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Melco Resorts & Entertainment Limited (NASDAQ:MLCO)
Q4 2020 Earnings Call
Feb 25, 2021, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for participating in the fourth quarter 2020 earnings conference call of Melco Resorts & Entertainment Limited. [Operator Instructions]

I would now like to turn the call over to Mr. Timothy logic. Thank you. Please go ahead, sir.

Timothy Mazik -- Director

Thank you for joining us today for our fourth quarter 2020 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 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.

Lawrence Ho Yau Lung -- Chairman and Chief Executive Officer

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 governments' measure and prudent approach toward 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 operations, 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 removal of the remaining two cities on Macau's medium risk list, all quarantine restrictions were lifted for totaling from Mainland China to Macau. More notably, there are no quarantine restriction for those Mainland Chinese citizens who are returning from Macau. In Macau, while we continue to see improvements in our business volumes, 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 Melco'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, with our gaming on hospitality operations running on a limited trial run basis as authorized by PAGCOR. While there was a slip return of domestic gaming demand at Cyprus casinos in the third quarter of 2020, an increasing number of COVID cases led the Cyprus government to announce a second lockdown during the fourth quarter. This resulted in a partial closure of our casinos from November 13 and a full closure from December 1. Despite the global pandemic, Melco remains committed to its global development program. Our next major project in Macau is Studio City Phase two, where construction is ongoing. Upon completion, the Phase two expansion will increase Studio City's hotel room inventory by approximately 60%, with two new hotel towers offering approximately 900 luxury hotel rooms that.

Gaming phases will be expanded, and new nongaming attractions will also be added, including a cineplex, one of the world's largest indoor/outdoor water parks, fine dining restaurants and state-of-the-art MICE space. To further strengthen our competitive advantage in the premium mass segment in Macau, our upgraded work continue at City of Dreams. And the fully renovated Nuwa is expected to open at the end of March. We plan to close the cap down in the near to medium term, reducing the key count and transforming the tower into an all-suite five star product with a targeted reopening in 2023. The renovation as it sounds, will give us five star offerings across all towers at City of Dreams, further enhancing our position as the leading premium property in Macau. In Cyprus, 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, and also ampitheater, a family events recall, a variety of fine lining 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 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 Melco'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 transactions, enabling us to overcome near-term challenges while investing for the future.

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

Geoffrey Stuart Davis -- Executive Vice President and Chief Financial Officer

Thanks, Lawrence. In the fourth quarter of 2020, we reported groupwide 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 two 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 one zero three and a quarter of par, which resulted in an effective borrowing rate of approximately 4.9%. 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 forma 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 nonoperating line items for the upcoming 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 $94 million 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.

Questions and Answers:

Operator

[Operator Instructions] We have the first question from the line of Joe Greff from JPMorgan. Please go ahead.

Joe Greff -- JPMorgan -- Analyst

Good evening to you, guys. Thanks for taking my question. Lawrence, your tone today is probably, at least to us, is the most optimistic in at least a year. And your comments about your expectations for increased visitation in your term and 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?

Lawrence Ho Yau Lung -- Chairman and Chief Executive Officer

Sure. Joe, why don't I give like a high level, and I'll pass it on to David to give more of the details? Well, 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 from Mainland China, and beginning of March is always the major political concession 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 -- and I think a year ago, when we did this call, for the Q4 2021, we were the very first one 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 of those pieces together, and even today, there was a little bit of news that Taiwan has resumed its the route between Taiwan and Macau. So all of these little pieces added together, and I think the main thing we're seeing how strong the tail end of Chinese New Year was. I don't know, David.

David Sisk -- Chief Operating Officer, Macau Resorts and Property President, City Of Dreams, Macau

And Joe, a couple of things. I think one of the things, and as Lawrence mentioned, the tail end is the Chinese New Year. Going in, we had pretty low expectations on what was going to happen because of the restrictions that Macau put out there. As these restrictions started dropping, we -- just the arrival that came in for Chinese New Year was pretty incredible, much more than we thought was going to happen. And then the quality of that we saw at Chinese New Year. So we were seeing a buildup in the fourth quarter, then the restrictions starting to pointing out right after that first since in January, and we started seeing it kind of drop off. But how fast the return once those restrictions drop, and now that's why players started coming back.

As IVS comes back, and there's other pieces 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. You start seeing a lot more customers coming in Guangdong, in that region, which we haven't seen before. We also saw customers that we had in Singapore in our premium direct for at least a year. We know the demand is out there. The people want to come here. If these things continue to improve like we think they're going to, as the vaccine rollouts -- as the vaccines, rollout 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 turn the corner here.

Lawrence Ho Yau Lung -- Chairman and Chief Executive Officer

So -- and then, Joe, one more thing I'll add on to -- and David reminded me of something. And then speaking to various levels of the government, they all are very proactively talking to China and the relevant bureaus in terms of restarting the -- each panel for the visas, restarting group tours. So there's a lot of incremental positive that they're working on. And with the -- with COVID being under control in China, we do think that once visitation returns and it's easier for people to get into Macau, the appetite is definitely there, and we forward forecast losses.

Joe Greff -- JPMorgan -- Analyst

Okay. Thank you very much. Good quarter.

Operator

Thank you. We have our next question from the line of Billy Ng from Bank of America. Please go ahead.

Billy Ng -- Bank of America -- Analyst

Hi, good evening. Ang thanks a lot for hosting the call. And I think just wanted 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 -- your personal thoughts about, like, the following border normalization, timing of the following order of normalization, including the E-channel that you mentioned, Hong Kong, Macau reconnection and also, like, other type of users, including group travel and transit visa? What should we expect in terms of seeing a bit more relaxation? Will that be a bit, like, next couple of months or it will be more realistically, it's still three to six months away?

Lawrence Ho Yau Lung -- Chairman and Chief Executive Officer

Again, Billy, I think we were very -- we've been the most realistic, and for the last year, we probably feel like the most pessimistic and Debby Downer. But I honestly believe seeing how the vaccine roll 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 our business. So I think that's the key to restart. I feel like that the restarting some of the E-channel stuff -- and again, it's 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.

Hopefully, sometime in Q2, maybe end of Q2, we'll see some normalization. And Macau, Hong Kong and China has taken a very scientific approach. So even Hong Kong, which is about 20% -- over 20% of our business. I think Macau has clearly told Hong Kong that if they start having the health code, the thing that Macau and China is sharing right now, and 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 positive than negative.

Billy Ng -- Bank of America -- Analyst

Thanks. That's very helpful. And my second question, 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 that haven't been back for quite some time, and also they're 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 to spend a lot more? Or is 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.

Lawrence Ho Yau Lung -- Chairman and Chief Executive Officer

I think -- look, I'll let David go into the details. But I think we compare very favorably to Golden week, surprisingly, especially the last week. But...

David Sisk -- Chief Operating Officer, Macau Resorts and Property President, City Of Dreams, Macau

Yes, we definitely exceeded the goal of the Golden week in October of 2020. I think maybe a couple of things to take away. Obviously, this is being led right now because our premium segments, both our premium mass and our premium direct. We've not seen announcements return yet. You can see that obviously in the visitation numbers that the government had posted, but it's been on the premium. I think one -- maybe one other thing to take away from this is if you look at the room nights -- I mean we weren't sold out in our hotels. But if you look at our occupied room nights, I feel to the theoretical for room and the players that we had coming in, it's the best we've seen since the fourth quarter of 2019.

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 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. 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 have either canceled or have 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 a Chinese New Year, but it was much better than we've seen at the October globally, and we think there's again room for optimism as we go forward here. We know the customers want to come.

Billy Ng -- Bank of America -- Analyst

Thank you. Again, that's very helpful.

Operator

Thank you. We have our next question from the line of Praveen Choudhary from Morgan Stanley. Please go ahead.

Praveen Choudhary -- Morgan Stanley -- Analyst

Thank you. Hi, Lawrence, Hi, Geoff. 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, 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.

Lawrence Ho Yau Lung -- Chairman and Chief Executive Officer

He, Praveen, I didn't hear the question perfectly, but so 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 for Macau government, and I am 150% agreed 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 if -- and the definition in Asia and Greater China about controlling COVID is very different from the West. Controlling COVID in this part of the world is almost the elimination of it. In the West, I think it's always going to be like the cold or flu. So even though Macau -- I mean 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 corridor 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 bullet point, 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 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.

Praveen Choudhary -- Morgan Stanley -- Analyst

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 Geoff 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 opex number for fourth quarter versus third quarter. Is it -- 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 in the last three, four quarters have been a bit on the high side?

Geoffrey Stuart Davis -- Executive Vice President and Chief Financial Officer

Sure. So for the last one first, on our bad debt, 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 we'll begin to normalize that bad debt provision going into 2021 and over the course of 2021. I think your second question was on Macau opex, right?

Praveen Choudhary -- Morgan Stanley -- Analyst

Yes.

Geoffrey Stuart Davis -- Executive Vice President and Chief Financial Officer

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 -- 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 variable business-driven costs come back into the system.

Praveen Choudhary -- Morgan Stanley -- Analyst

And there was last question on cash flow from Manila.

Geoffrey Stuart Davis -- Executive Vice President and Chief Financial Officer

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 recharges, profit share, rental, etc, that is slightly less than breakeven.

Praveen Choudhary -- Morgan Stanley -- Analyst

Great. Thank you so much.

David Sisk -- Chief Operating Officer, Macau Resorts and Property President, City Of Dreams, Macau

It's on our way now. Yes. Thank you.

Operator

Thank you. We have our next question from the line of Simon Cheung from Goldman Sachs. Please go ahead.

Simon Cheung -- Goldman Sachs -- Analyst

Hi, everyone. Thanks for taking myq question. I have two questions. One, Lawrence, you sound quite optimistic. And given all the travel -- potential travel restriction relief, obviously, normalization is one thing. But I wanted to get a sense how you think about the pent-up, if you were to put a number reassessment of the pent-up demand? Will we see maybe some of the lots gaming demand would have like, what, 20% are 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 City Phase two? Are you having any flexibility to speed up the constructions and see whether you have any update on that as well? Thanks a lot.

Lawrence Ho Yau Lung -- Chairman and Chief Executive Officer

Simon, let me answer your second question first. So for Studio City Phase two, 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 continually working with the government on the development period given the COVID delays. So we're very happy with it. And if anything, the building is -- the two hotel tower's already up to seven floors. And so hopefully, by the end of 2021, before the end of 2021, we will top up the building, and we'll spend the bulk of 2022 doing all the interior fit out. 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.

So -- 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 floodgate 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'll see more of a segregation as well. And you see it right now, the premium segments are doing better. The media mass segments are doing as well because the sheer number of people allowed to come in isn't that high. And that's why within our own facility, you are seeing a divergence. City of Dreams is doing very well. City of Dreams Altira as well. So -- but I do think by the end of 2021, the market should be operating at close to, like, fourth quarter 2019 levels. So of course, other than the VIP segment, which is which is another story.

Simon Cheung -- Goldman Sachs -- Analyst

Okay. That's very helpful. Thanks for the insight. Appreciate it. Thank you.

Operator

Thank you. We have our next question from the line of Shane Ng from American Century. Please go ahead.

Shane Ng -- American Century -- Analyst

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.

Lawrence Ho Yau Lung -- Chairman and Chief Executive Officer

Thanks. Geoff, do you want to take that?

Geoffrey Stuart Davis -- Executive Vice President and Chief Financial Officer

Sure. Evan is here, if you have anything to add. We definitely anticipate -- without a specific number, 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 toward the tail end of last year. So with all of the factors that Lawrence has discussed, we absolutely believe that 2021 for the market and for Melco will be a rebuilding year as we see visitation and GGR ramp up.

Shane Ng -- American Century -- Analyst

Got it. Thank you.

Operator

Thank you. There are no further questions. I would like to hand the call back to Tim.

Timothy Mazik -- Director

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

Operator

[Operator Closing Remarks]

Duration: 33 minutes

Call participants:

Timothy Mazik -- Director

Lawrence Ho Yau Lung -- Chairman and Chief Executive Officer

Geoffrey Stuart Davis -- Executive Vice President and Chief Financial Officer

David Sisk -- Chief Operating Officer, Macau Resorts and Property President, City Of Dreams, Macau

Joe Greff -- JPMorgan -- Analyst

Billy Ng -- Bank of America -- Analyst

Praveen Choudhary -- Morgan Stanley -- Analyst

Simon Cheung -- Goldman Sachs -- Analyst

Shane Ng -- American Century -- Analyst

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