in 2023. So that's very encouraging. It is premium-led, so -- which is actually one of the reasons why it gave us confidence in moving forward with opening up Raffles, which is a premium-centered product, as well as some of the non-gaming, which will drive incremental visitation in Macau with the MICE and the Arena events, starting with the 2 concerts.
So again, one of the beauties of this business is that, for us, the breakeven point, and we've obviously surpassed that, was basically doing mid-20s as a percentage of 2019's revenue. And hopefully, we'll generate some of the sustainable operating levers that we talked about. So it's, again, early days. I don't want to go too far out on a limb to say that we just want to give you an indication that we're off to a very solid start to be north of $1 billion, comfortably north of $1 billion, not even 2 months into the year, where it's led by GM, which we believe is the market leader still in GGR.
So it's -- but at the same time, we do acknowledge it's a competitive world out there. But hopefully, all the time and energy that we've invested in over the past few years will position us for success operationally. And couple that with new product in the market, we'll differentiate ourselves from the competition.
Okay, understood. Great. And then the second question, I wanted to get a sense about your table and the hotel room and allocation, historically, for VIP and Mass Market. The reason for that is, obviously, VIP volume was quite mute. I wanted to get a sense how much resources you can shift to Mass Markets.
Well, we've shifted the majority. In our VIP business now, it consists solely of our premium direct business. And of course, we're reallocating a lot of our capacity to, obviously, to the Mass business. So a, on the labor side, we're comfortably staffed with the local gaming labor. But it's -- with the positioning of Raffles particularly as a premium product, we're allocating our tables in that direction.
So it's what the market yields. Back in the days when we've had the VIP and Mass business, we are demand takers, and it's our challenge to address what the market is providing us and yield against that. So we continue to -- the government wants to move towards the Mass business. It's well signaled during the concession process and that we did ask for table allocation with 1,000, and that's what we got. And some -- we're very happy with that. And we've reallocated our resources as best we can to service the Mass Market.
Okay. Great. My last question is just you shared that you need about 700 staff for the Raffles towers and also the convention centers. Can you give us a sense what's our OpEx per day are we talking about? And then you obviously have Andaz or maybe some other non-gaming facility for Phase 3. So up on the opening of the entire Phase 3, how much additional OpEx are we talking about?
Well, it's not that's -- we'll have some increase in variable expense. You saw that. That's one of the reasons our daily [ now ] increased in Q4. And it's a good thing that you're adding incremental variable expense. It means that the business is coming back. So we're going to do our best to control our costs as diligently as we can without ever compromising on our customer service standards, which we expect to elevate, especially in Raffles and in new businesses of the Convention Center and the Arena.
So it's all about driving efficiency across. And hopefully, we can prove -- rather than talk about it for the last 3 years, you'll see it in our margins hopefully improving not because of the revenue mix, because we're doing more with less in driving efficiency across the organization, it's just not in operations, in support areas like HR and finance as well. So it's been a comprehensive review of the business over the last 3 years and, hopefully, really elevating our performance and getting -- again, driving returns and doing more with less.
Okay. We will miss you then. Thank you.
I'm not disappearing. Some people think those are -- they're tears of joy, not tears of sorrow.
As there are no further questions in the queue, I'd like to hand the call back over to Mr. Drake for any additional or closing remarks. Over to you, sir.
Thank you very much, operator. And you're continuing -- the broader financial community, all the investors listening on the call for the last 15 years and 20 years of the concession, we really believe that we've entered a very new and exciting chapter in Macau's history. And I think Galaxy is uniquely positioned to carry on what we've been doing historically and hopefully exceed everybody's expectations as we move forward into this new era. I personally thank everyone for supporting the company and getting to know everyone on the call over the last 15 years. It's truly been an honor, and look forward to continue our relationship. And I know I can speak on behalf of Mr. Mecca as well that it's time to turn the ball over to Mr. Chan, and we look forward to supporting Ted in the next era. Roland and Peter will be here as well. And -- but Mike and I will always be behind the scenes supporting the team. So we wish the best of luck to our colleagues and everyone on the call.
So thank you very much, and I'm just really touched by everybody's kind words. Thank you.
Thank you. This concludes today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.