Thank you for holding, and welcome to the Galaxy Entertainment Group's management update for the 2nd quarter and interim results of 2021 conference call. Joining us today are Mr. Michael Mecka, GEG Board's Non Executive Director Mr. Robert Drake, Group's CFO Mr. Roland Toh, Senior Director of Strategic Planning and Mr.
Peter Kameny, Assistant Senior Vice President of Investor Relations. At this time, all participants' lines are in listen only mode. The presentation will be followed by the question and answer session and instructions will be provided at that time. I would now like to pass to Mr. Drake for presentation.
Mr. Drake, please go ahead. Thank you.
Thank you, operator, and greetings, everyone, and thank you for joining us for GEG's Q2 2021 results update call. The GEG team joining me here on today's call include Mike Meka, a member of the GEG Board of Directors Roland Toews, Senior Director of Strategic Planning and Peter Kiveny, Assistant Senior Vice President of Investor Relations. Copies of our media release, stock exchange announcement and PowerPoint presentation are available on our website, which also include our customary disclaimers. On behalf of our Chairman, Doctor. Louis, Frances Louis and the entire GEG family, we greatly appreciate everyone's continued contributions and sacrifices throughout the pandemic as well as our heartfelt sympathies to everyone globally who have been impacted by this crisis.
We are confident that the world, including Greater China, will successfully navigate through the ups and downs of the pandemic in the near term, where we remain upbeat and positive that brighter days are indeed ahead. As you know, Macau recently experienced more COVID-nineteen cases in early August, where the Macau government demonstrated yet again its ability to react incredibly swiftly to minimize public health and safety risks as they have throughout the entire crisis. We again salute the Macau government for its proactive, decisive and effective leadership during the pandemic. Despite sporadic outbreaks in Greater China in 'twenty one, Macau has demonstrated an ability to bounce back quickly in a choppy market, while at the same time supporting the all important public policies, which is certainly cause for optimism. No one ever said this would be easy or that the recovery would be like a light switch or a straight line.
As we have mentioned many times before, we continue to believe that the Macau market recovery will be gradual, managed and choppy in the near term, where the green shoots we spoke about last quarter are well positioned for continued growth and remain as confident as ever in its medium and long term future. To be clear, GED remains as committed as ever to the health and safety of the community, our team members and our guests, as well as the economic and social stability of Macau, where the continued containment of the virus remains the highest priority. Let's move on to our Q2 2021 performance, where our effective cost control efforts introduced throughout 2020 continue to yield results in a gradually improving, but choppy revenue environment, while at the same time, we continue to make progress with our enhancement projects at our existing properties as well as with our game changing Phase 3 and Phase 4 development projects in Cotai. GEG's Q2 2021 EBITDA improved by $2,500,000,000 year on year from a $1,400,000,000 loss in 2020 to a positive $1,100,000,000 in 2021 and grew 32% sequentially. The group also played lucky in Q2 2021, which benefited EBITDA by $74,000,000 and as a reminder, also played lucky in Q1 2021, which improved EBITDA by $169,000,000 and modestly lucky in Q2 2020.
If you adjust the walk, normalized EBITDA grew 53 percent quarter on quarter to $1,100,000,000 and also improved significantly versus prior year's $1,400,000,000 loss. We mentioned earlier that there was some cause for optimism during a choppy second quarter, and that is our mall operations, which delivered an all time record performance. This is certainly an important KPI, which indicates strong demand and bodes well for an overall market recovery. We also continue to work hard at leveraging our cost structure as business gradually improves. To that end, our Macau OpEx burn rate has declined by 30% from approximately US3.4 million dollars per day under normal operating conditions, but ticked up very modestly to the US2.4 million dollars marked in Q2 2021, even as business ramped up where we are certainly generating operational leverage.
We would like to pause here like we have previously and make a very important point on fiscal management, especially during these challenging times. We certainly acknowledge that OpEx burn rate is an important part of the expense equation, but there is certainly more to the overall cost picture than that. Daily cash burn is more indicative of the cost structure as it includes interest expense. We are very fortunate that we are the only concessionaire in Macau that generates net interest income, not interest expense. In fact, our net interest income also remained virtually unchanged in Q2 2021 at approximately US300000 dollars per day.
We deducted US300000 dollars per day of interest income from the US2.4 million dollars per day in OpEx burn to get approximately $2,100,000 per day in cash burn, excluding CapEx. It's a powerful example of how conservative balance sheet management really pays in the balance sheet periods in general, and in our case, significantly differentiates us from the competition, as well as contributes to making prudent decisions, which are in the long term best interest of the company. And just for the record, we will be the only concessionaire in Macau to report positive NPAS for the first half of twenty twenty one. We would like to thank everyone on the GEG team as well as our valued suppliers who continue to support the company in these difficult times by contributing to our cost management program. Everyone's support has truly been inspiring.
We have also contributed 1,000,000 of dollars to the COVID-nineteen relief efforts to support the community as we previously reported, including most recently to the Henan flood relief efforts in China. Let's move on to our development update beginning in Cotai, where we continue to invest in Macau as well as Galaxy's future. You may recall that back in early March 2021, we announced that we will be welcoming a course legendary grapples brand to Macau with raffles at Galaxy Macau, which will feature a 450 all suite tower and is targeted to open in early 2022. We intend to follow this with the opening of the Galaxy International Convention Center and Andaz Macau in anticipation of the recovery of the mice and entertainment market. And finally, we are proceeding with the construction of Cotai Phase 4, Macau's only next generation integrated resource, which will complete our ecosystem here in Cotai.
As you can see, we remain highly confident about the future of Macau as we continue to invest literally 1,000,000,000 of dollars into our business. Our Cotai development activities, along with our existing property initiatives, also demonstrate our support of Macau during the pandemic by continuing to invest 1,000,000,000 of dollars into the economy, providing jobs and supporting local SMEs as well as our long term commitment to help Macau achieve its vision of becoming a world center of tourism and leisure. Next up is Henshin Integrated Bay Area, where we note that the central government is currently doing the strategic master plan at Henshin, which was revised by the New Hyatt Lake Powell government. We are also expanding our focus to potentially include opportunities in the rapidly expanding Greater Bay Area. And finally, Japan, we continue to pursue opportunities with our partner SBM LaMonica.
We're also monitoring the impact of the pandemic in Japan, which has also caused highly publicized delays through our IR process, and we'll continue to update you as the situation moves forward. Let's move on to our balance sheet, which continues to remain strong, liquid and virtually unlevered. Cash and liquid investments increased modestly from $42,400,000,000 at the end of March to $43,000,000,000 at June 30, 2021. Our net cash position declined from $33,600,000,000 to $31,600,000,000 due primarily to investing in our development projects, including Cotai Pesos 34 and a reduction in our gaming chip liability. Total debt grew from $8,800,000,000 to $11,400,000,000 which primarily reflects an $11,000,000,000 of borrowings associated with our treasury yield enhancement.
Our core borrowings remain virtually unchanged between $400,000,000 $500,000,000 which includes 0 debt associated with our Macao operation. Moving on to our outlook, where we continue to remain very optimistic that Macao's gradual and management recovery will continue despite the recent choppiness. If Greater China continues to remain diligent in effectively containing COVID-nineteen outbreaks and execute vaccination programs, then we are very confident that our green shoots will continue to strengthen as we navigate through the pandemic. We are also encouraged by the rebounding Chinese economy and are quite confident that the leisure and tourism sector will continue to recover on the back of the overall economy. In the interim, we remain well capitalized to invest in our development initiatives, including our game changing co tie Phases III and IV, as the fundamentals of Macau in our operating businesses continue to improve and generate cash.
We also remain upbeat and very positive about the long term prospects for Macau and the Greater Bay Area, where the underlying fundamentals continue to remain incredibly compelling. And finally, we'd like to extend our sincere appreciation to the Macau government for their outstanding performance as well as the community, which was rallied under their leadership during the pandemic. We would also like to thank all of the GEG team members again have been extraordinarily supportive of the community and the company during this challenging period. Operator, that concludes our opening remarks. So let's open up the lines for Q and A.
Thank you. Our first question is from Sharon Chang Chang from Bank of America. Please go ahead.
Hi. Actually, this is Billy. Hello. Good afternoon and second half. Congratulations on a very solid interim results.
And I have a few questions. First question, just one last Mike about the Japan bidding process and situation right now. We understand Galaxy has mentioned that they may not be interested in the Yokohama bidding. So can you tell us the latest situation there and also the company's strategy in terms of Japan, whether you guys will continue to focus on big cities, potentially Tokyo or will you look into other mono protection or cities? Billy, thanks for the question.
While we have not participated in the current RFPs, Galaxy continues to remain interested in Japan and we believe that Japan does offer a good long term opportunity. Our Japan based team remains active in their efforts and we are just keeping a very close eye on all the opportunities in the market. All right. Thank you. Another question, just wonder, a little bit short term, but just curious, we understand that like the account went through some cases last week and as a result, the border was kind of locked down in a semi lockdown mode.
And so I guess my question is, have you seen some turnaround given that I saw from the view some of the order restrictions have been relaxed and it no longer require 12 hours of negative test certificates in order to cross border. In another word, do you think the worst is behind us? And have you seen a little bit of recovery of the traffic?
Thanks for the question, Billy. And of course, as you know, and we've said this many times before, the primary focus of Macau and including the concessionaires is always public health and safety. And again, we applaud the Macau government for doing an outstanding and very commendable job throughout the crisis, including the most recent challenge of executing a mass testing program where they screen 700,000 people. Thankfully, there were no positive cases. I think just to be judicious, they want to continue to monitor the situation very diligently and daily they give us daily updates as well.
And you're right, they did relax one of the entry requirements by extending the validity of the NAT from 12 to 48 hours. It's going to take some time for that to trickle down into visitation, but if we remain continue to remain very vigilant, then hopefully we can bounce back pretty quickly here. And as you can see that even after it's a very choppy recovery, as we've been saying all along, so even when there are mild cases in Guangdong and mid pack visitation, you can see that we had in the quarter, we had our best launch of the pandemic post IVF restatement in May. And unfortunately, with the cases in China that broke out in late May, added an an impact on. But you can see that we quickly bounced back in July.
But it's been one of our best performances during the pandemic. So we still think it's going to be choppy. It's going to take some time. We're but I think we're well capitalized right out the storm. We've really been creating a lot of operational leverage here and that we're you can see it in our results.
So, A, our business mix has been shifting from VIP to mass. We're leveraging our cost structure. We've used this time to really focus on processes and procedures, and it does translate to operational efficiency. And then one of the highlights of the quarter was the fact that our retail business reported all time record results was materially above our record performance in Q4 of 'nineteen. So it's the that's actually a strong indicator a key KPI and a strong indicator that there's a lot of demand out there and that certainly bodes well for the overall recovery of the market.
So, we're looking at this for the long term. We're continuing to invest 1,000,000,000 of dollars in Jotai Pages 34. So, although it may be choppy in the near term, our outlook for the medium and longer term remain very bright.
Thanks. And my last question just wondered. The company's turn was bad positive in
the first half. So again, congratulations on that.
And I don't think there's any expectation of the dividend there. But I'm just curious, are there any threshold there before the company can get to certain level of profitability then they will consider consume the business?
As you know, we're the Chairman and the Board run a very conservative balance sheet and operation from that perspective when it comes to fiscal management. And yes, we're very proud that we're probably the only we are the only contestant there to report positive in GAF for the first half of the year for a lot of different reasons that we just talked about in my opening remarks. But having said that, even the Chairman
said at
the press conference that at some point, if we have more clear visibility on the recovery, then we would be more than delighted to pay a dividend. And that would be a great decision for the market. So but in the interim, we're going to be very conservative and not surprisingly, unsurprisingly so, given the pandemic that we just want to be conservative during this period. But as we had more clear visibility on navigating through the final stages of the pandemic, I'm sure the Board will be supportive of dividend.
Thing. Our next question comes from D. S. Kim from JPMorgan. Please go ahead.
Hi, D. H.
Hi, Bob. Hi, everyone. Good afternoon. Hey, how are you? I just have a quick one regarding the competitive landscape.
How do you see today's promotion environment given where the bookings are? And what do you think would be the most important driver for the especially for the premium mass if and when the orders open and recovery?
As I said earlier, no, we've seen some positive indications. And I think our retail business in the Q2 was just very encouraging for us, I think, with. So it reinforces that, A, there's strong demand. We continue to believe it's going to be a premium mass less recovery, which we've actually seen filter down into the middle and to the lower segment as well, which is equally as encouraging. And given that everyone is pretty well capitalized in Macau, there is certainly a lot of pressure on everyone's balance sheet.
I don't mean to assume that we are not feeling as well as you can see our cash balances are. Although they are healthy, they are declining somewhat. But so it does create financial pressure, but it's not enough to really, given the current state of the market, to really start acting irrationally. And yes, they're always going to have some, but and we hear a little bit here, we hear a little bit there. But given the visitation levels that it's not going to move the needle and we encourage everyone to act rational.
Ultimately, given the market structure that we're essentially the only legal place in Greater China where you're trying to compete and gain, that's very unique. And we don't want to compete on price. We want to compete on the experience that we offer here in Macau, which is world class. So there's really no real reason to start buying business.
Thank you. That's really helpful. Just a follow-up on our modeling. Can you share the level of that debt provision over the past few quarters and how does it compare to pre COVID level? And could you also share how many employees that we have at the moment versus HaiSings?
We had about 18,000 at the end of last year. And that's it from me and congrats again on the good result.
Yes, bad debt hasn't really changed, D. S. We're adequately provisioned. When you look across the business lines where we extend credit, let's start with Premium Direct. That's our in house.
It's the only house where we actually offer patrons credit. We still do way more cash than we do credit, and we're more than adequately provisioned there, and that really didn't change materially over the quarter. VIP, yes, we still lend our balance sheet, but I think everyone in the market has learned from previous experiences that they've dialed that down and our VIP exposure is very manageable. So we're very comfortable with that and have not adjusted the reserves there. And then on the non gaming side, it's not really material.
So it's the so we feel pretty comfortable with that. And I'm sorry, your second question? Oh, employees. The discount hasn't really changed that much. It's a little it's down a little bit.
We are down, you said 18,000. We are in the high 17, so it's but again, part of being a concessionaire and promoting economic and social stability, we are very protective, supportive of local staff. And at the same time, they've been very cooperative in supporting a lot of the programs that we've introduced. They are 100% voluntary. So they've been and we're very pleased with the cooperation.
And it's in the fire and the sense of teamwork that we're getting across the community, of course, the government, the receptionaires and the locals as well. So and we're also supporting local SMEs and we're all in this together and we're quite confident we can navigate through this.
Thank you. If I may follow-up one thing about retail earlier, can I ask how was the actual turnover tenant level sales compared this quarter versus Q2 2019 or Q4 2019?
Yes, it was very strong. And we've had some of our best months. I think I did a little analysis here the other day. Of our 10 best months, 5 of them have been in 2021. And we had an all time the top of the market was May.
And so we've had a strong July. We had a strong April. We had a strong May, as I said, record. And it was well north of 20%. Thank And we're doing that with less tenants.
And I think that what we're also doing is to give us an opportunity, as everyone is, to really focus on the existing properties and introduce new enhancements. One of the things that we've done is really changed the whole profile of our mall. We've added some very attractive brands. We've repositioned the whole portfolio and performed some upgrades. And if you were here and walking around, if you were in our diamond lobby or I'm sorry, you're in our old right where Phase III is going to, where Raffles is going to be.
You can see that we've introduced some new products there and we're just very excited. So everyone is using this time to the highest and best use and a lot of the stuff is normally disruptive. And so we're given the state of the business, this is really the time to do some of the more disruptive things that won't really impact you.
Thank you, sir.
And our next question comes from Praveen Choudhary from Morgan Stanley. Please go ahead.
Hey Praveen.
Hey Bob, thanks. Thanks for taking the call. First of all, congratulations, great results. As you mentioned, the only one with net profit in first half 'twenty one. I hope everybody gets to net profit eventually.
I have two questions. One is related to Shanghai.
Sorry,
not Chennai.
The what? I'm sorry.
I meant no, no. What I meant is Henqing. So in Henqing Island, you have a big piece of land. I am not sure how much money you have already spent on it, but there was a news article. I just wanted you to confirm whether that was a correct article or not.
It talks about how Henshin will be given under the provision of Macau government to run it. And so first of all, is it true? 2nd, if it's true, how does it impact your decision to expedite the process of building there the project and what is the realistic timeline of that project? That's the first question. The second question is related to the Raffles Hotel, which we are all eagerly waiting to open.
Could you tell us what may have driven the opening from end of this year to early next year? Is it proactively looking for the right market or is it some construction delay? Thank you so much.
Thanks Praveen for the questions. Let's take the last one first on Raffles and the construction. We're just trying to align more to the prevailing market conditions and whether we open in the latter part of the year or the early part of next year, in the long run, really doesn't matter. We want to get the experience right. We are not experiencing construction delays.
So it's more about aligning with the overall market. And of course, we want to introduce new capacity in an accretive way to the market. And longer term, we're quite confident not only Phase 3, but Phase 4 will be accretive to the market as well. So we're very excited about that. And of course, once the MICE and the entertainment market bounces back, we'll follow raffles up with the opening of the GICC and Andaz Macau as well.
And then if you were here, and you would see that Phase 4 is moving right along. So we're you can see that it will definitely be the only next generation product in Macau. And we're very excited because it really does complete our ecosystem here. So and that really for folks on the call translates into future earnings potential. So we're very excited about that.
And other projects like Henshin that you mentioned, we read the same stuff in the paper that you guys do about what the CD came out. We're awaiting yet a further update on the overall relationship between Macau and Henshin. But all that sounds to me is that something is very positive. So and the impact on our project remains to be seen, but we're waiting to hear the feedback as you guys are. It will definitely be a non gaming development.
We have not invested a lot of capital there as of today. So we continue to pursue the project and it's an evolving situation and we'll just continue to update you.
Thank you. May I follow-up with one question? Would you be able to tell us if there is any number of tables or slot machines which are inactive, meaning you're trying to keep it close simply because you can save some more extra cost of labor and so on? Is that 10% less than the peak or 20% less than the peak or any such number?
Yes. Tables are still a very valuable commodity here in Macau. I'm sure you saw that another concessionaire opened up and were granted due to mark tables. So you can see how dear a commodity they are here. We are a long way from operating at optimum capacity.
The market basically was in the quarter, we're doing 24% of 35% of what revenue we did in the Q4 of 2019. So it's not a hugely big thing that we have a long way to go until we hit the optimal capacity level. You're not taking tables out of service. We value them highly and we just have to be patient and we continue to pay the tax on them and especially if we're carrying the local labor. So we still have spacing constraints that we're dealing with.
So but we're a long way from hitting that river time where we have to add 3 different capacity.
Wonderful. Thank you so much again and congratulations to both of you.
Sure. Our
next question comes from Julie Zhang from Sunbridge Capital Partners. Please go ahead.
Thank you, gentlemen. I just got one question. Thanks. Would you like to share August to date the GGR versus the same period in 2019? And also, would you share current hotel vacancy if the data is available?
And how would the situation would you see to recover to at least July level? How's the visibility and what would be the key driver or key concerns before we get there?
These are Okay.
If I miss some, just remind me what you asked. But as far as Galaxy's gross revenue performance, we're operating at basically 35% of what we did in the Q4 of 'nineteen. So it's you can do the math and figure it out. So it's the and as far as hotel occupancy, obviously, we used to run it virtually 100% occupancy all the time. So right now, Galaxy was in the 50% and I think StarWorld was in the 70% during the Q2.
Of course, when we had the recent outbreak, occupancy has declined significantly. So as you can see, throughout 2021, we've had a very choppy performance and is tied with all due respect to immigration policy and visitation. And of course, that leads to revenue. We believe that it will take some time to navigate through this pandemic. It will probably be a gradual managed recovery, and we still believe it's going to be choppy.
But we're being very supportive of the government, which has done a great job. And if we can continue to contain the pandemic in Greater China and certainly here in Macau and execute vaccination programs, I think hopefully it will be over sooner than later. But at the same time, I think Macau in general and Galaxy specifically are well capitalized to weather the storm. We're certainly supportive of all the local government policies and it really comes down to the primary focus is public health and safety. And longer term and in the medium term, we're very positive and bullish on Macau.
We continue to invest 1,000,000,000 of dollars into the market. So Type A has been straightforward, the $50,000,000,000 commitment by the company and the Louis family to the cap. So we're longer term and we can turn we're very bullish about the process. We just have to make it through the pandemic.
Yes, that's very clear. Thanks.
Our next question comes from Alpha Wong from Goldman Sachs. Please go ahead.
Yes. Thank you for taking my question. I have two questions. The first one is, could you please share some updates regarding the gaming license renewal?
As far as the gaming license renewal process is concerned, you're seeing more about it in the press lately. The concessions expire technically in June of next year. The government has said they would intend to launch the first half of that process or the public consultation of the gaming law be followed by the tender process for the reissuance of the gaming licenses. We wish there what we can assure you is that there's it certainly appears that there's a lot of work going behind the scenes, but you're reading the papers is what you guys do. And all we can do in the interim is continue to do what we've been under our existing concession is really support Macau as far as employment in local SMEs as well as assist them in achieving their vision to become a world class tourism destination and we continue to do that.
So continue to watch the newswires like we do, and we'll update you as we move forward.
Thank you. Thank you for sharing. And the second question is regarding the Hung Ching and Greater Bay Area development. Besides the item you mentioned that will be about non gaming development, do you have some other initiatives around this area? And if so, what is the potential investment timeframe?
Thank you.
Thanks. Great question. As far as Henshin is concerned, again, we'll wait to hear when we get some feedback on from the central government on the revised master plan for Henshin Island. It's been in the news lately a lot and seeing how Macau and Henshin can potentially work together. And so we'll continue to pursue our project there as I just stated.
As far as the GBA is concerned, we're out looking at deals and exploring different opportunities. It's a rapidly growing area. It would definitely be non gaming, as you rightly pointed out. So we think it's one of the highest growth areas on the planet. And we're certainly out there looking at deals.
And when we have something announced, we'll be happy to share that with you.
Thank you. And just to be clear, so far, we don't have a like concrete investment timeframe yet. So the updates will be provided.
We're very flexible. We're very opportunistic. One of the things that's unique about Galaxy is that we're not chasing growth. So we have Cotai Phases 3 and 4. We're essentially doubling what we have in Cotai in terms of GFA and we're very excited about the future.
So as you know, with Henshin Island, that's a longer term development opportunity. The Greater Bay Area is certainly part of that mix as well as other international opportunities that we continue to look at. So our plate is pretty full. So we're very excited about the future prospects organically here in Macau, which we still think represents the best return potential in this industry on the planet. And we're also exploring other things.
So the Board is keeping us very busy.
Thank you. Thank you for sharing.
There are currently no further questions in the queue. And we have a question follow-up question from Sharon Chan Chan from Bank of America.
Hi. Just have a follow-up question. Just wonder if you are willing to share a little bit more detail about Q2. I'm just wondering if we can break down into the monthly contribution of EBITDA. I imagine we will see a very different picture from April to June.
So my question is that, how bad June was and how big of a drag because of June outbreak in Guangdong and how much has dragged the overall EBITDA? I just want to see if things were okay, what kind of run rate of EBITDAU the company has achieved there?
Sure. Billy, as you can see, what the market numbers were for the Q2 in terms of monthly GGR in the 1st month of Q3, you went from $8,000,000,000 to $10,000,000,000 to $6,000,000,000 to $8,000,000,000 So certainly our EBITDA kind of mirrors that trend. I would say that given our cost initiatives and the performance of our retail business and our breakeven point is significantly lower than it was historically. So it's probably in the 20% range. So we've tended to make money in June July.
So we'll kind of mirror the trend there. And again, we are carrying a lot of labor as you know. So we're doing our best to manage through that. But it's and hopefully at some point that as we navigate through this little hiccup here and the in the cap that will bounce back just like we have historically because we know we see that even in June to July, we bounce back very quickly. So it's the and then hopefully as we navigate what are hopefully the final stages of the pandemic that we could get back to normal here.
I see. And just want
to
clarify, you guys were able to get even in June?
Yes. More so. We made money.
There are currently no further questions in the queue.
That's great. Operator, thank you very much for leading the call here, and thanks, everyone, for listening. We look forward to updating you on our Q3 results sometime during the early part of Q4. Thank you very much, and stay safe.
This is the end of GEG's conference call. Thank you for joining us today. You may now disconnect.
Thank you for calling.