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Edited Transcript of SGR.AX earnings conference call or presentation 24-Aug-18 12:00am GMT

Full Year 2018 Star Entertainment Group Ltd Earnings Presentation

Queensland Sep 7, 2018 (Thomson StreetEvents) -- Edited Transcript of Star Entertainment Group Ltd earnings conference call or presentation Friday, August 24, 2018 at 12:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Chad Barton

The Star Entertainment Group Limited - CFO

* Matthias Michael Bekier

The Star Entertainment Group Limited - MD, CEO & Executive Director

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Conference Call Participants

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* Anthony Longo

CLSA Limited, Research Division - Research Analyst

* David Fabris

Macquarie Research - Research Analyst

* Donald N. Carducci

JP Morgan Chase & Co, Research Division - Analyst

* Larry Gandler

Crédit Suisse AG, Research Division - Director

* Mark Wilson

Deutsche Bank AG, Research Division - MD, Co-Head of Company Research Australia and NZ, and Analyst

* Matthew H. Ryan

UBS Investment Bank, Research Division - Executive Director and Research Analyst

* Monique Rooney

Morgan Stanley, Research Division - Research Associate

* Nick Basile

Goldman Sachs Group Inc., Research Division - Research Analyst

* Rohan Sundram

MST Marquee - Gaming and Contractors Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to full year results 2018 conference call. (Operator Instructions) I must advise you that this conference is being recorded today, the 24th of August, 2018. I would now hand the conference over to your first speaker today, Matt Bekier. Thank you. Please go ahead.

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [2]

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Thank you, [Bjorn], and good morning, everybody. Welcome to our 2018 results announcement. I'm joined here by Chad Barton, the CFO; and Harry Theodore, who runs our Treasury and Investor Relations group.

Let me start off with the overview on Page #4 of the investor presentation that we have provided.

We are pleased to report strong financial results. You see that our gross revenue is up 15.3% on a normalized basis, and our NPAT is up by 20.3% on a normalized basis. On an actual base -- on a statutory basis, we're down 44%. That just reflects the fact that in 2017, we had an abnormally strong win rate in VIP. And in 2018, we had an abnormally weak win rate in VIP. As I mentioned now, these things normalized over time. Now we think these are very high-quality results. We've got broad-based growth in -- across our geographies. Our investments are performing. Our cash conversion of the reported results to cash in the bank is strong at 105%. And we've been able to demonstrate market share gains in the critical product categories.

Further adding to the quality of the result is the strong performance of our VIP business. Turnover is up 54%. We've consolidated our #1 position in the market, and we are really pleased to see greater profitability in this line of business through some discipline and excellent outcomes on the credit function and the credit that we've been providing. So it's a positive result. On the back of that business performance and strength of our balance sheet, the board has declared a dividend payout policy -- the board has declared a 13% -- $0.13 fully franked dividend, that's up 53%.

Over the page, touching a couple of additional achievements. Page #5, first of all, I want to call out the effective delivery of our capital projects. The critical piece in the transformation of the Gold Coast was the creation and the building of The Darling and the expansion of the main gaming pool. That was done and delivered as promised on budget and on time. I'm also very pleased that today, there is actually a self-tuning underway as we speak in the Gold Coast where we are commencing the construction of the additional tower -- an additional tower in the Gold Coast, and I'll talk about a bit later.

What we also achieved last year was to expand our partnership with Chow Tai Fook and Far East, [half a mil] equity placement that gave us the opportunity to now start a marketing alliance and to identify a range of other specific developments that we want to undertake together.

Going forward, our capital burden will reduce, and Chad will talk to that in some more detail. But we're very comfortable that with our strong balance sheet and gearing at 1.4x, we are well placed to be able to fund all of our exciting development plans.

Finally, the start of the year has been positive. We've had broad-based growth across the group. That means growth across all of the products and all of the properties. Particularly pleasing is that we now have better trends in our domestic table games business, particularly here in Sydney but actually across the group, where the softness from last year both in terms of volumes and hold are no longer present.

In terms of VIP, [obviously] a short period of time but a very pleasing start to the year as well.

Page 6 shows you graphically how we've been performing last year and what has been driving the results. You see that most of the revenue growth came out of VIP and some additional revenue growth out of Queensland. Most pleasing thing about this chart though is the fact that despite the switch to a lower-margin business in VIP, we've been able to maintain our EBITDA margin at about 22%, which speaks to the quality of our cost management.

Let me now turn to the individual properties. In Sydney, on Page #7, we delivered an outstanding normalized result, EBITDA of $410 million. For those of you who've been around for a while, you may recall that before we started the investment, the refresh in Sydney in 2009, the property was doing $200 million of EBITDA. This is a very powerful illustration of the returns that we can generate on the back of our investments. What drove the excellent result was strong VIP business, which was up 57% in Sydney but also good solid performance in our domestic business. Visitation was up 11.4%. And particularly in slots -- as you know, that's an area we're very focused on, in slots we've been able to demonstrate very good performance.

Our cost remained well constrained and managed through that period, with total cost up in Sydney about 4.1%. I think it's a great illustration of the earnings capacity of these properties. I'm very excited about that result.

Let me turn over to Queensland now. Queensland is a story of 2 properties and 2 different halves. In Brisbane, we had a soft first half and a pleasing stabilization in the second half, and we feel comfortable about the prospects for Brisbane. And in the Gold Coast, that's where we put all of the assets and investments in. Gold Coast has had a very strong overall performance throughout that period.

And across the state, revenues were up 10.5% for the year. EBITDA went back by 8.4%. That's a little bit inflated by the fact that the VIP commissions fell negatively against us in Queensland in that period of time. If you'd normalize for that, EBITDA growth would have been flat.

The growth was reasonably broad-based across the categories but obviously most pronounced in the Gold Coast. VIP was very strong, up 41%, pretty much all in the Gold Coast.

Let me now double-click on the Gold Coast because I know that, that's of particular interest. And you can see now on Page #9, apart from the fact that we've been able to deliver the investments on time and on budget, it's pleasing to see that in all of the product categories, we are seeing good traction momentum in the property. We see the slots volume in the box on the bottom left, slots volume growing nicely, domestic table growing -- volumes growing nicely through the year and VIP volumes growing as well. So it's been a pleasing start to the monetization of our investment, but we are very keen to see more growth coming out of the Gold Coast. This is only the beginning of what this property can do.

For those of you who've had time to look at the financial report, I just want to point you to the statutory numbers in the Gold Coast. We had EBITDA of $116 million in the Gold Coast in last financial year. That's up from mid-40s about 4, 5 years ago. So it shows you how much this property has always -- already improved. But I'm excited about how much more we can do.

Over the following pages, Pages 10, 11, and 12, we have photos of some of the assets that we delivered and some of the main events that we've curated in the last 12 months in the Gold Coast, mainly Commonwealth Games and the Logies, which we host for the first time in Gold Coast.

If you now turn to Page #13, EGM market share, it's an important metric that we look at because it drives such a big part of our earnings. Very pleasing result, obviously in Sydney. We achieved a record market share of 9.6%, both through premium gaming areas but also in the mass market. And Queensland, very nice growth in Gold Coast as a result of the commissioning of the new assets. And in Brisbane, a pleasing stabilization where we've been able to start to eke out a little bit of growth now, now that we have a new leadership in place. So there's some confidence the EGM market share is a very positive story.

Page #14, finally touching on the highlights for us in these results. Great year in VIP. As we said, turn are up 54%. What we're really seeing is the return of the junkets. This doesn't take away from our strategy to diversify, but clearly, that part of the market, which have been suppressed in 2017, has come back in full strength. And despite the fact that we're doing more businesses with junkets, we've been able to increase profitability both through credit performance but also through more discipline in our commercial arrangements. You see that front money is up very substantially, receivables are down, and we continue to expand our growth in -- across all of our geographies. So the VIP business, in our view, has a lot more in the tank. And we are keen to suit up that diversification strategy here further, but it's a positive development for us. So with those sort of highlights, I want to hand over to Chad to take us through the financials.

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Chad Barton, The Star Entertainment Group Limited - CFO [3]

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Great. Thanks, Matt. Good morning, everyone. I'll take you through the P&L in some more detail on Slide 16. We're going to look at the normalized results first. Matt's already highlighted the strong results with normalized gross revenue of $2.7 billion, up 15.3% on pcp. Growth is being consistent and broad-based, with first half revenue growth of 15.9%, followed by second half growth of 14.7% versus pcp.

If you jump to the table hold rights in the domestic business to the same as prior periods, second half revenue growth would have actually been stronger at 17.9%.

The highlights in revenue performance are: international VIP, up 52%; strong non-gaming growth of 15.2%; above-market slots growth of 5.5%; and whilst tables were impacted by hold in Sydney, Gold Coast tables were up 21.1%.

Turning to costs. Driven primarily by the volume growth in the international business, gaming taxes, levies and commissions increased by 25.5%. The average gaming tax rate across the group remained consistent at 30.3%. Commissions were up 54.5%, which is in line with the increase in international VIP volumes, and the commission rates were consistent with last year.

Operating expenses were up 6.9% on pcp. This reflects the increased VIP volumes, which accounts for about 3% of the growth. Incentives, which were not paid in the prior year, accounts for about 2% of the growth, leaving 2% OpEx growth in the domestic business. To put this 2% OpEx growth in context, it includes domestic volume growth, cost pressures such as wage inflation of 2.5% to 3% as well as a 16% increase in cost from electricity and utility rates as well as adding new capacity in the Gold Coast post opening. So we have maintained a -- we've maintained cost growth to about 2% in the domestic business through benefits of our continuing efficiency program. This has led OpEx as a percentage of revenue to drop from 41.5% in FY '17 to 38.5% in FY '18.

Normalized EBITDA of $588 million is up 14.2%, with second half margins expanding faster at 16.4% compared with 11.8% in the first half. Depreciation and amortization at $187 million is in line with our prior guidance, increasing in line with the completion of major capital works in the Gold Coast and Sydney.

Net interest decreased 17.7%, primarily driven by the restructure of our USPP notes during the year but also $3 million in interest savings following the strategic placement.

Normalized net profit after tax of $258 million is up 20.3% on pcp, with a 60 basis points margin expansion.

Looking at the statutory results. The international VIP actual win rate of 1.16% compares with a 1.59% win rate in the prior year. This drives the $115 million reduction in statutory EBITDA versus pcp. So the international VIP players have had a luckier year. The win rate improved in the second half by 1.26%, and that's close to our long-term expectations of 1.35%. And I will say, we are tracking higher-than-normalized win rate in 2019 to date.

Significant items of $36.7 million is primarily driven by the costs associated with the USPP debt notes restructure, which we disclosed in August last year. Also, as flagged in the first half results, the costs associated with the Gold Coast preopening and launch expenses amounted to $6.5 million.

Now turning to the balance sheet. Balance sheets strength remains with gearing at 1.5x -- at 1.4x; cash collection ratio of 105% of EBITDA, which was up slightly due to timing of movements in working capital balances around year-end; trade receivables increased by $29 million due to higher IRB activity in June; and receivables past due were lower than the prior year; and bad debt expense as a percentage of revenue is at record lows.

Property, plant and equipment increased close to $300 million, mainly due to the Gold Coast redevelopments. Net debt is at $678 million and down $110 million on last year, reflecting the $490 million equity placement offset by increased capital expenditure and joint venture contributions.

Turning now to Slide 18. We successfully restructured our USPP notes in early FY '18. The restructure has reduced the cost of these notes by over 400 basis points. So therefore, our guidance for interest for next year is in the range of $35 million to $40 million, which includes a reduction in capitalized interest given reduced CapEx.

Capitalized interest was $10 million in FY '18 and will go down to around $5 million in FY '19. We have $580 million of undrawn facilities at year-end.

Just looking at CapEx now. CapEx peaked in FY '18 at $477 million. $297 million of this relates to growth projects, with the remaining $190 million as maintenance CapEx. CapEx will decline materially over FY '19 and '20 to between $300 million and $350 million each year.

Depreciation and amortization of $187 million was within guidance and up 14% on prior year following commissioning of new projects as well as accelerated depreciation on assets being refurbished. FY '19 is expected to be in the range of $200 million to $210 million for D&A.

So if I now take you through to Page 19, Slide 19 of the pack. To conclude, from a financial perspective, the group has delivered strong financial results again with a further 20.3% growth in normalized NPAT to achieve 19.2% compound annual growth rate over the last 4 years. This growth has been pleasingly broad-based and underpinned by good performance across our domestic and international businesses. We have good cash flow generation, our balance sheet is strong, which enables us to continue to execute our strategic growth plans. And to reflect the confidence the board and management has in the business, the board has approved a new minimum dividend payout ratio of 70% of normalized NPAT. This is a dividend lift by 28% for the year to $0.205, with a final dividend of $0.13 and the yield slightly over 4%.

I'll now hand back to Matt to conclude the presentation.

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [4]

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Thank you, Chad.

So much about the year that was. Let's now turn our minds to the upcoming developments this year. I'm on Page #21. I've already referenced to the strong start -- or positive start to this financial year, where we're seeing good revenue growth across our properties and across all of the lines of business. In terms of our priorities going forward, we remain essentially unchanged. We will focus on improving earnings across the group. I want to focus on 2 aspects of that. Particular focus for us will be investments in driving that performance through marketing and gaming as well as actively managing the disruption from our capital programs, particularly in Sydney. The second priority is to deliver the next stage of capital plans. And finally, the third priority is to commercialize -- expand the strategic partnership with Chow Tai Fook and Far East, where we expect to get active in both the VIP business as well as the mass market in the first half of this financial year.

On Page #22, we look at the capital expenditure forward profile that Chad has already highlighted. I would like to just make the point that, from our point of view, we are becoming increasingly comfortable with the forward capital program. There's a couple of reasons for that. First of all, we have delivered meaningful projects, in recent history, on time and on budget, and we know we can do this.

Secondly, our tendering is delivering good results. I just want to point you to the result on tower 1 in the Gold Coast. The additional -- the 700 key tower that we're starting to build from today, where we've been able to come in 8% below the previous guidance on a fixed price contract with the builder, which is a great outcome.

And then a final reason for our increased competency is that, in this financial year, we'll be tendering very substantial proportion of the Queen's Wharf project. So whatever residual risk there is at Queen's Wharf, that [won't] be materialized, dissipate this financial year. So we're very comfortable about the direction that we're heading in.

Looking at what's happening in the properties, Page #23. All the focus in Sydney is, of course, going to be on the Sovereign room. The work on the permanent facility is underway. We've moved our customers into the temporary facilities. And while it's very early days, they'll probably be in the temporary rooms for 1 week. The feedback so far from customers has been positive. It's a big credit to the team that has done outstanding work on the mitigation strategies. I think (inaudible) the best that I've seen in my career in this industry. Great work around the member engagement, how we recognized and -- our members across the property. And the temporary facilities, in my view, are probably superior to the previous facilities in many respects. And I look forward to showing these facilities to investors over the coming weeks.

Page #24 has some of the photographs about the facilities that we've now commissioned.

Turning to Page #25, Gold Coast. Gold Coast is progressing well. As I said, we're starting to date to build the first JV tower. The point that I just want to impress on everybody is this is the first of 5 towers, up to 5 towers, that we [collect and] build on that site. And we're really keen to see -- the first tower has been a big success from a commercial point of view in terms of the sales but keen to see how much more we can do on that front. But it's obviously a positive development, and it just reflects our belief that the Gold Coast has a lot more potential medium -- in the medium and long term than probably many people think.

Page #20 -- over the Page, on 26, we show what the tower will look like and one of the apartments as well as a graphic on some recently completed works in the Gold Coast.

Finally, on Queen's Wharf, on Page 27. The work is progressing well. Demolition was completed on time, excavation is progressing well. In fact, based on the metrics that we look at, we're probably a little bit ahead of where we ought to be, so that's progressing well from all aspects.

I just want to remind you that for Queen's Wharf, we've been able to enlarge the resort by about 25%, and we think that's a very positive outcome because it will allow us to derisk the revenue sources and build a better resort. And we can do that without impacting on business case and delivering -- and continue to deliver good returns out of that project. So we're very excited about the upside that we will have out of Brisbane. The pictures on this chart 27 show you some of the progress that's been made.

Finally, Page 28, just to summarize what we're trying to do for our investors here. Left-hand side, a recap of our strategy. We are making investments in all kinds of attraction drivers. And we're trying to make these investments in a capital-light fashion through our partners and through mixed-use developments. These investments drive visitations to our sites, both from locals as well as international customers. And this visitation drives earnings, which then allows us to invest more into these sites. It's a virtuous circle that we're trying to build here.

In terms of our delivery, on the right-hand side of the chart, I think there's increasing evidence that our investments are delivering above system growth. Chad referenced the strong growth of the last 4 years [of] the top line, and I think the share gains in slots are further evidence of that. We've got a building track record of delivering these investments on time and on budget. Our partnership with Chow Tai Fook and Far East supports these long-term opportunities, both from a capital point of view but also by allowing us to do this delivery of these projects. And collectively, this improves returns to shareholders because we now don't have to wait until everything is done, but we can actually start to pay increased dividends through the cycle. That's, in a nutshell, what we're trying to do.

With that, our presentation concludes. I'm now happy to take questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Don Carducci from JPMorgan.

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Donald N. Carducci, JP Morgan Chase & Co, Research Division - Analyst [2]

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Just 2 quick questions for me. The first being can you provide a little bit of color on how much contribution there was from Far East and Chow Tai Fook in driving second half premium mass and VIP turnover?

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Chad Barton, The Star Entertainment Group Limited - CFO [3]

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Yes, 0.

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Donald N. Carducci, JP Morgan Chase & Co, Research Division - Analyst [4]

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Good. And then my second question would be, what's the early feedback, and can you talk about any impact to the Sovereign room from its movement? And maybe any color on vantage players with their new fit out? And this is in reference to the comment from the previous half on player behavior, being less time on table but sustained visitation.

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [5]

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Yes. Look, the -- it's just been a week. And as we look at the trailing numbers because we moved the customers [to a temporary facility], there's obviously excitement. I think it's fair to say that there's been a few detractors of ours in the market that have been spreading news about terrible facilities that would be in operation for a little while. The consistent feedback that we've had from our investor -- from our players has been that this is a lot better than they have expected. That in fact, as I said, it's much better in some respect, for example, access to the car parks than previous facility. And it's about -- it's starting to build real excitement about what the permanent facilities will look like. In terms of the critical -- criticism, it's not as big as the previous Sovereign room, there's not enough outdoor areas. But the feedback have been very positive. Now what we have been doing in the lead up to that was -- and in response to the softer table numbers that we had experienced in the -- late in the first half and the second half was we dialed up our hosting programs. We put on more customer relations executives. We improved and enhanced our marketing to the top end of the customer base. And all of that is gaining traction. And we'll continue to manage that customer base with enormous focus over the next period as we open up the permanent facilities.

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Operator [6]

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Your next question comes from the line of Matt Ryan from UBS.

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Matthew H. Ryan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [7]

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My first question is just in regards to your operating cost, both what you reported in the result and also the outlook. So I think the second half cost growth was a lot better than what I think it might have been, and I think you've highlighted just 2% underlying OpEx growth. So just sort of curious on whether you think that's sustainable? And also maybe if you could just talk through the drivers of what might be happening over the next 12 months. I'd assume that outside of the preopening costs that you've identified in the Gold Coast, there might be some inefficiencies at that property which you can improve on over the next 12 months. So just provide any color on that.

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Chad Barton, The Star Entertainment Group Limited - CFO [8]

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Sure. Thanks, Matt. So FY '19, looking forward from a cost perspective, and then as you pointed out as well, FY '18 from underlying kind of around 2% cost growth in the domestic business. So we clearly remain very focused on our efficiency program that we've been running over multiple years, and that's been able to offset some of the cost growth. And I pointed out, when you got utilities going up 16% year-on-year, the only way for us to offset that is to continue to focus on our efficiency program. So then you look forward to FY '19, as we've always said, we expect cost to reflect volume growth. The incentives that were in FY '18 that were always there, they're now in the numbers. So I'm not expecting that to be impacting to FY '19. Probably the thing that we are very focused on is in the Gold Coast, we require to -- we actually stay very focused on the customer experience and match the investment that we've made. So our service levels are a bit higher in the Gold Coast to make sure that the visitation that's coming, the experience that the new players are having as they come to the Gold Coast is matched by our service levels. So we expect over the next 12 months, we're probably going to be running a little bit higher from a cost perspective as we then fully get to the ramp up in kind of 12 to 18 months' time in the Gold Coast. Matt sort of highlighted a little bit what we're doing around some of the service levels in Sydney around Sovereign, making sure -- but that's initial investments that we're making to mitigate the disruption. And then, obviously, we'll have the standard inflationary pressures around wages and utilities again in FY '19. As I said, our aim is -- with our efficiency program, is to effectively offset the impact of CPI on our business through efficiencies year-on-year.

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Matthew H. Ryan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [9]

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Okay, that's really helpful. And then just a question on the dividends. So pretty large increase year-on-year and love to have been given a guidance of the minimum 70% payout from here. But just curious on how do you actually think about where you want to pay out. The range, clearly between 70 and 100, is pretty big. So just if you can provide any color on the drivers and what you're thinking about there?

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [10]

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Look, I don't want to sound vague here, but this is something that the board will obviously decide every time around in light of the performance. The reason why we went with the dividend that we did was the board look -- performance was pretty good, we're happy with how it's going and where we're heading, and we have good momentum. And so the $0.13 in the second half reflects the fact that it is above the floor, 70% minimum, and the fact that we've got good momentum. And so you should assume that the board will continue to be mindful of our shareholders' needs and the performance of the -- in light of the performance of the business. But 70% is the minimum that we've set. That was a long sentence that said nothing, I realize that.

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Matthew H. Ryan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [11]

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Yes. I mean, I'm just looking at your balance sheet, appear to be pretty strong, earnings are going the right direction as you flagged, CapEx is now coming down. So I mean, are you sort of pitching towards some form of dividend yield relative to where the share price is? Or I mean, how are you actually thinking about it? Because there seems to be quite a lot of flexibility in what you could be paying out moving forward.

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [12]

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Yes. That's exactly how we like it. I don't want to be flippant, Matt. But I can't give you any more information here. There's a bunch of factors that go in here, there's the business momentum, it's how the actual win rate in the VIP business works for or against us. They all go -- get into the equation of how we look at dividends.

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Matthew H. Ryan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [13]

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Sure, okay. And just a quick one. You gave some guidance pretty recently on Queen's Wharf. And I guess, now you're talking about getting a better-than-expected outcome in the Gold Coast. Is it too short term to think that conditions have actually changed between the time that you gave that guidance and now or you think it's just, I guess, an incremental positive that you've been able to get a better outcome of the Gold Coast versus what you'll still be -- might be getting in Brisbane?

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [14]

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Yes. We are in the market tendering now for a very substantial piece of the Queen's Wharf development, and that will give us the best guidance of where that's going. I think the interesting thing about the Gold Coast is just this is the first time we've actually moved very closely with our partners, particularly Far East, and we've been able to leverage their capability, relationships and processes. And that has made a material difference here, and so when I said on the call that we're getting increasingly comfortable, that really reflects the fact that when we go into this joint venture with Chow Tai Fook and Far East, we knew that we were getting more than just a capital partner. We wanted a partner that could help us with the risk in the development, delivery of these developments. And I'm seeing the benefits of those relationships now. And that's how I would interpret the data set.

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Operator [15]

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Your next question comes from the line of Nick Basile from Gold Sachs (sic) [Goldman Sachs].

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Nick Basile, Goldman Sachs Group Inc., Research Division - Research Analyst [16]

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I just wanted to delve a little bit deeper into the difference between EBITDA growth on a normalized basis between Sydney and Queensland. I think you might have called out that VIP commissions were working against you in Queensland. And if you adjust for that, you may have been flat for the full year. But I guess, that's still some way off the leverage you saw in Sydney where EBITDA was up very strongly, 27%. So just trying to understand maybe what the differences were there. For example, was treasury a bit of a drag relative to Gold Coast? Could you provide a bit more context on that?

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Chad Barton, The Star Entertainment Group Limited - CFO [17]

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So I think -- thanks, Nick. Look, I think the big thing is for the VIP commissions and the normalized -- and the -- I guess, the impact of revenue share deals have had on our commissions, and we note that in the presentation. If you look at last year, there was a benefit of around $15 million on the commissions that were in Queensland. So when Matt said if you look at normalizing it, you're effectively flat year-on-year. That's the biggest driver of the EBITDA movement in Queensland. And this year, effectively, Sydney's got the $20 million benefit. It swings around between properties where players play, what rebate program they're on. So that's really the biggest swing within that. Now Queensland, also from more of a cost perspective, as I've highlighted in the second half. As we've ramped up Gold Coast, we are probably running a little bit higher on cost there, as I said, to make sure the service levels are there to be able to delight the customers as they're coming in and experiencing the new property.

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Nick Basile, Goldman Sachs Group Inc., Research Division - Research Analyst [18]

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So just to clarify, maybe, then would you say that Sydney has benefited from some of the VIP commissions being a bit lower than what they were in the prior period? 27 versus flat Queensland, adjusting for that is still a huge difference relative to the normalized revenues across non-gaming and gaming, which were, if anything, stronger in Queensland?

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Chad Barton, The Star Entertainment Group Limited - CFO [19]

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Yes. So Sydney has benefited from commissions on the revenue share deals where Queensland in comparison last year is down because of it.

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [20]

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The only other -- Nick, the only other thing I want to say in the context of this business is, one, we now are seeing a return of the junket business. And the new rate cards that we have implemented will start to insulate us a little bit more than in the past in terms of margin pressures. And it also means that in terms of our credit performance, while it was an outstanding performance, I think as there is more and more junket business, the credit performance should continue to improve because we pay more up on the commission, but we lose less on the bad debts. So the economics in the VIP business, actually, overall, relatively favorable for the first time in a long time.

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Nick Basile, Goldman Sachs Group Inc., Research Division - Research Analyst [21]

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Okay, great. Just one more question in relation to slots. You saw very strong growth across both Sydney and Queensland. Could you perhaps explain a bit more about what the features driving that were, whether it was new product versus player spend or utilization?

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Chad Barton, The Star Entertainment Group Limited - CFO [22]

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So I think, Nick, it's a mixture of all of that. Absolutely within our -- each of our properties, we are very focused on our product, what our product is, new product, exclusive product. We've got the launchpad that goes on in Sydney that launches new product. We've got exclusive casino-only slot product that we're putting in that has been very successful for us. We've got -- I'll probably pronounce this the wrong way, Jin Ji Bao Xi is coming in very shortly, will be exclusive through us in New South Wales as well, which is one of the leading games in Macau at the moment. You then match that up with the elements that we're doing around loyalty, across all segments of our loyalty program, in set time and we've moved forward quite significantly in all segments, with time on devices, Matt's already highlighted, in Sydney visitation was up 11%. We're seeing time on devices up as well associated with that. So -- and then we have also changed our jackpot strategy over the last year as well. So there's not -- you can't necessarily sit there and point to just one thing in particular that drives that. There are multiple things that we look at across our slots and our loyalty program that will drive and has driven the increase we've seen in the last year.

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Operator [23]

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Your next question comes from the line of Larry Gandler from Crédit Suisse.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [24]

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Look, just on the visitation in Sydney, 11% growth. I think that's another year of good -- of strong number. Just wondering if you can highlight the last couple of years, if you have that or whether that 11% is an acceleration? And then maybe just talk about how you drew 11% more visitation.

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Chad Barton, The Star Entertainment Group Limited - CFO [25]

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So Larry, yes, visitation has lifted a little bit in the last year. In comparison, we've seen good visitation increases that have gone on over the last few years. But yes, 11% is a little bit higher than the trend rate we've seen across it. There's obviously, again, a number of things, loyalty program we drive. We have (inaudible). We've got 235, so we're up about 7% on our loyalty program year-on-year as well in terms of numbers of active members. So we've seen that go up quite substantially. We're also trying to do more and more, as you know and our tourism strategy being relevant within our cities in terms of -- with the right tourist operators, making sure we're getting visitation onto our properties as they are visiting Sydney as well. So as I say, the biggest thing really comes down to what we've been doing around loyalty.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [26]

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Okay. That's good. And just with Gold Coast and the commissions there. I hear you on the comment that there was some, I guess, win rate issues in the commissions or normalization issues in the commissions. But they were pretty consistent throughout the year sequentially, first half and second half. So I'm just wondering if generally, the commission rates in Gold Coast will be generally higher than Sydney?

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [27]

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Larry, no. The answer is no. We have one rate card.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [28]

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Okay, there's one rate card for -- that's what I was going to ask.

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [29]

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Yes.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [30]

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And you said -- you mentioned, Matt, you changed the rate card recently. Can you just say when that change occurred, and what were the major changes there?

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [31]

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We put the rate card through -- that is more in line with the rate cards that other players in the market have. We were, across, a little bit more generous. And the rate card came into play in April.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [32]

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You were previously more generous, and now you're more in line?

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [33]

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Now we're more in line. And the profitability of this business is obviously driven by the rate card, and then it's by everything else we give in the way on top of the rate card. And so instilling a greater discipline here has been very important to us. And as you know, we've got a new leadership in the space that we feel very comfortable with to drive that profitability in that business.

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Operator [34]

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Your next question comes from the line of Anthony Longo from CLSA.

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Anthony Longo, CLSA Limited, Research Division - Research Analyst [35]

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So just a quick one on Queen's Wharf bridge for me. So you mentioned you're tendering a substantial portion of work this year. Are you able to give a feel for whatever metrics you can on that front in terms of definitive work done or dollars if you could?

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [36]

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So what we'll be tendering is the bridge is -- we've got some early contract involvement on the bridge, that will be tendered later in the year. By the way, the $120 million that been kicked around are practical. That is nothing like the number that we have -- that we have in the budget for and have confidence in spending on that. The main component that we're tendering will be the building of the basement and as well as the core of the property and the shell and the cladding. So that's everything except the fit out of the property. And the reason why we sort of pulled that apart is because we think that the market continues to soften, the forward market, and we do want to tender everything now when there's still a little bit of light in the market. We think that the market in Queensland will soften further from a construction point of view. And so pushing that out a little bit will serve us well. The shell and core will represent -- once that has been let, 50% of the total cost of the resort will be locked away.

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Chad Barton, The Star Entertainment Group Limited - CFO [37]

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Probably just to reiterate again, message, [Matt], you gave earlier in the presentation was we're ahead on the Gold Coast by about 8% on the first tower. The same quantity surveyor, actually did the budget on the Gold Coast, is doing the budget work for us on Queen's Wharf. So we're just trying to give a little bit of an idea. We're using the same quantity surveyor, and we've come in 8% under on Gold Coast.

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [38]

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[Don't] quite locked that in yet, though.

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Chad Barton, The Star Entertainment Group Limited - CFO [39]

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No, I'm just... Okay.

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Anthony Longo, CLSA Limited, Research Division - Research Analyst [40]

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Appreciate that. Just another question on taxes and commissions. So understand that -- so the tax rates are broadly in line given the increased volumes, but commissions are up, as you'd sort of expect. Are you able to give a feel for -- so I know you mentioned that commission rates broadly have been sort of in line with previous trends, but are you able to give a feel as to what -- I guess where I'm coming from is the rate, taxes and commissions as a percentage of revenue, that ratio is well and truly up on the pcp. Are you able to carve out how much of that is, I guess, volumes or the kickers that have come through?

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Chad Barton, The Star Entertainment Group Limited - CFO [41]

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Yes. Nearly entirely volume-related. Yes, we have, I think, about roughly around 20% of our volume is on revenue share or hybrid revenue turnover-based deals, so nearly all of the commission that we see is based upon revenue. The actual commission rates are actually very consistent with prior year, and the tax rates were effectively flat year-on-year as well.

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Anthony Longo, CLSA Limited, Research Division - Research Analyst [42]

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Excellent. And finally, in terms of the use of the junkets, is that proportion still similar to what you saw in the first half so around about that 85% mark?

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Chad Barton, The Star Entertainment Group Limited - CFO [43]

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Yes.

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Anthony Longo, CLSA Limited, Research Division - Research Analyst [44]

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Yes, fair enough. And sorry, last one for me, sorry. In terms of the Sydney tables results, I mean, it's pleasing that FY '19 started off positively in terms of those hold rates. Appreciate that it can be volatile, but from your perspective, is there anything that you can do from your end to manage that volatility or is -- those hold rates essentially just luck, and you can't do anything about that?

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [45]

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At the core, it's luck. But the luck normalizes more quickly if you have great facilities where customers spend more time at the table. So we experience more volatility when people come play for a short period of time, and then they're up or down and then leave. So part of our expectation is that the win rate will stop to fluctuate once we're in the permanent facility, and we experience a greater volume of play.

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Chad Barton, The Star Entertainment Group Limited - CFO [46]

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And it's worth having a look at the appendix on Page 34 as well. It gives you a longer-term view of what the hold rates have been within Sydney PGR. And you can see the trend line's actually been increasing over the years, as Matt said, which highlights the work that we've been doing on the proposition within our PGR over multiple years. You can see, however, then how low certainly the second half and FY '18 as a whole has been on our hold rates and the PGR there in Sydney.

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Operator [47]

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Your next question comes from the line of Mark Wilson from Deutsche Bank.

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Mark Wilson, Deutsche Bank AG, Research Division - MD, Co-Head of Company Research Australia and NZ, and Analyst [48]

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I was just wondering, just on that hold rate in the private gaming room, I mean, what did you see in that second half because it is quite surprising that it did drop so rapidly. And what have you actually seen it recover to in the first part of '19?

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Chad Barton, The Star Entertainment Group Limited - CFO [49]

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So first half '19 is above trend, so we're above where we were last year, so we're tracking above that at this point in time, Mark. Look, if there's anything that we know in FY '18 from a tables perspective that we highlighted previously, we've seen visitation of the PGR being quite strong. Time is actually being strong. What we're actually seeing is some customers, from a Diamond perspective, your top end of your loyalty program, their visitation's been a little bit lower. But the overall visitation in the room's been the same. It's just some of your bigger players have been potentially traveling overseas or elsewhere over the last year.

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [50]

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So Mark, let me just add one more thing. There has been a little bit of a move from very, very large players who no longer -- who are not on its odd in Australia and are now playing in the private gaming rooms at very high levels that we would have not seen 3 years ago. They're players who would be playing at IRB-type levels. And that just creates a bit of volatility. It shouldn't impact on the hold because they're playing the same game in the long run, but in the short term, it does create volatility. So these are people that in the international program played $20,000, $200,000 ahead, they now play that in the private gaming rooms.

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Mark Wilson, Deutsche Bank AG, Research Division - MD, Co-Head of Company Research Australia and NZ, and Analyst [51]

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Right, okay, okay. And so was there anything that you have done to actually...

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [52]

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I just want to -- in the long run, that's a great development, right? So this is a category of local [super whale] that's developing, but it just creates volatility.

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Mark Wilson, Deutsche Bank AG, Research Division - MD, Co-Head of Company Research Australia and NZ, and Analyst [53]

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Right, and do you expect that volatility to continue?

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [54]

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Yes, but it doesn't mean it has to be below the trend line.

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Mark Wilson, Deutsche Bank AG, Research Division - MD, Co-Head of Company Research Australia and NZ, and Analyst [55]

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Yes, okay. Okay. So what are you doing to that effect to actually take visitation up and basically time on table?

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Chad Barton, The Star Entertainment Group Limited - CFO [56]

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Well -- so the Sovereign room, first thing we've done is -- and we've done this also for the temporary facility, we've now created a special additional tier within the Sovereign room which we call the [chairmen's] and that really caters to that very high end, domestic high end. And that's where we are very, very deliberately lifting service levels and experience and (inaudible).

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Mark Wilson, Deutsche Bank AG, Research Division - MD, Co-Head of Company Research Australia and NZ, and Analyst [57]

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Right. Okay, okay. That's great. And...

(technical difficulty)

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [58]

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I think we just lost you, Mark.

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Operator [59]

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Your next question comes from the line of David Fabris from Macquarie.

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David Fabris, Macquarie Research - Research Analyst [60]

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I was just wondering if you have any thoughts as to why the Gold Coast market's been soft since April in the slots side. Is it that you guys are taking share, or are there other factors at hand in that market?

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Chad Barton, The Star Entertainment Group Limited - CFO [61]

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Look, I think, clearly, in this period of time, right, this time of the year, being a winter month, the Gold Coast is typically seasonally a bit lower than you'd see obviously through the warmer months of the year. But there's nothing that we're seeing significantly that's out of trend from what we would expect. I mean, we've given you the stats on our market share numbers. They continue to be strong and have been lifting in the Gold Coast. So yes, potentially, we are taking some more share there as well on top of that. But seasonally-wise, we're not very concerned with what we're seeing in slots within the Gold Coast at the moment.

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David Fabris, Macquarie Research - Research Analyst [62]

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Yes, okay. And just on (inaudible), can you give us an update on how that's progressing with the JV partners, Chow Tai Fook and Far East Consortium?

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [63]

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Our application is in. And it's not [looking great right now].

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David Fabris, Macquarie Research - Research Analyst [64]

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All right. And just one last question for Chad. Just with that accelerated depreciation, is that ongoing into FY '20? When does that stop?

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Chad Barton, The Star Entertainment Group Limited - CFO [65]

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No. So it's only FY '19. So it's about $10 million of it in FY '19, and then that accelerated depreciation and is finished.

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David Fabris, Macquarie Research - Research Analyst [66]

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Okay. And sorry, one last question, just on the capitalized interest. Does that only relate to the Sovereign resort, or is there other CapEx works in there as well?

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Chad Barton, The Star Entertainment Group Limited - CFO [67]

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Primarily, Sovereign resort for next year.

Sorry, [I should refer you] to Page 9 in the presentation and in the bottom left box there, it gives you the acceleration in volumes in slots in the fourth quarter. So we're certainly seeing the volume slots -- strong from a slots perspective.

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Operator [68]

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Your next question comes from the line of Monique Rooney from Morgan Stanley.

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Monique Rooney, Morgan Stanley, Research Division - Research Associate [69]

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I just had a question on the VIP outlook. Obviously, looking ahead, you'll be [lacking] some pretty strong numbers. But I'm just kind of wondering what your view is on Australia in the context of global VIP. And could you maybe talk a bit more about your plans with Chow Tai Fook and Far East and what you plan to do there in the VIP side? Just because I guess some feedback I've got is that there's a lot of wealthy individuals that will, through Far East and Chow Tai Fook, will look to gamble exclusively with Star.

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [70]

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Thanks, Monique. Look, the -- my comment about the VIP business reflects the fact that all of Australia is still only about 3% of the global VIP market. If we look at what's happening in Macau, that market continues to expand very nicely. What we've observed is that there's nobody that we see here that hasn't played in Macau for a couple of years before they start to travel. And so consistent with the outbound tourism trend, I expect that more and more people will start to travel. And so the outbound accessible market to us will accelerate faster than the growth in Macau. It's just a mature industry. So that's a very positive development, and we've said that's one of the main reasons why we are building significant hotel capacity in each one of our locations. And certainly, now, even for Brisbane, I should say now, 3, 4 years ago, I was dubious about how big that VIP market could be. I think the feedback we're now getting, and the confidence that we're getting is that could be actually a lot larger than we thought, which is more in line with what our partners thought all along. Now in terms of our marketing alliance with Chow Tai Fook and Far East, we've concluded, or we're in the sort of final stages of doing a lot of prep work. And we will be launching 2 separate campaigns if you mind or approaches into that customer base. One relates to with premium mass. We have a non-gaming offer that will be marketed into the Chow Tai Fook loyalty base. And we've had -- we've made good progress in working with Chow Tai Fook about how we're marketing to that customer base, a far bigger market, and that will happen in the first half. And then separately, what you referenced, the VIP program, we've had great support from the principals of Chow Tai Fook and Far East. We personally are getting involved here in developing a program, a very, very high end for some of these large players. And that, again, will launch in the first half of 2019, this financial year. So we're looking forward to see how that goes. Don't expect that to (inaudible) all these businesses need to be built over time, but it's an exciting additional opportunity plus on top of all the new organic opportunities that we have in front of us.

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Monique Rooney, Morgan Stanley, Research Division - Research Associate [71]

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And I might just have another. I know you took some of the launch cost in the Gold Coast down below the line. But were there any kind of one-time costs that were above the line?

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Chad Barton, The Star Entertainment Group Limited - CFO [72]

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Not really.

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [73]

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Look, the reality is when you launch these new assets, there's some specific costs that you're allowed to take below the line, I'll identify as (inaudible) costs, which are clearly bad. But there is inefficiency when you launch a new product. And we very deliberately overstaff the hotel. We continue to overstaff the hotel because we can get one shot of bringing it home [for us] to the property. And there's inefficiencies [in between] beverage operations until we run them in. So that's just now something for us over the next 6 to 5 months to drive in and get to greater efficiency. So those overstaffing costs are in the normal operating costs.

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Chad Barton, The Star Entertainment Group Limited - CFO [74]

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Correct so then purely defined with preopening costs below the line. So before we've opened, there's sort of the ongoing costs that are actually in the last quarter's numbers.

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [75]

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Yes. So -- And if you look at -- I think if you benchmark the preopening cost, you will find that they were pretty modest, particularly in casino work standards.

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Monique Rooney, Morgan Stanley, Research Division - Research Associate [76]

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Okay. All right, great. And maybe just last -- one last one for me. Probably a bit more less (inaudible). But look, I did notice there was -- there have been some recent articles about Hard Rock looking to come to the Gold Coast, build a second casino. At the same time, I know the government is also saying that they're not going to issue any more poker machines in the Gold Coast. So could you just talk a bit about, I guess, your kind of view on those, I guess, allegations, that they'll be coming. And just, yes, talk about how -- yes, I guess your view on that would be great.

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [77]

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So there is no process at this point, or a process at this point on the way towards that. There's a second license kicking around, and that goes back to the Queen's Wharf for us, essentially. But there's no process on the Gold Coast. There's a lot of process in Cairns, but there's not a lot of process for the Gold Coast. In terms of Hard Rock, look, I'm not going to comment in great detail other than saying I encourage you to actually go and visit some of these venues and have a look at what they're doing to get a better feel for what they do. It's a locals casino, that's very much what they've been dong in the U.S. In terms of the notes, the pokies, that is a positive development from our point of view because we do think that -- sometime that we think the market is not big enough for the large-scale resorts. So if you pull pokies out of that, it's going to be impossible, I think, to actually build a meaningful resort of any size in that market. So I can't give you an ironclad guarantee that there will be no second license or no process will be kicked off. But with the parameters that have been set, it looks very dubious.

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Chad Barton, The Star Entertainment Group Limited - CFO [78]

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I want to just add, I think, Matt, the clubs have already come out and saying they're not going to sell any of their licenses, right? So clubs have said that already, no more additional licenses. You've already got what's quite a saturated market from a EGM perspective, so it's 18 EGMs per 1,000 adults, which is higher than Brisbane after Queen's Wharf and also higher than Sydney and Victoria. So the only place that they're going to be able to try and get slots will be through the pubs, which I think is going to be difficult to get anything of that size and scale, to make sure an investment like that would return appropriately.

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [79]

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Okay, I think we've got a final question?

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Operator [80]

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Yes, we have a final question from Rohan Sundram from MST.

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Rohan Sundram, MST Marquee - Gaming and Contractors Analyst [81]

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Just a couple of questions. Firstly, just on the JV CapEx guidance, how should we be thinking about the resi sales proceeds that come through? Is that in that guidance, or will that come out a later date upon completion?

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Chad Barton, The Star Entertainment Group Limited - CFO [82]

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No. It's not in that guidance. It's -- that's the gross CapEx, but it includes our joint venture equity contributions. So it's a lower amount. So as an example, I think it's around $30 million for tower 1 in the Gold Coast.

And then when the apartments settle, they all get the -- you get that back plus whatever profits you make out of it.

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Rohan Sundram, MST Marquee - Gaming and Contractors Analyst [83]

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Yes, so that will be at a later date, then?

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Chad Barton, The Star Entertainment Group Limited - CFO [84]

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Yes.

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Rohan Sundram, MST Marquee - Gaming and Contractors Analyst [85]

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Understood. Okay, and just coming back to your comments around junkets, should we be assuming -- are you looking to take on more junket relationships, or are you looking to do more with the existing junkets that you have at the moment?

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [86]

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Both. So I think the trend that I tried to describe affect all of the junkets in Macau. And they will all have players who will be ready and want to travel more into Australia. And so we will want to work with more junkets as well as the existing junkets. But we will maintain our credit control. So one of the things that has served us exceptionally well over the last 4, 5 years has been the investments [which we do]. We now have over 10 people in Asia doing nothing but credit, and that investment is really paying back, and we don't want to lose that.

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Chad Barton, The Star Entertainment Group Limited - CFO [87]

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Rohan, probably adding to that, just to remind people as well, that is, credit is separated from the sales and IRB sales team. It's a separate credit risk function, like you'd suggest, within the bank separated from the marketers and the sales people versus the people making the assessment of how much credit is appropriate for individual players.

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Rohan Sundram, MST Marquee - Gaming and Contractors Analyst [88]

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Okay. And are you seeing any issue at all, any impact from China capital controls? I know the data would suggest otherwise, but is that still an issue at all?

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [89]

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That issue has been in the market, in our numbers for the last 4, 5 years. I think I've suggested to you in the past that the customer who comes to Australia needs to get a Visa, needs to go through all kinds of (inaudible) procedures, but they don't have to go through [another process]. So they probably have cleared funds, access to these funds outside of China but because of businesses, not of relationships, much more so than players who'd only go to Macau or other places in Asia. And so therefore, I think we are playing within a subset of players with greater liquidity.

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Operator [90]

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There are no further questions at this time. Please continue.

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [91]

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All right. I think we're done, seeing no further questions in the queue. Thank you, everybody, for your attendance and your support. And I look forward to seeing you over the next few days. Thank you very much.

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Operator [92]

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Ladies and gentlemen, this concludes our conference for today. Thank you for participating. You may all disconnect.