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Las Vegas Sands Corp. (NYSE:LVS)

Q1 2006 Earnings Conference Call

May 4, 2006 4:30 p.m. EST

Executives

William Weidner, President and Chief Operating Officer

Sheldon G. Adelson, Chairman

Brad Stone, Executive Vice President

Scott Henry, Chief Financial Officer

Rob Goldstein, President of the Venetian Las Vegas

Analysts

David Anders - Merrill Lynch

Lawrence Klatzkin - Jefferies & Company

Bill Lerner - Prudential

Celeste Brown - Morgan Stanley

Robin Farley - UBS

Jay Cogan - Banc of America Securities

Operator

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.

William Weidner

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:

  • First quarter net revenues that came at $530 million -- that’s an increase of over 31% over the first quarter of 2005, and marks an all-time record for the company;
  • First quarter adjusted EBITDAR came in at nearly $205 million -- that’s a 23% increase over the first quarter of 2005, and also marks an all-time record for the company;
  • we completed a number of targeted capital improvements at our operations in Las Vegas and Macao, which have not only enhanced our competitiveness but also improved the bottom line;
  • In Las Vegas, construction on our Pallazo core is at level 14, and our Macao construction is at level 35;
  • We made significant progress in executing the development of the Cotai Strip in Macao, which I’ll talk about in greater detail later;
  • We have continued our efforts to secure additional development opportunities to add to our growth pipeline;
  • We have added senior executives in both operations and development functions to help the execution process; and
  • Finally, we have taken steps to enhance our financial position, ensuring that we have the capital and flexibility to fund our growth initiatives and pursue new opportunities going forward.

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 volume was up 17.6% over the same quarter last year, while hold came in within our expected range at 22.1% versus last year’s first quarter hold of 23.8%.

We had the best first quarter in the history of the property in the hotel and food and beverage side of the business. The recent expansion of our meeting facilities continues to provide us with both greater capacity to book group business and increased booking flexibility.

Increased group business led the way to delivering a first quarter REVPAR increase of 4.6%, driven by an all-time high occupancy rate of 99.9%, and an ADR that also increased to $249. Catering revenues are added to room revenues and divided by available rooms, the rooms and catering REVPAR grew from $304 in the first quarter of 2005 to $330 in the first quarter of 2006, an increase of nearly 10%.

This result highlights the value of the sustained competitive advantage of our original convention based business plan, and bodes well for our ability to foster continued same-store REVPAR growth in the years ahead, and for the opening of the Pallazo in the third quarter of 2007, which allow us an expansion and extension of that strategy to a significantly larger asset base.

Later we will touch on our plans to add over 1 million square feet of additional meeting and convention space to further drive business for our Venetian and Pallazo complex.

Targeted capital improvements at the Venetian continue to bear fruit. The opening of the Paiza Club and the renovation of our high-end suites have played an important role in our ability to attract more premium customers and grow our high-end business in Las Vegas.

Given the success of our Paiza Club, we continue to invest in high-end suite capacity, and we are in the process of renovating or three presidential suites and establishing our 34th, 35th, and 36th floors here at the Venetian as an identifiable VIP enclave.

As we’ve noted in the past, an important component of our high-end strategy is our cross-marketing efforts with the Sands Macao and at its Paiza Club, particularly as we establish relationships with an increasing number of VIP players in that region, and as we increase our Paiza Club capacity in Macao.

Our strong Las Vegas Baccara business growth reflects the success of that strategy, with Baccara drop increasing over 40% this quarter compared to first quarter last year.

Turning to our entertainment offering, we are very pleased at the response to Tao and Blue Man Group, both opening last Fall. Tao and Blue man are generating significant traffic and clearly represent an additional dimension in terms of overall ambience and appeal of the property, particularly to a younger market demographic.

In April, we opened our new 39 table state-of-the-art poker room, further broadening our offering to this market segment while generating incremental traffic.

As we look out at the remainder of 2006 and into the year 2007, we have initiated projects designed to further strengthen and re-merchandise the Venetian, both in terms of its general appeal and its ability to produce incremental cash flow.

The new 1800 seat Phantom Theatre, hosting Phantom of the Opera, the Las Vegas Spectacular, remains on track for a June opening. Advanced ticket sales for the production, Phantom Las Vegas Spectacular, are extremely brisk.

Construction continues on a third theatre, adding 800 more entertainment seats to our offering. The theatre is expected to open in August with a show by the celebrated comedian and entertainer, Gordie Brown.

Mario Batali, the award-winning chef, will open a new restaurant at the Venetian later this year. The restaurant will be modeled on his highly successful New York creation, Babbo and Lupa.

Phase II of our pool deck renovation, which concludes the completion of upgrades to the balance of the pool area, the addition of more luxury cabanas and the creation of our new Tao Beach area, an elegant and sophisticated European style pool deck area, will be completed by this summer.

In terms of our room product, we are in the midst of the planning process to complete the renovation of all of our suite rooms in the Venetian tower. It is likely to commence later on this year. The renovation process will update, improve and contemporize our Venetian rooms while minimizing disruptions to our current business.

These initiatives illustrate one of the advantages building a large, all suite building with a timeless Venetian theme. We can reconfigure, reinvent and re-merchandise the property from a base that does not limit repositioning.

For example, our large, all suite rooms can be continually renovated and contemporized. No one has yet come up with the ability to make a 400 square foot room larger. No one has invented yet a wall structure to accomplish that. So having the timelessly themed base building, originally designed as an all suite produce, with a strong retail presence, restaurants, and entertainment offerings, that can continually be refreshed and re-merchandised, which also happens to be interconnected to millions of square feet of meeting and exhibition space, provides a distinct, competitive advantage for sustaining long-term, market-leading positioning.

Construction of the Pallazo all suites resort remains on schedule for a third quarter 2007 opening. Our retail leasing activity at the plaza mall is also going well, led by our agreement with leading retailer Barney’s of New York, to provide an anchor to that mall process.

Finally, we are currently in the process of working through the county approval process to add a new 1.1 million square foot convention facility to complement our existing Sands Expo and Convention Center. Assuming the approval process continues to progress on a timely basis, completion is expected in Spring of 2008.

This expansion, along with the Pallazo opening in third quarter 2007, will allow us to book more larger groups, creating incremental group demand for our rooms, and creating the expectation of a positive impact on room rates and REVPAR at the Venetian and at our new Pallazo, again opening in third quarter of ’07.

Turning now to our performance activities in Asia, our Sands Macao property turned in another record quarter, generating adjusted EBITDAR of $103 million, up over 50% from the same quarter last year and, more importantly, in the traditionally seasonally soft first quarter.

We are particularly pleased with the momentum in our mass casino business. despite significant increases in mass table and slot capacity in the Macao market, the total number of tables have increased by 40% in that market place year on year, and slot capacity has increased by 60%.

The addition of tables and slots at our own Sands Macao, we have added 80 tables and 90 slots on a year on year basis.

Despite those additions to capacity, the win per table per day and win per machine per day actually increased. That is a remarkable performance, particularly in the traditionally weaker first quarter.

At the Sands Macao, mass table drop reached $11.7 million per day in the quarter. That is up from $9.5 million per day in the first quarter of 2005, reflecting both the success of our promotional programs and our expanded capacity. We actually opened our level that we call the fortune gaming area, adding 28 additional tables in January, and added another 52 tables by reconfiguring the main floor over the same period.

Slot handle grew 78%, reaching $247 million. Our win per table per day, our win per slot unit per day growth, despite larger increases in capacity, support our belief that we will continue to see outstanding growth in both our mass table and slot business over the longer term, despite the addition of new capacity to the market place.

This is particularly gratifying news to us, providing further validation of our innovative approach to the Macao market. When we developed our strategy for Macao back in 2001, we communicated to the markets our view that the mass market in Macao will grow dramatically as the right type of product was introduced into the market place.

The lynchpin of our strategy in entering the Macao market was our belief that the principal driver for Macao’s future growth would be the growing Chinese economy, the rapid rise of Chinese disposable income, and emerging consumerism. We said we would focus on that growing mass market first and then follow on with developing the VIP market. The success of our Sands Macao validates the efficacy of that initial part of our strategy and supports the rationale for our broader strategic direction in Macao.

In the next step of that strategy, we said we will build a Venetian Macao as Asia’s first true Las Vegas mega-resort, complete with thousands of all suite rooms, major themed, grand canal retail space, large convention facilities, Vegas style showrooms and MGM Grand garden style arena, hundreds of thousands of square feet of casino space and thousands of slot machines to appeal directly to that new emerging market -- the mass Chinese consumer. Addressing that market with a full, Las Vegas style product, something entirely new and compelling to the market place.

We also said the development of Asia’s Las Vegas strip would maximize the opportunity created by that growing Chinese economy, the policy directives of Central Government of China, and in the longer term, increasing the consumer’s Chinese middle class.

So how are things turning out five years later?

Well, I have to say pretty well so far. The statistics concerning the increase in Macao visitation from Mainland China is up 19.8% in the first quarter 2006, compared to first quarter 2005. The rapid growth of the mass gaming market of Macao up over 40% this quarter compared to the quarter one year ago. The continuing support of policy directive of the Central Government, with respect to the special administrative regions of Macao and Hong Kong, all continue to support and validate that original strategy.

In addition, the expansion of the individual business scheme, the IBS scheme, with 19 more cities being added just this week, the increases in the amount of Chinese currency that may be converted to our currency by Chinese visitors, and the continuance of retail goods taxing policies favoring Hong Kong and Macao’s retail and tourism sectors, all bode well for the future growth of Macao market and the strategy we put in place to capitalize on that growth.

We believe these continuing positive trends validate our original strategy to maximize emerging opportunity. The multiple expansion of the Sands, the creation of the Venetian Macao, the development of the Cotai Strip with its convention, mall, hotel and entertainment attractions, and the pursuit of Hengqin Island, a 1600 acre summer land style vacation home development in Mainland China next to the Cotai Strip, are all pieces of that broader strategy.

Returning to the quarter results at the Sands Macao in the VIP market side, rolling chip volume came in at $3.7 billion in quarter 1, compared to $885 million in the first quarter of 2005. We are pleased to report that we remain capacity constrained as we ramp up on the VIP side of the business, particularly during peak playing times, and look forward to the opening of our Paiza Club expansion alter this month. That expansion will add 16 VIP tables, an incremental capacity increase of 30% to the Paiza Club, to accommodate the needs of additional junket reps and sales agents that will contribute to our high-end sales network. That will add strength to our Paiza marketing activities in Asia to directly support Macao and indirectly support Las Vegas.

Another trend that we recognized early continues to evolve. Increasingly affluent mainlanders earning hard currency due to their exporting activities, and additional favorable policy directives from the Chinese Government. For example, as of May 1st, mainland Chinese may now convert 160,000 RNB, the equivalent of $20,000 U.S. annually to hard currency to be used for investment outside of Mainland China. This is an indication of a future direction toward a more freely tradable currency, which portends great growth for Macao, particularly for the VIP room revenues.

Our strategy for growth and expansion in the burgeoning Asia market remains clear. At the Sands Macao, as I mentioned a moment ago, we will open our Paiza Club VIP market expansion later this month, the balance of our podium expansion, which will add over 250 mass tables, and nearly 300 slot machines to our current capacity, remains on track for an August opening.

Upon completion of the program, we expect to have a total capacity of between 700 and 750 tables, and 1200 slot machines, over three times the initial capacity of the Wynn Resort opening in September -- capacity to meet the increasing importance of the mass market we identified and targeted as early as 2001.

Construction of the Venetian Macao which will anchor the Cotai Strip remains on schedule for summer 2007 opening. We have now reached floor 35 of 39 total floors, and will be topping the building off by the end of this quarter.

On the remainder of the Cotai Strip, we will continue to make significant progress in all aspects of development. As we’ve related before, we have entered into non-binding letters of intent with Four Seasons, Hilton, Conrad, and Starwood Sheraton, St. Regis brands. We expect to sign definitive agreements this summer. We have already signed definitive agreements with Shangri La, covering the Shangri La and Traders brand. Agreements with additional operators for the remaining sites on the Cotai Strip are under negotiation.

On the retail side, we continue to make incremental progress in leasing malls on the Cotai Strip. At our last update one month ago, we announced that we had reached commercial terms with more than 115 premium retailers on almost 400,000 square feet of retail space. Today, 30 days later, we have continued to make steady progress and I am pleased to report we have reached commercial terms with additional parties, and now have come to terms with more than 135 retailers, who will rent over 500,000 square feet of retail space, with base rents averaging well in excess of $130 a square foot, and percentage rents ranging from 10% to 18%.

That represents over 40% of the approximately 1.2 million square feet available space in the Grand Canal spots and the adjoining mall at the Four Seasons in Macao. We are negotiating the definitive leasing documents with these retailers at this time. We are also pleased with the enthusiasm of our retail customers on the Cotai Strip, a number of whom have expressed an interest in leasing additional space from us in the malls we plan to construct in conjunction with the remainder of the strip itself. This additional Cotai development will add another 2 million square feet of retail space.

As we have related in earlier discussions of our mall leasing activities in Macao, we believe that the steadily increasing sales per square foot results reported by retailers in Hong Kong, fueled largely by mainland Chinese shoppers drawn by the approximate 30% tax advantage of purchasing luxury goods in China’s special administrative regions of Hong Kong and Macao, continue to validate our strategy of developing valuable, non-core assets to both attract patrons to our properties and maximize returns on investment.

Turning now to the development of our Macao convention business, we will report formally next week that we have secured binding commitments from a number of trade show organizers, including Reed Elsevier, for a multi-year agreement on multiple shows with the world’s largest trade show organizer, and the AAPEX, the Asian Automotive After-market Products Expo. The Asian version of a large, important trade show that we hosted here in Las Vegas for 14 years, as well as a number of other shows.

In addition, we received dozens of additional expressions of interest from other trade shows to be produced at our Venetian Macao convention and meeting facility.

Turning to our entertainment offerings on the Cotai Strip, we announced earlier this week that we have reached an agreement with Cirque Du Soleil, for a permanent home here, their first in Asia in our Cirque Du Soleil theatre at the Venetian Macao on the Cotai Strip. My French is a little wanting here.

An additional benefit of the extension of our strategy to develop integrative retail convention, tradeshow, and entertainment offerings for our Venetian Macao in the Cotai Strip is the growing realization that both in Macao and Mainland China, that our activities demonstrate our confidence in and commitment to making Macao a world-class, multi-faceted destination, which is not solely dependent on gaming, just as Las Vegas Strip has become. This advantages us politically both in Macao and Mainland China. To that end, we are looking just a few hundred yards away from our Cotai Strip towers at 1600 acres of land on Hengqin Island in the People’s Republic of China, which would provide us with a tremendous opportunity to leverage our presence in Macao and realize both the derivative real estate value of the Cotai Strip and the ability to fuel the strip occupying second homes only several hundred yards away. Think of it as a housing expansion of the Cotai Strip, a Cotai West, if you will.

We are making great progress with our master planning work. We continue to discuss the approval process with the Government of the PRC. We remain enthused about the level of interest we are finding in terms of branded amenities, partnership interests, and government support. The Hengqin Island development continues to be subject to receipt of the necessary government approvals, but we are working diligently toward that end.

As most of you know, we are in the process of closing a $2.5 billion senior secured credit facility to fund our near-term growth plans at Macao. That includes the Sands podium expansion, the Venetian Macao, and the Four Seasons, as well as funds to start construction on two additional complexes for site 5 and 6, and pre-development activities on sites 3, 7, and 8. We expect that facility to close shortly.

In terms of other development activities worldwide, we are continuing to pursue many promising opportunities. In Singapore, we have filed our proposal for a spectacular project in the Marina Bay site, to be called the Marina Bay Sands. The Marina Bay Sands proposal includes plans for an integrated resort with 2500 hotel rooms, 1.2 million square feet of flexible meeting incentive, convention and exhibition space for the so-called mass market business. Our additional 1 million square feet of retail space, three large entertainment venues, and 160,000 square feet of gaming space, which will include our high-end Paiza Club brand.

As is the case with an emerging China driving an expanding North Asian economy, the growing Chinese economic engine, along with that of India, will bode well for the economies of South Asia, particularly Singapore. We believe that we are the beginning of the Asian [inaudible] and look to use our huge footprint in Macao in North Asia, with millions of square feet of meeting and convention facilities, thousands of mass and VIP gaming tables, thousands of sleeping rooms, and millions of square feet of retail space to build relationship with Asian meeting organizers, junket high roller sales agent, tour group organizations from China, Japan, Korea and elsewhere, and with international retail brands.

We will use these relationships in Singapore, Las Vegas, and elsewhere to bring real value to the jurisdictions that we operate in, to expand our integrated convention resort business model, as other nations seek to adopt casino-based developments to augment their tourism economies.

Specific to the Singapore bid, we believe our large footprint in North Asia differentiates us from our competitors there, and singles us out as the only bidder who can underpin claims for the maximum success of a Singapore integrated resort, with both real-world results on the ground and unrivalled breadth of relationships with partners and customers in North Asia.

By way of illustration, according to the World Travel Organization forecast, North Asia will be the source of almost 300 million exit travelers annually by the year 2020, tripling from today’s count, with China alone expected to grow from about 30 million in 2005 to over 100 million visitors out of North Asia in just that 15-year period.

When we look at additional ways to take advantage of the valuable footprint we are developing in North Asia, we do not limit ourselves to Singapore. There are many intriguing opportunities around the globe, particularly in Europe, that we are constantly evaluating based on their potential opportunity. You might expect to hear from us about that in the very near future.

On the domestic front, we have filed our application with the State of Pennsylvania for our proposed development of the abandoned and subsequently acquired by us, Bethlehem Steelworks in downtown Bethlehem, Pennsylvania, the closest casino to New York City, less than an hour’s drive away from the affluent northern New Jersey suburbs of New York. We expect to hear by the end of the year whether we will be granted that license or not.

I know this all sounds like a mouthful, but we remain focused on executing our step-by-step plan. At the same time, we continue to develop a pipeline of extraordinary opportunity to propel our growth strategy forward.

As I mentioned earlier, we have added two senior executives to our team. Mark Brown, formerly the COO, President and CEO of the Trump Organization, has joined our Macao operating management team, and Michael Schindler, former Senior Vice President of Development for the Hyatt organization, has joined our development team. We are finding the attraction of our growth platform to be compelling factor in recruiting highly talented executives interested in professional growth and a share of the future value to be built by the execution of our plan.

It is gratifying to see our strategic vision being realized, and it is clearly an exciting and energizing time, both for our company and for its management team. With that, I will now turn the program over to the Operator to begin the Q&A session.

Question and Answer Session

Operator

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?

William Weidner

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 itself wanted to make sure that it goes through it goes through its process. All we can do is try to provide you the best information we can from our perspective as we move along.

David Anders - Merrill Lynch

Just as a follow-up, Scott, maybe you could comment on this. Development expense, how should we think about that going forward? It is a lumpy line item.

Scott Henry

Development expense in terms of the rollout and how it is spent, David?

David Anders - Merrill Lynch

It is just absolute dollars, because the $9 million was a fairly large number, and I am wondering, is it going to stay at that rate for the next several quarters, or drop back to that $5 million rate?

Scott Henry

Singapore represented a little more than 100% of the increase over last year in this quarter. You are right. It is going to be lumpy, David, and because we are chasing after things, that seems to make a lot of sense to us. Different things heat up at different times. I think the number is a big larger than you could probably expect it to be on a recurring basis every quarter, but again, it is going to be lumpy.

David Anders - Merrill Lynch

Thank you.

Operator

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?

Unknown Speaker

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.

Unknown Speaker 2

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.

William Weidner

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.

William Weidner

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?

William Weidner

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.

William Weidner

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.

Operator

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.

William Weidner

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?

Unknown Speaker

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

William Weidner

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?

William Weidner

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.

Operator

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.

William Weidner

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.

William Weidner

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.

Sheldon G. Adelson

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.

William Weidner

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.

Operator

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

Robin Farley - UBS

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

Sheldon G. Adelson

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.

William Weidner

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.

Sheldon G. Adelson

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.

Robin Farley - UBS

Will you start selling before the end of this year?

Sheldon G. Adelson

Yes, I believe we will.

Robin Farley - UBS

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?

William Weidner

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.

Sheldon G. Adelson

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.

Robin Farley - UBS

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?

Rob Goldstein

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.

Sheldon G. Adelson

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.

Robin Farley - UBS

All right, thank you.

Sheldon G. Adelson

He is suffering for me.

William Weidner

Operator, we have time for one more question.

Operator

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

Jay Cogan - Banc of America Securities

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.

William Weidner

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.

Jay Cogan - Banc of America Securities

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.

William Weidner

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.

Jay Cogan - Banc of America Securities

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?

Scott Henry

Just so we know, are you talking about Macao?

Jay Cogan - Banc of America Securities

Yes.

Sheldon G. Adelson

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

Scott Henry

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.

Jay Cogan - Banc of America Securities

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?

Sheldon G. Adelson

It is too premature to tell you at this time.

Jay Cogan - Banc of America Securities

Thank you.

William Weidner

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.

Jay Cogan - Banc of America Securities

Perfect. Thank you very much.

Operator

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.

William Weidner

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.

Operator

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

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Source: Las Vegas Sands Corp. Q1 2006 Earnings Conference Call Transcript (LVS)
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