Las Vegas Sands Corp. (LVS) Q1 2006 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Las Vegas Sands Corporation First Quarter 2006 Earnings Conference Call. My name is Onika and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question and answer session towards the end of this conference. If at any time you need assistance during the call, please press star zero and a coordinator will be happy to assist you. As a reminder, ladies and gentlemen, this conference is being recorded for replay purposes. At this time, I would now like to turn the call over to Mr. William Weidner, President and Chief Operating Officer. Please proceed, sir.

Thank you, Onika, and good afternoon, everyone, and thanks for joining us today. With me today are Mr. Sheldon G. Adelson, Chairman of our company; Mr. Brad Stone, Executive Vice President; Mr. Scott Henry, our Chief Financial Officer; and Mr. Rob Goldstein, President of the Venetian Las Vegas. Before we begin I need to once again remind you that today’s conference call contains forward-looking statements that we are making under the Safe Harbor provisions of federal securities laws. I would also like to caution you that the company’s actual results could differ materially from the anticipated results of those forward-looking statements. Please see today’s press release under the caption, “forward-looking statements” for the discussion of risks that may affect our results. In addition, we may discuss adjusted EBITDA and adjusted EBITDAR, which are non-GAAP measures. A reconciliation of those measures to the most comparable GAAP financial measure is included in the press release. Please note that this presentation is also being recorded. Those of you that follow the Sands Corporation know that 2005 was a very important, highly successful year for the company. Our financial performance reached record levels and our development activities produced an exceptional pipeline of growth opportunities. I am pleased to report that we have maintained that momentum on all fronts in our first quarter of 2006, from financial, operational, development and executive perspectives, we have made substantial progress. Some of those highlights include: Turning to our quarterly results, we started year 2006 with a record first quarter, reflecting strong growth across the board at both our Las Vegas and our Macao properties. In Las Vegas, we delivered strong results in each component of our business -- hotel, casino, convention, and food and beverage. At Las Vegas, EBITDAR came in at just over $101 million. Table games…

Thank you. (Operator Instructions) Your first question comes from the line of David Anders with Merrill Lynch. Please proceed. David Anders - Merrill Lynch : Thank you. Maybe you could give us a little more on the timeline and what is required for Hengqin Island as far as -- I know there were certain levels of government you had to go through. Could you bring us up to speed on where we are and what is left and if there is anything we should be monitoring to kind of keep track of the progress?

As in any development involving applications to the Central Government of Mainland China, it is always extraordinarily difficult to figure out a timeline. All we can say is that our local authorities that we interface with at three different levels, at the Zhuhai City planning level, at the provincial level in Guangdong Province, and at the regional level, and the nine plus two all are telling us how to step forward and the time frames that we need to make our submissions within. They have indicated to us that of course the next steps are to Beijing. They package up all the information we provided to them, their endorsement, and we have received endorsements from each of those three levels. We now make the submission to Beijing. I think I mentioned last time we were going to be making that submission right around now, and we have already made that communication. Now really it is up to the central government to determine whether our project fits with their overall strategic plans and the strategic plans for the Pearl River delta region. We believe we have touched all the bases. We think this is a picture postcard example of the kind of development that they want for the expansion of the tourism business there. We are confident from that regard, but no one can be 100% confident in Central Government’s decision. I look at it from the standpoint of its ultimate decision, or the time that it takes to make that decision, so all we can do is provide you the best information that we have and keep our fingers crossed, quite frankly. I am not sure there is anything that would publicly help validate because these things tend to be done quietly, because of Asian face issues and the government…

Your next question comes from the line of Lawrence Klatzkin with Jefferies. Please proceed. Lawrence Klatzkin - Jefferies & Company : Thank you. A couple of questions here. I’m looking, in a sense, to compare your option expense, it seems on the low side. I know you are ramping up and you are getting a lot of new, good people. Can we expect that as people get compensated, that the option expense should go up?

Our option expense is lower than others in our sites, and as we add people, the mix of senior executives, when you expect to see the options expense going up. That is the question.

Well, if the new employees are so happy to be with us, they are willing to take pure… -- Laughter By the way, Larry, how come you were not first on the Q&A? Lawrence Klatzkin - Jefferies & Company : David needs his time.

Larry, I think it is safe to say you would see increasing options expense as we attract more people to the organization to be able to actually exercise this. I am not sure what the average is among our peers. I know it is much larger than what our option expense is now because we are a newer company, but I think you would expect to see a gross grow in option expense, but I do not think you would see it approach that of our close competitors. Lawrence Klatzkin - Jefferies & Company : As far as timing of CapEx over the next year, and by quarter, if you could give us an indication of how it is bouncing up and down? Scott Henry : You always ask that question, Larry. I enjoy it because I always answer it the same way. The balance of the year, we are not going to break it out by quarter, but for the balance of the year, we forecast capital expenditures of $1.8 billion to $2 billion. $1.2 billion to $1.3 billion of that amount we expect to spend in Macao on a combination of the Venetian, the Sands podium expansion, and some additional development work on sites 5 and 6, and site 2, predominantly. As well as a fair amount of site work, design work and other pre-construction on sites 7 and 8. The balance we expect to spend in Las Vegas, the lion’s share of that on the Pallazo. Lawrence Klatzkin - Jefferies & Company : Seasonality, do we see seasonality on any particular quarter at Macao? What should we be expecting, as you guys have been in there for a little while.

I think Brad has a good handle on that. Brad Stone : I think we are staring to get a sense of it. It is a little challenging as always, because the rules are always changing about how many people are let in, as Bill said. Just this week, more people were allowed on the IBS, but certainly as we mentioned in conference calls, the first quarter is probably going to be our weakest quarter overall. Believe it or not, that is because predominantly Chinese New Year. Chinese New Year over there, while it is successful in Las Vegas, part of the reason it is successful in Las Vegas is why it is not as successful in Macao. A lot of the higher-end, wealthier people travel during that time period, and a lot of the gamblers quite frankly enjoy the time to come to Las Vegas. On the math side, Chinese New Year is kind of an interesting holiday where it runs for about 10 days, but the first five days are family days, and frankly, the five days leading up to the initial start of Chinese New Year, are probably the five weakest days of our year, given the fact it also has less days in the quarter. I think we will continue to see the third quarter be a strong quarter. It’s a similar vacation period in China. The mass business is very strong. I think we will have a little bit of disproportionate amount of mass versus high-end during that time period. Obviously that is higher margin business for us, so that should be both a good volume quarter as well as a good margin quarter. And then the two periods which I think will be very similar are the second quarter and fourth quarter, with good, solid business. not as strong mass business as during the third, but perhaps better quality, high-end business during the shorter periods between the first and the third, and between the third and the first quarter. Lawrence Klatzkin - Jefferies & Company : Okay. You said more money is being allowed to come out of China for individuals. Could you give us exactly what we are talking about here?

What I mentioned when I talked about that, that is a brand new policy that was just adopted last week, or announced last week. The illustration I was making there is that Central Government has said it’s okay for Chinese to cash their soft currency for hard currency to make investments directly outside of China. All it is is another policy direction. I think the key thing I was trying to point out is the Central Government of China is a little like an oil tanker. You can’t turn it on a dime. When you see incremental decisions being made out of central government, and they support an overall direction, I think you can be confident that oil tanker will continue in its direction. It can’t and won’t turn on a dime. So while over the last couple of years we’ve seen direct benefit of Chinese being allowed to bring more and more soft currency turn it to hard currency and come gamble with it, another announcement by Central Government of another way of converting soft currency to hard currency, even though they talked about investment, it is jut another data point to follow. I think it is pretty clear that eventually, over some time on the horizon, the Central Government will in fact go to an open currency policy. If they go to an open currency policy, that is a huge development for us, particularly as it relates to the VIP business. Right now, we deal with a lot of middle-men between the owner of currency and the gambler at the table. If the currency is opened altogether, then that changes the game altogether. So it is a big, big, development for us. We see that over some time on the horizon over the ensuring years as being another huge jump in the ability of that market to generate more income. I only used it as an example of a data point. Currently though, the individual visitor coming, I think the daily amount that they can actually convert I think is in the area of $6,000 U.S., and that is on a 24-hour basis. They can wait 24 hours, hit the ATM machine, and draw down another $6,000. Brad Stone : That is up $2500 from when we opened the Sands, so it has more than doubled.

So that directly goes to the mass market, and we think that policy will continue on the high end, as more and more people are allowed to bring large amounts of money out, that helps the VIP market. So I was only pointing that out by way of illustration. Lawrence Klatzkin - Jefferies & Company : Okay, Thank you.

Your next question comes from the line of Bill Lerner with Prudential. Please proceed. Bill Lerner - Prudential : Thank you. My sense is the strength of the IBS scheme probably becomes even more obvious as infrastructure moves along. Can you give us a sense of this in general? Maybe it provides an additional level of comfort as competitive supply comes online in the near term. So for example, what is the update on the capacity increasing the load and so forth, and then I just have a quick follow-up.

I do not think it as much driven by capacity as it is driven by product. I mean, the Mainland Chinese put up with a lot to move from one place to another. I mean, it’s 300 million people move from one city in China to another city in China during their holiday breaks, they are putting up a lot of lines, a lot of difficult ways of getting from one place to another. The more compelling the product, not that infrastructure isn’t a part of the equation, the more compelling the product in Macao, the more penetration there will be in the IBS scheme. I think the last statistic we looked at was only about 1.5% or 2% of the total people who are allowed to come to Macao under the IBS scheme have actually done it. What it means is that the more compelling the product is as a destination in Macao, a higher penetration will be made. I think in the U.S., it was about 11% or something?

Right. Las Vegas was about 14% of the U.S. population, Atlantic City is like 70% of its market.

So we would expect to have a very high penetration in the Guangdong market in terms of multiple visits. It should be more like Atlantic City, and as Macao becomes a legitimate multi-purpose, multi-faceted destination market place, I think we go from 1% or 2% to something close to what Las Vegas is, so that is the huge value or the upside of that IBS scheme. Bill Lerner - Prudential : That’s helpful, Bill. Just as a follow-up, if you do get Marina Bay, would it be your strategy to sell that million square feet of retail space like you have, obviously, in three cases in Vegas and like you are in Cotai, or is it something that would preclude you from doing that in that market?

Well, the answer is there is something that precludes us from doing it. We would love to be able to do it, but we can’t. There is a ten-year moratorium on selling the mall space. But we think it is a terrific asset. We think that asset then helps drive our yields out of Singapore. We think it is part of the overall program. Brad Stone : We are looking for ways to achieve this, but right now the government says we cannot do it, so we can’t do it. Bill Lerner - Prudential : Thank you.

Your next question comes from the line of Celeste Brown with Morgan Stanley. Please proceed. Celeste Brown - Morgan Stanley : Just in terms of the convention business that you mentioned, how does that relate to the announcement you made I think at some point last year, also relating to conventions. I think it was maybe relationships at that point, and this is direct trade shows themselves.

Well, we talked in terms of the letters of interest or commitment or whatever you call it from the individuals. As I said, next week it looks like we will have a more definitive update, and so what we are doing is we are turning those letters of interest now into definitive agreements, as I mentioned. I know I only mentioned two of the shows that we will be talking about next week in a more formal press release, but we also added more expressions of interest, so the pipeline in converting 20 to a number to shows will then be refilled by letters of intent that then get turned into actual contracts. So it will probably be better next week when we actually announce those commitments and signed agreements that are either in the mail or on the desk of certain people to get a better sense of it. I just wanted to provide a glimpse of where we are in the convention process there, and give the markets a sense that we do have momentum on that side. Celeste Brown - Morgan Stanley : Great. In terms of the high-end business, you are new to the business, I guess, in the market. Do you anticipate moving some of your business to the Venetian when it opens, or do you think the high-end business at the Venetian will be incremental to what you are getting at the Sands Macao today? Brad Stone : I think it is going to be, certainly the people that are enjoying the Sands Macao are going to want to see and be involved and we’ll have a lot of cross-marketing between the two properties, but I think the Venetian is such a huge asset in terms of its infrastructure. We have an excellent infrastructure on a limited basis in our current facility at the Sands. We will multiply that by 10 in terms of what we will be able to deliver through the Venetian product, both in terms of spas, and suites, products, restaurant options, entertainment options, as well as a very significant Paiza Club with the same type of services and in some cases, because of the fact we have physical room, even superior services. So I think the answer is we are going to generate and see a lot of new market that as product in Macao becomes better, more room product is available for people to stay overnight, I think that was mentioned yesterday on the Wynn call. We believe similarly that as product gets better, we are going to expand and be a more acceptable gaming product to not only the mass market but the very high-end market as well, and the Venetian will definitely deliver on that.

From a strategic perspective, what we did is if you think of The Sands on peninsular Macao, and most of you have been there and seen where it is positioned. It is positioned next to the ferry terminal, next to where the helicopters land from Hong Kong. As we look at this thing strategically and said there will always be a day trip market to Macao, so I’m not sure they’re going to go away. So The Sands is aimed at that day trip market, both on the high-end, for a convenience situation with the helicopters, and on the mass end in terms of people going down Avenue [Amazad] as they progress on their visit from Hong Kong. So strategically, The Sands was always positioned against that convenience-buy on the high-end. The strategy on the Venetian Macao was the multi-day stay. So there will be a little bit of difference, because longer-term stay people also come to a little bit of overlap, I guess you would say, also come right now to The Sands Macao, but we see them as being a very safe marketplace. We think the Venetian is largely incremental.

Celeste, you said at the beginning that we had moved to the high end market, I would just like to correct that. We have not moved to the high end of the market. The only hesitancy we had going into that market was the limit of the bet when we first opened in 1999 here at the Venetian. But before the end of the first year, we were up to par in terms of the maximum allowable bet with our competition. In Macao, we certainly are very aggressive on the high-end market.

Our hesitation at Macao was simply to make sure we wouldn't lose our license in Las Vegas. The initial months we were trying to put the procedures in place, money laundering, other kinds of things to make sure that we were fully prepared to move into the more sophisticated, I guess you would say, high-end market there in Macau. Celeste Brown - Morgan Stanley : Thank you.

Your next question comes from the line of Robin Farley, UBS.

Can you talk about the timing for pre-selling your new residential space in Macao?

We are in the process of improving the sales organization, sales and marketing organization at this time. We intend to build our preview apartments in both Macao and in Hong Kong. We are on the move. We are starting that process now, but the first thing we had to focus on was the retail in terms of real estate marketing efforts. Because the lead time to get those sold and designed and up was much longer than ordinary apartments. We prefer to call them vacation suites. So the vacation suites have been designed and that’s it. I mean, we don't have to wait until they get every interior design and built before we can sell them, like the retail side. We will be very aggressive on that. Our first project is 600,000. We said 600 apartments, about 900,000 to 1 million square feet in the standalone building on the Four Seasons property that we call The Residences at Four Seasons. It is larger than the average size, so instead of 600 I think they will be more like 400, of a larger average size, but we hope and expect to get the number that we are looking for.

I think the important thing to point out is the strategy for the vacation suites is similar to the strategy for our mall. By developing a non-core asset and then monetizing that asset, and then reutilizing that asset as an attractor for incremental business. So if we are successful in selling vacation suites to wealthy Chinese, they either put it in a pool or they come visit it themselves, and not only do we create real estate value but we create additional reasons for wealthy Chinese to come and visit. So it is much like the mall. Once the mall was developed, and whether it is monetized or not, it continues to be an attractor of mass market because it is a good place to come, just like here in Las Vegas. It is a similar strategy there, exercised both in the mall market as well as in what we call these apartments. We don't want them to be perceived as places where people live, because they are not intended as places for people to live. They are places for people to come and visit the Cotai Strip for longer periods of stay than simply a single room. Nevertheless, they are aimed at a market that would turn over. In other words, come and visit periodically and spend a week or more.

We are intending to open the Four Seasons in December of '07, and the apartments will be occupied at least we are targeting now at April '08. But if we do the kind of job we think we can do, the apartments will be sold long before we open.

Will you start selling before the end of this year?

Yes, I believe we will.

Great, and then two Las Vegas questions. One is, I think this is the first quarter you didn't break out the convention center cash flows separately. What is that number?

That is because it is now an integral part of our business, and so just like if you look at Mandalay Bay, that would be; well, should Mandalay Bay break out its meeting facilities? We thought it was more reflective of what the market does.

It is a marketing tool for the property, and there is no reason why they should be broken out. We continue to do what we have been experiencing since we opened here, so in the last couple of quarters we have broke it out separately, but there is no necessity and there is no market necessity and there is no marketing or operational reason why we should continue that.

Last question is, in your introductory comments you made a reference to Venetian room remodel. Can you just give a little color on the timing of that and how many rooms out of service, over what period of time?

Robin, we are working through that right now. The timing of it would probably be towards the very end of this year, simply as we go through the planning process, the selection process. We will be building a number of model rooms and selecting furniture, so that timing of selection and then the actual ordering and fabrication probably means the project will start towards the latter part of this year. Our goal is to have a reasonable amount of the Venetian remodeled. Again, this is the Venetian Tower, so it is 3,000 rooms, not the full 4,000 rooms. Again, our goal would be to have a significant amount of that opened by the time we open the Plaza in late third quarter. The timing is such, we are working through it, as obviously the design is going to drive the amount of time these rooms are out of order, but we are being very sensitive to really limiting -- while the room will be totally redone, we won't be touching things like marble and electrical and plumbing and sinks. So most of the work is what I will call more cosmetic -- new carpet, new colorations, all new furnishings. The disruption is not what I would call an architectural disruption, it is more of an FF&E disruption. We are probably trying to find times when we can take large chunks of rooms out. For example, in December, trying to get a reasonable amount done during the week before Christmas and all. While it will have some financial impact, I don't think it is on par of perhaps some other renovations you have seen in town where the rooms have been dramatically changed. We will give you some more update probably by the next quarter when we've got a firmer grasp on the program of that.

As to what we think is probably an unprecedented record-setting occupancy of the first quarter at 99.9%, it should be obvious that -- Bill mistakenly said we had 19%. Bill and I just went to Singapore and back in about 66 hours, so he suffers from jetlag. I don't.

All right, thank you.

He is suffering for me.

Operator, we have time for one more question.

Your final question comes from the line of Jay Cogan, with Banc of America Securities. Please proceed.

Thank you. Good afternoon. A few quickies on Macao and then one on Vegas. I understand the seasonality issue with respect to 1Q versus 4Q as you've explained. I was just wondering, when you open the Paiza expansion here in the second quarter, do you expect your VIP volumes to rise as much as 30%? Are you that capacity-constrained on a run-rate basis? I was also wondering if you could tell me if you thought the VIP market broadly in Macao, if the volumes were up? I see the revenues, I was just curious if the volumes were up.

I don't think I fully understand the question, but I don't think we would necessarily provide that kind of lead information. I would point out that what we did say was that it is particularly useful during those periods when we are at peak demand. I don't know that you straightline an increase in capacity to an increase in volume. We certainly expect it to add to our volume.

That's fair. I was just trying to get a sense as to how much it might, if you were that capacity-constrained that you would suddenly be at the point of 30%, as we are looking at our models over the next few quarters.

It is not even that. Even if we had no capacity increase, it is not as though we wouldn't increase volume anyway, just that it is increasing rapidly as we get better at it. As we broaden our network and as we separate wheat from chaff, and as we tell certain junket operators, sayonara because you are not bringing high enough quality customers. So there is going to be a constant weeding process and a constant upgrade process. Capacity is really only one piece of that.

Sure. With regard to the margin, sequentially, the revenues were up about $10 million, EBITDA was up 1 -- are you doing some things from a marketing standpoint right now? Are you doing anything from a cost standpoint that would have had that slight impact in the quarter? I am just curious if you are getting ready for more competition, if you are starting to expand the marketing to a broader base of customers, as you talked about doing before? Can you give us any sense of that, or is it just the way the numbers go?

Just so we know, are you talking about Macao?

Yes.

We are up over 50% from last year. I don't understand. It is in a seasonally weak quarter.

Let me address the question. We had a margin of 37% in the fourth quarter, 36.1% in the first quarter, I believe that's the number. I think what it is reflecting is continued growth in the mix of the business on the VIP side. There is nothing that has changed dramatically. Obviously we are staffing up and we had some inefficiencies as we opened the new 28 games up on the table, and that is going to occur from time to time as we bring staff on and train them. It hits our operating statement before we are able to generate revenues. So I don't think the nine-tenths of 1% change in margin could be a timing of a booking issue, or anything like that. I don't think it is material or any way reflective of any necessary trend or pattern.

That's fair. Last question on Macao, in regard to conventions, maybe you will give us an update when you give the more formal update coming up. I was just wondering, if it is available to talk about, can you give us a sense as to where you'll be from an occupancy standpoint with conventions for '07, '08, et cetera? What should we expect that ramp to be for the Venetian and your convention facilities?

It is too premature to tell you at this time.

Thank you.

I think it is safe to say in the initial time, we open in the summer. We have September, October, November, December -- those are going to be experimental times. We are hopeful that we shovel all of those holes in, but it is going to be one of those start-up periods. We do have shows already laid into some of those dates, but I think it will be a little lumpy at the beginning. As we progress further, I think it will ramp up pretty quickly.

Perfect. Thank you very much.

At this time, there are no questions in the queue. I would now like to turn the call over to Mr. William Weidner for closing remarks.

Thank you for your time and attention today, and we appreciate your joining us for our conference call. We look forward to further updates in subsequent quarters. Once again, we thank you for your time and attention. As I mentioned, we are all energized and ready, and we are happy to share our thoughts, our projections -- well, not necessarily numerical projections, but activity projections with you for the future. Thanks again, and have a good day.

Thank you for your participation in today's conference. This concludes the conference. You may now disconnect. Thank you and have a good day.