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spk09: Ladies and gentlemen, thank you for participating in the fourth quarter 2020 earnings conference call of Melco Resorts and Entertainment Limited. At this time, all participants are in listen-only mode. After the call, we will conduct a Q&A session. Today's conference call is being recorded. I would now like to turn the call over to Mr. Timothy Majic. Thank you. Please go ahead, sir.
spk00: Timothy Majic Thank you for joining us today for our fourth quarter 2020 earnings call. On the call are Lawrence Ho, Jeff 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 federal securities laws. 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 is included in the earnings release. Finally, please note that our supplementary earnings slides are posted on our investor relations website. With that, I'll now turn the call over to Lawrence.
spk02: Lawrence Chang All right. Thank you, Tim. And hello, everyone. During the fourth quarter, our integrated resorts continue to experience a gradual recovery in business levels. Despite increasing COVID cases throughout the world, thanks to both the Macau and the mainland Chinese government's measured and prudent approach towards border reopening, We have not seen any locally transmitted COVID cases in over 300 days. Benefiting from the resumption of visa issuance, our Macau Mass Table Games operation, which contributed the vast majority of our EBITDA in pre-COVID times, saw notable sequential improvement from the third quarter to the fourth quarter. We reported positive property EBITDA for both Macau operations and our overall global operations. We remain optimistic on the recovery in Macau and continue to expect increased visitation in the near term. Earlier this week, with the renewal of the remaining two cities on Macau's medium risk list, all quarantine restrictions were lifted for those traveling from mainland China to Macau. More notably, there are no quarantine restrictions for those mainland Chinese citizens who are returning from Macau. In Macau, while we continue to see improvements in our business volume, ensuring the safety and well-being of our colleagues, customers, and the communities in which we operate remains our highest priority. We continue to expect a faster rebound and faster growth in both the premium mass and premium direct segment, which will benefit Nelson's portfolio of luxury integrated results. Our current expectation is that we'll begin to see the benefits of pent-up demand starting in mid to late March. Business trends continue to improve in the Philippines, and City of Dreams Manila generated positive property EBITDA without gaming on hospitality operations running on a limited trial-run basis as authorized by PACOS. While there was a swift return of domestic gaming demand in Cypress casinos in the third quarter of 2020, an increasing number of COVID cases led the Cypress 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. 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 Cineflex, one of the world's largest indoor-outdoor water parks, fine dining restaurants, and state-of-the-art MySpace. To further strengthen our competitive edge in the premium mass segment in Macau, our upgraded works continue at City of Dreams, and the fully renovated NUA is expected to open at the end of March. We plan to close the countdown in the near to medium term, reducing the key count and transforming the tower into an all-street five-star product with a targeted reopening in 2023. The renovation at the countdown will give us five-star offerings across four towers at City of Dreams, further enhancing our position as the leading premium property in Macau. In Cypress, Our development of City of Dreams Mediterranean continues to progress. After completion, it will be Europe's largest integrated resort with over 500 luxury hotel rooms, approximately 10,000 square meters of mice space, an outdoor amphitheater, a family adventure park, a variety of fine dining outlets, and luxury retail. Turning to Japan, we want to highlight our commitment to bringing a world-leading IR there and continue to pursue opportunities within the market. While the process in Japan has been delayed and remains complex, it has renewed momentum as jurisdictions are again initiating RFP processes. We remain convinced that Japan represents the best potential new gaming market globally. At the same time, we remain patient and will maintain our disciplined approach with respect to all development activities, including Japan. Finally, I remain confident in Malco'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 transaction enabling us to overcome near-term challenges while investing for the future. With that, I turn the call over to Jeff to go through some of the numbers.
spk01: Thanks, Lawrence. In the fourth quarter of 2020, we reported group-wide property EBITDA of approximately 53 million, while luck-adjusted EBITDA came in at 49 million. A favorable VIP win rate positively affected EBITDA at COD Macau and COD Manila by approximately 9 million and 1 million, respectively. At Studio City and Altira, EBITDA was negatively affected by an unfavorable VIP win rate by approximately 4 million and 1 million, respectively. On a consolidated basis, overall results were positively impacted by approximately 5 million. Details of these adjustments can be found in the supplementary earnings slides posted on our investor relations website. In addition to the VIP win rate fluctuation, our performance was also affected by our bad debt provision. During the fourth quarter of 2020, we incurred a bad debt charge of approximately 23 million as compared to a bad debt charge of approximately 12 million in the fourth quarter of 2019. On a year-over-year basis, the change in the bad debt provision negatively affected EBITDA by approximately 11 million. Additionally, our fourth quarter 2020 EBITDA was positively impacted by a $16 million bonus reversal. 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 II CapEx and general corporate purposes. The transaction reduced our average borrowing rate and extended our maturity profile, with Studio City's next material 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 percent. At the end of December, we had approximately $1.8 billion of cash on hand. Pro forma for the capital markets transactions in January, our cash balance would have been approximately $1.9 billion. When combined with our undrawn revolver facilities in Macau and Manila of approximately $2 billion, This implies pro-pharma available liquidity of approximately $3.9 billion at the end of December. To provide more clarity on our capital structure, Melco, excluding our operations at Studio City, the Philippines, and Cyprus, had cash of approximately $900 million and gross debt of approximately $4.1 billion at the end of the fourth quarter of 2020. 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 to $150 million. Corporate expense is expected to come in at approximately $20 to $22 million, and consolidated net interest expense is expected to be approximately $94 to $98 million, which includes finance lease interest of $11 million relating to City of Dreams Manila and $4 million of capitalized interest. This concludes our prepared remarks. Operator, back to you for the Q&A.
spk09: Certainly. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star 1 on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press pound or hash key. We have the first question from the line of from JP Morgan. Please go ahead.
spk04: Um, uh, good evening to you guys. Uh, thank you for taking my question. Uh, Lawrence, uh, your, your tone today is probably at least to us is the most optimistic in at least a year. And, um, your comments about your expectations for increased visitation in the near term. Uh, and, uh, More recovery in the mid to late part of March has caught our attention. Can you talk about what's rooting this increased optimism relative to just three months ago and how much? I mean, we obviously had some clear positives recently with travel restrictions easing. How much of this optimism is rooted in, I guess, more traction or ease coming from visa issuance from mainland China?
spk02: Sure. Hi, Joe. Why don't I give like the high level and I'll pass it on to David to give more of the details. I think our optimism really comes from seeing what happened with the tail end of Chinese New Year and seeing how strongly that pent-up demand was coming back even last week. And also as there are no more cities on the quarantine list from mainland China and at beginning of March is always the major political two session meetings. I think after that, there are just many pieces that are getting incrementally better. And with the vaccine rollout happening in China and the rest of the world, I honestly see, I think a year ago when we did this call for the Q4, uh, 2029, we were the very first ones to say, this is going to be very, very slow and very, very gradual. And so I think finally, we are seeing the light at the end of the tunnel. And when we look at the consumption behavior in China, it is very impressive, given how successful China and also Macau has controlled the virus. So I think with all those pieces together, and even today, there was a little bit of news that Taiwan has resumed its you know, the route between Taiwan and Macau. So all of these little pieces added together, and I think the main thing was seeing how strong the tail end of Chinese New Year was. I don't know if David.
spk10: Yeah, I think there are a couple things. I think one of the things, you know, as Lawrence mentioned, the tail end of Chinese New Year, you know, going in we had pretty low expectations on what was going to happen because of the restrictions that Macau had put out there. As these restrictions started dropping, just the arrivals that came in for Chinese New Year was pretty incredible, much more than we thought was going to happen. And then the quality of play that we saw that came in for Chinese New Year. So we were seeing a buildup in the fourth quarter. Then the restrictions started coming in right after that first week of January. We started seeing it kind of drop off. But how fast it returned once those restrictions dropped and how fast those players started coming back. As IDS comes back and as other visas and other things start coming into play, we know the customers want to come. I think one of the other things that really made us pretty happy was we started seeing a lot more customers coming in from Guangdong, that region, which we hadn't seen before. We also saw customers that we hadn't seen before in our premium direct for at least a year. So we know the demand's out there, but people want to come here. If these things continue to improve like we think they're going to, as the vaccines roll out, as the number of travelers are able to come and starting to make it so it's easier for them to come, we know that the things are going to improve. So, again, we think that hopefully we've turned a corner here.
spk02: And, Jill, one more thing I'll add on to, and David reminded me of something, and in speaking to various levels of the governments, they are very proactively talking to China and the relevant bureaus in terms of restarting the e-channel for the visas, restarting group tours. So there's a lot of incremental positives that they're working on. And with COVID being under control in China, We do think that once visitation returns and it's easier for people to get into the house, the appetite is definitely there and we saw it firsthand. Great.
spk04: Thank you very much for the thoughts.
spk09: Thank you. We have our next question from the line of Billy Eng from Bank of America. Please go ahead.
spk07: Hi, good evening, and thanks a lot for hosting the call. And I think just want to follow up with the previous comment regarding the border normalization. I know the situation is still quite fluid, but Lawrence, would you mind to give us some of your personal thoughts about like the following border normalization, timing of the following border normalization, including The Yi Channel that you mentioned, Hong Kong-Macau reconnection, and also like other type of visas, including group travel and transit visa. What should we expect in terms of seeing a bit more relaxation? Will that be a bit like the next couple months, or it will be more realistically still three to six months away?
spk02: Again, Billy, I think we were... We've been the most realistic, and for the last year, we probably feel like the most pessimistic and Debbie Downer. But I honestly believe seeing how the vaccine rolled out in China, Hong Kong, and at the end of the day, if you look at Macau, greater China, Hong Kong, Macau, Taiwan, and China is over 90% of all business. So I think that's the key to restarts. I feel like the restarting some of the e-channel stuff, and again, this is ultimately up to the discussion between Macau and the Chinese government. But assuming vaccine rollout is going smoothly, and Macau has started, Hong Kong has started, I do think it's really two or three months rather than for the last year we've been looking longer and longer. So I do think it's probably two or three months. So hopefully sometime in Q2, maybe end of Q2, we'll see some normalization. And Macau, Hong Kong, and China have taken a very scientific approach. So even Hong Kong, which is about 20%, over 20% of all business, I think Macau has clearly told Hong Kong that if they start having a health code, the thing that Macau and China are sharing right now, and that they have fewer than, I think, 10 daily local transmitted cases, I think that corridor will reopen. And so there are a lot of incremental positives because Hong Kong is really close to that number now. So again, for the first time in really 12 months, we see a lot more positives than negatives.
spk07: Thanks. That's very helpful. And my second question is just want to get a bit more color about the Chinese New Year traffic. And as you guys just mentioned, you see some of the new customers or customers that haven't been back for quite some time and also their spending power. Can you tell us a bit more? Have you seen like the recent traffic and compared to the Golden Week? Do you see they spend a lot more or it's the same type of customers but they just spend, the behavior change a bit, or it's a different type of customers, any color that you can share will be appreciated.
spk02: I think, like, let David go into details, but I think we compared very favorably to Golden Week, surprisingly, especially the last week.
spk10: Yeah, we definitely exceeded the Golden Week in October of 2020. Yeah, I think maybe a couple things to take away. Obviously, this is being led right now by our premium segments, both our premium mass and our premium direct. We've not seen the mass mass return yet. You can see that, obviously, in the visitation numbers that the government has posted, but it's been on the premium. I think one other thing to take away from this is If you look at the room nights, and we weren't sold out in our hotels, but if you look at our occupied room nights, if you look at the theoretical per room from the players that we had coming in, it's the best we've seen since the fourth quarter of 2019. So, again, we're optimistic as we look out into the future here. We think things are freeing up more and more. Like I've said before on many calls, we know that customers want to come. We know the demand is there. They just need to be allowed to come and participate. We think things will just jump from there. So it was pretty amazing when you go back and look as they started dropping the number of cities and provinces, as they started moving them off the list, and the number of people that came in. Traditionally, Macau has got a very late booking window. We had so many day of arrivals and players that had either canceled or said they weren't coming that ended up coming. It was pretty extraordinary for us. So, again, we weren't sold out. It wasn't like it normally was for Chinese New Year, but it was much better than we've seen at the October Golden Week, and we think there's, again, room for optimism as we go forward here. We know customers want to come.
spk07: Thank you. Again, that's very helpful.
spk09: Thank you. We have our next question from the line of Prabin Chowdhury from Morgan Stanley. Please go ahead.
spk05: Thank you. Hi, Lawrence. Hi, Jeff. And also, hi, David. Quick question for me. One is on Hong Kong opening, which I think is obviously the most important in the near term to help Macau. And then second, I have some numerical questions. On Hong Kong opening, you know, in December we were trying to open up with Singapore and there were some comments made that Hong Kong needs to show zero number of local cases for a consecutive seven days before either Macau or China opens up. Could you just update us if that's changed or things are looking a lot better because of vaccination? And what's your realistic assumption of all the people of Hong Kong and Macau getting vaccinated? Is that when we get a full-fledged easy access to these three regions, please? And then I have some numerical questions.
spk02: Hey, Praveen, I didn't hear the question perfectly, but let me try to guess what... So I think what has changed between Hong Kong and Macau is, from Macau's angle and in my prepared remarks, Macau is nearing the first anniversary of zero locally transmitted cases. So from Macau's government, and I am 150% in agreement with them, is that the most important lifeline to Macau is obviously the mainland Chinese market. And so Macau is not going to risk that with Hong Kong. And the definition in Asia and greater China about controlling COVID is very different from the West. Controlling COVID in this part, there was almost the elimination of it. In the West, I think it's always going to be like the cold or the flu. Even though Hong Kong had under 100 cases, that was considered way too much for both China and Macau. And so Macau wasn't going to risk closing the China border for Hong Kong that way. But I think given some of the more drastic measures that the Hong Kong government has taken in the last few months to control their so-called fourth wave – I think now that the numbers are coming down and that's why Macau and Hong Kong are having those discussions. And again, as I reiterated, it's a very scientific approach in terms of how they look at it. So, you know, again, given these numbers and hopefully Hong Kong doesn't have any other major outbreaks and with the vaccination program started, I think that addresses what David talked about, which is if people can come, it certainly is apparent to us now that they will come. So there isn't any permanent change in behavior. People are still longing for that excitement and entertainment that Macau has to offer.
spk05: That's great. Thanks, Lawrence. And I agree with you on that point. And sorry, greetings to Ivan as well. So my question on the numbers for Jeff would be three questions. Could you tell us about the cash flow from Manila? I would assume that even though it's EBITDA positive, maybe the cash flow is negative. The second question was of OPEX number for fourth quarter versus third quarter. Does it have to go up as volume goes up? And the third question is, not every company reports bad debt number, but you do. Although these numbers look a little bit on the high side, can you just explain Why are these numbers on a sequential? I mean, the last three, four quarters have been a bit on the high side. Thank you so much.
spk01: Sure. So, for the last one first, on our bad debts, as you know, we provide that every quarter just to provide some transparency to you and our investors. And yes, it's definitely elevated from what you can call maybe normal levels. And that's just a reflection of the operating conditions we have on the ground. in Macau over the last year. As you know, it's been very challenging. So I would say that, you know, we'll begin to normalize that bad debt provision, you know, going into 2021 and over the course of 2021. I think your second question was on Macau OPEX, right? Yes. So The daily OPEX number in the third quarter was approximately 1.7 million. That did increase as volumes returned into the fourth quarter at about 1.9. And as, you know, with the backdrop that was provided recently by Lawrence, as the business continues to improve, yes, I would expect OPEX to continue to increase as the volume returns and some of those, you know, variable business-driven costs come back into the system.
spk06: And there was a last question on cash flow from Manila. Thank you.
spk01: So cash flow from Manila, you're right, the property level number of about $17 million, once you get through some of the charges against that, rent payments, etc., etc., yes, after that, the net number after the recharge is profit share, rental, et cetera, that is slightly less than break-even.
spk05: Great.
spk01: Thank you so much again.
spk09: Yep. Thank you. Thank you. We have our next question from the line of Simon Schrank from Goldman Sachs. Please go ahead.
spk03: Hi, everyone. Thanks for taking my question. I have two questions. One, Lawrence, you sound quite optimistic. And given all the travel, potentially travel restriction relief, obviously normalization is one thing. But I wanted to get a sense how you think about the panoply man. If you were to put a number, you know, reassessment of the kind of demand, would we see maybe some of the lost gaming, you know, demand would have like, what, 20% going to be coming back or 30% going to be coming back? That's the first question. And then the second question, and given the, also the current situations, how would you think about the studio CT phase two? Are you having any flexibility to speed up, you know, the constructions and see whether you have any update on that as well? Thank you. Thanks a lot.
spk02: Let me answer your second question first. So for Studio City Phase 2, we haven't slowed down at all because we do think that around the end of 2022, beginning of 2023, the market would have been fully recovered and then some. And so we think that's a great timing to open a new property. And so we haven't slowed down. We're continuing to work with the government on the development period, given the COVID, you know, delays. So we're very happy with it. And if anything, the building is, the two hotel towers are already up to seven floors. And so hopefully by the end of 2021, before the end of 2021, we will pop up the building and we'll spend the bulk of 2022, doing all the interior fit-outs. So we're very happy on that front. In terms of the pent-up, the return of pent-up demand, again, I think 2021 is going to be a year of rebuilding and recovery. And judging from COVID and how the success factors that have enabled China and Macau to control the virus. I also don't think they're going to all of a sudden open the floodgates and let people rush in. So as David mentioned earlier on, it is really a function of how many people we can get into the property. And that way you see more of a segregation as well. And you see it right now. The premium segments are doing better. The medium-mass segments aren't doing as well because the sheer number of people allowed to come in isn't that high. And that's why within our own portfolio, you are seeing a divergence. You know, City of Dreams is doing very well. Studio City and Altera as well. But I do think by the end of 2021, the market should be operating at close to like fourth quarter 2019 level. Of course, other than the VIP segment, which is another story.
spk03: Okay, that's very helpful. Thanks for the insight. I appreciate it. Thank you.
spk09: Thank you. We have our next question from the line of Shane Ng from American Century. Please go ahead.
spk08: Hi, thank you for taking my question. Just to follow up on your previous comments about more optimism heading into this year, Could you kind of give us a sense of how you're looking at historical GGRs and annual visitations exiting this year, please? Thank you.
spk02: Jeff, do you want to take that?
spk01: Sure. Evan's here if he has anything to add. We definitely anticipate, you know, without a specific number or sort of a run rate or even for a full year, we definitely expect over the course of this year both visitation and GGR to ramp up meaningfully from where we are today as part of a continuation of the ramp up that we started to see towards the tail end of last year. So with all the factors that Lawrence has discussed, we absolutely believe that 2021 for the market and for Malco will be a rebuilding year as we see visitation and GGR ramp up.
spk08: Thank you.
spk09: Thank you. If there are no further questions, I would like to hand the call back to Tim.
spk00: Thank you for participating in our conference call today. We look forward to speaking with you again next quarter.
spk09: Thank you. Ladies and gentlemen, that does conclude the conference for today. Thank you for participating. You may all disconnect now.
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