Melco Resorts & Entertainment Ltd
NASDAQ:MLCO

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Melco Resorts & Entertainment Ltd
NASDAQ:MLCO
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Price: 5.95 USD -1.82% Market Closed
Market Cap: 2.6B USD
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Earnings Call Transcript

Earnings Call Transcript
2018-Q1

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Operator

Ladies and gentlemen, thank you for participating in the First 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 call is being recorded.

I would now like to turn the call over to Mr. Richard Huang, Director of Investor Relations, Melco Resorts & Entertainment Limited. Over to you, sir.

R
Richard Huang
Director of IR

Thank you for joining us today for our first 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'll now turn the call over to Lawrence.

L
Lawrence Ho
Chairman and CEO

Thank you, Richard, and hello, everyone. After several challenging quarters we have started seeing encouraging trends at our flagship property City of Dreams, which delivered over 8% sequential mass gaming revenue growth, driving group-wide property EBITDA to an all-time high of US$402 million.

We anticipate these positive trends to accelerate in the second half of the year, driven by the improving demand environment, completion of the Hong Kong-Zhuhai-Macau Bridge and most importantly, the opening of Morpheus.

We could not be more excited about our new openings, which will put an end to the first part of construction disruption at COD. Especially, on our main gaming floor. It will also give COD the most spectacular offering Macau has never seen to attract premium customers.

Melco has always aspired to be a leader in everything innovative and luxury. Our leadership position in the premium market was recognized by the 2018 Michelin and Forbes Travel Guide, which rated us as the operator with the most Forbes Star award and the most Michelin-starred restaurants in Asia.

The opening of Morpheus will allow City of Dreams to expand its dining and entertainment offering, which should help widened its lead over the competitive competition. The 70% increase in luxury hotel rooms from the opening of Morpheus will also enable City of Dreams to more aggressively acquire and retain gaming premium gaming patrons, which is key to driving future mass gaming revenue growth.

In addition to expanding our footprint, it is critical to continue to inject freshness into our resorts. That includes redeveloping the Countdown into a luxury hotel concept that better fits the overall positioning of COD. Additionally, and separate from the refurbishment of the Countdown, we have identified over a US$100 million of targeted enhancement CapEx in the next 12 months to upgrade the gaming areas and the non-gaming attractions at both COD and Studio City, which is aimed at maintaining the longer-term competitiveness of these two resorts.

Looking further out, we have received Macau government approvals to extend the development dead line of Studio City Phase II to July 2021 enabling us to continue to develop a detailed design for the Phase II expansion, which offers a significant point of differentiation from our Macau competition.

Moving onto the Philippines. COD Manila continues to enjoy robust year-over-year growth across all gaming segment. The 44% year-over-year increase in mass stable GGR was particularly encouraging. Highlighting the strong growth potential in the Philippines gaming market and our commitment to drive high quality earnings.

Finally, in Japan, we believe the Japanese government is diligently making progress towards the passage of the IR Implementation Bill, which suggests that the license bidding process could start in 2019 or in 2020. Our Japan team has been actively engaging potential 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 Macau - Japan to realize the vision of developing world leading IRs with unique Japanese touch.

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

G
Geoffrey Davis
CFO, Executive VP & Treasurer

Thank you, Lawrence. I would like to start by reminding you all today that similar to our peers new accounting standards in relation to revenue recognition have been implemented starting with the first quarter of 2018, which will result in lower net revenues and higher EBITDA margins. At a high-level, the two primary changes are the elimination of promotional allowances, which will now offset reported casino revenue and 100% of junket commissions will also offset casino revenue.

We're happy to discuss the details of this accounting standard change offline after the call. In our earnings release, the first quarter 2018 figures are presented under the new revenue recognition rules, while the historical first quarter 2017 figures are presented under the prior rule i.e., no restatement for the 2017 numbers.

Moving onto the highlights of our first quarter results. We reported record group-wide property EBITDA of approximately 402 million in the first quarter of 2018 increasing by 14% from the first quarter of 2017, while luck-adjusted property EBITDA increased by 17% on a year-over-year basis to approximately $403 million.

In other words, there was no material impact from luck in the first quarter of 2018 on a consolidated basis. At the property level, an unfavorable VIP win rate negatively affected EBITDA at COD Manila by approximately US$6 million. At Altira, EBITDA was positively affected by a favorable VIP win rate by approximately US$4 million.

In the first quarter, the luck-adjusted property EBITDA margin in Macau was approximately 30% up from 29% in the prior quarter and up from 27% in the first 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.

Despite the recent resurgence in VIP, 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 and driving group-wide EBITDA and EBITDA margins.

In the Philippines, COD Manila delivered to luck-adjusted EBITDA of approximately 64 million representing an increase of 18% year-over-year. The luck-adjusted EBITDA margin expanded by approximately 300 basis points quarter-over-quarter, an increase by approximately 210 basis points year-over-year to 44%. Again these are all apples-to-apples comparisons reflecting the new accounting standards.

You may have noticed a rather steep sequential reduction on our corporate expense line from 4Q '17 to 1Q '18. Our bonus payments to executive management are discretionary and are designed to reflect overall company performance and aligned senior management with shareholders. Therefore to reflect our relative under performance in Macau in 2017, we have reversed our bonus accrual from the fourth quarter of 2017 by approximately 6 million. This reversal was taken in the first quarter of 2018 and reduced our first quarter corporate expense by the same amount.

Moving onto capital management. The board has recently approved a new $500 million share repurchase program, which is consistent with our strategy of returning excess capital back to shareholders. To provide more clarity regarding our capital structure within our core or wholly-owned group, we had cash of approximately 650 million and gross debt of approximately 1.4 billion at the end of the first quarter of 2018, excluding Studio City and 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 135 to 140 million, including approximately 45 million at Studio City. Corporate expense is expected to come in at approximately 30 million to 31 million and consolidated net interest expense is expected to be approximately 60 million, which includes financed lease interest of 10 million relating to City of Dreams Manila and 12 million of capitalized interest.

For those that follow City of Dreams Manila more closely, our building lease payment for the first quarter of 2018 was approximately US$9 million.

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

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Joe Greff from JPMorgan. Please ask your question.

J
Joseph Greff
JPMorgan

Hello everybody. Excellent results. Congratulations.

R
Richard Huang
Director of IR

Thanks a lot, Joe.

J
Joseph Greff
JPMorgan

I was hoping you can just you know go a little bit deeper on some of the changes that you have made at City of Dreams Macau, and obviously the mass performance that we saw in 1Q is encouraging relative to the last couple of quarters. Can you talk specifically what changes maybe you're making on the player development incentive side? And then I'm presuming month three in Q1 was better than month two, and month two was better than Q1.

So your performance maybe even understated then and that like coming out of the quarter where the share is presently? And then maybe you can talk a little bit about that, and then I'm presuming, look forward to comment in terms of the sustainability of some of these trends changes and encouraging results so far in April that you have to do?

L
Lawrence Ho
Chairman and CEO

Hey, Joe. It's Lawrence here. Let me hand the ball over to David to go through the detail because, I think, from my perspective, David, has done a great job in rallying the team together on the common goal of getting better, but why don't we let David talk about some of the changes that he has made.

D
David Sisk
Property President, Studio City

Sure. Hey, Greff. So it's a variety of things. It's never just one thing you do, but first off, we've got great people, we've got a great marketing team, we've got a great operations team. I think when we brought that we talked about this on the last call a bit that we brought the new leadership team in, which we really part of the old leadership team.

I've got sales people that are happy, that are engaged, that are very focused now, while we still maintain a high level of accountability. We've also seen an increase in terms of the players that we used to have they will come back, they have increased through levels of the play. We put in new marketing programs at a more tailored and individualized to these players.

And then lastly, we constantly are going through and looking at how we can optimize our gaming for. And it's a focus for us every day that we're out there looking how we can improve our performance, but the team is very, very focused, the team is very engaged, and we share a lot of data now. So people will understand what we need to do and where we need to go.

J
Joseph Greff
JPMorgan

Okay.

L
Lawrence Ho
Chairman and CEO

Joe, this is Lawrence. So I think, at the same time, thought. I think you can't underestimate the construction disruption that we're experiencing at City of Dreams. Before Morpheus opens up, there is a significant work being done on the main gaming floor to make the whole property flow. So I think this quarter and what we've seen - it is - it's not easy. I think if people are coming to Macau over the next two weeks for G2E.

You will see that right before Morpheus opens up. It's getting more difficult to get around on the property. But at the same time, David and the team have done an excellent job in terms of keeping people in-house and redirecting them to various parts of our property.

J
Joseph Greff
JPMorgan

Great. And do you have a hard date yet that you're circling for the Morpheus Star opening?

L
Lawrence Ho
Chairman and CEO

We're - I think we plan on announcing that in the next couple of weeks, but it's certainly going to be in the first half and I think a lot of it. We're currently going through government licensing. So of course, everything is going to be dependent on that. So will be giving all the date fairly soon.

J
Joseph Greff
JPMorgan

Great. And then my last question with respect to Phase II at Studio City. Can you give us some sense of cost, there were CapEx ranges and the timing there and then $100 million of CapEx that you talked about for COD and Studio City that's outside of the Phase II. If you can help us there, we're good to go. Thank you.

L
Lawrence Ho
Chairman and CEO

Yeah, I think, the 100 million of CapEx it's outside of Phase II, as we talked about, we have done a lot of work to improve the overall COD experience and at the same time, I think, ever since Geoff Andres has joined us. We have also continued to identify areas to improve and optimize underutilized areas at Studio City.

So that 100 million is really for that. In terms of Phase II is a bit too early to say because we are still discussing with our minority investor on that project to build consensus in terms of - we think what we have come up with in the concept is extremely strong and excited about it, but I think we just need to work through the details with our minority investors.

J
Joseph Greff
JPMorgan

Thank you.

Operator

Thank you. The next question comes from the line of Billy Ng from Bank of America Merrill Lynch. Please ask your question.

B
Billy Ng
Bank of America Merrill Lynch

Hi, good evening, and congratulations on a very strong set of results. I have two questions. The first question is related to Japan. And Lawrence, would you mind to elaborate a little bit more your strategy in Japan given that the government already submitted the bill to the diet and it becomes a bit more clear that they are focusing on three locations, maybe if you can talk about your preference or overall strategy there?

And then the second question, just some housecleaning question. Just wondering, during the quarter, if there is any one-off items or any bad debt reverse goes or any bad debt write - significant bad debt write-down anything that we should pay attention to.

L
Lawrence Ho
Chairman and CEO

Hey, Billy. So I'll take the first question. I think on the second question, Geoff, can give you the details. As we've been very focused on Japan of many, many years and outside of Macau, it is the greatest opportunity in our lifetime. And, I think, for us, we have been very focused on the major cities, and I think the exact locations haven't been decided. But I think the direction is that potentially two major cities and one regional city.

I think frankly the opportunity is so great that we're going to go for all of them, but of course the preference is to be in the major cities because ultimately Melco is about building something premium, luxury and the major cities have more access to a much larger number of potential tourist to cater for the offering that we're going to build, but I think at this stage, it's still early days because the bill is going to be submitted to the diet hopefully it gets passed in this diet session or within the year.

And as I said, in the prepared remarks hopefully bidding will start sometime in 2019 and 2020. So I think, over the next two years a lot more information, a lot more details will be - will be unveiled. And I think on the second question, Geoff, please.

G
Geoffrey Davis
CFO, Executive VP & Treasurer

Yeah, so Billy we already talked about one of them as the reversal of the bonus accrual that benefited first quarter corporate expense by roughly US$6 million. And then on your question on the bad debt reversal. We're on bad debt. We had a reversal in the first quarter of 3 million and that compares to about $10 million reversal in the fourth quarter of last year. So we had quite a bit of headwind in that respect.

B
Billy Ng
Bank of America Merrill Lynch

Thank you. Thanks a lot.

Operator

Thank you. The next question comes from the line of Karen Tang from Deutsche Bank. Please ask your question.

K
Karen Tang
Deutsche Bank

Hey, guys. It's Karen here. My question is regards to Morpheus. Maybe, Lawrence, you can give us a pace of what it would be like and previously you mentioned that it would be like a relaunch of City of Dreams Phase 2. So maybe you can give us a little sense of how it would be like with the new hotel tower and potentially gaming? Thank you.

L
Lawrence Ho
Chairman and CEO

Sure, Karen, maybe I'll give my thoughts and then David can fill in on the details, but - we've been working on Morpheus for quite some time and what we wanted to do is create an architecturally iconic building. We've always been very focused on awards in Forbes and Michelin and we really wanted Morpheus to take that to a whole new level. And at the same time help us relaunch COD, so that it is, it will feel new and fresh and it is the most stylish property in town.

So but in terms of the details, I think, ultimately, we're waiting for the Macau government to see if we would get any tables. But even if we don't get any tables, we feel that the offerings is so strong that it will help the overall business environment for us, I think, on that maybe I'll hand it off to David.

D
David Sisk
Property President, Studio City

Sure. Hi, Karen. So I think, one of the big things about this is the team is incredibly excited to have this new product to sell and this product, I think, is going to be really stunning for the market and really takes the market by a storm here. I think, if you kind of look at not only the room, the suites, but just when you go into the lobby areas or the atrium area and just the way the space envelopes you. It's going to be pretty stunning for the market.

The teams are also very excited about some of the new gaming space. It also will come with this in terms of the space that will come in our VIP area as well as the new signature gaming space that is being done in conjunction with this on the main gaming floor. We just opened up recently our new signature space for slot which has been incredibly well received. We think the table game space that we're going to open up, at the same time, Morpheus opens up, is going to offer that same level of impact and really re-energized and really get our players really excited as well as our marketing team.

K
Karen Tang
Deutsche Bank

Excellent. Looking forward to visiting it in a couple of months. Thank you.

L
Lawrence Ho
Chairman and CEO

Looking forward to having you.

Operator

Thank you. The next question comes from the line of Harry Curtis from Nomura Instinet. Please ask your question.

H
Harry Curtis
Nomura Instinet

Good morning. First of all condolences on your bonus, but I would guess that will be reversed in the next 12 months, so don't despair. The question I had for Lawrence and David the surprise overall and GGR has been the acceleration in mass. And is it simply capacity driven much like Vegas was back in the mid-90's when exciting new product came in or are there other factors that work. What do you think?

L
Lawrence Ho
Chairman and CEO

David, you want to?

D
David Sisk
Property President, Studio City

Sure, look, I think, it's a bit of both honestly. Obviously, capacity new product coming in the market. Much like we always see in Las Vegas when the new product come in would have a tenancy to grow the overall market and make it much more, much more competitive, but also better for the players who they came in, but I also think in terms of that the players have a level of expectation now and the players are getting much more sophisticated, so they're demanding more and more promise whether that would be from the service or from the product itself. So again, it's both.

H
Harry Curtis
Nomura Instinet

All right. And my second question maybe Geoff can just walk us through the pace of total CapEx including maintenance CapEx this year and next?

L
Lawrence Ho
Chairman and CEO

Sure, Harry, so for the remainder of this year, we've got about 475 million remaining of CapEx, total CapEx and then that number drops down in 2019 to approximately 250 million and then in the out years, we've identified more in the 150 million range. That does not include any CapEx for Studio City Phase 2 however.

H
Harry Curtis
Nomura Instinet

Okay. And so given the amount of CapEx remaining for this year. The announcement of the $500 million repo. Is that do you feel that you've got room to do both this year?

L
Lawrence Ho
Chairman and CEO

The board authorization was really meant as a standard and operating procedure for us to have that in place for our ability to be opportunistic and to be able to move quickly. That being said it really doesn't change our focus of returning capital to shareholders through the ordinary dividend as the primary avenue. So we have multiple tools on our tool belt, but and we would certainly look to deploy capital via share repurchase, but we've listen to our shareholders and for the most part the feedback that we've received is a preference for ordinary dividends, so that's really where we put the focus of our attention.

H
Harry Curtis
Nomura Instinet

Okay, very good. That's it from me. Thank you.

Operator

Thank you. The next question comes from the line of Ming Tan from Barclays. Please ask your question.

J
Jit Tan
Barclays

Hi. Good evening, guys. Thanks for the call. Couple of questions from me here. [indiscernible].

L
Lawrence Ho
Chairman and CEO

Sorry, Ming, we don't mean to interrupt, but we can barely hear your question. Can you?

G
Geoffrey Davis
CFO, Executive VP & Treasurer

A lot of background noise.

R
Richard Huang
Director of IR

I believe you are using a speaker phone to ask a question, which is a bit far away from you.

J
Jit Tan
Barclays

All right. Sorry.

R
Richard Huang
Director of IR

Can you use the headset phone. That would be clear. Thank you.

J
Jit Tan
Barclays

Yeah. So okay, maybe is it better?

L
Lawrence Ho
Chairman and CEO

Yeah, it's better now. Thank you.

J
Jit Tan
Barclays

Okay, sorry about that. So my first question is, with regards to COD. I mean the - when I look at the earnings for the quarter, and if I look at the challenges from the construction of Morpheus. You also talked a bit about the impact of competition from the neighbors. That's my first question. The second question is with regards to Studio City. We talked about Phase 2 and - we are in talks with our minority shareholders.

Can you, to the extent possible, can you talk a bit about the potential funding for the Phase 2. And in that regard, to the extent, can you talk about the IPO application that works well. So as a fact that your minority shareholder's funds expire next year?

L
Lawrence Ho
Chairman and CEO

Sure, I think, on the first, Ming, on the first question, I think, when we first built City of Dreams over 10 years ago we always knew City of Dreams was the best location in a sense that it's in the middle of everything, that's right between Venetian and Wynn and MGM and Sands Cotai Central, but I think since our last quarterly call MGM has opened up.

And, I think, longer term, MGM is having more properties and having more neighbors is going to improve the cluster effect and benefit us quite a bit, but to be honest, the first month and a half of MGM we've really haven't seen any significant changes for our business for better or worse, but I think longer-term will be great for traffic. I don't know, David, you want to?

D
David Sisk
Property President, Studio City

No, I think, Ming, I think, Lawrence kind of covered it, but clearly we were happy to have neighbors. I think the more products around us, the more people around us. We think we're the beneficiaries given where we're positioned for that business coming across the street, whether it would be from Wynn Palace or from MGM or coming across Venetian or Sands Cotai.

So we love our location. We are well positioned on those counts. But as Lawrence said we've not really seen any impact one way or the other from the business that's going on over at MGM to our business at COD.

L
Lawrence Ho
Chairman and CEO

And on your second question, Studio City Phase 2, is I guess the discussion with our minority shareholders is ongoing and it's probably too early, I think, Geoff, it's too early to review the concept or the potential investments surrounding it, but.

G
Geoffrey Davis
CFO, Executive VP & Treasurer

Correct. And regarding the IPO, at this point, we don't have any updates for investors beyond what was included in the August public release. We'll provide public updates when appropriate, and to the extent permitted by US Securities Laws and, I think, following under that sensitivity discussions of funding plans going forward as well. And on your last question regarding minority shareholder what their plans are, and how that might be impacted by some of their outstanding debt instruments, I think, that's an area where we just can't comment on their behalf.

J
Jit Tan
Barclays

Okay. Thank you so much.

Operator

Thank you. There are no further questions at this time. I would like to hand the conference back to the management. Please go ahead.

R
Richard Huang
Director of IR

So thank you for participating in our conference call today. We look forward to speaking with you again next quarter.

Operator

Thank you. Ladies and gentlemen that does conclude our conference call for today. Thank you for your participation. You may all disconnect the lines now. Thank you.