Las Vegas Sands Corp. (LVS) Earnings Call Transcript & Summary

Okay. Thanks, everybody, for joining this afternoon. I'm Steve Wieczynski, the gaming and leisure analyst at Stifel, and I'm thrilled to be joined today from Las Vegas Sands by Daniel Briggs, who's their Senior Vice President of Investor Relations. And we have only a little over 30 minutes this afternoon. So I'm going to get right into some questions and try to get through as many of these as possible. And if you have a topic or question you would like addressed that I don't get to, you can either post your question on the dashboard or e-mail me directly, and I'll try and get it asked and answered. So let's get right into it. So Dan, first of all, thanks so much for joining this afternoon.

And I want to start with Macao and understand or maybe help us understand why Beijing or the Chinese government has been so slow to open certain provinces back up while it seems like other parts of the country have opened sooner, and the results have looked pretty good. I assume this is probably -- is it just out of pure caution? But -- or is there anything else that you can add there would be helpful.

Sure. Steve, thanks so much for having me. It's a pleasure to be here. Look forward to seeing everybody in person sometime soon when we're all back to traveling again. And with respect to your first question about Macao opening up, I think we've been a little surprised that it hasn't opened up more quickly to visitors from Mainland China. The first thing is our buildings are open in Macao. So we do have operations ongoing. What we don't have though is visitors from Mainland China. And we need those to open up. The first thing that we've seen happen is a positive, which is that there's been a travel bubble established between Zhuhai, which is the adjacent city, and Macao. So Zhuhai is the adjacent city to Macao in Guangdong province. And a travel bubble exists for people who've been tested and who are either students or teachers or construction workers. So they can go back and forth between Macao and Guangdong province today. We believe that there will be stages of incremental visitation opportunity without having to have a quarantine when you return to China. And the next stage of this will be business visa holders between Macao and Guangdong province being able to travel back and forth without having to do a 14-day quarantine. Subsequent to business visa people, it's likely that you'll see either group visas or maybe the IVS scheme opened up for Guangdong province only. And once Guangdong province and Macao are connected in a travel bubble, then we'll get 30% or 40% of our revenue back because Guangdong is a very important piece of our revenue opportunity. And then over time, you'll have Fujian province and other places open. And finally, Hong Kong will also get into the travel bubble. And then to get to full earnings power, you're going to need the 5 airports in Guangdong province: the Hong Kong International Airport, the Guangzhou airport, the Shenzhen airport, the Zhuhai airport and the Macao airport able to receive people from the rest of China. And then get into Macao that way. So we couldn't tell you why it's taken so long. We couldn't be more pleased with the support that we've gotten from local Chief Executive Officer and the government there. We're one of the biggest employers in Macao. Obviously, we've kept everybody on board. We are very optimistic about a strong recovery once Macao is able to have visitors from Mainland China, again, without a 14-day quarantine thereafter. So we feel good about that. We know that the government of Macao has been very clear with the folks in Beijing and the folks at the liaison office about the need for having visitation to get Macao's economy back moving in the right direction. It is a tourism-based economy and all the investments of the Greater Bay Area initiative have been designed to make sure that Macao is a great place for Mainland Chinese people to visit and enjoy themselves and have fun. So it's all tied together. We are surprised it's taking longer than we expected, but I don't think there's anything else to say other than caution is the right way to think about it. We do know that Guangdong province folks traveling around their province have been able to go to places like Shinwon Park, which is just a few miles away from the Cotai Strip in Macao. And on the May Day holiday, there were a lot of people and they have very few infections coming out of that. So we're pretty hopeful that when things get open, we'll see a very nice uptick of business and be back to making money again. But there's no indication that we know of today that we're absolutely about to open. So we're hoping it's days, not weeks, to get a little more bubble, people involved in going back and forth. But we don't have any specific information to share at this time.

Okay. Got you. And so if we stay with Macao. And obviously, the thought pattern is as the market does start to open back up or reaccelerate, there will be more demand from that premium mass and VIP player versus just grind mass. And you guys have typically dominated the mass side of the business. So I guess how do you position yourself now? Those circumstances are correct. And I'm guessing the revamped Four Seasons asset should really help you in that area or what else can you do to gain share in that premium mass/VIP business?

So we won't focus too much on VIP. I think that's a business we're in, but it's not really going to be the lion's share of growth and profit for us or anybody else. The money is going to be made in mass, and premium mass and base mass are both very important to us. We have the biggest premium mass business in Macao. And what we're doing with the Four Seasons suites, which is 290 super high end, very large, up to 6,000-square foot suites is appealing directly to premium mass players. There's 290 of those suites. There'll be 370 suites in the St. Regis Tower. And then we've got another 600 suites in the former Holiday Inn, which has been rebranded and expanded into 500 rooms at the Londoner. So all those things are going to help us in the premium mass area. The $2.2 billion we're spending on Four Seasons, St. Regis and the Londoner conversion, we believe, give us a really good upside in the premium mass space as well as incremental opportunity in the base mass space. We do feel very strongly that both of those markets will return. Macao has got a lot of gaming capacity. A lot of the lower-end mass play can be moved to ETG machines or slot machines. If HKD 500 tables are -- per bet, are too expensive for certain of our base mass players, they can find another way to find the game that they like, baccarat principally, in a different format. So we don't feel that, that market will be a laggard when things come back. If you think about the $22 billion mass market, it's probably roughly 50% premium and 50% base. And maybe a little bit more premium, but very close to that. Now there's a lot more customers, and it could be that people don't want to crowd together at first when they get together, but that's not what we've seen out of Chinese folks. They tend to seem to be comfortable wearing a mask and crowd together and going through the activities that they'd usually do. So we've seen the same thing in Hong Kong, where the restaurants are open, people are wearing masks. They do their best to social distance. But they're going about their lives. And so we feel pretty good about all those segments coming back. And just to touch on VIP for a moment. It might be -- with Macao, the only people in Macao right now are just junkets and a few others that they can have a little moment where they make a little more money for a short period of time. But once the border is open to visitation from visitors, you're going to see mass and premium mass be the primary driver of growth and profit.

Okay. Yes. And so to add on to that grind mass kind of conversation, I guess, how do you make that business more profitable in this so-called new operating environment? Meaning VIP and premium mass makes sense, given they already are socially distant. There's very few people at those tables. But if I take a grind mass table and cut that -- cut the number of positions down to, let's say, 3 and with your tables essentially being capped, how do you make that work?

Well, I think you've got to raise limits, number one. I mean, first off, if someone's coming with -- let's say, they have a gambling budget of USD 1,000 for their trip. And let's say they want to bet $100 a hand, that's 10 hands. So $50 a hand, it's 20 hands -- it's 20 losing hands. So in essence, people can increase the amount of money they're willing to spend to get to the game that they prefer, if it's HKD 500 table, for example. If none of our tables are below HKD 500 simply because we don't -- we have enough desire from people playing to fill every single one of our tables, and we've got a tremendous amount of table capacity in Macao across a lot of different properties. Then you're pushing that customer -- in essence, you're pushing that customer toward an ETG situation. There's lots of ETGs in Macao. Remember, Macao has got unlimited amounts of ETG and slot capacity. So tables are limited, and that's the game that many people prefer to play, but we've seen this when the market gets very crowded in the past. People will migrate to a place with a lower minimum bet in a nonpreferred format, in other words, away from table games towards slot machines and ETGs if the market is very, very full and crowded and people feeling uncomfortable. So we can spread our floors. We can put a lot more ETGs and slot machines into that business. But we really do feel that probably, over time, people will be betting shoulder to shoulder, again, with masks on. And as long as there's not a resurgence in COVID-19, that's probably going to be a reasonable and appropriate thing to expect.

Okay. Can you help us understand where construction actually stands right now in Macao? And I would assume with visitation levels being extremely low, you've probably accelerated some of the Londoner project. And the Four Seasons does seem like it's basically done. And are there any issues with you guys potentially finishing a project like the Londoner before other projects get completed? I guess what I'm getting at here is, with as much as SJM has kind of dragged their feet, would you guys be able to open the Londoner before they open their property, if that make sense?

Yes. It's a great question. So first off, we have been able to accelerate certain of the constructions that we're doing. We can't get a lot of new construction workers that weren't already in Macao or Zhuhai. So we haven't been able to increase the number of workers, but we have been able to accelerate some of the work in the building because we don't really have customers in the Londoner right now. The Sheraton has been used as a hotel for the city to do quarantine for part of this period of time. And so we've been able to be very noisy in our construction. In general, what you try to do with this construction is wait for times when there's not as many people playing or not as many people sleeping. And then you can try to do things that are noisy. And noise is the biggest problem. If something is very loud, obviously, people aren't going to stay there and gamble. They'll just wear earphones. They'll find another place to go across the street. So we've been able to be very noisy and really complete everything within the Londoner area on the retail and other stuff at an accelerated fashion. The St. Regis will be ready to open in November. So we've accelerated that a little bit. The Londoner hotel is ready to open now this summer. The Four seasons, as I think you already mentioned, is ready to go right now. We've been doing a lot of business there on a trial basis. We don't have the occupancy permit yet, but we're ready to go with all of that stuff, and that's been very helpful. On the other hand, on the other side, on the out -- the exterior where we're building the houses of parliament and building the Tower of London and these sorts of things, we haven't yet received some of the construction permits that we need. It's pure speculation for us to wonder why we haven't received them as of yet, but it feels as if they like us to complete the outside of that building some time in '21 and -- maybe earlier '21, maybe even later in '21, which -- it'd be natural for people to think, are they trying to let SJM with the big $5 billion new building, have that building open before we get to have this beautiful thing. We're going to be advertising on social media all the way through China with David Beckham kicking soccer balls and Victoria Beckham there and all sorts of other things to kind of open up this idea with bee feeders in the Londoner. It feels as if they might want us to delay that a little bit to let somebody else go first. Don't know that. That's pure speculation. But the interior of the building, which should help us -- all our rooms and whatnot, in the premium mass area, in particular, we're going to get soon and -- during this year. And then the exterior, which will help us more with the base mass, the bottom Instagrammable moments will get some time in 2021.

Okay. So I guess where does your relationship stands today with the so-called mother ship, meaning Beijing? And the visa renewal process coming up shortly. I mean, as an outsider, to us, it seems like you guys have done everything by the book in terms of expanding your nongaming amenities, which seems like that's what they want. But what do you think these guys are looking for at this point? Is it just more commitment that you're in this market for the long term and willing to invest more capital?

In a word, yes. We've really been told by Beijing to do a number of things, but the principal thing is keep investing in Macao. So when they say keep investing, they mean billions of dollars toward nongaming assets, meaning hotel, retail, entertainment, convention and exhibition business, tourism attractions. Spend money on those things, keep doing that. And if you do those things, you're likely to be around helping in Macao for a long, long time. So we take that to heart. I think Wilfred Wong, who runs our Sands China business and the team there, it's a local team, they speak to these people in Mandarin and Cantonese. And they're very committed. And I think the Adelson Family and Sheldon has been -- our Chairman has been deeply, deeply committed to continuing to invest in China. So we would relish the opportunity to spend another $5 billion or $10 billion within Macao, building more hotel inventory, building more retail, building more entertainment. These are what they're asked -- these are the commitments -- they're multigenerational commitments that they're looking for us to sign up for, and we're very happy to do that. We look at the $22 billion mass market in 2019, which generates probably 80% of the departmental profit, maybe 85% of departmental profit that's generated from gaming within Macao as a big growth opportunity in the future. That $22 billion could go to $25 billion, $30 billion, even $40 billion, $50 billion in the future as long as incremental transportation infrastructure is completed and as long as there's more hotel inventory and retail and entertainment assets to keep bringing Chinese people to Macao. So we feel very good about investing into that growth opportunity, and we love the opportunity to expand. We've proposed all sorts of different things. We don't have the approval to do anything beyond the $2.2 billion program we have today. But I think the expectation is that we will spend a lot more money in the future in Macao. And we think the returns are going to be great. So we're very happy to do it. And that's kind of the setup, I think, for now. We're patient. We have to be patient, obviously, with respect to the borders getting open and getting through COVID 19. But the Greater Bay Area commitment that China has is right -- completely consistent and aligned with the commitment we have to continue to invest in nongaming. So that's kind of the trade there.

Okay. Let's go to Singapore. And it seems like it was a little bit more of a black box. But what does the potential look like to reopen that market? And I would guess Singapore could have a much longer ramp time than Macao. Maybe I'm not thinking about that the right way. But given there's more reliance on air traffic versus Macao, am I thinking about that the right way?

So it's a good question. With respect to where the business comes from, your local business in Singapore, which includes Chinese people who own a Singaporean passport and spend a lot of time in Singapore, so can travel to Singapore without a quarantine thing is probably roughly 50% of the market. So the local market is about 50% of the market. So think of Guangdong province and Hong Kong and Macao, 120 million people, $1.5 trillion, maybe $2 trillion of GDP. That's probably 50% roughly of the Macao market, maybe 40% to 50%. Then in Singapore, you've got, call it, 5.5 million, 6 million people. That's also roughly 50% of that market. So if we can just get the building open again and have Singaporeans coming in, we can very quickly be making money again. We were making money the day we closed in Singapore in April. So we did have -- we have some loyal customers that like to come that are in Singapore, aren't Singaporeans. Some of them are VIP players. Of course, the VIP business is much more profitable in Singapore than it is in Macao because of the very low tax rate against it. 40% in Macao and around 11% in Singapore. So much, much higher productivity in VIP. So you have a good recovery opportunity there. We'd love to be open soon. We have a big casino there with plenty of opportunity for social distancing, particularly in the premium mass and the VIP areas. We have a lot of table games there. We will have a more pronounced, I think, capacity problem in the lower end of mass. And that's particularly because Singapore has 2,500 only per operator slot machines in the market. So in Macao, you're unlimited on ETGs and slot machines. In Singapore, you are limited to 2,500. Now that number will increase to 3,000 over time and then 3,500 is part of our $3.3 billion investment program in, what we call, IR 2, which is our new building that we're building, and we'll finish that in say '23. So that's a long way off. But having said that, there will be a squeeze during weekends and holidays, I think, in Singapore on the slot machines. Because if it's every other slot machine, then you've got only half your capacity. And there are times when we're already deeply capacity constrained during weekends and holidays. So to get to full power in Singapore, to your point, Steve, we're going to have to have Indonesia and Malaysia and Thailand open, so that people can come and not have to quarantine when they go back home. And we're going to have to have the flights from Hong Kong, China, Japan and Korea and Taiwan or Formosa all the way down to Singapore back to Changi Airport. So Changi is going to have to get us going before we're going to get back to the levels of profitability we saw before. But we can get to about half of the revenue base just on Singaporeans if we can get that opened up again. So we don't know when it's going to happen. We're hopeful it's sometime in June. It could be in July. We don't have great information. The good news is Singapore has done a really nice job, I think, of controlling the virus. They've got one place where it's very difficult, which is they've got a lot of foreign workers who sleep in dormitories, construction workers and other types of lower-end workers that come from other parts of Asia. And the infection rate in those places, because they haven't been able to social distance while they sleep, has been quite high. So that's unfortunate. But they've done a great job of permanent residents and citizens having a very low infection rate. So we feel good about when we open up again. We'll be in a good position to make sure that the spread isn't exacerbated. And again, we'll be making money again as soon as we get the doors open.

So I got to ask the question, and I don't know how much you can say. But obviously, there was news about a DOJ investigation that popped up. I think it was a couple of weeks ago in Singapore. And again, not sure how much you can say about that, but any color there would be greatly appreciated.

Sure. Sure. I mean this is a situation where -- let me frame this out by saying, number one, the company is deeply committed to leading in compliance. And we want to be a leader in compliance, and we spend a lot of money and hire a lot of really expensive experienced people from financial services institutions and the Department of Justice and the FBI and all sorts of other law enforcement agencies that give us a great feel for how we can lead in compliance and make sure that we're not doing anything that's untoward and inappropriate. In this specific situation, we had a -- we have a customer who is a disgruntled customer and not a good person. I don't want to get into the details of it, but this person has mistreated staff and had been very inappropriate, and we basically banned him from the building. And that customer didn't like being banned, wants to come back and play, has been fighting with us to try to figure out a way to come back and play. He's paid us all of the debt that he owed us, but we have continued to ban him because of his mistreatment of some of our employees. And then he has threatened, "Well, I'm going to get a lawyer and we're going to make as much trouble as possible." So that's what's happened. We'll see. We don't know of any investigation that's happening right now. We've heard that this guy is trying to illustrate some things that he believes were inappropriate in the past. We don't believe that we've done anything inappropriate with respect to this customer other than not letting him back in the building because he's mistreated folks. So we'll see what happens. We're very, very close to the CRA. We talk to the CRA almost on a daily basis. The CRA is the Casino Regulatory Authority in Singapore. And we're very close with them and want to make sure that, that relationship is very deep and strong and it is. So we'll work through this thing and figure out what it is. But it's coming from a disgruntled customer. Whether there's anything underneath it, I think it's still too early to say.

Okay. Got a couple of minutes left. So let me ask -- I got a couple more for you before we turn you loose. But if we go to Vegas and -- I'm going to ask the generic question about how your assets opened over the weekend, and I assume the answer is going to be very strong. But I guess the real question is, does it really matter? And what I mean by that is, you guys aren't making a material amount of money off domestic play. Either you need the convention business to come back or the high-end international player to come back. And am I thinking about that the right way? And then maybe also help us think about forward bookings for that group in convention traffic, whether it's late this year or in 2021.

It's a great question. So just to emphasize your framing, we make money mostly in mass gaming in Macao and Singapore. Singapore has a little VIP gaming contribution. And then, of course, there's retail and a little bit from convention and exhibition. But in Vegas, the primary driver of money being made of profit is hotel room sales. And RevPAR is the one statistic you can watch and follow. And if RevPAR is going up, then we're going to be making more money. And we can get to a good place if we can get RevPAR to be high and get occupancy where it was before. But -- look, it took 12 years to get to a situation after the problems that happened in 2007, 2008, 2009 for us to get to a year last year where we made nearly $500 million in EBITDA. We're not coming back to those kind of numbers without convention and exhibition being a driving force for rate compression within the hotel. So yes, we had a very nice weekend and get some domestic gaming customers, and it's great to have those domestic gaming customers. They're very nice to have. And if we get Chinese customers back, it'd be a little gravy on top. But the real fundamental issue is you need convention and exhibition business to get rate compression in our 7,100 rooms, and we don't have a very good feel for when that's going to come back. And we don't have a -- most people have moved stuff from '20 to '21 , and they're staying kind of in the boat, so to speak, to want to come back to Las Vegas in '21, but we'll have to see if -- what happens within the travel space. Obviously, there's a lot more airplanes today than there were a week ago coming in and out of Las Vegas. We are getting some better airlift, but it's still a long, long way to go. So it's very early days. I think it's going to be a rough summer out here. It doesn't mean there's not going to be a lot of gaming customers. But until you can get the room rate up, you're going to be struggling to get back to anywhere close to the kind of money you were making before. So we're optimistic about long term the convention business coming back, but that could potentially take either herd immunity or a vaccine or antivirals that make this thing a nonevent for people if you end up getting it. So we're a long way away from that. And so I think the recovery is going to be very long.

Okay. Two more questions, and I'll let you go. So shifting over to -- real quick on Japan. And maybe just some detail as to why you decided not to pursue an IR in that market. Was it just as simple as given the ultimate project cost, you couldn't model out a scenario where returns were acceptable?

Yes.

And I guess now it seems like Japan might -- yes, might table the IR -- they might table the IR process for a while. So is that a market you might look at again somewhere down the road?

Well, I think it's a great question. I think Sheldon has always wanted to be in Japan. And Mr. Adelson, our Chairman and Founder, is deeply, deeply committed to trying to build there. But the frustration that we felt and that he felt was that the conditions that were set up, very high development costs, difficulty lining up financing because the period of the concession is set at only 10 years, lack of commitment to making it easier for people on the transportation infrastructure side to get there. All sorts of challenges. The idea that potentially some people within the government were talking about taxing, having withholding taxes on Chinese customers that might come before they actually left Japan. So they couldn't leave with their winnings or get their winnings wired out, which would be different than any other place in Asia. A lot of really challenging things. Of course, high tax rate, both the top and the bottom lines. All these things made it really -- looking at our returns on invested capital in Macao and Singapore, it was going to be a much lower return on invested capital. And our conclusion was that it's actually higher risk -- much higher risk. So a lower return for a higher risk didn't make sense for us. So it may be a different calculus for other companies, and we think the Japan opportunity is a great top line opportunity, if someone can figure out how to build something inexpensively. But if the conditions were to change on the ground, then obviously -- I have worked with Sheldon for 15 years. And he wants to be in a situation where he can contribute to the business and leisure tourism appeal of a country and do that with great scale. And if the conditions changed, then potentially, I'm sure he'd be willing to look at it again. But with the current conditions, we're just not interested, and we've got the opportunity to increase our investment in Macao, the opportunity to increase our investment in Singapore. I don't think we'd be looking at anything in Las Vegas because we think the returns here will be lower than other opportunities. We're certainly interested in New York. And we've been talking about Korea for a long time, too, if the conditions there change where locals can come. So we probably have our hands pretty full with things that we'd like to do. And we'll be -- hopefully -- we wish the people in Japan well. We want them to do well. If the conditions change, I'm certain that we'll take another look.

Okay. Last question. And I don't mean this to be anyway offensive. But how do we -- or how do you guys -- or what's the right way to think about what this company looks like years down the road? And I guess what I'm getting at here is in terms of a succession plan once the Chairman steps down or decides not to work anymore. He's probably going to work longer than I do. But how do you think that...

A bunch of us like that, man.

Yes. How do you think that management structure -- what does it look like years down the road?

Sure. Great question. I think what Sheldon has said about it is he's going to outwork us all and outlive us all. So I know he's deeply engaged and enjoys very much his job and the company that he's built. He has said very clearly that he believes that Rob and Patrick are the right guys to take this company into the future, into the decades ahead, to continue his vision of building these convention-based integrated resorts in more places and continue the investments and the commitments we have to the markets that we're in. We've got a great management team, I think, at Sands China. I think Rob has been very pleased and built up a bunch of folks in both -- in all of our markets where we have very, very good leadership. George Markantonis here in Las Vegas is a great leader. We've got great people in Singapore. Again, great people in Macao. So I think it's Rob and Patrick, together with the people that have been built throughout the company, and -- will continue on in the footsteps of what Sheldon has laid out. And I know that the commitment that the family has. Obviously, the family owns 56% of the company. And their commitment is to continue in Sheldon's vision as we move into the decades ahead. So not a sensitive question at all. It's something that everyone has thought about very carefully, and it's probably going to be a lot more of the same as opposed to something that's much different.

Okay. Well, Dan, thank you so much for participating today in our virtual fireside chat. We can't thank you enough. And thanks, everybody, for listening in this afternoon. I hope everybody has a great rest of their day. If you missed any of the call or had any audio issues, there will be a replay available very shortly. So thanks, everybody. Have a great rest of your day. Appreciate it.

Steve, thanks so much. Take good care, everyone. Bye.

Thanks, Dan.