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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for participating in the First Quarter 2021 Earnings Conference Call of Melco Resorts & Entertainment Limited. At this time, all participants are in a listen-only mode. After the call, we will conduct a Q&A session. Today's conference is being recorded.
I would now like to turn the call over to Mr. Robin Yuen, Director of Investor Relations. Please go ahead.
Thank you. Thank you all for joining us today for our first quarter 2021 earnings call. On the call are Lawrence Ho, Geoff Davis, Evan Winkler, and our Property Presidents in Macau, Manila and Cyprus.
Before we get started, please note that today’s discussion may contain forward-looking statements made under the Safe Harbor provision of the Federal Securities Law. Our actual results could differ from our anticipated results. In addition, we may discuss non-GAAP measures; a definition and reconciliation of each of these measures to the most comparable GAAP financial measures are included in the earnings release. Finally, please note that our supplementary earnings slides are posted on our investor relations website.
With that, I will now turn the call over to Mr. Ho.
Thank you, Robin. During the first quarter, our integrated resorts continued to experience a gradual recovery in business levels. While COVID cases continue to persist throughout the world, we have benefited from the Macau and the Mainland Chinese government’s efficiency in addressing the global pandemic and from their measured approach towards border reopening which have been the key factor in the ongoing recovery of the integrated resort industry in Macau and the broader Macau economy.
Macau has not had any locally transmitted COVID cases in over a year and following the guidelines outlined by the Macau government, we have provided a safe environment for our guests and team members.
In Macau, our mass table games operation which contributed the vast majority of our EBITDA increase all the times saw another quarter of sequential improvement. Similar to the fourth quarter of 2020, we reported positive property EBITDA for both our Macau operations and our overall global operations. While we continue to see improvements in our business volumes in Macau, ensuring the safety and well-being of our colleagues, customers and the communities in which we operate remains our highest priority.
We remain optimistic about the recovery in Macau and continue to expect a faster rebound and a faster growth in both the premium mass and premium direct segments, which will benefit Melco’s portfolio of luxury integrated resorts.
As mentioned on our last earnings call, our current expectation to see the benefits of pent-up demand starting in mid-to-late March has materialized. Business trends continue to improve in the Philippines for most of the first quarter and City of Dreams Manila generated positive property EBITDA with our gaming or hospitality operations running on a limited dry run basis as authorized by PAGCOR for the majority of the first quarter.
Unfortunately, all integrated resorts in Manila were closed in late March due to COVID concerns and are currently planned to remain closed through the end of April 2021.
While there was a swift return of domestic gaming demand at Cyprus casinos in the second half of 2020, an increasing number of COVID cases led the Cyprus government to announce a second lockdown during the fourth quarter. This resulted in a partial closure of our casinos from November 13th and a full closure from December 1st, which has remained in place throughout the first quarter of 2021 and thus far into the second quarter.
Our current understanding is that the tentative date to reopening casinos along with other sectors will be on May 2. Despite the global pandemic, Melco remains committed to its global development program. Our next major project in Macau is Studio City Phase 2 where construction is ongoing. Upon completion, the Phase 2 expansion will increase Studio City's hotel room inventory by approximately 60% with two new hotel towers offering approximately 900 luxury hotel rooms and suites.
Gaming spaces will be expanded and new non-gaming attractions will also be added including a Cineplex, fine-dining restaurants, and state-of-the-art MICE space and one of the world's largest indoor/outdoor water park,.
On May 22nd this year, Studio City will strengthen its position as Macau’s leading entertainment property with the launch of the outdoor section of the water park.
To further strengthen our competitive edge in the premium mass segment in Macau, our upgrade works continue at City of Dreams where the fully renovated Nuwa reopened at the end of March. Also at the end of March the countdown closed down for renovation where we will reduce the key count and transform the tower into an all three product with a targeted reopening in 2023.
In Cyprus, our development of City of Dreams Mediterranean continues to progress. After completion, it will be Europe's largest integrated resort with more than 500 luxury hotel rooms approximately 100,000 square feet of MICE space, an outdoor amphitheater, a family adventure park, a variety of fine-dining outlets and luxury retail.
Turning to Japan, we remain committed to bringing a world-leading IR there and continue to pursue opportunities within the market. We are currently engaged with multiple potential partners. While COVID continues to present challenges in terms of aspects of process timing and travel, IR in Japan has continued to move forward and we remain convinced that Japan represents the best potential new gaming market globally.
We remain patient and continue to maintain our disciplined approach with respect to all development activities including in Japan.
Finally, I remain confident in Melco’s medium and long-term growth prospects. I believe Macau is still the most attractive integrated resort market in the world. Our balance sheet was further strengthened by our recent capital market transactions, enabling us to overcome near-term challenges while investing for the future.
With that, I turn the call over to Geoff to go through some of the numbers.
Thanks, Lawrence. In the first quarter of 2021, we reported group-wide property EBITDA of approximately $30 million, while luck-adjusted property EBITDA came in at $54 million. On a sequential basis, this represents a 10% increase in our luck-adjusted group-wide property EBITDA.
At COD, Studio City and Altira, EBITDA was negatively affected by an unfavorable VIP win rate by approximately $17 million $4 million and $10 million respectively. A favorable VIP win rate positively affected EBITDA at COD Manila by approximately $8 million.
On a consolidated basis, overall results were negatively impacted by approximately $23 million. Details of these adjustments can be found in the supplementary earnings slides posted on our Investor Relations website.
Turning to our balance sheet, to optimize our capital structure, in January, Studio City issued $750 million of 5% senior notes due in 2029. The proceeds were used to refinance the $600 million of 7.25% senior notes due in 2024 with the remainder of the proceeds raised to be used for Phase 2 CapEx and general corporate purposes.
The transaction reduced our average borrowing rate and extended our maturity profile with Studio City's next debt maturity not until 2025. Also in January, Melco utilized favorable market conditions to tap the 5.375% senior notes due 2029 for an additional $250 million. The tap was priced at 103.25% of par, which resulted in an effective borrowing rate of approximately 4.9%.
At the end of March, we had approximately $1.6 billion of cash on hand. When combined with our undrawn revolver facilities in Macau and Manila of approximately $2 billion, this implies available liquidity of approximately $3.6 billion at the end of March.
To provide more clarity on our capital structure, Melco, excluding our operations at Studio City, the Philippines and Cyprus had cash of approximately $770 million and gross debt of approximately $4.1 billion at the end of the first quarter of 2021.
As we normally do, we'll give you some guidance on non-operating line items for the upcoming quarter. Total depreciation and amortization expense is expected to be approximately $145 million to $150 million; corporate expense is expected to come in at approximately $20 million to $22 million; and consolidated net interest expense is expected to be approximately $85 million to $90 million, which includes finance lease interest of $7 million relating to City of Dreams Manila, and $5 million to $8 million of capitalized interest.
That concludes our prepared remarks. Operator, back to you for the Q&A.
[Operator Instructions] Your first question comes from the line of Joe Greff of JP Morgan. Please ask your question.
Good evening, guys. Thank you for taking my question. Lawrence, a quarter ago, it was tough not to notice an incremental change in your tone and a more optimistic tone from you. Had that optimism waned at all in terms of what you’ve seen so far through April? And can you give us a sense of how you think the Golden Week Holiday plays out next month?
And then, you also mentioned a quarter ago that you thought by the end of this year you thought mass table games would be at levels consistent with 2019. Do you still see a path and a reopening and a recovery that kind of gets you to – where those – market to those levels at the end of this year?
Hi, Joe. So, why don’t I ask David to give more details later on, but generally, my view remains the same from the last quarter. So, on the last quarter call, we talked about the recovery really beginning in March and I think we saw that. In the beginning of the first couple of months of the year, China has some COVID issues as well in the northern parts of it and they’ve very quickly got it under control.
And so, as of March, we did start seeing a rebound and we are very – we are encouraged by what we’ve seen in terms of the forward booking for the May Golden Week. I think the key is, will it sustain going forward or is it just going to be a blip during the holidays.
So, I think our confidence comes from the fact that judging from the consumption in China, especially in luxury retail and luxury goods that people are – life is going back to normal within China. They had a number of COVID cases in China on any particular day is single-digits at best for a country with 1.4 billion people.
So, we are encouraged by that and we – having said all that, it is still a gradual recovery. So the issue with Macau right now is not so much COVID, because after all Macau haven’t had a single locally transmitted COVID cases in over a year. It’s really getting people to be able to travel to Macau. And in Asia and China in particular, there is really a zero tolerance with regards to COVID. And so, it’s just when can people travel freely. So, I think on that, maybe David can provide – add more color.
Thanks, Lawrence. Hi Geoff. Hey, I think just a few things that we are working at in relation to the Golden Week. And one of the things we do is, this will have the outcome to kind of track again with cost cut for a significant period. Three of the resorts since we’ve opened essentially after the kind of the COVID crisis let’s say.
But if you look at the October Golden Week in 2020 if you look at for the Western New Year for 2020, if you look at Chinese New Year for 2022, our period for the Golden Week in May is tracking ahead of those three areas, which will be giving us a lot of confidence and we are feeling very good about that. If you go back to – where we work for the May Golden Week in 2019, we are still little bit behind there, but I think we will close the gap as we continue to move forward here.
But we feel pretty strongly that we will close the gap I think we are – as I said, we are running a little bit behind certain players. I think we’ll end up playing up to where we were before. More importantly though, I think as long as we would hold up, we will be okay.
We have seen too much trouble with the disease yet, but we have – we will do get some half kind of work from one of the provinces that one of our customers who may become a little bit too often, maybe get to work they shouldn’t come. So, we have seen a lot of that. But again as long as that holds up, we feel very, very confident.
In relation to – I think in terms of the recovery and what we are seeing, we saw obviously March, as we said on the call, last time was very strong for us. April, we would start off a little bit from April with some of Easter holiday. People are going to meeting their ancestors. It’s really kind of picked up quite a bit over the last couple of weeks.
We think that’s a strong indicator as we head into the May Golden Week. As we look out towards the rest of the year, I long said, I think we are fairly confident that the market is starting to recovery particularly on the mass side that hopefully by the end of the fourth quarter that we will be back to where we were, let’s say in 2019 with those 2019 levels showing up in the fourth quarter of 2021.
Thank you very much for your thoughts guys.
Your next question comes from the line of Billy Ng from Bank of America. Please ask your question.
Thanks. Good evening and thanks for taking my questions. I have two questions as well. The first question is, like I think we noticed that like recently, the visitation number continue to improve but the [Indiscernible] improvements slow down a bit. So I just wonder what have you guys seen in your properties in terms of customer mix in this stage of recovery.
Have you seen some mix of your customer change and more main or dry hours in the mix or how does that compare to the high end premium hours and regular premium hours? That’s my first question.
And then my second question, maybe just want to ask opinion from Lawrence and I think the Chief Executive of Hong Kong mentioned about creating some type of trouble bubble with Macau. What’s your view on that? How likely you think there will be some type of connection between Hong Kong and Macau in the next few months?
Hey Billy. Why don’t I answer the second question for us and then David can answer the first question. In terms of the Hong Kong, Macau travel corridor, it would be great it happened because Hong Kong traditionally has been 20%, 25% of our business in Macau. And similar to Southern China, that business is always is a really good one.
But as I mentioned very early on, China and Macau, because Macau has firmly – and rightfully so, by far in a way the most important market for Macau is always going to be China. And China has a zero tolerance policy with regards to COVID cases. So, I think Macau would have to balance the Hong Kong travel corridor with not jeopardizing what they have with China right now.
And so, I think previously they talked about if there weren’t any less than ten locally transmitted cases for two consecutive weeks, that was kind of the thinking they had and then I think that was revised to – with zero unknown origins. So – but I heard, I read in the news as well that the Hong Kong Chief Executive met with the Macau Chief Executive last week at the Boao Forum.
So hopefully, they are together with China if they bring something out as part of that corridor. So, I am optimistic if the leaders are talking and discussing hopefully something and also I think the worst of the COVID outbreak in Hong Kong with a fourth wave or fifth wave or whatever they call that is relatively under control now.
So, that would be a huge thing for us, again, 20%, 25% of our business. So, maybe David if you can answer the first question?
Sure. So, Billy Ng, again, it’s mainly a tale of two cities here a little bit in the sense that, if you kind of look for us the premium mass and mass plus customers for City of Dreams continues to drive our recovery and we’ve also seen that translate into a lot of sales on the retail side from the high end from those, let’s call them high end or luxury high end vaccine sales as well.
Studio City is much more of a mass template and the mass players level is what the visitation is up to your point. The mass players that do not seem to be playing quite as strongly as they have in the past. I think that maybe to be more of a function of just maybe it’s a bit of a different customer coming in right now.
The mass plus players looking to play very well – the mass or these – let’s call them the premium mass players are still playing out. Let’s call that I mean, that mass with that grind if you call it is playing down a little bit. I think obviously that will – we will kind of get a better sense of things through the Golden Week here since we want to be up significantly. So that is kind of where it sits right now.
Thanks a lot. That’s very helpful. Thanks.
Your next question comes from the line of George Choi of Citigroup. Please ask your question.
Thank you very much. So I’ve got a couple of questions. Firstly, - in February, I just wonder if you see any changes in the way your competitors keep in particular in premium mass after they are opening? And based on your best estimate do you gained or lost market share in premium mass during the first quarter? And my second question is a housekeeping one. Would you please tell us if there are any one-of items during the first quarter, specifically I remember there was the new birth of platform is done in the fourth quarter last year and would you please remember us what the amount was and I assume that then recurred in the past quarter right? Thank you.
Hey, David, do you want to take the first one? And I guess, Geoff would take the second one?
Great. So, George, if you look at the one year it’s a nice for us. It stands out there and once I got a chance to take two others back in February. I think they’ve done a nice job. It’s a highly seen property. It’s like – it’s nice. We’ve not seen much of an impact.
I think we are hopeful that wonder that there are more players there is an impact as you just saw an opportunity, that’s given our proximity with City of Dreams to draw a lot of those players in and bring them over to our side of the suite so to speak. But we have not seen any impact from the – so far.
Our premium mass – in terms of our premium mass share where we’ve been – I think we’ve grown a little bit of anything. I don’t think we’ve lost any share. It’s not the numbers that we are looking at. It seems like we’ve grown more so than I would have thought during this kind of COVID period. So it just seems to be very strong and very good for us.
Okay. And I’ll take the second question. Hi, George. So, you are correct. In the fourth quarter of 2020, we had a reversal of a management bonus accrual of about $16 million. And of course no bonus, no normal bonus provision. So just the – this $16 million reversal and then, in the first quarter of 2021, we had a more normal bonus accrual that hit 1Q. Other than that, no material one-time charges in the first quarter.
Thanks very much. That’s very clear. Thank you.
Thanks, George.
Your next question comes from the line of Praveen Choudhary of Morgan Stanley. Please ask your question.
Thanks very much for taking my question. Hi Lawrence. Hey Geoff. Hi Evan. Hey David. My question – two, three questions here. First one is, Lawrence can you talk about what is the biggest impediment of people coming to Macau at this point in time? Is it the visa which is not automatic, it’s manual? Is it negative test at the end to show, you got Hong Kong not opening or anything that we are not – so that once these things start showing up opening, we can see the full normalization?
The second question is related to housekeeping questions. Geoff, could you talk about Q1 OpEx and the OpEx mostly Macau and how does it compare quarter-over-quarter and year-over-year? And the last one, it seems like there was no bad debt provisions. Last year, the bad debt provisions have been much bigger. Can you first let us know what is the bad debt provision and the explanation for it dropping off in Q1 at 22 points. Thank you so much.
Hey, hi, Praveen. So, I do think the biggest impediment of people coming to Macau is e-visa above anything. Of course, the PCR test is annoying for a lot of people, but at the same time, unless the world comes together and come up with a vaccine passport anytime soon, that’s just going to be part of life wherever you travel from city to city, country to country, you are going to have to do those tests.
So I do think that e-visa, I think is really the main impact. And as anything, during COVID I am seeing a divergence of Hong Kong, Macau, which is in the past people really talked about Macau and Hong Kong in one bucket when they come to Hong Kong, Macau.
But nowadays, I think people do look at Macau differently considering how well Macau has controlled COVID and I think politically as well Macau is more aligned to China. And so, I think that’s the reason why probably one bright spot we haven’t spoken about on this call is retail. Retail in Macau has done very well. It’s probably at 20 – close to 2019 level.
It’s probably going to be above 2019 levels very soon. And so, you are seeing some of that customer mix before where they used to go to Hong Kong to those shopping and buy goods, they are doing that in Macau, as well.
So, I think, once the e-visa is sorted out and China is comfortable again for people to travel more freely with Macau, I think that will have a huge uptick for us in terms of visitation and a massive impact in terms of business. I guess, Geoff, you want to take the second question?
Okay. Thanks, Lawrence. So, Praveen, on your OpEx question, in the fourth quarter, we were at about for Macau only, about $1.9 million a day and in the first quarter of 2021, that has increased to about $2.1 million as we foreshadowed on the fourth quarter call, that is the business comes back. We anticipated that OpEx would start to also come back ratably.
And then, on your third question on the provision, you are correct. We are getting to a more normal provision level. So, in the first quarter of 2021, we took a $17 million provision and that’s down from about $23 million in the fourth quarter of 2020.
Thank you so much. And Geoff and Lawrence, good luck with the May holidays. Thank you.
Thanks, Praveen.
Your next question comes from the line of Simon Cheung of Goldman Sachs. Please ask your question.
Hi everyone. Thanks for taking my question and thanks for the presentation as well. So, I have two questions. Just again, looking at the VIP numbers, we been here, obviously the number remain to be quite weak and that’s continued to be screw up for that the VIP which have a impact on the recovery pace of the premium mass.
Just wondering how do you think about the potential further decoupling up of VIP and premium mass? And whether you think that it’s going to be some negative impact from the VIP on to the premium mass in the longer run?
That’s the first question. The second one, can you share with us on the visitation number on - to your – to Macau properties if you can? Thank you.
Hey, Simon, why don’t I start off with the first question and then hand it off to David. So, our view even – our view from ten years ago was that the VIP market wasn’t really sustainable. And I think that has played out to be true on a number of factors and the VIP business has fundamentally changed.
So, I think even within the VIP business, the junket part of it is not going to be what it was in 2019 and I think more of that might shift to the premium direct side of things. But in terms of the VIP’s business impact on premium mass, David, do you want to take a shot at it?
Sure. Simon, so I think the VIP did had a bit of an impact on our premium mass just like anything else in the growth of our premium mass and just changes in our customers and how they look at things. I think they’ve kind of switched over from the junkets and probably doing more time like this via VIP to now to premium mass more.
So, I think we may have a bit of an impact in the beginning. I don’t think it’s going to have much of an impact on a go forward basis for us.
In relation to the visitation question you asked, we are probably just down 45% to 50% approximate what we were seeing which we thought in the fourth quarter of 2020.
So your visitation number is actually tracking slightly ahead of the entire Macau visitations?
Our visitations, what we talked coming to the property, we ended up 45-ish percent is what we would have seen in the fourth quarter of 2020.
Understood.
So I think again, I am not sure again, the visitation that was a little bit different, Simon, as we said, people counting system. So, if someone comes through a few different times we think it’s not a completely accurate number if I am not sure it correlates, let’s say to the – completely to the Macau visitation numbers.
Understood. Understood. Those are helpful. Thanks a lot. Thanks guys.
Your next question comes from the line of Angus Chan of UBS. Please ask your question.
Hi there. Good evening. Just a quick question for Lawrence. With the potential resumption of e-visa, what you think our authorities are looking at? Obviously, COVID has been quite stable, what kind of metrics can be used do you think they are waiting for before they resume the visa? Thanks.
Hey, Angus. I guess, that’s a billion dollar question. I guess, I would go back to the point that, China really has a zero tolerance for COVID. And so, on one hand, Macau and Hong Kong are part of China, but on the other hand, it’s still considered special administrative regions and technically outside the border.
And I think sometimes when they look at Macau and Hong Kong, they see potentially at a back channel into China, because technically, if somebody from the U.S. Canada went to Hong Kong and Macau and if there was a travel corridor, people can get into China. And with the varying strains of COVID that the people are still a bit concerned.
So, and vaccine rollout in China, Macau and Hong Kong is ongoing, but given the large population and the fact that the cities and China as a country have been relatively stayed safe from COVID in the last twelve months. The vaccine enthusiasm hasn’t been as high as other countries that had really suffered hard from COVID.
So, I would say, it’s really a matter of hopefully more people getting the vaccine and that’s why for us, as well, we highly encourage our colleagues and staff to get the vaccine, protect themselves, protect their families and also protect our customers in the future and do the world and humanity a favor because unless we reach herd immunity, things will never go back to normal.
So I suspect China’s hesitation is probably a little bit on that in terms of resuming full travel and through full e-visas.
Thanks.
There are no further questions at this time. I would now like to hand the conference back to Mr. Yuen for the closing remarks. Please go ahead.
Thank you. Thank you everyone for participating in our conference call today. We look forward to speaking with you again for the next quarter.
Thank you.
This concludes today’s conference call. Thank you for participating. You may now disconnect.