Melco Resorts & Entertainment : Q2 2021 Melco Resorts & Entertainment Limited Earnings Conference Call Transcript (PDF)

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Q2 2021 Melco Resorts & Entertainment Ltd Earnings Call

EVENT DATE/TIME: JULY 27, 2021 / 12:30PM GMT

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JULY 27, 2021 / 12:30PM GMT, Q2 2021 Melco Resorts & Entertainment Ltd Earnings Call

CORPORATE PARTICIPANTS

Lawrence Ho Melco Resorts & Entertainment Limited - Chairman & CEO

Geoffrey Stuart Davis Melco Resorts & Entertainment Limited - Executive VP & CFO

David Ross Sisk Melco Resorts & Entertainment Limited - COO of Macau Resorts & Property President of City of Dreams-MacauEvan Andrew Winkler Melco Resorts & Entertainment Limited - President

Robin Yuen Melco Resorts & Entertainment Limited - Director, Investor Relations

CONFERENCE CALL PARTICIPANTS

Hay Ling Ng BofA Securities, Research Division - Research Analyst

Joseph Richard Greff JPMorgan Chase & Co, Research Division - MD

Praveen Kumar Choudhary Morgan Stanley, Research Division - MD

PRESENTATION

Operator

Ladies and gentlemen, thank you for participating in the Second Quarter 2021 Earnings Conference Call of Melco Resorts & Entertainment Limited. (Operator Instructions) Today's conference is being recorded.

Now I'd like to turn the call over to Mr. Robin Yuen, Director of Investor Relations of Melco Resorts and Entertainment Limited. Please go ahead.

Robin Yuen Melco Resorts & Entertainment Limited - Director, Investor Relations

Thank you all for joining us today for our Second 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 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 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.

Lawrence Ho Melco Resorts & Entertainment Limited - Chairman & CEO

Thank you, Robin. Before we begin to talk about our business performance, I would like to express our sympathy to the people who have been impacted by the flooding in China. We hope for a swift recovery of the situation soon.

Our results in the second quarter continue to reflect the pandemic's impact on the business. However, on a sequential basis, we experienced a progressive recovery in business levels as tourists return to Macau.

First, we would like to thank the Macau and Mainland Chinese governments for the efficient handling of the COVID-19 situation. As travel restrictions loosen and visitors gradually return, Macau has enjoyed a steady recovery in its integrated resorts industry and its overall economy.

We have rolled out employee vaccination incentive programs to support the government's efforts to meet the community vaccination goal of 70%. Since mid-July, Macau's vaccination rate has reached over 30%. It's on track to hit herd immunity before the end of the year. Here at Melco, our overall employee vaccination rate has reached almost 65%. We have followed the COVID-19 guidelines set by the Macau government, and we have dedicated substantial resources to create a safer environment for the community, our customers and our colleagues.

In Macau, our mass table games operation, which contributes the vast majority of our EBITDA, saw another quarter of sequential improvement. Continuing the trend from last quarter, we delivered positive property EBITDA for our Macau operations and our overall

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JULY 27, 2021 / 12:30PM GMT, Q2 2021 Melco Resorts & Entertainment Ltd Earnings Call

global operations. Our Macau operations registered an over 10% increase in GGR, while property EBITDA grew by a factor of 9.

May Golden Week was a success and confirmed our expectations of pent-up demand from our customers. For the first 5 days of Golden Week, industry GGR hit 50% of 2019 levels, and we experienced similar levels of strong growth driven by our premium mass market and premium direct businesses, highlighting our long-standing focus on the premium segment.

In the Philippines, our gaming and hospitality operations at City of Dreams Manila were closed for the month of April due to government and post-quarantine measures. We subsequently reopened at 50% capacity on May 1 and have seen a strong recovery in pent-up demand, especially led by mass-market patrons. As such, we have repositioned some of our gaming space from VIP to premium mass.

In Cyprus, we were pleased to reopen our casino operations in May after a government-mandated lockdown from the beginning of the year with restrictions on patron capacity and gaming position. On June 10, the restrictions on gaming positions were lifted, allowing us to accommodate our normal capacity. We are encouraged that Cyprus returned to profitability in June, and that Cyprus has virtually breakeven in EBITDA for the quarter.

Looking ahead, we're encouraged by the increasing vaccination rate in Macau, Hong Kong and China. We remain optimistic on the recovery of our gaming business, especially in our premium mass and premium direct segment. That said, the safety and wellbeing of our customers and colleagues remain our highest priority, and Melco will take the necessary precautions to guard against the pandemic.

While COVID-19 has brought challenges, Melco remains committed to its global development program. In Macau, construction of Studio City Phase 2 remains ongoing, and we expect its completion no later than December 2022. Upon completion, the Phase 2 expansion will increase Studio City's hotel room inventory by approximately 60%, with 2 new luxury hotel towers offering approximately 900 luxury hotel rooms and suites. There will be additional gaming space and non-gaming facilities, including a Cineplex, fine dining restaurant, state-of-the-art MICE space and one of the world's largest indoor/outdoor water parks. We launched the grand opening of the Phase 1 outdoor water park in May, with summer season passes for the water park quickly selling out.

At City of Dreams, the newly renovated Nüwa Hotel reopened on March 31, and we have continued building additional suites and guest rooms at our Morpheus Hotel. The Countdown hotel closed at the end of March 2021 and is undergoing a transformation into a luxury hotel that is expected to reopen in 2023.

Hosted at Studio City, we have announced a series of residency shows featuring an incredible lineup of A-list superstars, namely, Aaron Kwok, Joey Yung and Leon Lai for the next 3 years. Such entertainment offerings will differentiate us from the competition. This should enhance Studio City's brand and entertainment proposition and represents an opportunity to drive visitation across the entire Melco portfolio in Macau.

At Altira, starting in the third quarter of this year, we've embarked upon a strategic shift that aligns Melco's first integrated resort with the company's broader focus on the high-margin premium mass segment. Consequently, we've shut down VIP operations at Altira and moved both its existing junket and premium direct VIP business to City of Dreams and Studio City. We will refocus some of the existing VIP gaming space to cater to the premium mass segment and reallocate non-gaming assets to support the premium mass initiative.

Although historically focused on the VIP segment, Altira has always enjoyed a level of premium mass play, which we will enhance and reinforce through this strategic realignment. Accordingly, we've also reassessed the VIP cost structure at Altira and have made efforts to align its cost base with its new demographic positioning. We do not believe it will be necessary to incur material capital expenditures to implement this strategic shift.

We expect this transformation to take approximately 12 months to complete. After the transformation, we expect Altira to emerge as a stronger, higher-margin, more stable property in the portfolio.

In the Greater Bay Area, Melco International, our Hong Kong-listed parent company, recently announced they will build a theme park in Zhongshan City as part of a larger mixed-use property development with a local partner. The theme park is in alignment with the central

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JULY 27, 2021 / 12:30PM GMT, Q2 2021 Melco Resorts & Entertainment Ltd Earnings Call

government's desire to develop non-gaming assets in the area. The theme park and potentially other components of the overall development is expected to use Melco Resorts' IP, which represents an excellent opportunity to highlight our brand in Guangdong.

Turning to Cyprus. The construction progress of City of Dreams Mediterranean continues. 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.

In Japan, we remain committed to bringing a world-leading integrated resort there and continue to pursue opportunities within the market where we remain actively engaged with our partners. COVID continues to present challenges for the country in terms of process timing and travel, but the development of the integrated resorts industry in Japan has continued to move forward. We remain convinced that Japan represents the best potential new gaming market globally and that the quality of our assets and our focus on premium segment is a great fit for the country's tourism development. We remain patient and continue to maintain our disciplined approach with respect to all development activities, including in Japan.

Finally, I remain optimistic in Melco's medium- and long-term growth prospects. I am encouraged by the normalization of travel restrictions for all Guangdong visitors.

Meanwhile, our balance sheet and liquidity profile have improved, thanks to recent debt financing activity and improvement in our operating environment. In my view, Macau remains the most attractive integrated resort market in the world. We will overcome these near-term challenges and build towards a greater future.

With that, I turn the call over to Geoff to go through some of the numbers.

Geoffrey Stuart Davis Melco Resorts & Entertainment Limited - Executive VP & CFO

Thanks, Lawrence. In the second quarter of 2021, we reported group-wide property EBITDA of approximately $79 million, while luck-adjusted property EBITDA came in at $91 million. On a sequential basis, this represents a 69% increase in our luck-adjustedgroup-wide property EBITDA.

At COD and Altira, EBITDA was negatively affected by an unfavorable VIP win rate by approximately $13 million and $6 million, respectively. A favorable VIP win rate positively affected EBITDA at Studio City and COD Manila by approximately $2 million and $5 million, respectively. On a consolidated basis, overall results were negatively impacted by approximately $12 million. Details of these adjustments can be found in the supplementary earnings slides posted on our Investor Relations website.

During the second quarter, we incurred one-off expense items that impacted our property EBITDA for our Macau properties.

In May, we launched the Thinking of You special leave program, which allows employees to take time off over 6 to 18 months at the trade-off of a reduced base salary. The Thinking of You program reduces our overall salary expense over its duration, but accounting standards require us to take a front-loaded $14 million charge in the second quarter that affects property EBITDA. We note that subsequent periods would be offset by reduced staff expenses.

Also in May, we launched the New Chapter program, which is a voluntary exit scheme whereby Melco provides one-off compensation for colleagues exiting the company. We will incur a charge of $14 million from the New Chapter program for the second quarter that is reflected in the property charges and other line of our financial statements.

Turning to our balance sheet. In May, Studio City utilized favorable market conditions to tap the 5% senior notes due 2029 for an additional $350 million. The tap was priced at 101.5% of par, which equated to a yield to maturity of 4.76%. The transaction increased Studio City's liquidity and extended its weighted average debt maturity profile. The proceeds will be used to partially fund Studio City Phase 2 CapEx and for general corporate purposes.

At the end of June, we had approximately $1.8 billion of consolidated cash on hand. When combined with our undrawn revolver facilities

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JULY 27, 2021 / 12:30PM GMT, Q2 2021 Melco Resorts & Entertainment Ltd Earnings Call

in Macau and Manila of approximately $2 billion, this implies available liquidity of approximately $3.8 billion.

To provide more clarity on our capital structure, Melco, excluding its operations at Studio City, the Philippines and Cyprus, had cash of approximately $740 million and gross debt of approximately $4.1 billion at the end of the second quarter of 2021.

As we normally do, we'll give you some guidance on nonoperating line items for the upcoming third 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 $90 million to $95 million, which includes finance lease interest of $7 million relating to City of Dreams Manila and $8 million to $10 million of capitalized interest.

That concludes our prepared remarks. Operator, back to you for the Q&A.

QUESTIONS AND ANSWERS

Operator

(Operator Instructions) First question comes from the line of Billy Ng of Bank of America.

Hay Ling Ng BofA Securities, Research Division - Research Analyst

Okay. I have a couple of questions. The first question is, just want to get a sense of what's happening on the ground recently. From the data that we received, it looks like in the last three weeks, Macau has been recovering. But as you may know, like there another outbreak in China right now, have you seen that has already had any impact on our booking or daily traffic? Or anything that you can share will be really appreciated.

Lawrence Ho Melco Resorts & Entertainment Limited - Chairman & CEO

Billy, it's Lawrence here. So as you said, ever since the Guangdong mini-outbreak has been under control in the last few weeks, we've seen very strong visitation in conjunction with the summer holiday period. But in terms of the -- another minor outbreak in Nanjing that's currently happening, maybe I hand it over to David.

David Ross Sisk Melco Resorts & Entertainment Limited - COO of Macau Resorts & Property President of City of Dreams-Macau

Sure. Thanks, Lawrence. So far, Billy, we've really not seen much of an impact from the most recent outbreak. Obviously, June when we had the issues, things slowed down dramatically for us. But boy, we really got back on track when we got to July. It was very strong. And anything after that first week of July, it seems just to get better with each passing week.

So, so far, no impact. I think part of it may be as well as we started to hit the school holidays. And as the school holidays come into play, more and more visitors are starting to come into Macau as well. So no impact. We're pretty happy with where the results are going.

Hay Ling Ng BofA Securities, Research Division - Research Analyst

And another question I have is regarding -- I think, Lawrence, you mentioned about the vaccination rate in Macau, which is quite encouraging. And -- but do you get a sense like 70%, I think, from Hong Kong government -- they mentioned 70% is kind of like the goal here and maybe that will lead to further border reopening. Do you get a sense that will be the same thing for Macau? And how confident do you think that once Macau gets to that number, we will see a bit more border normalization at that stage?

Lawrence Ho Melco Resorts & Entertainment Limited - Chairman & CEO

Yes. I think that is certainly what we hope for as well because from the get-go, Melco has been the most proactive in terms of having vaccination schemes and incentive programs for our colleagues because -- in order for the world to get back to normal, international to get back to what it was before, and most importantly, for Macau and our business for travel to ease with China.

Certainly, I think we need to hit close to herd immunity. And I think with the medical community around the world saying herd immunity is around 70% or now they're asking for potentially even higher because of the delta variant, anything that we can do to encourage our

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