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Las Vegas Sands Corporation (NYSE:LVS)

Q1 2007 Earnings Call

May 2, 2007 4:30 pm ET

Executives

Sheldon Adelson - Chairman

Bill Weidner - President and COO

Brad Stone - Executive Vice President

Scott Henry - Senior Vice President

Bob Rozek - Chief Financial Officer

Dan Briggs - VP of Investor Relations

Analysts

Felicia Hendrix - Lehman Brothers

Joseph Greff - Bear Stearns

Harry Curtis - J.P. Morgan

Larry Klatzkin - Jefferies & Company

Steven Kent - Goldman Sachs

Robin Farley - UBS

Jake Hogan - Banc of America Securities

Celeste Brown - Morgan Stanley

Presentation

Operator

Good day ladies and gentlemen, and welcome to the Las Vegas Sands Corp. 2007 First Quarter Earnings Call. My name is Leticia, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

At this time, I will turn the presentation over to Mr. Bill Weidner, President of Las Vegas Sands Corp. Please proceed, sir.

Bill Weidner

Thank you, Leticia, and good afternoon everyone and thank you for joining us. Sorry for the slight delay there, we were connected to the wrong group, the wrong conference call before. But any way, we are ready to start today. And with me today is Sheldon Adelson, our Chairman; Brad Stone, our Executive Vice President; Scott Henry, Senior Vice President; Bob Rozek, our Chief Financial Officer; and Dan Briggs, our VP of Investor Relations.

Before we begin, I do 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 laws. 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 of forward-looking statements for the discussion of the risks that may affect our results.

In addition, we may be discussing such things as adjusted EBITDA, adjusted net income, adjusted EPS and adjusted property EBITDAR, which are non-GAAP measures. A definition and reconciliation of these measures to the most comparable GAAP financial measure is included in the press release. Please note that this presentation is being recorded.

By now you all should have received our press release detailing our financial results for the first quarter of 2007. We are going to keep our prepared remarks today to a minimum, beginning with some abbreviated highlights moving on to a few concluding thoughts and then we will take your questions.

First quarter consolidated adjusted EBITDAR came in at a first quarter record $214.4 million, that's a 4.8% increase over record first quarter of 2006. In Macao, the Sands delivered another strong quarter in the Macao Peninsula, reaching another record quarterly gaming win. Our VIP and slot business both achieved record levels of drop and win. Our visitation numbers continue to increase, and our mass table games business remained healthy despite significant additional high quality capacity being added by competitors on the Macao Peninsula.

First quarter revenue at the Sands Macao came in at an all time record of $350.4 million, that's an increase over 24% compared to the first quarter of 2006. Adjusted EBITDAR at the Sands Macao came in at just over $102 million, which is about the same as one year ago.

Our results at the Sands were burdened by approximately $12 million of expenses, principally for labor cost and junket commissions that were incurred to position us against new competition and to assure a smooth opening of the new Venetian Macao this summer. Those extraordinary expenses will end when we open the Venetian Macao later this year.

On the VIP market side, rolling volume was an all time record of $6.86 billion in the quarter, up over 85% compared to $3.70 billion in the first quarter of 2006.

The major construction of the Venetian Macao is essentially completed, both on time and on budget. We are increasingly focusing our efforts on the pre-opening activities including the set up of our restaurant and retail space and the launch of our initial marketing efforts with the opening of that property.

Those initial events or initial activities include our sponsorship of the upcoming Venetian Macao Cup, featuring the Manchester United Football Club who will play Shenzhen Shangqingyin of the Chinese Football League on July 23rd on Macao Stadium. The star studded Manchester United Football team with Ronaldo, Rooney and the like will be the first guests of the Venetian Macao, which will open to the public a few weeks thereafter.

In October NBA’s Cleveland Cavaliers featuring LeBron James will play the Orlando Magic and the Magic will play team China, at the Venetian Macao's 15,000 seat arena. Both these activities will be broadcast throughout China and around the region. These high profile type events are just the beginning of the series of activities and events that will position our Venetian Macao, a first Las Vegas style true destination resort.

Turning now to our convention and exhibition business, we have now contracted more than 20 trade fair organizers for 44 separate exhibition events through 2009. Separately, 20 corporate meeting organizers have contracted to host corporate events at the Venetian Macao in September, October, November and December of this year. Organizers of these meetings include such globally recognized household names in the financial and professional services, the pharmaceutical and industrial sectors.

The Venetian Macao put out a press release yesterday as part of its selling efforts that gives more context and detail to these results and actually names the names of the events of the corporate meeting planners et cetera. That can be referenced and you can pick that information up individually if you like.

On the tour and travel side of our activities there in Macao we have now signed agreements with a 111 tour and travels operators in Asia, including most of the key wholesalers and tour operators in all the major cities and countries of the region.

With respect to progress on the development of the Grand Canal Shoppes and the adjoining Four Seasons mall in Macao. We now have 450 tenants under contract and have executed final leasing documents with over 150 of them.

Construction of tenant fit-out has now begun for certain restaurant tenants. Our average base minimum rent continues to exceed $135 per square foot. Leasing incentives are very consistent both with our expectations and the high-end market, retail market in Hong Kong.

On the reminder of the Cotai Strip, the Four Season remains on track for the first quarter of '08 opening. We are out of the ground of sites five and six doing set preparation work on site seven and eight and design work continues on what we call site three.

Moving on to Hengqin Island, our engineering design and architecture teams continue the collaboration with the Zhuhai Hengqin Island Project Coordination Committee and their consultants. Zhuhai's overall plan for the development of Hengqin Island, of which our plans are a component, has now been submitted to the appropriate authorities in Guangdong province for their review and approval.

Back in Las Vegas, first quarter EBITDA for the Venetian was $112.1 million up 11% compared to the quarter one year ago. ADR was $276 and REVPAR was at all time high for the Venetian at $273, up more than 10% compared to the first quarter of last year.

Palazzo construction is on time and on budget, we top off the building in June and we announced yesterday that the Broadway hit "Jersey Boys" would take up residence in our theatre at the Palazzo. Our retail leasing activity at the Palazzo Mall is going well and is little over 80% complete so far.

In Singapore our construction is now advancing at a steady pace. 650 construction personnel are on the site each day and we poured over 600,000 cubic yards of concrete as part of the preparatory works for the hotel substructure. We remain on track for an opening of that resort in 2009.

In Bethlehem, we began the demolition and salvage work this week to prepare for the construction of our integrated resort there. We're planning a formal groundbreaking ceremony for the Sands Bethworks on May 14.

That concludes the highlights. We are clearly executing across the board on a number of major initiatives, but before we go to Q&A let me summarize the enthusiasm we feel as a company and as a management team.

First, in Las Vegas, our property is performing exceptionally well, and before the end of this year we will unleash the full power of our convention business driven model by opening the 3068 room Palazzo. The Palazzo was designed to extend and broaden the highly successful Venetian business model. It's intended to capture fully the back-of-house efficiencies of operating both properties out of the same back-of-house to deliver stronger margins and has been specifically designed to appeal to our increasingly important high-end Asia gaming customer.

On the Macao Peninsula, the Sand continues to perform exceptionally well and will add 238 rooms to its products mix in the third quarter of this year. The Sands is demonstrating its first mover advantage as Macao first 21st century Casino. It's built right. It's built for the right market. It's at the right location. It's at the Ferry Terminal, an Avenida da Amizade. It's easy to see, easy to get to, get in, and to get out of. It contains the right infrastructure to appeal to the Peninsula Macao day trip market and is doing very well against wave upon wave of new [need to] product coming into the Peninsula marketplace.

But just months from today, we will begin in earnest to realize the full potential of Macao's future and lead to the transformation of Macao from a gambling locale to a world-class resort, full-fledged destination, with the opening of the Venetian Macao on the Cotai Strip.

The most recent growth statistics in the marketplace clearly support our strategy to be long Macao and the trends within that growth. For example, there are 34% more four and five star overnight room guests in Macao in February. For another example, strong retail sales

For another example, strong retail sales statistics are evident at the Win Macao. Our advance booking of trade shows and conventions and our tour operator contract abatements for Venetian Macao also all bode well as indicators that our long-term strategy for the new Macao has aged destination is right on.

Additionally, we continue to develop millions of square feet of branded destination product on the Cotai Strip, or we aggressively advance our projects in Singapore, Bethlehem, Pennsylvania, Hengqin Island and continue to pursue additional development opportunities around the globe.

So we are clearly running at full speed, but rest assured as a move ahead, our number one focus remains the same, execution in operations, in development and the identification and aggressive pursuit of future opportunities. We remain confident that the execution of our strategic plan will produce tremendous results and industry leading returns.

With that introduction, I am at conclusion. I'd like to now open it up. I ask the operator to begin the Q&A session for our management team.

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Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Felicia Hendrix representing Lehman Brothers. Please proceed.

Felicia Hendrix - Lehman Brothers

Hi, good afternoon guys. Just a couple of quick questions. First, your rolling ship volume in Macao was fantastic, and I am just wondering, according to the numbers that I have seen, it looks like the property overall lost a little market share in the market for the quarter, just a tad. I am wondering if you actually gained share in the VIP area or it's the strength that you are seeing is just an indication of the growth of VIP market overall. And then my second guess to the comment that you may Bill, about the 44 events that are booked at the Venetian through 2009. Wondering, if you could just some context to that for us, and what is the ideal number per year, what do those 44 events really mean?

Bill Weidner

Okay we should start with number one first in terms of market share overall. Brad you want to.

Brad Stone

Yeah, if you look at our history obviously in the segment we continue to grow and you break it down into market share and fair share ratio. And we have seen strength of our market share, fair share ratio grew in the fourth quarter and maintained about the same position in the first quarter, which was above our fair share in terms of the number of units.

Obviously, we've added units, we added about 17 units to our [mix], 78 tables in the VIP business. So despite adding capacity in the summer last year we've been able to continue to grow that business and we are very pleased with that portion of our segment. And of course if you look at our win in that segment, we held a normal range and so I think the rolling volume is fairly very indicative. There is no aberration in terms of the low or high hold percentage against that business.

The business in the Macao seems to be fairly robust, but again we are more than keeping pace with it. I doubt we were the most aggressive in terms of single property in terms of individual VIP rooms. And again we are doing it, trying it with our hamstrung with only 51 suites. And I think for the Sands property the good news is we are adding 240 units and those 240 units aren't just guest rooms they are suites. There are multi-base suites and there are suites that average, like the typical small one is about 900 square feet with some living room area and bedroom area. So there's upside for us there and we feel very positive about that segment of our market.

Bill Weidner

You can hitchhike on the back of my comments. Felecia, since last quarter, I think trying to put 44 events through 2009, in context I think its better you take a look at what we talked about last quarter and this quarter.

Last quarter we had something in the area of 30 total events. So we've added 14 events just in that three month period. I think the important thing here, the toughest part of advance selling a Convention Center is convincing people that that piece of dirt is going to be a place they are going to put their convention or the trade show in. So as you get closer to opening and close to completion actually show people product, the pace of bookings picks up naturally. So, 14 events in the three months period represents a 48 event annual booking pace overall. So the pace is something to look at that something is very important, we would expect that then to continue and get even better.

But secondly we now talk about 20 corporate events in the first four months. So, yeah it's even more important for the shorter term booking business and as they see the actual carpet on the floor the meeting clients can comfortable that within the context of the September, October, November opening there will be a place to hold their meetings. So I think the velocity is something to really take a look at.

Now that the longer term booking events that is the trade shows that now we have 44 of those are usually larger functions. They take place in the exhibition center, the shorter term corporate events take place more in the carpeted space generally. But we are pleased with the way the velocity is picking up as people actually can walk in the building and touch it and feel it. And I think you'll see that pace continuing. So, those were just my initial comments, Sheldon, has some comments.

Sheldon Adelson

This is Sheldon Adelson, of the giant rats, I'm sorry I meant the MICE giant. The MICE giant, that's Meetings, Incentives, Conferences and Exhibitions. That's what I have only managed. At 44 shows were full house shows. That is they occupied the entire exhibition center. That would be above all we need and as we could accommodate during the course of an entire year, during the course of two years. Because if you understand that in the exhibition business it's typically at least in the United States, there are two days of move in and move out time at everyday of show time. So, if you divide the four-day show which is the average and the two-to-one is eight so it's 12 days divide that into 360. You can only have if you would have chose not considering holidays and considering [Debi] show that one show move out on Monday night at midnight at 12 or 1 am, the next shows starts to move in, of course that never happens.

But from a practical maximum occupancy viewpoint, you can only have about 22, 24 shows. But, in China, the holidays are not just one day holidays. Like this is golden week and the golden week will take one full week. So, we are working on those metrics. But 44 full house shows, they are not starting with full house shows and lot of those of incubated shows, some of the shows that have been moved. In total, the mature shows from other locations. I'm very, very happy. We have 44 full house shows with full and we'll need more exhibitions space before we need more customers.

Felicia Hendrix - Lehman Brothers

Thank you very much for that answer. Also just quickly the $12 million in the investments that you had are these higher charges in the quarter, can you break those up between labor and VIP?

Bill Weidner

Yeah, in the quarter we have a program it's called the junket retention program. We put it in place. We realized when other properties we are going to open in Macao that we are going to be at a product disadvantage particularly in terms of rooms. So we decided and we are seeing good velocity in our junket business. It was important for us to maintain that and to grow it as we open the Venetian property and other properties in the Cotai Strip.

So we put a program in place. It was meant and it continues to be a temporary program to bridge us from the time our competitors opened and we are able to offer room product and competitive things that make us product competitive. We are against that market. We have been somewhat hamstring by again lack of particularly room product. That program in the first quarter was about $6 million program, just over $6 million. And again we believe that's a cost that will go away as we wind down, open the Venetian property, bring room product to the Sands property, and we don't see that as recurring expense. But we feel it was a good investment for us to maintain the type of velocity we have in this business segment.

The other expenditure is roughly about $6 million as well and that's the investment of quarter employee retention program. Obviously, we've done very well there. I think our employees are viewed as probably the best employees in Macao. I think certainly the Wynn Resort has done a great job as well. But at the time when Wynn was opening and Starwood was opening, we were the employer of choice and we were certainly going to be the target of individuals. Now, you don't want to lose people in your property as one you are expanding it and two you are opening a significant asset like Venetian Macao. So again we chose to invest in our people similar to our junket reps to bridge ourselves through the point of opening the Venetian product.

By that we ended up promoting people in advanced so we're actually paying some people in positions they are not actually occupying but they will be promoted either at the Sands or at the Venetian property if that opens. And we've invested dollars that we really can't take in charge off against a pre-opening line item. These are people at our performing functions that are somewhat staffing levels are little higher, so people learn about it and that also again putting people in positions and training them. So as we open the Venetian product we open it smoothly, professionally and we maintain the quality the workforce, which I think has made a difference and is necessary to have to open a world class destination like the spectacular Venetian resort is going to be. So it's really a 50/50 break up for Felicia.

Felicia Hendrix - Lehman Brothers

Okay thanks a lot, thanks guys.

Operator

From the line of Bear Stearns with the next question we have Joseph Greff. Please proceed.

Joseph Greff - Bear Stearns

Hey guys quick question on Sands Macao, sort of big picture maybe from a revenue and margins perspective. In terms of when the Venetian Macao opens the impact on Sands Macao now that you have I guess some experience in terms of other higher quality capacity in that market impacting the Peninsula property. Have your expectations changed in terms of how that property does once Venetian Macao is up and running?

Brad Stone

I think we remain very, believe we are very fortunate as Bill mentioned in terms of location of our asset. Venetian Macao is going to have a real impact in Macao over the short and over the long term. It's going to redefine the marketplace, it should initially impact most of the operators and the Sands will not be an exception to that.

We believe however the thing we have going for us with the Sands is one its superior location as a day trip type of property and also the fact that we are coming in with assets, we are coming with a substantial amount of room product to bolster that product. So while we feel there will be an affect, we feel that the effect won't be draconian to us.

We certainly, one of the positive effects the Sands will benefit from is the fact that as we open the Venetian its going to see a lot of its cost burden shifted as we consolidate the operations of the finance and the computers and all these things similar to that we have always talked about here in The Pallazzo and the Venetian.

So the two positive things that the Sands has gone forward is, first of all reducing a cost structure, I talked about with Felecia, those expenses go away, second of all an economy of scales by operating the two properties on a consolidated basis and much more efficiently than it was operated as two single standalone properties, and thirdly asset coming on in place that again we believe will help shore up some of the markets that we've had some challenges with over the short term.

So those things all being said, I think it would be Pollyanna to say that that it won't see an affect it certainly will. But we believe that the Sands is very well positioned and we continue to invest in that to make sure that their property remains very strong, and very viable after the Venetian opens and subsequent Cotai Strip properties.

Sheldon Adelson

We don't know for sure about the impact on the Sands, but we do have the strong belief that the peninsula will be impacted by the opening of the Venetian. But, when Brad to locations, we are the only property that's within walking distance from the Ferry Terminal.

Joseph Greff - Bear Stearns

Great, thank you Brad, thank you Sheldon.

Operator

And representing J.P. Morgan with the next question we have Harry Curtis. Please proceed.

Harry Curtis - J.P. Morgan

Good afternoon. I wonder if you could address some investor concern over the preparedness of infrastructure prior to the Venetian's opening and will they be able to get from A to B easily?

Sheldon Adelson

Well, the two short-term of pieces of infrastructure that are important for the Venetian. Is the Ferry Terminal itself next to the airport, which is literally a minute, minute and a half away from the Venetian. When the market essentially doubles the capacity of the ferry terminals overall and then splits the capability to be able to get directly where you want to go, we think that's a very important piece of that infrastructure, it is under construction. Government has indicated to us that they will allow us to use the landing area of the Ferry Terminal. So that's a key item number one.

Number two, the reopening of the Border Gate that's right in our backyard, is the Lotus Bridge, that is to be reopened in a matter of weeks. So it adds another gateway in the Macao and it just happens to be right there on the Cotai Strip.

Buses are also an important part of moving people around, and so I think Brad has statistics numbers.

Brad Stone

Yes, again we want to make sure that we are the company who don't like putting our future in other people's destiny. So we have ordered 80 busses that are coming from Europe. I mean these are beautiful first quality busses manufactured in Germany; various sizes 25 passenger, 35 passenger, 45 passenger and we want to ensure that we have a presence at all the eventually two Ferry Terminals or border crossings and ensure we have adequate transportation to move people to the existing Sands property and of course we already have existing bussing. But those 80 busses will ensure ourselves the huge traffic flow and capability of moving people to the Venetian Cotai Resort.

And again we feel that the bus opportunity is front door is right there at the border. So when they get off the busses, off the ferries, or across the border, we want to make sure that they are with a strong presence, with a great looking product, with great looking people because that's the first opportunity we have to sell to that consumer and we want to make sure they know where they are going. There are going to the best places and they are getting on the best transportation to get in there.

Bill Weidner

In that same category of controlling your own destiny, of course we have 12 ferries that will be arriving over the next approximate eight months.

Brad Stone

We have the right to be able to provide the other in the line. So we have the capability of being able to add in that production line but ten will be delivered. The first couple we delivered end of this year and then we'll be adding more ferries.

We are working with a ferry operator, so that we will be able to have access to their ferries in the nearer terms. So we have plenty of capacity to be able to bring passengers either from Hong Kong Airport or from Hong Kong or Shenzhen or other places in the [Pearl] Delta directly to the new ferry terminal as well as adding more capacity, the current ferry terminal people who want to go to the Peninsula. So I think as far as we are not waiting for the government to build light rail. We are not waiting for somebody to show up over the hill side and rescue us. Basically, we want to control our own destiny. And we are comfortable that we have the enough additional capacity coming online to take care not only of the Venetian but the other properties that are coming down the line also.

Harry Curtis - J.P. Morgan

So as a follow-up, the first type of ferry should be available when and then turning to the Ferry Terminal on the Peninsula, which is in large part controlled by Stanley Ho. What assurance is the government giving you, if any, that he won't take advantage of his ownership position and shuttle guests towards his buses?

Bill Weidner

The one thing he has is control of his ferries. I mean he operates the ferry terminal on a concession from the government, and in that concession, he has to provide equal access to any ferry operator. So it is now the ability of "choke off" ferry access and when people come out of the building, those people are free to go whatever casino they want to. And so even if he brought his own ferries and even he brought it to his own terminal, we get most of those people coming at the Sands anyway. So there is really no way of him controlling us out of the market overall, just as he can't do that even today as he has all the ferries and controls that particular terminal.

Brad Stone

We have the berths at the Shun Tak, which was his company a terminal in Hong Kong that we'll operate from. We'll are getting delivery in November, December. It averages about two ferries a month from December through March or April. And there will be no specific casino operator to operate the new type of terminal, which will have 16 berths compared to the 12 berths that they have at the Peninsula ferry terminal. One of the difference is that he has got smaller ferries that average about 200, 250 a trip. We've got 430 passengers on each ferry. So there will no private agenda on the way we operate the new ferry terminal, because we've tried to operate that too and we have always been ahead it.

Sheldon Adelson

We have tried to dominate ourselves.

Bill Weidner

We will have that (inaudible) because we've been ahead most of the business. We had most of the ferries coming to us. So that's not a problem, the governments of Hong Kong they auctioned off or they assign ferry berths every month. So there is no, he has no long-term. We've already, we've gotten a location in the Shun Tak terminal, for our ticketing booth and everybody said we won't be able to either have births in Shun Tak ferry terminal or won't be able to get space inside of it, won't be able to get berths in Macao. We've got all that overcome and we have now two or more choices on retaining different ferry operators.

Harry Curtis - J.P. Morgan

Okay. Thanks guys.

Operator

With Jefferies you have a question from the line of Larry Klatzkin. Please proceed.

Larry Klatzkin - Jefferies & Company

Couple of questions here, first of all what's the status of Japan as far as you see that going proceeding ahead with possible gaming?

Bill Weidner

I was in Japan last week. I was asked by the LDP committee that is studying casino gaming to address their committee and their advisors at LDP headquarters in Tokyo. They specifically wanted to have information about the process and the development of the Sands Marina Bay property because they see the Singapore model as being the model that they might pursue.

But with all that I think its still as mysterious, I think as any political process would be and particularly in Japan. They were curious interested, there are about 20 members of the diet and about 50 of their advisors in the group itself. I made a presentation about what we're doing, what we're doing here, what we're doing in Macao and certainly what we're doing in Singapore.

But again I think it's hard to handicap it. They say that they think this is the time to kind of put the suggestion forward. On the 24th of July there will be an election of the upper diet or the upper house of the diet. They say behind that partially depending upon how well the LDP does, there may be a movement of legislation and if there were movement this year it would formally go before the diet next year in 2008.

Even if it did move at that kind of a pace, generally Japan moves at something of a snails pace relatively even if it did move in 2008 I don't think we'd see actual adoption until 2009, 2010. But look its encouraging I mean the fact is what we are doing in Macao is having a real impact on all the regional governments looking at this development of the Las Vegas trip in their backyard, number one, and number 2, our selection and the development of the Marina Bay Integrated Resort is also turning a lot heads there. So I think it is making governments in the area think they are by their nature generally pretty conservative overall. But I think there is opportunity there over some time and I guess the best description I can make.

Larry Klatzkin - Jefferies & Company

All right. That's good Bill. I appreciate that. And then as far as just one technical question I guess for Scott, the $46 million of corporate CapEx, just what would the nature of that be?

Scott Henry

Hi, Larry, the $46 million of corporate CapEx?

Larry Klatzkin - Jefferies & Company

Yes, it's down under the CapEx, the $46 million corporate.

Scott Henry

It's airplanes Larry. It's the fleet being deployed in Macao now similar to the fleet that we have deployed here in Las Vegas. We are not adding a fleet being deployed in Macao now for the regional marketplaces there to fly customers in.

Larry Klatzkin - Jefferies & Company

Okay, excellent, okay. As far as Singapore goes, you seem to have quite a good facility there, is there any indications as far as people looking at the mall you are building in Macao and already hitting you up and saying hey should we talk about mall business in Singapore, have you gotten some already some cross [fertilization]?

Scott Henry

Well, I just talked to the head of leasing last week in Singapore and he is stationed in Hong Kong and we have people in Singapore. He says I am not sure it might have been exaggerated a little bit because last number I heard was about 30% less. The last number I heard was about 360 companies on the wait list. The number I heard last week and he said he was certain a bit, was 500 companies on the wait list.

Larry Klatzkin - Jefferies & Company

So this is for a mall, you haven't even announced the structure pricing or what exactly you are going to offer?

Scott Henry

That's correct. But everybody knows that integrated resort is going to be focal point of Singapore for tourist. And everybody knows that. I am always going to be, it's going to be the must see mall in Asia. We are doing things like, I liked the Rockafellers skating ring, we're going to have skating ring in Mall and a lots of its going to be facing out is going to be a magnificent fiscal structure. It's going to be very unusual. It's on like three levels. And Singapore is the city of shopping and everybody is there from the most high-end, to the most local, to the most casual, to the most mid-market, everybody is pushing. I think we can push the age in the envelope as far as this ever been pushed in a single Mall anywhere in the world, even on the restaurant side. When we were talking about what the average rental per square foot would be on the regular non-food beverage retail, talking about the restaurants, they weren't too far away in terms of places. So, we are very optimistic about what's Singapore is going to do in the Mall.

Larry Klatzkin - Jefferies & Company

Excellent. Thank you guys. I appreciate it.

Bill Weidner

By the way Larry how come you end first on the Q&A.

Larry Klatzkin - Jefferies & Company

Hey, it's the luck of the draw.

Bill Weidner

You are getting old.

Larry Klatzkin - Jefferies & Company

Why are you telling?

Operator

And your next question comes from the line of Steve Kent representing Goldman Sachs. Please proceed.

Steve Kent - Goldman Sachs

Hi, while acknowledging you have always said that the Venetian Macao would open up sometime over the summer. I think many of us or some of us at least had more of a July or even early August opening. Could you just comment on the late August opening, is it a function of labor, construction, retailers getting ready, timing of marketing events or any other issues?

Brad Stone

There is a combination of things. The primary driver is making sure we have adequate capacity of restaurants, mall space, et cetera. So, we are balancing the fact of opening the property and opening it, we want to open it very positively. Certainly when you put tenants and stuff, you have to work with those people to get them access and get their places built and really that's a stage we are in right now. You want to visit Venetian Macau today, the property is well on its way to completion and we really as I believe said in either press release or Bill said in the statement.

We are in the real fit-out stage now with tenants. Most of these tenants particular on the retail side are tenants that do a lot of work in that part of the world that sets out to it very quick. They in many cases replicate the same store over and over. So it’s not like, perhaps like when we had the Grand Canal Shoppes here a lot of the tenants were one (inaudible). These are all international and national brands, so they are the pretty good at doing that. And certainly we are getting the, we are into the phase of getting the restaurants fitted out.

Additionally we are sensitive and we have to be careful about feng shui issues that we face in Asia. It’s a very important part of the culture there. We have to be respectful of it so we do find ourselves somewhat dictated in terms of opening dates within certain time frames of being sensitive to feng shui issues. And so work with our feng shui master there. He works with us on various dates that we can do it and that dictates of it as well. But the property is just absolutely, incredibly stunning and I think that if we open a couple weeks later than we had hope for, I think the results is just going to be something that that part of world, even this part of the world has not seen before. It is truly a coming out far exceeding my expectations, and so that's where we are at.

Sheldon Adelson

I just like to put it in a deal tried ferries of this good news and bad news. The good news is that we have our fundamental marketing strategy says that we build core and non-core assets and we sell off the non-core assets to pay for our core assets that's the good news. And the good news also is that we are selling retail space at significantly higher than what we can get base rents here and as percentage rents over there. Percentage rents go up to 18% percent over there on some of the retail and the lowest is about 12.5% there are couple of minor exceptions but its very good news over there and very high shopping expectations.

The bad news is sometimes you got to rely upon other people working at their base and they don't go as fast. So if there is any put your finger on any part of the delay, you've got to rely upon hundreds of other people to get their work done. But the good news is working many times over. We've finished with the property today and we just looked at a set of pictures that just knock yourselves off. Better look at them in my own airplane.

Bill Weidner

Which ones?

Sheldon Adelson

Which I'd like to look at, [I mean, pictures].

Bill Weidner

This is pinup girls, it's kind of Sheldon's pinup girls, airplane pictures.

Sheldon Adelson

Yes, that's subject to my wife, so that's it but could we open that early yes we could have done. But all the restaurants and they think, we are learning from this and we are going to do things differently. In other words, we can change the retail portion of it. So, we are going to try to get that retail portion turned over lot earlier by focusing on taking these things off the critical path, or getting him on earlier in the critical path. So that everything, the showrooms, the retail, the restaurant can all open simultaneously. I think a little bit, we'll hope that's what we shoot for in future developments.

Bill Weidner

And the other thing to point out is we are pushing a very large peak through the pipeline there. The fact is nobody has ever built anything of this scale in Macao before. And we are building to entirely different building code because although our competitors do nice places, the fact is their boxes that have high rise stuck on them. And buildings we are building on the Cotai Strip, every one of them is build to a code that didn't exist in Macao before we proposed the kind of building we proposed. So big atriums, high ceilings, air excavation systems, fire systems and pieces of property that are pieces of building that are 500,000 square feet things like that they didn't exist in Macao before. And they are learning as we are building too. So we are pushing, I mean the biggest mall there had a dozen stores in it and we are pushing 380 or 400 store units through that pipeline at the same time. But we are doing things that nobody has ever done. And nobody else is doing. So they are trying to get use to it while we are trying to get use to it at the same time.

Sheldon Adelson

Our construction people have pulled a survey, and said that we're the second largest structure in one building effort in the world. There is an industrial building. It's 10.6 million in square feet. This is 10.4 million square feet. It's about 1.5 or one in two-thirds Pentagon's. So you could say we are the largest non-industrial building in the world.

Steve Kent - Goldman Sachs

Okay, thank you.

Operator

And your next question comes from the line of Robin Farley representing UBS. Please proceed.

Robin Farley - UBS

Great, thanks. I wanted to get some more color on the expense you have talked about at Sands Macao, the higher commission levels in advance of the Venetian opening. Do you expect it to continue the spending of the $12 million in the June quarter as well, or will that go higher? And then also our competitors matching the higher commission rates, and if so, then how do you get comfortable that it's only a temporary increase in expenses?

Bob Rozek

Well, I think first of all the answer to first question. I think it's going to be a similar situation in the current quarter, the June 30 quarter. We again are bridging ourselves to that opening and I think we'll see that diminishing all the way during the third quarter. So I think you can anticipate similar types of levels. I don't see anything driving it up; I think it will stay about where it is Robin.

As far as competitors, some competitors have chosen to be more aggressive but that's been happening all along. I think you can fight this battle so to speak with consumers on both on either a capital basis or a marketing center driven basis. Our belief is we have to have a very competitive Rolling Chip program and we back down off this junket retention program, we'll still have one, that's still at a 1.1 level.

But we think with the product we have to offer and the experience we have to offer, balance was still a very, very competitive rate that some of the secondary properties that choose perhaps that more aggressive. It's a classic pricing issue. It happens whether it's cash back program or is it coined, whether it's comps and whether you get you know, It happens across the street. Harris offers a better deal on rooms in the Venetian offers on rooms.

We priced ourselves differently and people choose what asset they want to go to based upon a whole myriad of decisions. So we won't be uncompetitive, we'll still be very competitive in terms of our commission program. It's just as we feel we can back down once we have more basic products that the customer needs, you know what we'll try and loose some customers here and there but we think we'll move in and pick up many times over with the assets we are putting in play to over come that. We just think it’s the thing we should do, we don't we aren't going to fight the battle at both ends both on a capital and marketing basis. We are choosing to be competitive from a marketing basis and we are going to be super competitive from a product basis.

Bob Rozek

Some of that cost obviously we opened in 2004. A lot of the dealers and the base level employees that we brought in; we brought along trained, got them ready for supervisory positions, unfortunately we had three major new competitors open in the timeframe when in those prime people will be prime to be there and be promoted to the next level supervision or floor person or whatever. So we couldn't really let that happen, so we in essence advanced promoted and called it advance paid, many of the hundreds of people that we needed to be the supervisory people when we open out the Venetian. If we'd had our way we could have waited longer, but the realities are and that kind of marketplace you have to do what you have to do in the near term to make sure that you have the supervisory people and the higher quality people to then open that big place coming down the street that is Venetian. So that's what's really driving a lot of those weight rates in the near term.

Robin Farley - UBS

So it was really the commission levels more so than the labor rates that worried about being issue?

Bill Weidner

No, no. Well, labor rates make up most of the difference more than the commission rate difference.

Robin Farley - UBS

And then my other question is--

Bob Rozek

Wait Robin, I just have finish it. If you look at the inflationary rate in terms of most of the growth in our labor costs has been this promotional thing it's not being driven by high escalation of wages, that's a much smaller component that's $6 million, that's a smaller proportion of it. So if $1.2 million of that, $6 million is wage inflation and rest of it is what Bill just articulated. So, I think that's important to understand. We are not seeing here and have some wage escalation but it's not ramping in Macao.

Robin Farley - UBS

Okay. And then my other question was, I wonder if you can update us on your expectation for timing the approval to final floor for Hengqin. And also, there were recent proposals from China just cool real estate market that proposed eliminating the presale of units and introducing different taxes on developers and capital gains and things. I wonder if you can talk about, I guess, I know if you would handicap the chances of those proposals and how that might affecting some [pension]?

Bob Rozek

Always hard to predict, I mean, that those series of suggestions came out of the think tank group, that said okay, given the over heating in China and given the over heating particular in the real estate markets. What could be done to possibly reduce that over heating? So that's a laundry list of things that might be done whether to get adopted or not, I don't know. Whether they get adopted differentially, because certainly Hengqin Island is a place that China wants to incense development of, and what they want to do is they want Hengqin Island to be master planned in a way that consistent with what central government wants Hengqin to become. They see Hengqin as being a support to what's going on across the way, quite frankly driven to a great extent by us in terms of the development of the Cotai Strip. So they are trying to think in terms of, how of this seems to be developed and in what categories of development make sense as far as their master plan for basically the Pearl River Delta Triangle, Hong Kong, Shenzhen, Zuhai and Macao.

Part of that is how the bridge fits in with each other. So there are many, many moving parts. So that's why I am reluctant to give an estimate of time because the more that we propose and the more development that we talk about are Hengqin, the more call it multi-tiered involvement there is in their master planning process.

There is a light rail that goes down the west side of the Delta of that connect Guangzhou to Zhuhai and then what they are planning then is a light rail spur that then comes from Guangdong bay gate in Zhuhai that comes right over to the property at Hengqin Island then connects up with the Lotus Bridge, where the landing area of the bridge that connects Hong Kong with Macao. How that lines up without rail station and picks up people to go the other way, I am mean we began this process with what was a real estate development that we felt supported what we did next door.

What we end up with is a process that were a kind of feeding into an overall master plan for the Pearl River Delta that then involves both the government, the local government in Zhuhai, the regional government in Guangdong Province and then the central government in terms of millions and millions of dollars of infrastructure expenditure that's has been planned for the Delta overall, just a long winded way of trying to answer question in several different ways. The bottom line, we are right at the point of the right physical place to be for where this physical infrastructure goes over the next 5-10 years. So we have to be a bit patient because they are a lot of big wheels turning as it relates to the specific development itself. That's why it's got hard to give you an exact date, it just that all we know is that we are driving to a great extent at least the Northern part of the entire master plan that is being driven not just by the locals but by the provincial government in Guangdong Province as well as the central government.

Robin Farley - UBS

Okay, thank you.

Operator

And your next question comes from the line of Jake Hogan representing Banc of America Securities. Please proceed.

Jake Hogan - Banc of America Securities

Hi, good afternoon, I've got about three or four relatively quick questions. First, as we are talking about what may or may not happen at Sands or Venetian etcetera. I just kind of wondering if you can talk a little bit with the crown opening up here near term if you aware if you are sharing room operators junket players et cetera, how do you think that may or may not impact results on the VIP near term? Second question I had was just about the month of April, I was wondering if you can just talk a little bit about trends in Macao and or Vegas in regards to be consistent or not with respect to what we see in the first quarter?

And then Bill, I was wondering if you can talk a little bit on the retail, you reminded us of the sequential increase in convention contracts that you signed, can you remind us of the may be the sequential increase in like these final lease agreements and there seems to be still a fair amount going, there was some stuff rate in the press recently. I was wondering if you may be can just kind of respond to the comments that you might be providing some discounts here therein and how real you think the $135 or so base rents are going forward?

Bill Weidner

Okay, I guess the three questions start with ground Macao and the sharing of you wouldn't share ice water with those guys, so.

Brad Stone

No, I think junket reps, they spread themselves out around town. There may be a possibility that people we have wrapping our place, have a presence through some other partnership whatever. I got to tell you, we really don't take crown and its location and its product very seriously. So there have been a lot tougher competitors open in the last couple of months. We have had our view of it and so we have no indication at least from our operational people, our marketing people that we believe Crown is going to really have any kind of effect on the Sands and certainly I think the Venetian will have lot of effect on it. So that would be my response to the Crown opening.

Sheldon Adelson

I think their park worse (inaudible).

Brad Stone

Okay. Now item number two I have a short term memory (Multiple Speakers) April trends.

Bill Weidner

April trends. I don’t think we really even comment on those, do we?

Bob Rozek

Lets try.

Bill Weidner

Retail data point.

Bob Rozek

I just don't recall last quarters versus this quarters.

Dan Briggs

Hey Jake, this is Dan. We went from about 400 different retailers that we had inked in last quarter to 450, this quarter and we were at probably a couple of handfuls of people that we've done the actual final lease agreement with. And we are now at over 150. So that's a huge jump and we're at the point we're signing as many as 10 a week at this point with respect to extending that 150 numbers, so making great progress there.

Jake Hogan - Banc of America Securities

And your thoughts--

Sheldon Adelson

Try to understand that in Macao and outside leases per se they try and grant huge. This is under old Portuguese law and people are not familiar with it so it's taking a while for most of the attorneys in the area to get familiar.

Jake Hogan - Banc of America Securities

And just the pricing on that, from the numbers you've been putting at it's been sounding consistent at the same time. There’ve been some reports here there and I was just kind of curious if you wanted to talk.

Bob Rozek

The pricing hasn’t been an issue.

Scott Henry

You'll be getting different information in the future about our different products, because it's somewhat confusing. Our retail number that is apparel stores, leather stores, jewelry stores the prices are significantly higher. When we need or we put it into an integrated resource then we have many, many, we have thousands of seats that we have to put in restaurants both for the mall visitors and the hotel visitors than the restaurant pricing, brings down the average significantly.

So in the future we're going to report few retail numbers, I think it's too late for this one but in lots five and six, seven and eight and three in Singapore where we are also going to develop. We will then report by segments, so you'll see the average kind of segment and you'll see the food and beverage, which is less and I think the retail will be significantly higher that what we're reporting blended today.

Jake Hogan - Banc of America Securities

Got it.

Brad Stone

I think there are couple of things that we probably would mention. A couple of Johnny-Come-lately is mentioned that they may be in the market or they are off the marketplace of whatever, so we had to do a couple of things just to squash that overall positions. The malls were developing three million and square feet out of the black holes of mold and we wanted to make sure that our traction was correct overall. We're not looking to flip these malls the day we open them. So minimum rents while they are interesting indicators aren't as important as 18% rents on what their turnover is.

So, yes we made a couple of concessions I guess you would say in a couple of TI places and things like that just to make sure that we solidified and anchored correctly to make sure nobody else could make any in roads. But it didn't significantly affect either the base rents nor did it affect the percentages or the ability to generate income.

We have some short-term rental abatements just the land deals at the very end but no more than may be a two-three month rental abatement process, but again a lot of those were based how the Cotai Strip opened anyway overall didn’t significantly affect the overall plan and just make sure that we solidified our anchor base as we move forward.

Sheldon Adelson

You will find that the cumulative average of concession is significantly less than what the cumulative average of concession would be here by the typical mall developed in the United States.

Jake Hogan - Banc of America Securities

Got it. And if I can just ask one question more. As it relates to just the growth CapEx for the Cotai Strip and on the timing of five, six, seven, and eight, I know sometimes you might have a tower that's opening at one point and another tower that's opening a little later, can may be Brad or somebody just give us a quick update as to timing and dollars?

Brad Stone

All right. I'll give you the, I don't have the dollars right in front of me, so I don't want to necessarily quote on that. But the timing right now is for the Four Seasons property and it really breaks down to two components. There is the hotel, casino, and mall component, and we're still targeting the first quarter of '08 for the opening of that asset. The room haul at the Four Seasons, the service departments that will be selling off is about seven months behind that, I mean that's a 39-storey building and obviously it takes a lot of longer to construct and that will not affect the opening or the operation of the Four Season product itself.

Sites five and six, we're coming up out of the ground. It's a very large site. It's really going to be completed in two phases. Phase one is the entirety of the podium, the entirety of the casinos basically and about 3000 of the total rooms and some of the product itself.

Phase two will be the other 3000 rooms as well as the service departments that will probably lag some place about eight months behind the phase one. Currently, we're looking at probably a late '08, early '09 opening of that asset as we come up and build that project through.

Site seven and eight, we are currently finishing up the soil stabilization. We are submitting foundation of piling plants. We would hope, I think we have said by the summer time to be commenced piling work and foundation work on site seven and eight, and that's our current intention. That project will probably complete roughly 26 to 28 months after we commence the piling work itself. In site three, we are finalizing the design program of that and we don't have a specific timeframe prior. Within a next six months, we'll start on that project.

Jake Hogan - Banc of America Securities

And now we are looking at the bulk of the rooms opening straddling '08 and '09, the balance of the rooms opening up '09 and six by the '10?

Brad Stone

And then you have got Singapore, that project is well underway. We are in the foundation part of that project right now, and consistently we said in the past that's a late 2009 opening for that project. If that works that project we are starting. We started initial demolishing of buildings. We are starting relocation of site utilities and that project is probably something we'll see in the late part of '08 would be our estimate at this point in time.

Scott Henry

And the preservation of the guns (inaudible) or Missouri?

Brad Stone

Missouri, yes, right.

Scott Henry

[Throw] that gun away.

Brad Stone

I saw the gun last week.

Jake Hogan - Banc of America Securities

Okay. Thanks a lot. I appreciate it.

Operator

And our final question will come from the line of Celeste Brown with Morgan Stanley. Please proceed.

Celeste Brown - Morgan Stanley

Hi guys. Good afternoon. First, I think last time, Brad you talked about the mall being open in its entirety, I know you are going to phase it by October, is that still the goal, is that still possible?

Brad Stone

Okay. Which comment are we on?

Celeste Brown - Morgan Stanley

In Macau and Venetian.

Brad Stone

Okay, the Venetian Mall in Macau. I think we are talking today season we were saying that the second phase in the mall would probably in the November time frame, roughly the same time frame.

Sheldon Adelson

So two thirds of it will be has been opened and completed by the end of September. That will be opened, but the second third will be what we call Phase II to that will be by the end of November.

Brad Stone

I think you want to have to remember each third is the equivalent of the Grand Canal Shops, more than the Grand Canal Shops here in Las Vegas.

Celeste Brown - Morgan Stanley

And then in terms of the selling service departments do you expect to start selling the Four Seasons anytime soon or at least opening up a site in Hong Kong to show of the product.

Bob Rozek

Yes I think that our lead sales person is joining us. As we speak just in the next couple of weeks. And the physical facility itself is being cleared and readied at the Lippo Tower. While we actually be opening the initial suites of product (inaudible).

Celeste Brown - Morgan Stanley

And then you will start to sell them in the near term?

Bob Rozek

Yes.

Celeste Brown - Morgan Stanley

Okay and then to divert to Vegas for a minute. You talked about $40 million to $60 million of operating efficiencies. How should we think about that at the Venetian versus Palazzo should we take half and subtract it from the Venetian costs today or…

Bill Weidner

Yeah may I think the way we characterize that is, that the properties there are on standalone basis and generating new individual EBITDAR would be burdened. So I think, which the way I have to almost look at it is, currently that burden being mostly carried by the Venetian itself. So the Venetian, you almost say it was $40 million maybe the Venetian achieves $20 million of efficiencies and the Palazzo cost $20 million less to operate, or if it gets to $60 million, I think it leans more towards the higher end of that number than the lower end, that the Venetian will see an efficiency of that. The question is since its now one credit, how carefully do we report that and worry about allocation processes etcetera. So I'll leave that up to the accounts to figure it out. But the bottom line is we think we're going to achieve some cost that the Palazzo won't need to incur and some savings that the Venetian will incur.

Scott Henry

I guess, I'll save my money by doing less the allocation saving.

Brad Stone

Yes, I would we save money by not worrying about the cost accounting methodology either so--

Scott Henry

So we would at as if the Palazzo could generate $40 million to $60 million less and generate some other cash [flow]. There's another way to look at it, operating expenses avoidance.

Brad Stone

That's real, its interesting hoping the, you were here the other day walked in and say (inaudible). What's interesting is even on a pre-opening basis, we certainly are positioning the Palazzo as a standalone resort and it is a beautiful distinct property which will carry its own market and support the existing model of the Venetian plan.

But the reality if at all it's interesting as we talk about the pre-opening of the Venetian Macao, and what a challenge that is the Palazzo is in a sense an expansion of this property you can just see it in terms of the infrastructure we are needing to build up is fairly minor. It's borne variable costs and so we aren’t building departments. The buildings were prior to building over Macao. The departments we're building here in Las Vegas. And so its you can see it just in terms of the staffing up, you can see in terms of physical manifestation of office space and physical product and building docks and surveillance and joint building surveillance and joint buildings IT. Well, our opinion is this we are not building there is nobody to play in. So it’s a real savings and it's going to help the efficiencies of these two properties.

Celeste Brown - Morgan Stanley

Great. And then just one more question, was D&A down sequentially because you have rooms offline, you have the rooms offline at the Venetian or is there another reason for that?

Brad Stone

D&A, depreciation and amortization?

Celeste Brown - Morgan Stanley

Depreciation and amortization, sorry. It's down about $39 sequentially. I can follow with Dan.

Scott Henry

Yes, why don't we do it the other day?

Celeste Brown - Morgan Stanley

Okay.

Dan Briggs

Are you suggesting that we demonstrate D&A on rooms that are out of service?

Celeste Brown - Morgan Stanley

Some companies do that.

Scott Henry

We don't do that, and still don't mind to do that.

Celeste Brown - Morgan Stanley

Okay. I will follow up with Dan.

Scott Henry

Okay. Thank you.

Celeste Brown - Morgan Stanley

Thank you.

Operator

Ladies and gentlemen, this now concludes the question-and-answer session. At this time, I would turn the call over to Bill Weidner for closing remarks.

Bill Weidner

I think we had a pretty thorough discussion. I don't really have that many closing remarks as I mentioned in my wrap-up of the presentation itself. There is a lot going on certainly, but we are energized by all that that it is going on because it's wonderful things to be going on. And we appreciate the opportunity to talk to you today. I appreciate the questions and hopefully you have the information that you need. And we look forward to next quarter of talking further about the further developments of the company. So thanks again for joining us today. And we'll talk to you again shortly.

Operator

Thank you for your participation in today's conference. Ladies and gentlemen, this concludes the presentation. You may all disconnect, and have a good day.

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Source: Las Vegas Sands Q1 2007 Earnings Call Transcript
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