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Las Vegas Sands Corp (NYSE:LVS)

Q2 2009 Earnings Call Transcript

July 30, 2009 4:30 pm ET

Executives

Daniel Briggs – VP, IR

Sheldon Adelson – Chairman and CEO

Mike Leven – President and COO

Rob Goldstein – EVP

Ken Kay – CFO

Analysts

Joe Greff – J.P. Morgan

Janet Brashear – Sanford Bernstein

Cameron McKnight – Buckingham

Steve Kent – Goldman Sachs

Dennis Forst – Keybanc

Larry Klatzkin – Jefferies

Rachael Rothman – Wedbush Morgan

Operator

Good afternoon. My name is Michael and I will be your conference operator today. At this time, I would like to welcome everyone to the Las Vegas Sands Corporation second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions). Thank you.

I would now like to turn the call over to Mr. Daniel Briggs, Vice President of Investor Relations. Sir, you may begin.

Daniel Briggs

Good afternoon, everyone, and thank you for joining us today. On the call with me today are Mr. Sheldon G. Adelson, our Chairman and Chief Executive Officer, Mike Leven, our President and Chief Operating Officer, Rob Goldstein, Executive Vice President and President of The Venetian Las Vegas and The Palazzo, and Ken Kay, our Chief Financial Officer.

Before we begin, I need to remind you that today’s conference call contains forward-looking statements that we are making under the Safe Harbor provisions of federal securities law. I would also like to caution you that the company’s actual results could differ materially from the anticipated results in those forward-looking statements. Please see today’s press release under the caption forward-looking statements for a discussion of risks that may affect our results.

In addition, we may discuss adjusted EDITDA, adjusted net income, adjusted diluted EPS, and adjusted property EBITDA, which are non-GAAP measures. A definition and a reconciliation of each of those measures to the most comparable GAAP financial measures are included in the press release. Please note that this presentation is being recorded.

I will now turn the call over to Mr. Adelson.

Sheldon Adelson

Thanks, Dan, and thank you all for joining us today.

I want to begin the call today by making a couple of interesting points, a couple of very interesting points. First of all, that is no doubt that the operating environment in both Las Vegas and Macao remains challenging. Our properties are holding up quite well. People are continuing to visit our properties in great numbers and we're generating solid cash flow from a diverse set of revenue streams in both markets. The implementation of our cost savings programs has enabled us to significantly enhance cash flow generation and has positioned us to deliver greater operating margins when the economy eventually recovers.

As we have stated in the past, we are continuing to advance five or six different options to increase our liquidity. We look forward to updating you about this in the near future. And finally, the management team here is the right team to execute our plan. I'm extremely pleased that Robert has now formally extended his contract with us and will be an important member of our management team in the years ahead. In addition, Mike is implementing additional leadership in Asia to adapt and strength to our management team there.

Now I would like to turn the call over to Mike and he'll tell you more.

Mike Leven

Thank you, Sheldon, and thank you all for joining us today.

Let me provide a quick update on the three principal components of our plan. First, to maximize cash flow from our current operating profits in Las Vegas and Macao by rightsizing our business and implementing cost control and efficiency measures. We have now increased our cost saving initiatives to more than $500 million of annualized savings. This is $30 million more than we had previously targeted. And we will continue our efforts to identify additional opportunities to increase that $500 million number. As of June 30, we have successfully implemented approximately 69% of these identified costs, eliminating $345 million of costs from our running rate.

Turning to the second element of our plan, the delivery of our Singapore and Bethlehem developments as scheduled. We are pleased to have successfully opened sales at Bethlehem on May 22 and to have turned the focus of our efforts there towards building operating momentum at the property. At Marina Bay Sands in Singapore, construction, development and pre-opening activities continue on pace, and we are targeting an opening of the property in the first quarter of 2010.

The third component of our plan is to generate sufficient liquidity to enable us to execute our deleveraging and growth strategies. As Sheldon mentioned a moment ago, we are advancing a number of opportunities that would generate additional liquidity. We are perusing a diversity of options and we look forward to updating you in the near future.

I will now turn the call over to Rob to provide an update on our Las Vegas operations.

Rob Goldstein

Thanks Mike. Despite a difficult environment in Las Vegas marketplace overall, our properties delivered adjusted property EBITDA of $78 million in the second quarter. We generated $107 million in adjusted property EBITDA last year second quarter. The primary driver of the reduced performance in Las Vegas was lower hotel revenues, which were down by nearly $30 million, principally as a result of lower ADR across our suite product due to pending [ph] rate reductions in the higher segment of the marketplace.

Visitation at both our Las Vegas properties remain healthy. Occupancy for our combined 7,100 rooms was 90% for the quarter with an ADR of $195. Our strategy to maximize cash flow in this environment remains the same, maintain high levels of occupancy at both hotels, fill as many rooms as possible with segments that are less rate sensitive such as group and corporate meeting business during the mid week periods, and FIT business on weekends.

Our table gaming business, in particular our high-end baccarat business has held up well compared to Las Vegas marketplace overall. The second quarter table drop was $386 million compared to $408 million in the second quarter of last year, a decrease of approximately 5.4%. Slot number was $48.2 million, a decrease of less than 4% compared to last year's second quarter. Despite the relative stability in our business overall, we remain cognizant of the challenging operating environment, particularly with respect to room revenues. We're thus continuing to reduce our cost and right size our Las Vegas operations and that eliminated approximately $135 million from our run rate as at June 30 due to the implementation of our cost savings programs.

Although we are making cost cuts, which principally involve back of the house functions, we continue to strive to provide a five star, five dime experience for our guests. Customer service excellence remains at the center of our culture. It is what we do, what we stand for. We believe these cost initiatives have been implemented with no degradation of the customer experience. We expect to have fully implemented approximately $200 million in annualized cost savings across our Las Vegas operations by end of this year. We will continue to seek additional opportunities to reduce our costs while maintaining our philosophy of maintaining our award-winning customer service.

So in summary people are still visiting our Las Vegas properties in large numbers for both leisure and business purposes but they are spending less once they arrive, particularly on rooms and other non-gaming activities. In this environment, we believe our all suite asset base with it luxury and approachable appeal, diverse dining, retail and entertainment offerings will appeal to a wide range of customer and consumer tastes and budgets. We will continue to generate solid cash flow. As our cost savings programs are fully implemented, our properties will be positioned to perform well when the environment turns in the future.

With that said, I'll turn the call back over to Mike and look forward to addressing your questions at the completion of the prepared remarks.

Mike Leven

Thank you, Rob. Let us turn to Macao and start with the Venetian Macao, which generated approximately $110 million of adjusted property EBITDA for the second quarter of 2009. The property generated a record $140 million in EBITDA over the second quarter of 2008. The decrease in adjusted EBITDA for the quarter compared to last year was negatively impacted by $10 million due to the impact of entertainment losses related to the Cirque du Soleil production and the write off during the quarter of certain retail receivables.

Visits to the property have remained very strong with the Venetian Macao enjoying more than 5.4 million visits during the second quarter. That visitation drove healthy mass play and hotel occupancy for the quarter while rolling play has also remained solid. Our CotaiJet ferry service carried nearly one million passengers in the second quarter while our convention and group business accounted for approximately 13% of our room nights sold.

The three prong strategy for the Venetian Macao continued throughout 2009 with the first initiative, the rightsizing of our business and the full implementation of our cost savings program, as well as other efficiency initiatives front and center. We have now expanded that program to target at least $300 million in annualized cost savings across our Macao operations. The program is designed to reduce our operating costs while preserving as many Macanese local jobs as possible and maintaining a high-quality customer experience for our guests.

As of June 30, 2009, we have implemented approximately 70% of our targeted savings. That is up to $210 million from our annual run rate. The impact of the cost savings will become more pronounced in the coming quarters as the savings from recently enacted cost reductions are realized and as we continue to execute on additional initiatives. Other important areas of the cost reduction program include transportation, utilities and general hotel operating costs. Although we have accomplished a great deal, our work will continue on pace and we will update you on our progress as the year continues.

The second strategy is to grow our mass table and slot business. Our CotaiJet ferry service remains an important infrastructure component in support of visitation to the Cotai Strip in the Venetian Macao. We expect the eventual ramp up of City of Dreams complex to add further critical mass to the Cotai Strip increasing our ferry occupancy over time, which may have been impacted in the quarter by the effect of the H1N1 virus and ultimately to increase visitation to the Venetian Macao.

The promotional offerings of the CotaiJet are being targeted to casino customers and the service continues to drive traffic to the property. The direct service to Cotai Strip is an important contributor to strong slot play for the quarter which was up nearly 20% compared to the second quarter of 2008 and to healthy non rolling chip table games played.

The third initiative is to manage our VIP business. The Venetian Macao's rolling chip volume of 9.8 million during the second quarter was consistent with the second quarter of last year and up over 13% sequentially from the first quarter of 2009. VIP revenues in the market overall for the quarter were down 19%, so we're pleased with the Venetian Macao's relative performance. While the VIP business remains an important component of our business, it contributes less than 12% to our adjusted property EBITDA at the Venetian Macao although that figure was impacted by lower hold this year compared to last year.

That 12% compares to approximately 25% during the second quarter of 2008 and illustrates the increasingly diversified nature of our cash flows with over 30% coming from non-gaming sources, principally hotel rooms, entertainment and retail, and nearly 60% coming from mass gaming play and slots in the second quarter of 2009. Our principal objectives for the VIP rolling business remains the careful management of the business and the control of credit risk while we focus on the development of both profitable direct play.

During the second quarter, our non junket VIP play at the Venetian Macao represented 16% of our total rolling volume compared to 13% in the second quarter of 2008. So in summary, these three strategies have contributed to a solid performance for the Venetian Macao during the quarter. The full implementation of our cost savings program will contribute additional EBITDA in the coming quarters.

Let me spend a moment on the Sands Macao. The Sands delivered $61 million in adjusted property EBITDA for the quarter compared to $54 million in the second quarter last year. The results reflected healthy mass gaming volumes and expanding EBITDA margins on a smaller revenue base. The cost savings initiatives we have implemented at the property today are positively impacting both the Sands EBITDA margins and its financial performance.

The Sands remains a leader in mass play in the Macao Peninsula, delivering non rolling drop of greater than $595 million and nearly $300 million in slot handle. Rolling volume of $4.7 billion was down compared to the quarter one a year ago. We will continue to implement additional savings and other efficiency measures to further reduce the Sands' cost structure.

Now a comment on the Four Seasons Hotel. The property generated nearly $6 million in adjusted property EBITDA during the second quarter. Although we have experienced a slower ramp up at the property that we planned, awareness of the property is growing, with weekend play and visitation in particular gaining momentum. The Four Seasons Hotel reached 44.5% occupancy with an ADR of $291 for the second quarter of 2009.

Looking ahead, we hope to benefit from both the launch of new marketing programs at the property and a natural increase in visitation to Cotai as our neighbor the City of Dreams continues to mature. We should also benefit from the recent addition of our 19 luxurious Paiza mansions, which have been full since they have opened. These exclusive suites, among the most luxurious in our portfolio, are being marketed directly to VIP customers residing throughout the region. So that covers our Macao operations.

Let us spend another moment on Sands Bethlehem in Bethlehem, Pennsylvania. The property opened on May 22 and has received a wonderful perception from the City of Bethlehem, the people of the Lehigh Valley and the wider region. Visitations to the region property, particularly on weekends, has been very healthy. We expect to increase visitation and play at the property as our player development, promotion and bussing programs mature in the months ahead, particularly in the mid-week businesses situation.

Turning to our development activities at Marina Bay Sands in Singapore, construction, development, and pre-opening activities continue on pace, and we continue to target a first quarter 2010 opening. We're working closely with the Singapore Tourism Board and we will continue to do so throughout the summer and fall as we collaboratively work to finalize our opening days.

With that, let me turn the call over to Ken to provide an update on our liquidity initiatives and capital resources overall.

Ken Kay

Thanks, Mike. As Mike mentioned previously, advancing opportunities that will generate liquidity, enhance our credit position and enable us to execute our deleveraging strategy is an important aspect of our plan. We are advancing a number of options to do just that which may include the sale of a minority equity interest in our Macao operations, and we look forward to providing you with an update of our progress on these opportunities in the near future as they come to fruition.

With respect to our $500 million of cost savings, we have achieved approximately $345 million in total cost savings across Las Vegas and Macao. Of the $70 million in savings realized in the second quarter of 2009, approximately $35 million was realized from Las Vegas, and approximately $35 million was realized across our Macao operations. An important point with all these cost savings measures is that we view them as permanent. We expect to realize significantly improved EBITDA margins as revenues expand.

Turning to liquidity and capital resources, as of June 30, we have approximately $2.7 billion of cash, cash equivalents and restricted cash on the balance sheet. In addition, we have approximately $1.3 billion of availability under our undrawn credit facilities at current exchange rates, principally through our Singapore credit facility. So together, we have approximately $4 billion of cash, cash equivalents, and available sources of liquidity. The uses for that $4 billion includes approximately $2 billion of capital expenditures for the opening of Singapore.

Total debt is $10.8 billion of which no significant maturities occur until May of 2011 when approximately $570 million related to our Macao revolver comes due, and then in May 2012 when our US revolver is due. Scheduled principal payments required for the remainder of 2009 and in 2010 totals $63.3 million and $198.8 million respectively. In addition to not having near term maturities on our outstanding debt, the cost of borrowing is quite low with a current weighted average rate of approximately 2.97%, which reflects a healthy reduction from the weighted average second quarter rate of 5.6% in 2008.

With respect to our debt covenants for domestic credit facility, our trailing 12 month EDITDAR at June 30, 2009 for compliance purposes was $452 million. At June 30, 2009, our total gross domestic debt for compliance purposes was $5.2 billion. Our cash balances within the US restricted group were $2.2 billion and our calculated net debt for covenant compliance purposes was $3.1 billion. Our leverage ratio for covenant compliance purposes was 6.76 times compared to a maximum leverage covenant for our US credit facility of seven times.

For the Venetian Macao restricted group, our trailing 12 month EBITDA at June 30, 2009 for compliance purposes were $827 million. At June 30, 2009, the Venetian Macao restricted group total gross debt for compliance purposes was $3.17 billion. Our leverage issue for covenant compliance purposes was 3.83 times compared to a maximum leverage covenant in the Venetian Macao restricted group of four times. Our cash balances within the Venetian Macao restricted group were $473 million.

And with that, I'll turn the call back over to Sheldon.

Sheldon Adelson

Thanks Ken. Before we go over to the Q&A, let me make a couple of final points. First, we are singularly focused on the execution of our plan, and that plan is quiet straightforward. To maximize cash flow from current operations, open Singapore and generate additional liquidity to enhance our credit position on our balance sheet. We are executing on these things and have complete confidence we will complete this. From there we will be very well positioned to resume our industry-leading growth trajectory.

We possess very high quality assets and differentiated operating strategies in each of our markets. Our assets have broad appeal across diverse customer segments. At our highly profitable mass business in Macao – our highly profitable mass business in Macao positions us quite well. And our Singapore property, an asset with the potential to generate the strongest growth in our entire portfolio is targeted to open approximately 6 months from today.

And I would like to make another point that seems to get lost in the shuffle of figures and that is our original business plan. Our original business model was to build core and non core assets, sell off the non core assets at the right time and pay down or pay off all of the financing related to building the core assets. So when we talk about owning $10 billion plus, first of all, we break it up into three groups. About a little more – about a third of it, or a little under a third in Singapore, it is totally reliant upon the Singapore assets. That is its primary collateral and we feel quite good about Singapore. The leasing activity in the recent past has really undergone a trust in demand. So the activity in the GDP and Singapore is improving quickly.

So we expect overall that our original business plan will be amply executed in Singapore by selling the cash flow of the retail mall in Singapore and either substantially reduce or eliminate the total debt to build Singapore. In the case of Macao, the cash flow and the sale, of course, we have to wait until the current real estate property market improves, but it is going better in Asia than it is in the United States, and we expect it to – you know when everybody reasonably expects it to get back to normal, when it gets back to normal, we will sell our retail – we will consider selling our retail, if we can get the exaggerated price we are looking for.

And we do intend to start selling the Four Seasons apartments, serviced apartments as condominiums, hopefully by the end of this year. And I was in China, this past week, came back Sunday night, and the South China Morning Post saying that there was becoming a shortage of apartments in Hong Kong. So people are opening up – they are picking up their mattresses, taking their money out, and they are starting to buy apartments, and they made reference to the old style of Hong Kong apartment sales that several projects get sold out within two or three days of they being exposed to the market. So we do expect a very good response on the Four Seasons apartments.

And in Las Vegas, as the market returns to normal, and you're guess is good as ours, but things appear to be appearing more normal in today's – currently than has been over the last six to twelve months, then we would be able to hopefully restart our condominium project, the St. Regis project for condos and then substantially reduce our debt in the Las Vegas market plus upstreaming money from Macao and Singapore.

What I want to say is that our business plan, our business model is just completely different from other business models. Other business models rely upon paying off the debt to build the properties only through operations. So when I look into only to operations to pay off our debt, we will look into our very unique fundamental business plan, by selling off our retail and other apartments, and reducing the – reducing or eliminating all of our debts.

So we don't feel as uncomfortable as just a superficial look might encourage some people to look, where they would say, hey, they have got a lot of debt, and how are they going to pay that off quickly from operations? Well, we have the non core assets that we've built to make a substantial dent in those big numbers.

So with that now, I think it is time to move to Q&A.

Question-and-Answer Session

Operator

(Operator instructions). Our first question will come from Joe Greff with J.P. Morgan.

Joe Greff – J.P. Morgan

Good afternoon, everyone. I have a couple of follow up questions on the second quarter results and then I will, if I could, ask some big picture strategy questions of you, Sheldon and Ken, on liquidity. The 10 million write off that you refer in the press release, Mike, I believe you said that was in the 110 million of adjusted EBITDA in the quarter?

Mike Leven

Right.

Joe Greff – J.P. Morgan

Okay. And what was the net hold impact at the Venetian Macao if you were to adjust for normal on both VIP and mass?

Ken Kay

In the Venetian Macao?

Joe Greff – J.P. Morgan

Yes.

Ken Kay

It is about 17 million.

Joe Greff – J.P. Morgan

17 million net benefit?

Ken Kay

Yes.

Joe Greff – J.P. Morgan

Yes, okay. All right. And then corporate expense, obviously you referred to what the big year-over-year increase was, if we were to back out that one item that you referred to, what is the normalized corporate expense run rate in the quarter and going forward?

Ken Kay

I'm sorry. Say that one more time.

Joe Greff – J.P. Morgan

If you back out the one time item in corporate expense, what sort of a normalized level there?

Ken Kay

Yes. It is probably in the, I would say – well, there is two ways to answer that question. And in the environment in which we are also including cost avoidance, meaning limiting salary increases and bonuses, it is probably in the, I want to say, about the $20 million range. Obviously, when business conditions improve, then you would expect bonus compensation and incentive compensation to come back. The numbers will be higher than that, but for the time being, it is probably around $20 million a quarter.

Joe Greff – J.P. Morgan

Great. And then, Ken, Sheldon, what sort of a timetable for you that you think you can come through and figure out the liquidity situation before the Venetian Macao covenants starts to put , so to speak, a noose around your neck? And then from a timing perspective, what is the earliest you think you can do something in Hong Kong?

Sheldon Adelson

What do you mean do something in Hong Kong? You mean go to have dinner there?

Joe Greff – J.P. Morgan

Well, you will probably do that pretty soon. You probably…

Sheldon Adelson

We have great Chinese restaurants…

Joe Greff – J.P. Morgan

… doing an IPO in Hong Kong, I mean if you were to have everything set like I think you guys are, what is the earliest that you guys could do it assuming the market is receptive?

Sheldon Adelson

Why a fishing expedition, Joe? I will just repeat. We have not finally decided. When we finally decide what route we're going to take, we will announce it. Until we do announce it, no final decision, and none of the five or six approaches that we are taking are decided upon. We may do – we may take two or three steps of the five or six that we're considering. I know there has been a lot of publicity about since Wynn filed its IPO in Hong Kong. It has been almost a given that we're going to follow on. So I would just like to caution that that final decision is not yet made.

We're still talking to all the people with whom we have spoken before. We're talking to construction companies about putting money up for five and six. So I think that the decision as to what route to take, hopefully we will make it within the next month, within the next 30 days, and start to implement those decisions before the end of the year. We are anxiously looking forward to starting lots five and six and have a reasonable feeling that we will be able to get the financing to do that.

And we will announced, if and when we're going to do an IPO, otherwise if and when we're going to do private equity, or any other form of financing. But I could tell you this. Negotiations and discussions are going on virtually every single day. And so there is no final decision yet. The opportunities become more plentiful and more palatable as each day goes by. I wish we had a year or so to wait but we shouldn't do that. We should – we'll get money and improve our liquidity position as soon as we can.

Joe Greff – J.P. Morgan

Thank you.

Sheldon Adelson

You're welcome.

Operator

The next question will come from Janet Brashear with Sanford Bernstein.

Sheldon Adelson

Hi, Janet.

Janet Brashear – Sanford Bernstein

Hi. How are you? Thanks. First question, if I could ask this without incurring Sheldon's wrath, I'm curious about the City of Dreams. It appears that it has posted some significant share gains in July. I’m curious as to whether you would characterize those as market expansion or share shift, and if it is share shift, who is losing to them?

Sheldon Adelson

Well, I could tell you that we have – the fellow who runs all of Macao was just here for our board meeting presentations that have occurred over the last couple of days, and he said we put up a camera to watch the traffic going across the street. And he said for every one person that goes from our property to their property, two people come back. Now, you know, you have these, it is – we just don’t have somebody there with a clicker. We have these – I don’t know these high-tech gadgets that count people as they walk in and that is how we get counts.

You want to incur my wrath, Janet? You were absolutely positive in your prior report that the City of Dreams is going to cannibalize us. The fact of the matter is that our attendance is going up and very happy to say that because the traffic had I think to all of Macao had sunk a little bit, because of the H1N1, or let’s call it the swine flu scares, we think that’s abating now, and that there are more people coming, and I think we are back to – for instance, over the past weekend on one day, we had 94,000 people at the Venetian Macao.

And the next day we had 98,000. And a normal high demand peak period for a weekend would be give or take a 100,000 for each of the weekend days. So the City of Dreams is contributing to the solidity of the Cotai Strip location, and we feel quite comfortable. So we are going to allow them to connect to our overpass walkway that go – pedestrian – raised pedestrian walkways to go over the main street.

So we are not concerned about them taking traffic from us. We know that our properties will be the must see properties and whatever people they get that go to the – that come to Cotai to go to the City of Dreams will also go to our properties, The Venetian, The Four Seasons, and when we open five and six, which we hope to do within a year from the time we started, we’ll be the major beneficiaries of the cross traffic.

Janet Brashear – Sanford Bernstein

Can I ask about the Sands and the Peninsula? All the revenue components are down. Your EBITDA margin is up an impressive six points and your EBITDA is up 13%. How do you do that?

Sheldon Adelson

By cooking the books. Just kidding, just kidding. Mike, you want to answer that?

Mike Leven

I think that the Sands situation has been, some of the planning on how we’re working the floor and also some cost reductions that have gone in and have been implemented in the Sands that have produced better EBITDA. Also significant degree of mass market gaming, which is – much of it is higher profitable on a margin basis. So that’s why you’re seeing I think the margins are so much better, and they are continuing as well.

Janet Brashear – Sanford Bernstein

One final question, Sheldon…

Sheldon Adelson

I would like to just finish off what Mike said. They are continuing. We normally don’t go into the current quarter when we make the call but it is continuing on the upside, above the run rate at the second quarter.

Janet Brashear – Sanford Bernstein

Okay. Thanks for that. Sheldon, as you meet with the Casino Association, it’s been reported that some of the topics are tax rates and junket commissions, are there other issues at the forefront of those discussions?

Sheldon Adelson

Well, I wasn’t at the last meeting, Steve – Steven was. I was there a couple of meetings ago. And we all signed a document at the time saying that we all agree to put a cap on the junk – on the junket rate commission. But in the interim, we’ve agreed with City of Dreams and we’re both holding and we’re staying at 1.25 including comps. To the best of my recollection, there was no material discussion – there was no discussion of any other material issue. I brought up discussion about the getting better handling of the – at the airport, and talked about the other issues about the light rail and adding on to the and accelerating the completion of the Cotai – Pac-On ferry terminal, where we bring our ferries into, but there was no substantial discussion of any other material issue.

Janet Brashear – Sanford Bernstein

Thank you.

Operator

Your next question comes from Cameron McKnight with Buckingham.

Cameron McKnight – Buckingham

Hi, guys. How are you?

Sheldon Adelson

Good. How are you doing?

Cameron McKnight – Buckingham

Well. Very quickly, wondering if you can give us an update on the renegotiation of the covenants with the Macao Bank Group?

Sheldon Adelson

What did he say?

Ken Kay

The Macao Bank Group covenants?

Sheldon Adelson

Update on the covenants?

Mike Leven

Covenants and negotiations, Ken?

Ken Kay

Yes. That process continues. I think we have gotten some pretty favorable feedback in our recent discussions with them and we are optimistic that we will bring that to a favorable conclusion in the near term.

Sheldon Adelson

There is always a low bid and a high ask, and just like in every negotiation, we are trying to bridge the gaps.

Cameron McKnight – Buckingham

Got it. So would it be fair to say that it is more about the price rather than whether it will happen?

Sheldon Adelson

Well, I think that’s fair to say.

Ken Kay

Yes. I think there is always give and take in the negotiations that Sheldon mentioned, and we think we will come to an amenable conclusion for both sides.

Sheldon Adelson

I think if your thinking is that they have not given it to us, that’s not the case at all. There is definite – there is a definite package of goodies that they want, which obviously we as the other side think are highly exaggerated, but doesn’t that happen in every negotiation?

Cameron McKnight – Buckingham

Absolutely. And the expiry on your offer was tomorrow, is that correct?

Sheldon Adelson

I don’t know.

Ken Kay

The original date is, but that has to be extended.

Cameron McKnight – Buckingham

Okay. Sure. And just a question for Rob, Rob, your outlook gave us some color on what happened with the slot flow at Venetian Las Vegas during the quarter?

Rob Goldstein

Sure. We have been rethinking it for the last three, four quarters to reflect less poker play and our goal is to – I just see by the numbers our hold percentage is increasing, our handle is off, but that’s calculated in our thought process, because we just don’t see the value on all the poker play we have taken previously, and we still drove I think good results in this market. We were down you know very little compared to the market, very pleased with it. And it’s our belief the poker business gets tougher and tougher and so we’re de-emphasizing it. We still have poker play available but some of the team play and some of the tougher costs we have passed on and we have just gone to better margin and better results.

Cameron McKnight – Buckingham

Got it. So how should we think about slots going forward? I mean are the volume numbers you posted this quarter indicative of what we might expect in the going quarter – in the coming quarters or was there some degree of disruption in there as well?

Rob Goldstein

I think we will continue to you know hopefully try to improve last year's results in the third quarter. I mean one thing that is happening in the slot side of our business is that we are giving more rooms away, we never did it in the past, complementary rooms to the slot segment. We are able to do that because of it is available to us, obviously occupancy were up a bit. But if there is one part of our business I feel good about, it is our slot business. It grew our numbers versus our competitors, and I’m very pleased, and I think we will continue to move upward. We just want to mange our costs because our goal at the end of day is to make money not just drive revenue.

Cameron McKnight – Buckingham

Okay, great. Thanks very much.

Rob Goldstein

Welcome.

Operator

Your next question comes from Steve Kent with Goldman Sachs.

Steve Kent – Goldman Sachs

Hi, couple of questions. First, Mike, could you just talk a little bit about the expense reduction program? And I guess I would – what I would say is that, the company, LVS has always been very return focused and pretty tight fisted. So to find $500 million in expenses is impressive and I just want to know the strategy of how you are doing that and how it's not impacting the consumer in any significant way. And then, Rob, maybe you could just talk about the convention calendar over the next 12 months, and also what your plans are to react to the City Center opening?

Mike Leven

Steve, the answer to the – thank you, the answer to the first part of that first question regarding the millions of dollars that we have found, first of all, let me say that the previous management before I got here had identified a significant amount of that. We just went to a different situation starting around the beginning of April finding more. That split about roughly $200 million in Las Vegas, $300 million in Macao.

We track very, very consistently our guest satisfaction, customer complaints and what have you, and we have seen absolutely no increase in customer objections or problems with what we have done. We have carefully gone through every potential saving situation in order to identify those non-customer related activities, some of what we call soft costs, the advertising, marketing expenses, things of that kind. And some are high costs, which represent pay roll activities and pay roll situations, changing the way we do business and the cost of call centers and things of that kind, that represents saving that don’t affect the customer whatsoever.

Clearly, the number sounds very, very large, but one has to recognize that these operations are enormous in size. We are dealing with 7,100 suites in Las Vegas or 3,600 or 3,500 suites between the Sands and the Venetian Macao. The numbers of employees, the numbers of transactions, the numbers of activities are gigantical in size. So we have been able to very carefully find ways to do business differently and to achieve those numbers.

We are very, very aware of the fact that we can’t absorb customer complaints and we monitor them. But I would say we have done a really good job and we have seen nothing that indicates that we have gone too far. And frankly, I think we are pretty close to the end of what we are doing in that particular situation with our identification. We will find some more stuff around the edges because you always do, but we are watching it every day to make sure that we don't go too far away.

Rob Goldstein

Steve, as to the group side of the business, it is – there is demand. The good news is demand is certainly there, it is returning, it is getting better for both the balance of this year and in 2010 and 2011. The issue is going to be rate because, obviously, we love to go back to running 45% of our mix being group driven, and it enables us maybe to fill and fill it fast, ADRs, and the banker revenues with it. I don't think we are going to get there because of the rate issue. We can fill the hotel and get to 40%, 45% again?

But we are not seeing the rates we are used to, so we are holding back a bit trying to be more judicious and looking out to strengthen the wholesale until we see rates return to a place we are comfortable with it. That being said, July bookings this year really increased (inaudible) to a level we are happy with what we are seeing. Demand patterns are strong. It is simply competitive pressures on the rate that have those concerns. And we believe we will come back, but it is not as – it would be wrong to say that it is back to levels we like to see it at and again it is a function of rate not a function of demand.

Sheldon Adelson

I think – this is Sheldon. Hi, Steve. I think that and knowing the convention market like I do, I think that what we are seeing is people are seeing rates that hotels are willing to sell at today to different groups. And I think that that will last forever. But we are not succumbing to those low ball rates and low ball offers, because as the market gets back to normal, and we are seeing it move faster back to normal. As Rob just said that, we have had a very good July, selling July, I mean to sell for future months.

I think that that as people understand that we expect the market to go back to normal, the room rates will go back to normal. We have just got to hold in tight and not cave in to the low rate mentality that these show organizers, show producers want us to cave into. But listen, we have got to – we can’t be as strong as we were in the past. We will have to take a little bit of time to ramp up to get back to normal.

Steve Kent – Goldman Sachs

Thanks

Operator

Your next question comes from Dennis Forst with Keybanc.

Dennis Forst – Keybanc

Yes. Good afternoon. I wanted to ask Rob about The Palazzo and Venetian hold percentages. I noticed that there was a big difference between the win per table at The Palazzo versus The Venetian that would indicate to me that The Venetian had a very long hold.

Rob Goldstein

You will be correct to assume that. But again I mean it swings dramatically, same thing is happening this month, it swings dramatically, and in some months we play lucky, one place goes to the other. There's two types of business on the table inside, there is the mass table and it is the high end. On the high end side, we do have – we do have a high end side, you know, a lot of volatility. This month we have had extraordinary amounts of high end play in The Palazzo, and it depends where it is at.

You can almost – you can almost assume that our mass table play will come in at 15,16, 17, and at the end of the day our high-end play will come in at the high 20s, I mean the handle will be $10 billion in Las Vegas since we opened The Venetian, and the truth is we really sell them at high 20s, 28, 29 and 30. And in the end that is where it will be at. But you will have volatility and we kind of expect that, it is not surprising.

Dennis Forst – Keybanc

Okay. And why are there so many more tables at The Palazzo? And more important than that, the trend sequentially, you added tables at The Palazzo in the second quarter and dropped The Venetian by about 15 tables?

Rob Goldstein

We are moving our – we are constantly looking at our mix. We are not looking any more at this building as a Venetian versus Palazzo or vice versa, we are looking at what is the right mix of tables and slots on both sides. You can choose to downsize our slot floor dramatically from the opening of The Palazzo, we keep looking at what we need to have on the floor. As you know in Las Vegas, the capacity issues I think in every hotel in this town, there is probably too many slot machines relative to demand.

I think the table games we are trying to right size there as well, looking at staffing, where the demands are. But at the end of the day, we are going to have enough tables and slots to satisfy the busiest weekend, the busiest night. We are just trying to step intelligently and obviously we are buying slots machines these days. It is obviously expensive and we want the right mix, but there is no magic to it.

We treat it as one large gaming floor, we look at the manpower,, we look at the traffic, we are constantly look at our cost side. And frankly it is just simply a day in, day out exercise of trying to right size the tables and slots. Again back to an early question of volatility, you know volatility is what it is, and you are going to have nights where you are going to win money in table games, especially of the high end baccarat play where you are betting a lot of money, and you are obviously going to lose a lot of money. But I don’t think there is any magic to it, it doesn’t matter, Venetian, Palazzo in the end, it is the same building to us.

Dennis Forst – Keybanc

Okay. And you had mentioned that I think in the group business that when things are good, you get about 45% of your rooms from group…

Rob Goldstein

Yes.

Dennis Forst – Keybanc

What has it been the last six months?

Rob Goldstein

We dipped down in the first quarter. For the year, we have dipped down below the 25%. And again the inching part of the equation is that demand is there. There is demand coming back on line from especially pharmaceuticals, fast food, we are not seeing return in the financials, obviously would be automotive, but there is demand on the group side and it continues to get stronger.

The problem we are having is rate pressures. So in a perfect world back in 2007, 2008 until the third quarter, we ran 44% occupancy of our hotel, mix was group, and we are now dipping down below the 25%, which is not where we want to be at. So again we are not going to take rates, they are simply silly relative to the (inaudible) we achieved in the wholesale FIT market. We will move more into casino (inaudible) et cetera.

Dennis Forst – Keybanc

Okay. And then you mentioned Palazzo had a lot of high-end business in July. How was the hold?

Rob Goldstein:

I am not going to talk about that, am I? We can't talk about that.

Dennis Forst – Keybanc

You can't?

Rob Goldstein

No.

Dennis Forst – Keybanc

Okay. And then lastly, can you give an indication of what the Palazzo's contribution EBITDA contribution was over that 78? Usually each quarter you kind of breakout the two properties.

Rob Goldstein

Is that handy, I have cumulative, if you hang on one second, we can dig that out for you. We didn't break it out. So you can just go through our numbers and pull it out. One second. Jeff, can you…

Sheldon Adelson

While he is looking for that, I want to explain on the answer that I gave before about liquidity. So I want to emphasize that there is no question whatsoever that in the near feature we are going to have a decision on which is the best opportunity for us to create the liquidity that we would like to have. So this is not a question of if, it is only a question of when, and what are the most favorable terms for us. So when we come out with the answer, it will be an answer that will be the best answer available in the market today.

Rob Goldstein

On the question of Palazzo contribution, it is actually $45 million EBITDA for the quarter, up from 34.7 Q2 of 2008. And the leading factor there would be our ADR climbed to 2.07. The Palazzo is getting stronger every day.

Dennis Forst – Keybanc

Yes. It seems like the Palazzo is becoming the place of choice of the – the handle is higher, you have got more tables, your room rates are higher. It has to have to do with the location, closer to the higher end properties than The Venetian next to the Harrah's property.

Rob Goldstein:

Look, the Venetian is a ten-year-old product. The Palazzo is newer and fresher. And the room product in The Venetian is extraordinary, as good as any room product. We spent a $100 million to make the room product in The Venetian compete. We are working and looking into a casino floor, but you are right, the Palazzo has become a very successful product, and sandwiched between Wynn and Venetian, it has got great cross traffic from (inaudible) but the original Palazzo will get there, it has gotten there, it has arrived.

Dennis Forst – Keybanc

All right.

Sheldon Adelson

That was the original plan for that? Is this Dennis?

Dennis Forst – Keybanc

Yes, Sheldon, it is.

Sheldon Adelson

Hi, Dennis.

Dennis Forst – Keybanc

Anyway thank you very much. And keep up the good work.

Sheldon Adelson

Thank you.

Dennis Forst – Keybanc

Good luck going forward.

Sheldon Adelson

The original plan for The Palazzo was to create a property that appealed to different tastes and not just to good looking taste of people who like The Venetian. And since it is newer and it took a lot longer to get it open from the – compared to the – relative to the time we first opened The Venetian, so obviously we get a higher rate out of that because it is newer and people expect to pay a higher rate. So it is really accomplishing the basic purpose for which we established it.

Operator

Your next question will come from Larry Klatzkin [ph] with Jefferies [ph].

Larry Klatzkin – Jefferies

Hi, guys.

Sheldon Adelson

I thought Larry got lost.

Larry Klatzkin – Jefferies

Hi, save the best for last. Couple of things here. One the commission cap agreement among the various operators, Sheldon, is there a method set up for enforcing that and how do you expect it will affect your bottom line?

Sheldon Adelson

I think it affects the bottom line. Ken, can you give us an estimate of how the commission affects our bottom line?

Ken Kay

Yes. It should be an improvement that is probably north of about $30 million.

Sheldon Adelson

All right?

Larry Klatzkin – Jefferies

And as far as enforcement goes?

Sheldon Adelson

A quarter or a year?

Ken Kay

A year, on an annual basis?

Mike Leven

That is just The Venetian not for the Sands.

Sheldon Adelson

That is just for one property.

Ken Kay

There would be as well The Venetian and the Four Seasons, right.

Sheldon Adelson

30 million to 40 million minimum?

Ken Kay

Yes.

Sheldon Adelson

What was the first half of the question, Larry?

Larry Klatzkin – Jefferies

Whether there is an enforcement so that since in Macao not everybody follows the rules in play?

Sheldon Adelson

Well, that is a good question. There has been no – when I was there I committed to do it on the onus system, the breach of which will be reason to beat people up with a wet spaghetti noodle.

Larry Klatzkin – Jefferies

All right.

Sheldon Adelson

I just don't know how it is going to be. Well, according to quote Francis Tandy [ph], Head of the Economic and Finance Ministry, said that there will be – he will suggest that $0.5 million per occurrence breach of the regulation, because this will not be just an agreement amongst the operators, it will be embedded in the law. So, there has been no final agreement on it. The most that I have heard is the possibility of that half a million dollar penalty, but who knows?

Larry Klatzkin – Jefferies

All right. And then as far as the new administrator coming in, Sheldon, what are your expectations, hopes?

Sheldon Adelson

You mean the new chief executive?

Larry Klatzkin – Jefferies

Yes.

Sheldon Adelson

Yes. Fernando Chui, we visited, I don't have a lot of experience with him, but the experience we do have with him is very positive. He is a very bright, he went to PhD in the US, and he is a very, very bright person, very – he is not going to be a bull in the china shop, or at least that is what the press says. He is going to continue a lot of the same policies, but then change some of them.

The one thing that Edmund Ho was quick to point out that he won’t open the door on the question of reducing taxation. What I want to point out there is, the taxation is 35%, and that's what they think of it. We think of it as 40, because there is a 4% additional tax, but it goes to the Macao Foundation. They don't call that a tax, they call that a contribution. That can be usually removed by just a dictate from the Chief Executive. He doesn’t have to go to the Legislative Council for that like you would have to go to reduce anything from the 35.

So we rounded it out to 40% because there are small taxes on per machine per table that probably go 1% of the rule. Actually what we are looking at is, number one, he has stated repeatedly that tax reduction is on the front burner. And even Stanley Ho was talking about tax reduction at the Gaming Association meeting to compete with Taiwan, to compete with Singapore and the Philippines. So it appears as though there is a lot of momentum in favor of the tax reduction. Did I answer the question?

Larry Klatzkin – Jefferies

And then as far as Pennsylvania tables, I mean I know the government made some comments when you opened. What are your hopes for that and what kind of upside do you see?

Sheldon Adelson

My last memo from our government affairs guys came out two days ago said that it appears pretty likely that it will pass before the end of the summer. And that – I remember when I was there for the opening, the Head of the Gaming Commission said it will take like nine months to implement the rules. That will be a big game changer for Bethlehem. It will be the closest casino – full casino to New York City.

Larry Klatzkin – Jefferies

All right, thanks

Sheldon Adelson

So they said – they said it is likely to pass by the end of the summer, and if doesn’t, it will pass for sure in the fall.

Larry Klatzkin – Jefferies

Okay. And then last question, General Growth, what’s the final result on that, do you guys end up getting the mall back? What exactly happens there?

Sheldon Adelson

General Growth, that’s a misnomer right now, it is General Shrink. Discussions and positioning is still occurring. We don't know what we are going to be able to close there.

Larry Klatzkin – Jefferies

All right. Thanks Sheldon.

Operator

And our final question will come from Rachael Rothman with Wedbush Morgan.

Sheldon Adelson

Let me just add on to what I said before, our general counsel tells me that General Growth is in make up shape, so it is up to the bankruptcy court.

Ken Kay

Okay, Rachel.

Sheldon Adelson

Go ahead.

Rachael Rothman – Wedbush Morgan

Thank you. I just had a bigger picture question on Las Vegas, if I could, specifically I guess on room rates and RevPAR and occupancy. Looking kind of out to 2010 as we think about the three buckets of your business, the visa, traveler or gambler, and then the conventional association business, and then the individual or FIT business, I guess you guys have cut rate enough to sustain occupancy, but historically it is been pretty hard to drive rate on leisure I guess?

And conventions and associations and FIT being a late cycle play, how should we think about rate improvement? And then as we look at the cost containment, with the cost already having been taken out of the business, will any further rate declines – how should we think about the flow through from RevPAR to EBITDA, kind of in years two and three of the downturn? Thanks.

Sheldon Adelson

That is a tough question, I will answer that. What I want to point out to you is that our property is substantially differentiated from other properties. We are not just a hotel, we are an all suite hotel that has the – that has amenities, we are an integrated resort, that other properties don’t have. So for instance, we have like many hundreds of thousands of square feet of shopping, where other hotels have either none or small amounts. The only property that connects with – there are two other properties that connect with large shopping malls, that is Caesar's Palace connected to The Forum, and the Desert Passage that connects to the Planet Hollywood, or that surrounds the casino in Planet Hollywood.

So we have four show rooms here and most of the hotels have only one. We are a different value proposition. So when people look at paying, we think we can get away with something $50 or $75 more than what just a plain hotel room can get. So not all hotels, not all Vegas properties are created equal. We think we are created a little more equal than others and our ability to get back to normalized ADR is probably better and faster than our competitors. Of course, The Palazzo and Wynn are – still have a very, very high level of appreciation.

Ken Kay

I think we will continue to balance the segments you referenced and obviously we had a look – you are talking out the booking timing, is the issue for us. We can sell the hotel if we want to (inaudible) but the rates aren't favorable. We will watch the rates in all segments and play to them. The one we are moving into, obviously we are moving more into leisure FIT, expand to a casino, because we think there is an upside there for us, that have more of a balance toward that, those two segments.

But when the rates return in the group market, that will be our first choice because of the midweek booking and also because of bank book, but we are watching all of it closely. We believe rates will move up this fall and then we are going to realize that Las Vegas is too discounted, is too cheap, and the Palazzo is too good to be selling at these rates. I mean hopefully post Labor Day, we will see a return to a better placement rate issues in those segments.

Rachael Rothman – Wedbush Morgan

I guess on the margin flow through, if we could just use an use an analogy from the hotel industry, yourself being from the hotel industry. You know looking at kind of the progression coming out of the 2001 recession in September 11. By 2003, RevPAR declines had moderated if I recall correctly, may be they were just down 0.5%. But EBITDA margins in the industry overall fell 300 basis points, as the flow through was pretty severe, most of the low hanging fruit out of the cost structure had already been taken. So I guess how should we think about the potential relationship between RevPAR to EBITDA margin flow through as we enter years two and three at the downturn here without you know a material rate uptick?

Ken Kay

I think – I think we have a lot of upside in this company because we have the right sized building. I think that every dollar – as the ADR has climbed, it should augur pretty healthier. I mean we have a structure that a $20 or $30 increase of ADR would be very impactful for us and I think 90 plus percent would flow through the EBITDA. Mike, do you…?

Mike Leven

Yes. I, having went through those years and seen what has happened, what you have seen in the hotel industry, if you are in hospitality industry, they looked at it on a non-casino basis over those cycles since – actually since 1990. What happened in the business over the last four or five year is that room rate had dramatic increases all over the place. And now what you are seeing is it coming back, but it will never go back to where it originally started from.

It generally comes back and then goes forward, it is sort of two steps forward and one step back kind of situation. What you see is right sizing going on in a lot of situations, but some are not as pliable as we are here to really gain the maximum advantage. Because we have so many rooms and so much demand, it simply – we think the rate problem is more psychological than it is actual.

And basically just a couple of weekends ago, we had a $241 weekend rate here. And so that’s available to us, and if these cost of operations that flow through is positively astronomical, I mean you’re going to get almost $0.90 – $0.90 on the dollar is going to come right through to the bottom line at the EBITDA level, flows really right through. So I think that’s really our hope is we are very well positioned to be able to take advantage of any kind of improvement in the marketplace, some of which is created by the market and some of which is created by the operators themselves, who are willing to take the risks and go higher, and we are already implementing some of those strategies.

Rachael Rothman – Wedbush Morgan

Great. Thank you very much.

Operator

And I would now like to turn the call back over to management for closing remarks.

Sheldon Adelson

Closing remarks, I just want to go back to what I said earlier about the liquidity issue. This is something that is a first priority on my mind, on our minds, and we expect to have an announcement about that in the near future. But it is a – I forget the expression, but it is a something of plenty. We have five or six different opportunities to mix and match certain opportunities that are out there.

For instance, to have partners or to have construction companies fund money for lots five and six, we were talking to two companies, we were still talking to both, although one of them is getting very close. There is a possibility that a new market has opened up and the possibility of selling bonds, which was not on our schedule before has popped up.

There is the possibility of private equity and, of course, there is a possibility of doing an IPO. That also comes along with something that we are not used to here in the States, and that’s called pre-IPO financing. And in some cases, some of the IPOs in Hong Kong sell pre-IPO financing for a very significant amount, percentages of what they anticipate for an IPO. So there is also financing for lots five and six, and there is not one of these issues that are turning more solid, and they are turning more positive. Each one of these issues is turning more positive. The terms are looking better as each day goes by. So we don’t want to make a final decision until we feel that we are at a plateau of the improvement in the deal.

So we are focusing on – we are going to have – we will have the liquidity, we do have liquidity now, and we will have even much more liquidity later, and it will help to restart a couple of the projects, or maybe all of them that we stopped in the not too distant future for which we will have adequate financing. So I want to thank all of you for being part of this call and we will talk to you again next quarter.

Operator

Thank you, ladies and gentlemen. This will conclude today’s conference call. You may now disconnect.

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Source: Las Vegas Sands Corp Q2 2009 Earnings Call Transcript
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