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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 Second Quarter 2018 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 question-and-answer session. Today's conference is being recorded.
I would now like to turn the call over to Mr. Richard Huang, Director of Investor Relations, of Melco Resorts & Entertainment Limited. You may go ahead.
Thank you for joining us today for our second quarter 2018 earnings call. On the call today are Lawrence Ho, Geoff Davis and our, our property presidents in Macau and Manila. Before we get started, please note that today's discussions may contain forward-looking statements made under the Safe Harbor provision of Federal Securities Laws. Our actual results could differ from our anticipated results.
I will now turn the call over to Lawrence.
Thank you, Richard, and hello, everyone. After almost 10 years of meticulous planning and the hard work of thousands of individuals, I’m delighted that we successfully opened Morpheus in June.
The hotel has already been coined an icon for Macau, a view that’s one of the coolest and most luxurious integrated resorts in the world that reaches the highest international standards offering truly unique experiences for all of our guests.
This architectural master piece is the world’s first free-form exoskeleton high-rise, designed by the late Dame Zaha Hadid. We’ve over 770 explicitly designed and furnished guest rooms. Morpheus will significantly expand City of Dreams luxury hotel room count, giving it enhancibility to acquire and retain premium gaming patrons.
The hotel offers world class culinary delights from the likes of Alain Ducasse and Pierre Hermé. Sky pool dive is 130 meters above ground with stunning surrounding, a unique retail experience showcasing the world’s most fashion forward brand and a curated art installation space featuring internationally renowned artist.
Beyond Morpheus, the relaunch of City of Dreams included extensive renovation on the mass gaming floor, with nearly design gaming space that were unveiled to guests in June, along with the opening of Morpheus.
On top of that, renovation in the VIP area on the second floor of City of Dreams is ongoing and we plan to open these upgraded VIP gaming spaces over the next nine months. We will also commence the renovation of Nüwa after the Chinese New Year with the rolling refurbishment of the hotel anticipated to conclude before Chinese New Year 2020.
Lastly, we plan to start the redevelopment of the countdown hotel in the second half of 2019. That involved a complete overhaul of the interior, which will take roughly 18 months to complete.
The renovated hotel will be rebranded Libertine and will complement our City of Dreams portfolio with guest rooms that are luxurious, yet ultra cool.
Moving to Studio City, we have exciting plans ahead. This includes the launch of an original show created with our new partner Stufish, which has produced some of the most spectacular live shows over the past 20 years. After that, we will also be opening Asia's largest virtual-reality zone and a new street with some fantastic food and beverage offering.
Looking further out, we still have the Phase 2 expansion of Studio City in our growth pipeline, which offers a significant point of differentiation from our Macau competition. We are currently in the process of developing our detailed design, while targeting to commence construction.
At City of Dreams with Morpheus being virtually 100% occupied and 100% comped [ph] since opening, mass gaming performance has seen encouraging improvements, with year-over-year mass top [ph] accelerating from 10% in the second quarter to over 20% in the month to date July.
Focusing more on the second quarter, we have experienced some meaningful mass hold rate issues at City of Dreams and Studio City, which Geoff will discuss in more detail.
It is worth noting that all mass drops have remained robust, with it being virtually flat sequentially despite the quarter’s typical weak seasonality. Altira continues to deliver strong year-over-year growth across all gaming segments, with EBITDA more than tripling to reach U.S$618 million in the second quarter of 2018.
Turning to the Philippine, benefiting from an exceptionally high VIP win rate, we had yet another solid quarter with EBITDA reaching an all-time high of US$87 million. Melco was the company that never stands still.
In addition through our ambitious plan for Macau and Manila, we are also devoting a huge amount of resources on Japan, which we have always viewed as the most attractive, currently available integrated resort opportunity globally.
The license bidding process could start in 2019 or 2020. We believe, we are well placed in Japan with a strong local team actively working on the ground, engaging with the relevant stakeholders. We believe our focus on the Asian premium segment, high quality assets, craftsmanship, dedication to world-class entertainment offering; market-leading social safeguards system and commitment to being an ideal partner will put Melco in a strong position to help Japan realize the vision of developing leading IRs with a unique Japanese touch.
With that, I’ll turn the call over to Geoff to go through some of the numbers.
Thanks, Lawrence. We reported group wide property EBITDA of approximately US$355.5 million [ph] in the second quarter of 2018 increasing by 8% from the second quarter of 2017 while luck adjusted property EBITDA increased by 10% on a year-over-year basis to approximately US$348 million.
An unfavorable VIP win rate negatively affected EBITDA at Studio City and COD Macau by approximately US$14 million and US$8 million respectively. At COD Manila and Altira, EBITDA was positively affected by a favorable VIP win rate of approximately US$20 million and US$9 million respectively.
In the second quarter, the luck-adjusted property EBITDA margin in Macau was approximately 27% down from 30% in the prior quarter and up from 26% in the second quarter of 2017. I would like to clarify that these are apples-to-apples comparisons as the aforementioned margins are all calculated based on the new accounting standards including those for the prior periods.
As Lawrence mentioned, we have experienced a lower than usual mass hold percentage at City of Dreams and Studio City during the second quarter. While we do not adjust for this and our luck adjusted EBITDA calculations if we were to hold at rates similar to the preceding 12 months and mass, EBITDA would have been approximately US$20 million higher than reported at City of Dreams and approximately US$10 million higher than reported at Studio City.
Despite the recent VIP resurgence, the EBITDA contribution from our non-VIP segment still represents more than 85% of luck-adjusted EBITDA on a Macau wide basis highlighting the mass gaming and non-gaming segments importance in driving group wide EBITDA and EBITDA margins.
In the Philippines, COD Manila delivered luck adjusted EBITDA of approximately US$67 million representing an increase of 20% year-over-year. The luck-adjusted EBITDA margin expanded by approximately 115 basis points to quarter-over-quarter and increased by approximately 380 basis points year-over-year to 45%. Again, these are all apples-to-apples comparisons, reflecting the new accounting standards.
Moving onto capital management, the board has decided to increase the quarterly cash dividend by 7% to US$0.14505 [ph]. This is consistent with our strategy of returning excess capital to shareholders in the form of occurring dividends.
To provide more clarity regarding our capital structure within our wholly-owned group, we had cash of approximately US$680 million in gross debt of approximately US$1.4 billion at the end of the second quarter of 2018 excluding Studio City in the Philippines.
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 US$150 million to US$155 million, including approximately US$20 million for Morpheus.
Corporate expense is expected to come in at approximately US$31 to US$32 million and consolidated net interest expense is expected to be approximately US$73 million, which includes finance lease interest of US$10 million relating to City of Dreams, Manila.
For those that follow City of Dreams Manila more closely, our building lease payment for the second quarter of 2018 was approximately US$9 million.
That concludes our prepared remarks. Operator, back to you for the Q&A.
We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Karen Tang from Deutsche Bank. Your line is open.
Hi guys, it’s Karen Tang here. I have two questions. The first question is with regards to Morpheus. I understand that Morpheus Group [ph] been gradually opening more hotel room and it’s good to see the mass digital growth have picked up. We wonder how much more can the new opening have or do you have a sense of what percent of the final ramp up is already been achieved by Morpheus todate.
My second question is with regards to the margin pressure in the second quarter. Geoff seems to be saying that our first quarter margin is 30% luck-adjusted and the second quarter is 27%. So aside from the change in VIP and mass mix, what else are impacting that? Thank you.
Hey hi Karen, its Lawrence here. So I think on the first question, let me just provide some high level input and then hand it off to David and on the second question we’ll let just David handle that.
We’re very happy with the opening of Morpheus, and as you know Morpheus was really the anchor of the re-launch of City of Dreams 2.0 and during the second quarter we really suffered through and we highlighted it on our Q1 call, that we had significant construction disruption on the main mask gaming floor in order to make Morpheus connect with the rest of the property.
But, I think so far it’s still early days with regards to the ramp-up I think we have over 700 rooms open. There is the reaction from our guests to the room and the building has been phenomenal and we’re very happy with that. And so it’s delivering on everything that we've always wanted Morpheus to be, but again, it's still early in that process, so maybe I’ll let David give you some highlights.
Sure. Hi Karen, so I think there are a few things here. One being that obviously when you open up a new property, you want to make sure you can provide the best possible guest and service experience. So we’ve always plan to open it up in stages, we are now as Lawrence said we [Indiscernible] about 700 rooms and suites. We will be at a full compliment which is 772 approximately at the end of July. As Lawrence said, we continue to see really good results from the experiences we are getting from our guests. Primarily right now that the casino guests have shifted over to that hotel from both Hyatt plus we've actually brought in a lot of new customers from our database that, that we weren't really able to accommodate before us, so we are pretty excited about the initial impact of Morpheus to guest comments, and we’re looking forward to seeing better business as we keep going forward here.
That’s great. Thank you very much.
Karen, its Geoff. So on the second question thinking of total margin keep in mind that we had the bonus reversal in the first quarter of last year, so that impacted the sequential performance we had a few million of about one-time items in corporate as well.
I suppose the largest element of the margin differential between the first quarter and second quarter, though, could be attributed to the difference in the mass hold rates between the first quarter and the second quarter that we addressed in our prepared comments.
All right, because you allocate just at EBITDA but not adjust for the mass hold rate again. Yes, that makes sense. Thank you.
Your next question comes from the line of Billy Ng of Bank of America Merrill Lynch. Your line is open.
Hi, good evening. Just have follow up questions regarding [Indiscernible] ramp up, and I think in the opening remarks, Lawrence mentioned about 20% growth in the March revenue of the overall COD. Would you mind to tell us a little bit more in terms of the win rate, whether the local win rate in the second quarter continue to be an issue in the third quarter and also Esther Zani [ph] kind of like guidance on the ramp up pace now have been open over 700 hotel room and how many quarters do you think it will take to get to its full potential.
Hey Billy, it’s Lawrence again. You know I think don’t forget that for the first two weeks of July, the beginning of the third quarter we also had the World Cup. And so, every four years when the World Cup happens, it naturally slows down business. But I think the early data points that we've seen post World Cup has been very encouraging. I think David you want to give more highlights on…
Yes, so Bill, I think [Indiscernible] comments we said our drop we’ve seen a 20% year-on-year increase in our drop so far during the month of July. As Lawrence said, that seems to have accelerated a little bit for us since the World Cup ended on the 15th of July. Again, it’s typically we would talk about some prior calls, we typically probably six months to nine months for kind of that ramp-up and they kind of get everything kind of fully cranked up in the property, so we think probably by the end of the year we should be hitting our stride here pretty strongly.
Okay, thanks. And different topic regarding Japan, I think in the opening remarks Lawrence mentioned, where we like to work with an ideal partners in Japan. What kind of companies do you think will be a good partner? Can you elaborate a little bit more?
Well, Billy, we've been running around Japan for over 10 years. And last Friday was a very significant day because as we all know, it passed the Upper House and now, it's really -- the process has really started. With Japanese companies, they are very cautious. And before the gaming sector was a legal enterprise a lot of them were still deliberating. So, I think a lot of the matchmaking happens now. But for us -- we've – Melco has always been a great partner in any jurisdiction wherein. We have partnerships. We started off in Macau as a partnership. Philippines, we have a great current partnership. And even Cyprus we have a great partnership. And I think for us we're open-minded to work with any partners in any consortium as long as it's a winning consortium.
Thanks a lot. Thank you.
Thank you.
Your next question comes from the line of Harry Curtis of Nomura Instinet. Your line is open.
Hi. Good morning. I wanted to shift gears and talk a little bit about CapEx and capital allocation. Geoff, can you walk us through how much CapEx you expect for the balance of this year and next year? Why don't we start with that?
Sure, Harry. So for the third quarter we've got about US$205 million of CapEx scheduled and for the fourth quarter approximately US$150 million, in 2019 approximately US$225 million, and then going forward I would put approximately US$125 million of maintenance CapEx. Of course all of those excludes Studio – sorry, this excludes Studio City Phase II.
Okay. And you said that Studio City Phase II, you're still on the design phase. With respect to the timing of the concession renewals is it likely that you will begin spending money anytime soon on, I mean, say in 2019 or 2020 on Phase II?
Hey, Harry, it's Lawrence here. For Studio City Phase II we were – the Macau government was very kind to grant us an extension on the development period, but even that extension ends in July 2021, so exactly three years from today. So we are against the clock to get started on the construction because at the end of the day Studio City Phase II is close to 2.5 million square feet development and to do it in three years including all the regulatory approvals and from the various departments is no easy feat. So, in my prepared remarks I talked about starting in the second half of this year. So pretty much, pretty soon, that has to happen in order to meet the timeline.
I got it. Okay. So, and that leads me to do the last part of my question. The increase of the dividend it seems to be more symbolic than actually impactful as far as consuming some of your free cash and you got a very low net leverage ratio. With your stock at nine times I'm just curious about the thought process at the board level why not repurchase stock here because you are generating free cash flow, your stock is ridiculously cheap, your shareholders I think are view that as a terrific opportunity for you and your board to make a statement about where you think your stock price ought to be?
Geoff, do you want to?
Sure. Harry, as we talked about the last several quarters our primary avenue for returning excess capital to shareholders will be through the recurring dividend. That being said, we haven't eliminated the opportunity or the option of buying back our shares. So that's on the table, something that is considered. And again part of our potential strategy going forward, but to-date we focus on the recurring quarterly dividend.
Okay. Just wanted to get that out there that lot of folks believe your stock is ridiculously cheap and we hope you do too.
Well, thank you for that, Harry.
Your next question comes from the line of Praveen Choudhary of Morgan Stanley. Your line is open.
Thank you very much. Hi, Lawrence, hi, Geoff, hi, David, couple of questions from me. One, could you talk a little bit about City of Dreams Manila and exceptional quarter for them, but you were trying to do some restructuring in terms of the way its shielding structures design, any progress there? That's the first question.
The second question is more housekeeping. On the bad debt provisions did you have any reversal or bad provision in this particular quarter? I remember you had updated us last quarter. And maybe the last one is the Phase II construction which needs to start soon, how should we think about funding of that Phase II? Thank you very much.
Hey, Praveen, it's Lawrence. So maybe I'll take the first question. I'll leave the second and third question to Geoff. And Kevin who is also on the call is our Property President in Manila can add more highlight to my first question. In terms of restructuring -- as you know the Manila business is a joint venture between Melco and the SM Group and Belle, but it shows that we're super open-minded and we're the ideal partner for any jurisdiction, but at the same time its a synthetic JV and it's very hard to understand for our investors and for most people for that matter.
And so as part of we've been looking at Manila we're very happy with the performance and we wouldn't rule out looking at an expansion down the road, but at the same time we also want to cleanup that structure. So I think some of that is – there is no new news on the cleanup of that structure. It's not a major urgent matter for us. If that happens, that happens, if it doesn't, we're happy with the current structure. But in terms of the performance of Manila, Kevin and his team have done a great job. Kevin, you want give more highlights to Praveen's question.
I mean, yes, as Lawrence mentioned we had an amazing quarter with our premium direct business in particular really driving a lot of it and then our mass business just continues to be our bread and butter with our mass table is growing quarter-over-quarter continuously and our slot business has continue to boom while maintaining really strong hotel occupancy. So, we're seeing a lot of upside opportunities and very, very pleased which just both the local and international markets here.
It's Geoff. The first question I'll just add. It's an ongoing discussion in regard to the potential transformation of that structure. Moving on to the second question, we had a reversal in our doubtful debt of around US$7 million. In the second quarter most of that would've been in City of Dreams. And on your third question; funding for Studio City Phase II, we've made certain announcements about [ph] capital structure there. It is a discussion that we're having with our minority shareholders and how to move forward.
And there is significant cash on the balance sheet at Studio City and incremental capacity for debt as well. So – well, we don't have a specific plan to announce today on the Studio City Phase II financing. We do have various options and we'll have some blended basket of those options as we move forward for the construction of Studio City.
Thanks very much, Geoff, and thanks Lawrence, and congratulations on Manila performance to the team. Thank you.
All right. Thanks, Praveen.
Your next question comes from the line of Omar Sander from JPMorgan. Your line is open.
Hey, guy. This is Joe Greff from JPMorgan.
Hi, Joe.
Just with respect to the City of Dreams, you provided, but I thought it was an encouraging data point if that's mass drop of 20% year-over-year at City of Dreams Macau in July. I'm not sure if I heard you talk about the mass hold percentage. Can you talk about that or how are you approaching as at your year ago level?
Joe, maybe I'll let David run through it. I think we've had very bad luck in Q2 and -- but at the end of the day we don't think there's anything fundamentally wrong with how we're operating. It's purely luck. And I think all key KPIs and trends are in the right direction, so, maybe David?
Yes. Hi Joe. It's just a couple different things. I think one of the things as we just got our butts kicked in June we just had one of the – there were really great time to come to City of Dreams and play and it seems like every player we've activated, every new player we brought in just had – just in fantastic luck. So it’s a kind of a bad news, good news story. The bad news is we got our butts kicked. The good news is we think there is a lot of players who are going to be coming back to us and feel very lucky when they come in the City of Dreams which we think it's going to bode well for us in future quarters. We generally don't talk about revenue or what's happening with our hold percentage when we're in the quarter, but overall we're pleased as to where we're headed here.
Great. That's good news. And when you look back at the 2Q was there much that you can quantify or talk about in terms of construction disruption that may have negatively impacted results in the 2Q?
Yes. We certainly had some construction disruption and really in terms of as we start looking at our main gaming floor, as we cleaned up around the GP area and we took the escalator out, it was not a nicest place to play particularly in the month of June as we are pushing hard to get everything open by 15th of June for the Morpheus opening. So that did have an impact on some of our bigger players not been sticking around as long our play is long, but most of the construction disruption now on that main gaming floor is pretty much over. We'll still have some future gaming disruption or construction disruption related to some of our VIP business as we continue to review our junket spaces.
Got it. On the mass side the construction disruption should not happen going forward. It would be more on the VIP side of things that Lawrence eluded to earlier on the call?
That's correct. It would be more minimal. We've got smoking room we've got to add on the main gaming floor. We've got some lightings; some other adjustments as we kind of fine-tune that gaming floor. But we've seen nothing like we saw during the first and second quarter.
Great. And then final question to Geoff is with respect to capital return particularly with the buyback authorization do you guys have 10b5-1 [ph] program, so that you can buy in periods that follow the quarter but before your earnings release?
Currently, we do not have one of those programs in place.
Okay. Thanks guys.
Your next question comes from the line of Jared Shojaian of Wolfe Research. Your line is open.
Hi, everybody. Thanks for taking my questions. So I know some times there could be noise in the mass hold rates. Can you just confirm that this is entirely lock or maybe there were some other factors at play particularly in June with all the construction disruption? And then related, just at COD Macau and Studio City, the VIP rolling chip volume seemed a little light sequentially, so may you can address that as well? Thank you.
So, I think why don't we start off with Studio City on this one because I think in terms of hold rate it wasn't -- Q2 wasn't to say COD Macau phenomenon for us, it was also at Studio City. So -- and in terms of the VIP seemed lite, so why don't we handed off to Geoff Andres.
Sure, Jared, this is Geoff Andres. At Studio City this we had a similar phenomenal what David had, which are -- we had many more of our big players beat us than many of our big players loss. So similar to comment David made we had a lot of happy customers and a lot of customers who are feeling pretty lucky and who I hope are telling other friends how easy to win at the Studio City and City of Dreams in Macau. And we did our analysis. We did the research. There's been no structural changes in how we operator our games. Nothing that's as far as our game pays down, no rule changes, nothing like that. There really just a matter of luck especially in our signature gaming area.
On the VIP roles, we are extraordinarily unlucky on the premier direct segment. So, when you add that less than 1% hold on premium direct. It’s just an absolute margin color when you lose money and also pay the commission.
So wasn’t our luckiest quarter, but I feel very good about the volumes, as we had very strong volume increases year-over-year and I think we are well positioned as long as the God of probability come back to our side.
Okay. Thank you. And I know, you are limited on what you can say with potential Studio City IPO, but it does sound like you're willing to move forward with Phase 2 without any clarity on a potential IPO, and maybe you could just help us understand what has to be done at this point and you know in other word about a year past the original announcement, is it more regulatory clearance you need or is it just still discussion with your minority partner, anything specific you can point to?
I still think there is much we can comment, given you know from a regulatory standpoint Geoff, I don't know if you want to add anything.
As much as we’ve like to I think we really can’t comment but we are prepared to move forward with Phase 2.
Okay, thank you very much.
So I think there’s no more questions in the line, so thanks a lot for joining us today. We look forward to speaking with you again next quarter.