Melco Resorts & Entertainment Limited (NASDAQ:MLCO) Q3 2023 Earnings Call Transcript

Melco Resorts & Entertainment Limited (NASDAQ:MLCO) Q3 2023 Earnings Call Transcript November 7, 2023

Melco Resorts & Entertainment Limited misses on earnings expectations. Reported EPS is $-0.04 EPS, expectations were $0.02.

Operator: Ladies and gentlemen, thank you for standing by in the Third Quarter 2023 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-session. Today’s conference call is being recorded. I would now like to turn the call over to Ms. Jeanny Kim, Senior Vice President, Group Treasurer of Melco Resorts & Entertainment Limited. Thank you. Please go ahead.

Jeanny Kim : Thank you, operator, and thank you, everybody, for joining us today for our third quarter 2023 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’ll turn that over to Mr. Lawrence Ho.

Lawrence Ho: Thank you, Jeanny. Macau’s recovery continued to grow from strength to strength into the third quarter of 2023, especially during the summer months with our property visitation and casino player hours benefiting from this growth. We had solid performance over the October Golden Week and saw a robust recovery during the remainder of October, with GGR excluding junkets reaching close to 2019 levels. Both gaming and non-gaming revenues improved, and this was reinforced by our commitment to invest in world-class entertainment and enhance our non-gaming amenities. Our market-leading design standards were recognized last month by Prix Versailles with Morpheus being the only hotel in Macau to have the honor of being included as one of the World’s Most Beautiful Hotels.

Studio City has been the center of entertainment for us in Macau. The opening of Phase 2, the addition of the Epic Tower and W Macau hotels, the Residency Concerts and an ongoing schedule of events drove gaming volume and contributed to a 65% increase in adjusted property EBITDA quarter-to-quarter. We expect further growth in Studio City as Phase 2 continues to ramp up. In the Philippines, City of Dreams Manila continues to generate solid earnings with a strong margin profile. City of Dreams Mediterranean and Cyprus have been severely impacted by the conflict in Israel. Our teams are working on realigning our marketing strategy there. With that, I turn the call over to Geoff to go through some of the numbers.

Geoffrey Davis : Thanks, Lawrence. Our group-wide adjusted property EBITDA for the third quarter of 2023 was approximately $281 million. Luck-adjusted group-wide property EBITDA for the third quarter of 2023 came in at $291 million. A favorable win rate had a positive impact on COD Manila of around $9 million, while in Macau, unfavorable win rates at COD and Studio City had a negative impact of approximately $19 million. Details of these adjustments could be found in the supplementary earnings slides posted on our Investor Relations website. Macau OpEx increased to approximately $2.5 million per day in the third quarter of 2023 from approximately $2.4 million per day in the second quarter. The increase in OpEx was largely due to the addition of full-time employees across our properties, including the opening of the W Macau in September and increased marketing costs.

Despite the increase in cost, our EBITDA margin increased slightly quarter-to-quarter. Turning to our balance sheet. We continue to focus on reducing debt and deleveraging. We repaid $100 million in debt during the third quarter of 2023 and repaid another $100 million at the end of October. We currently have approximately $1.2 billion drawn on our RCF, which gives us around $750 million of undrawn and available committed revolving credit facilities. We will continue to closely monitor our free cash flow, which will drive further debt reduction. As of September 30, 2023, we had around $1.5 billion of consolidated cash on hand. Melco, excluding its operation that Studio City, the Philippines and Cyprus accounted for around $800 million. Of this, approximately $125 million was restricted as collateral required for the concession-related guarantees issued to the Macau government.

As we normally do, we’ll give you some guidance on non-operating line items for the upcoming fourth quarter of 2023. 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, and consolidated net interest expense is expected to be approximately $130 million. This includes finance liability interest of around $7 million relating to fees payable in relation to the Macau gaming concession and the Cyprus gaming license and finance lease interest of approximately $6 million relating to City of Dreams, Manila. That concludes our prepared remarks. Operator, back to you for the Q&A.

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Q&A Session

Operator: [Operator Instructions] First question comes from the line of George Choi of Citi.

George Choi : I have a couple of questions, if I may. Firstly, how should we think about OpEx installation in Macau going forward? I mean although naturally, the favorable VIP, mass GGR ship means that there will be a boost to margins. Should we be worried about inflation in marketing costs, player with investments or costs for upgrading nongaming offerings, including concerts? And I have a second question and that’s about — is regarding the latest GGR trends. The share prices in Macau seem to be reflecting investors concerned about the sustainability of GGR and EBITDA recovery in Macau. Do you guys see any signs of moderation in gaming demand and non-gaming revenues? That’s all for me.

Lawrence Ho: George, it’s Lawrence. Thanks for the question. I think why don’t I address the second question, first, and then we’ll have Geoff talk about the first question, and maybe David can supplement on that as well. On the second one, obviously, we’re feeling good about Macau. And travel and tourism is the leading sector in China right now. I think after 3 years of being not being able to travel during COVID, people are coming to Macau in force. And we have seen that, October was the best months in Macau and also the best month for us since the reopening. So we’re feeling very good. And even the rest of October has been good. It has not been soft and November has started off strong as well. So we’re not concerned about it.

Of course, we understand the investor appetite over the last 6 months of the year and the so-called China risk or decoupling, that’s something we can’t control. And we — all we can do is really put our head down and make sure that we continue to deliver the earnings. I think on the first question, maybe I’ll hand it off to Geoff.

Geoffrey Davis : Thank you, Lawrence. I’ll take the first part of the first question. So on OpEx, we came in at about $2.5 million in Macau for the third quarter, in line with the guidance that we had provided on the second quarter call. We anticipate in the fourth quarter that number looking more like $2.6 million. And then as we think about how that could change going into next year, the one thing I would highlight is the reopening of The House of Dancing Water show. And that would add about 0.1 per day when that happens. Other than that, subject to decisions in respect to other entertainment, et cetera, et cetera. I think that’s a pretty solid run rate.

David Sisk : So I think the only other thing I’d probably add to that is, as you look at some of the nongaming attractions and amenities that we have, including House of Dancing Water coming back, we have started to advertise a little bit more in market more in, let’s say, Hong Kong or in China to, again, let people know we have these assets out there. So that’s been a bit of a change that we didn’t have before as much other than House of Dancing Water. So those concerts, those attractions that we have, that will continue. But I think we will still stay within the number and the guidance that Geoff just gave you.

Geoffrey Davis : And in respect to our savings initiatives that were a key focus during the COVID years. No change in our guidance there. We still anticipate that 20% to 25% of those savings would be permanent. We’d endeavor to make sure that they remain intact going forward, with that inherent margin benefit starting to show through, along with operating leverage going into next year as we continue to drive the business and drive incremental operating cash flow.

Operator: Next question is from the line from Joe Greff of JPMorgan.

Joseph Greff : Lawrence, just going back to your comments about Golden Week and then the subsequent period in October and being close to 19%, excluding the junket business, does that imply EBITDA in October was, at least on a hold-adjusted basis in excess of October ’19 levels?

Lawrence Ho: Maybe I’ll let Geoff.

Geoffrey Davis : Yes, I think we had provided some guidance in the past that we would need to see mass and slots and non-junket business return to something more in the 115% range to be at par or parity with 2019 or pre-COVID EBITDA.

Joseph Greff : Okay. And then just a broader question. Can you just talk about either your levels or where you think the market is in terms of premium mass reinvestment levels, how does that compare to levels in 2019? Is that slightly elevated?

Lawrence Ho: Maybe, David, can talk about that.

David Sisk : Sure. So Joe, I think what we’ve seen a little bit now as this has kind of come out of the, let’s say, out of the COVID period, we’ve seen a lot more marketing going on, whether that be with some of the other concessionaires relative to their new, let’s say, new hotel rooms or other new assets that they’ve got — brought on — that have been brought online. Additionally, as we’ve kind of seen a shift in the business where right now, it’s very much a premium mass market-driven economy basically. What we’re seeing is there’s more comps related to that. So the reinvestment rates have climbed a bit. That doesn’t mean that as we see more of that mass, mass kind of coming back and kind of a smoothing out of things as a lot of these new product comes online in the market that we don’t see a return back to, let’s say, more of what we saw in the fourth quarter or throughout 2019.

But for right now, it is a bit more elevated than we’ve seen in the past. And again, it’s for the reasons I just mentioned.

Joseph Greff : Got it. And then David, the mass market table game hold percentage at COD in the third quarter was 32.1%. Do you look at that as sustainable, as normal or do you think of that as sort of the mix between premium mass and mass as something that’s outside the range of a normal mass against hold percentage.

David Sisk : No. I think we’re within the normal range of mass table game from a whole percentage. What we haven’t seen yet is kind of that complete mass, mass coming back to kind of smooth things out a little bit. But I think we’re within our normal range there, might be a little bit higher sometimes. But again, we’re probably on that, let’s say that 31% to 33% like we’ve talked about before, but we’re right within that normal range.

Operator: Next question comes from the line of Ricardo Chinchilla from Deutsche Bank.