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Edited Transcript of SGR.AX earnings conference call or presentation 16-Aug-19 12:00am GMT

Full Year 2019 Star Entertainment Group Ltd Earnings Presentation

Queensland Aug 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Star Entertainment Group Ltd earnings conference call or presentation Friday, August 16, 2019 at 12:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Gregory F. Hawkins

The Star Entertainment Group Limited - Chief Casino Officer

* Harry Theodore

The Star Entertainment Group Limited - Chief Commercial Officer

* 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

* Kane Hannan

Goldman Sachs Group Inc., Research Division - Research Analyst

* Larry Gandler

Crédit Suisse AG, Research Division - Director

* Matthew H. Ryan

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

* Rohan Sundram

MST Marquee - Gaming and Contractors Analyst

* Sacha Krien

Evans & Partners Pty. Ltd., Research Division - Senior Research 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 The Star full year results conference call. (Operator Instructions) Please be advised that today's conference is being recorded.

I'd now like to hand the conference over to your first speaker today, Mr. 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, Addison, and good morning, ladies and gentlemen, and welcome to our conference call. I'm here joined with me today are Greg Hawkins, our Chief Casino Officer; and Harry Theodore, our Chief Commercial Officer. Harry will take over as CFO from Chad Barton by November. Chad's retirement from his role here at The Star is a subject of a separate ASX release that we put out this morning.

We contextualize that change as part of the organizational consolidation that is underway here at Star. I want to take the opportunity to thank Chad for all he's done for us and wish him the very best for his next career step. While I hope that you had the opportunity to read our results. So I'll just keep my comments about 2019 brief because the results are in line with June 11 announcement. So for the full year, our solid domestic performance was where our EBITDA was up by 5.4%, was offset by softer VIP market that's giving us normalized EBITDA for the group of $557 million, within the range that we have indicated on June 11. And that $557 million is 2% down on last year.

We declared a dividend of $0.10 for the second half. So the full year dividend is flat on prior year. This expresses the fact that our earnings are solid, our balance sheet is strong and that we have a very robust domestic business and that business is becoming stronger now that we've taken decisive action, of course, that will set us up well for next year. I'll now focus on what is new and make a couple of points that I think are worth emphasizing. We're happy to take any questions at the end of this call. I'll be touching on 5 points and reference a couple of slides as we go through that.

First of all, our trading that we're seeing today, 6 weeks into this financial year, is showing similar patterns to the one we described in June last year with the only difference that we are seeing a little bit of turnaround in some gentle green shoots appearing.

So if I can recap the performance of the second half, we had a solid start in January and first half of February; then started to -- then demand domestically started to soften. March was worse; April, worse; May, terrible; June improved; July was better than June and August is better than July. So we would say that the spend patterns are still -- of our consumers are still demonstrating a level of caution but there is clearly more momentum in the market now than there was a quarter ago.

In aggregate, we've seen better volumes in the first 6 weeks of this year than we've seen in the fourth quarter of last year. In fact, the volumes are better than, on average, the whole second half. In terms of what's driving this, it's the same forces. So the customer growth from the customers under loyalty is a key engine group for our growth. We can cache traffic to the main floor, the sort of business that's probably the best indicator of consumer sentiment was particular soft in Q4. And that's now showing some signs of improvement. So on a big weekend, for example, here in Sydney, we would have 44,000 people to the floor. In Q4, that dropped as low as 35,000; we're back in the 40s. So it's positive turnaround.

The VIP business underperformed our expectations throughout the year. But we see that that was really largely broader market conditions and consumer sentiment that drove that performance. In fact, 2019, we recorded a record number of VIP arrivals to our businesses and we also had a very strong growth in premium balance. It's just that the very large players that we had tended to play at lower levels than they had in the past. As I said, that's really probably an indication of the confidence levels of those customers.

Volumes in VIP, in the early part of 2020 are up, though I just want to emphasize that -- are up on last year. It's a very short period of time, 6 weeks and we know that VIP business is lumpy and we've seen it swing around both in terms of volume and win rate of the last few years.

Let me move on to the second point. The domestic business is really what's driving this company and has been driving this company. A couple of points under that. First of all, we're holding or gaining share in critical categories. If you go to Page #9 of the presentation, we demonstrate that we have consolidated our market share in slots in Sydney and we are expanding our market share in Queensland.

Page #10 then shows the longer-term trend in our domestic business. Over the last 5 years, we've grown revenues in the domestic business by 5.1% and expanded EBITDA at 6.8% at the compound level over the same period of time and that's despite the supertax in Sydney. This means now that the domestic business accounts for 88% of group EBITDA and our strategy and investment programs continues to be primarily focused on that segment. So I hope that puts it a little bit into perspective, some of the nervousness about the VIP business. We love the VIP business. We just recognize that it's volatile. The real engine room for us is the domestic business.

The third point I want to make is the restructuring that we announced in June 11 has largely been completed. On Page #18, we show the salaried staff reductions that we've pushed through since the program commenced in June. We have reduced headcount in the salaried ranks about 343 staff members which has generated or which is generating a run rate benefit of $40 million to date. So we are -- have gone on very fast on that program. $37 million of the $40 million is straight salary; the rest are just variable costs like travel, mobile phones and so on. We are almost done with the program. We expect the number to settle about $45 million at the half.

We're now turning our attention to additional non-staff related cost savings. Throughout this period, we've monitored customer engagement and other key metrics and we are confident that we're managing the risks that come out of the cost reduction program effectively. Overall, if my opinion on this matters, I'd say it's been an exceptionally well-executed program that has now allowed us to really push through the new operating model very, very quickly.

The fourth point is that we haven't just looked at our operating cost, we've also worked on our CapEx program. On Page 20, we describe that we have been able to reduce our forward CapEx spend relative to the guidance we gave in 2018, by $125 million. The main sources of the reductions came from the fact that we have built great facilities, particularly in Sydney, as interim facilities. And we know the team has done great work to find ways to redeploy those when the term limits on the revolver's up. So we don't have to spend the money to upgrade other facilities.

We've also done very good work in IT space and now have a clear roadmap for our IT applications that have allowed us to reduce our IT spend. And because with every new facility that we've commissioned in the Gold Coast and in Sydney, we've been upgrading the infrastructure as we went moving along, that allows us to reduce our forward CapEx maintenance somehow. I should also say that we've also pushed out a couple of wish list items in the F&B space, beyond the 5-year planning horizon.

In addition to all of this, we'll be testing the market from this half onward to see if there's further opportunities to release capital from supporting assets that we have in the company such as carparks, for example, and some of the hotel assets that we think we could isolate. That work's underway and we'll be testing the market, as I said, over the coming months.

The last point I want to make is, all the other elements of our strategy, particularly the large development programs, are continuing according to plan. The risk profile for those projects will reduce substantially in the coming 8 months. In Sydney, the Sovereign room was let under a fixed price arrangement, which is progressing through budget and on plan for opening in Q4. In the Gold Coast, Tower 1 is progressing well on a fixed cost arrangement. The funding for this Tower has been secured and the 2 -- Tower 2 sales are progressing steadily as well. And in Brisbane, Queen's Wharf is -- in Queen's Wharf we've let 60% of the total contract sum as a lump sum contract.

We're expecting to open the first public amenities in October and let the bridge contract at a fixed price and the fit-out contract at a fixed price as well in FY '20.

This will mean that total proportion of the project that will have been completed or be under or is under at fixed price will go up to 88% by the end of this financial year. So we will have fundamentally derisked Queen's Wharf. So the works are progressing to schedule and the work to raise debt funding for the project is also progressing well. And we believe based on the market impact to date, that there is strong appetite in the market.

So those were the 5 points that I wanted to emphasize as part of our results. Let me now turn to the priorities for this financial year and they're set out on Page 27.

First of all, we want to implement the organization model, make sure we get our bang for our buck from the organizational capabilities that we've deployed and can drive that -- drive above system revenue growth through those capabilities. Secondly, we need to deliver on the development projects. Third, we need to come to hopefully positive resolution on 3 open items that we're working through strategically. And these 3 items are: The second Gold Coast casino risk; the tax uncertainty in New South Wales; and the Ritz-Carlton development approvals. We expect to make good progress on all of those in this half.

And lastly, we will focus -- and this will dominate the day-to-day work, to drive our returns on the capital deployed further up. So those are priorities for 2020 and these are the key points I wanted to make in my address.

I'm now opening up for any questions. So Addison, if you want to go back to the business on the phone. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question is from Matt Ryan from UBS.

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Matthew H. Ryan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [2]

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Just looking at the dividend payout ratio coming at 92%, which is much higher than usual. Can you just talk about, I guess what the driver was there? Was it just the unlucky VIP turns that you don't think were normal during the period or something else?

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [3]

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Look, when we discussed this with the Board yesterday, the view was more that our profits, all up, are down 2% on last year. We think we have good momentum. We've done -- we've taken decisive action on the cost base. We're setting ourselves up well for next year. So we didn't really see a reason why we should be holding back on the dividend.

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Matthew H. Ryan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [4]

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Was there any reason why we couldn't see similar numbers in terms of payout ratios moving forward?

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

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The dividend policy is about 1 year old now and it says that we are planning to payout a minimum of 70%. That dividend policy stays on put.

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Matthew H. Ryan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [6]

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I guess just in terms of your CapEx requirement, though, you've got a much better visibility now relative to when you recently changed that dividend payout, so...

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [7]

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Yes.

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Matthew H. Ryan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [8]

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I mean are you more confident that you can start to pay higher dividends than the minimum 70% that I think is in your guidance?

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [9]

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Look, a minimum is a minimum and when we came out with it, we said the minimum goes from 70% to 100%.

So you're right about the visibility on the CapEx. We do feel that from next 5 years, we have much greater clarity today, where we're going to spend the money and we feel that there's a lot less risk associated with our forward capital spends.

We are also starting the work now to see whether there's additional capital (inaudible) in the carparks and potentially some of the other non-core gaming assets to further release capital.

And depending on how successful we are on that front, we can then form a view as to whether we should modify our dividend payout policy.

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Matthew H. Ryan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [10]

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Okay. And the new disclosure around domestic versus VIP EBITDA. How you splitting operating costs between the 2?

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Harry Theodore, The Star Entertainment Group Limited - Chief Commercial Officer [11]

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So Matt, we -- a portion operating cost based on volumes. So when a VIP customer comes to the property, the property obviously services that consumer with gaming labor and other operational labor. That gets allocated to the VIP business based on the volumes that are generated. It then has its own cost base in terms of sales people, management, the jets that are in the business all sit within the VIP business because they're specific labor and assets that relate to that business unit.

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Matthew H. Ryan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [12]

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Okay. And I think -- according to the disclosure you given over the past few years, it looks like it -- VIP contributed somewhere between 10% to 20% of EBITDA.

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [13]

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Yes.

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Matthew H. Ryan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [14]

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What return do you think you're getting on the capital that you got on that business at the moment?

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [15]

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See, that's the interesting thing.

So first of all, just quickly, very quickly, just on the operating expenses. So the exercise of cost, as Harry says, is not actually that hard because we know exactly what labor gets deployed. At the end of the day, there's only about $30 million worth of fixed cost that then gets apportioned based on EBITDA, so it's not all that hard.

In terms of the returns on capital, in terms of really dedicated capital there's -- on our reckoning, probably less than $400 million worth of capital deployed to the VIP business. And that's being expansive, even taking into account the jets that we have.

And so if you look at that return, I'll say $60 million to $100 million on $400 million, it's probably the highest return on asset that we have. But it is volatile, as you know. But it is just very volatile. I guess that's why it have a very high return.

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Operator [16]

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Your next question is from Kane Hannan from Goldman Sachs.

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Kane Hannan, Goldman Sachs Group Inc., Research Division - Research Analyst [17]

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Just starting on the productivity program in that $40 million run rate today, expecting to increase to $45 million by the end of the first half.

Just comment on whether that program is -- you think that's complete at that point with $45 million worth of savings, whether there's any additional sort of benefits in the second half?

And then I suppose, sort of how the business is being impacted by that headcount reduction, whether you're [happy around] everything's being trending?

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [18]

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Yes. So the 45 -- so this program is very much focused on our fixed cost base. We have about 9,000 staff. Salaried staff is now down to 2,200 and the cost base was focused on that. We feel that with the steps we've taken, we've now right-sized the cost base. We feel comfortable that we have an efficient model that we can drive forward. We are not planning to do more in that bucket of cost. And what we are working on and continue to work on is on the variable cost.

So the work on rostering and deploying the right labor unit at the right cost to the front line is a work of a thousand little steps to continues to go ahead and continues to make progress. But this program was focused on fixed cost and that's completed. Where we're doing more work is on other non-labor cost-related savings. We think it's through procurement that we can capture. And it's -- that's more in the nature of business-as-usual. So I've told the team internally that the cost-cutting is finished substantively and we are now focusing on driving the business.

In terms of impact, as I've said in my introduction, the customer service readings continue to be strong, probably not surprising because we haven't really done anything about the frontline staff. We continue to look at the risks that we're taking and the roles that we've removed.

Not everything's worked perfectly. Of course, some things fall over. But because we went very quick and hard, it's all behind us and it's our sense that people are moving on. So I used to be, in my previous life, a management consultant. I've done a lot of cost-cuttings. This is the best of I've ever seen.

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Kane Hannan, Goldman Sachs Group Inc., Research Division - Research Analyst [19]

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But it -- and then just that VIP trading unit [to date]. Just comment on whether that -- you've seen any improvement in the turn rates in terms of driving that number? Or whether that's more volume visitation-driven?

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

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Yes. Look, it's a short period of time but yes, we have seen some improvement in returns.

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Kane Hannan, Goldman Sachs Group Inc., Research Division - Research Analyst [21]

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And then looking towards the rest of the year. I know you spoke about seeing VIPs at say a 10% growth business. Just comment on what you see is, I suppose, the positive/negative influences that will impact that 10% number this year. There's obviously a lot of noise in the press of the moment.

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [22]

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Yes. I might just -- I've got Greg Hawkins here. We've got Greg here, who is in charge of that line of business. I might let Greg talk to that.

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Gregory F. Hawkins, The Star Entertainment Group Limited - Chief Casino Officer [23]

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Sure, sure. I think Matt outlined the context that VIP represent about 12% of our total earnings. Notwithstanding that, we've had a pretty solid start to the new financial year, which is positive.

We're very cognizant of the fact that it's impacting performance of VIP. There's quite a bit of activity, as you will be aware, happening within the Macau region as well. But generally, Australia has sort of weathered the storms pretty well in terms of inbound VIP demand. So to date, we're tracking well, I think some of the indicators would be across the previous financial year from a number of customers coming in board as well as the program activations. We're actually growing and the front money was only down marginally. So we still remain reasonably positive on the business as we look forward.

Another insight has been, how the positive acceptance of Gold Coast as an alternate destination to Sydney. We think that something can be added and stimulated further inbound into the market as well. So overall, clearly, it's a watch space for us and can be volatile. But volumes to date are solid and we'll continue to manage and focus on what we need to do to keep that business growing.

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Operator [24]

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Your next question is from Sacha Krien from Evans & Partners.

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Sacha Krien, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [25]

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Just had a couple of questions about the trading update as well. So just in terms of the reference to improvement, can you can just confirm, are you talking there about a sequential improvement on the previous months rather than any year-on-year gains?

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [26]

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Yes.

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Sacha Krien, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [27]

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Okay. And then just secondly, I noticed you included a sort of D&A and finance cost impact from AASB 16, which looks like it's about $11 million to $12 million.

Can you give us an idea of what the EBITDA impact is going to be from that accounting change? I assume it's going to be bit of an uplift.

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Harry Theodore, The Star Entertainment Group Limited - Chief Commercial Officer [28]

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Yes, it is, Sacha. So there's about $10 million of OpEx that is currently in leases for the business. That then goes on and sits on the balance sheet and you remove the $10 million of OpEx and then you've got the incremental D&A and interest that we flag on Slide 14.

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Sacha Krien, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [29]

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Okay. So you sort of pretty much net out at NPAT level, but EBITDA is going to be higher?

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Harry Theodore, The Star Entertainment Group Limited - Chief Commercial Officer [30]

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It's a very slight negative at NPAT initially, but then that filters through over time. But EBITDA is, yes, roughly $10 million higher and then $11 million higher in D&A and interest.

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Sacha Krien, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [31]

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Yes, great. And then a question on the early VIP trading. I know it's a very short period of time. But are those volumes benefiting from any low win rate, potentially or is it pretty normal win rate?

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [32]

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Oh, Sacha, we never really comment on that. But let me just say it's been a very short period of time and the win rate hasn't been great.

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Sacha Krien, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [33]

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Okay. And then final question, I think. Just in terms of -- I haven't had a chance to look at the accounts yet, but have you -- what have your bad debt expenses done in terms of your VIP business this year versus last year? And what impact is that on the EBITDA number?

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [34]

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Look, they're about $6 million this year. So relatively low and pretty flat to last year, not materially different.

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Operator [35]

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Your next question is from Larry Gandler from Credit Suisse.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [36]

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Matt, just in terms of your July and August performance.

July is refund checks and fiscal stimulus. Just wondering if you think that has created, perhaps a more permanent kick in the consumer pants? Or do you think it might be sort of temporary, what you thinking there maybe your experience relative to GFC, if you can reflect upon that?

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [37]

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Well, Larry, the experience in the GFC was that our business is really a consumer confidence business. And if you look at the underlying consumer in Australia right now, actually the household disposable income is not under the pump, right.

So the rents are down, mortgage payments are down, unemployment is low. People have cash, they're just not confident. And what happened in GFC was when the $1,000 handout was declared in November, confidence returned very quickly.

Now what we're seeing here is, it's a more, for us, it's a more gradual return to normality, if you want. We really saw a hit to confidence in the fourth quarter and now it's returning slowly to normality.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [38]

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Okay. So it seems like, though, the stimulus had an impact on the performance. Would you agree with that?

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Harry Theodore, The Star Entertainment Group Limited - Chief Commercial Officer [39]

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Look, it's hard to know because you've got quite a few moving parts, Larry. As Matt said, we've seen 2 sort of areas of softness. One, was your mass visitation to the main gaming floor, particularly here in Sydney. But I think you've got to put that in context that there was a fair bit of disruption in the second that rolled off in May and you're probably getting the benefit now that you rolled of the disruption, people do turn off at times coming to the property. You might be seeing some benefit of them coming back, but probably also a bit of benefit from some of the uncertainty reducing for some of that mass market customers, as Matt talked about.

We also saw a very strong period in the very -- in the top end of our loyalty customers, the diamond customers, in the first half. And Matt talked to some volatility. That came off in that period in the second half. And we're seeing a bit of life again in the last couple of months there, which are unlikely to be a segment that's impacted by the forces you're talking about.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [40]

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And while we're on that same topic, the hold rates in the PGRs around Sydney and Gold Coast would, in part, be influenced by consumer sentiment and not just luck? As you know, maybe in terms of the hold rates in those room, are you seeing any improvement there?

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [41]

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Look, they can bounce around but they are at normal levels again, where we would expect them to be this half.

So you're right, they will be impacted by average bed on time on device. But there's also month-on-month some luck factor, so you need a longer period of time. But we started the year with hold rates back to what we would normally see in those rooms.

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Operator [42]

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Your next question is from David Fabris from Macquarie.

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David Fabris, Macquarie Research - Research Analyst [43]

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Look, I've got a couple of questions here for Harry. So you've almost executed on that cost out program. So in FY '20, how should we think about the underlying cost growth?

And then secondly, can you talk us through the asset recycling you mentioned in the presentation? So what assets are you looking at first? How could this impact it from an operational perspective? And just talk about timing as well.

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Harry Theodore, The Star Entertainment Group Limited - Chief Commercial Officer [44]

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Okay. Just on the cost outlook. So it's difficult to really talk about cost without talking to revenue as well. But Matt referenced the domestic earnings slide, so on Slide 10 where we show the history of domestic earnings in the presentation pack.

If you look at the compound annual growth rate forecast in the domestic business, they've tracked over that 5-year period at about 3.4% compared to revenue growth of 5.1%. So we'd say typically, over the long term in the domestic business, which you'll appreciate is 19% of the cost base, which is where much of the OpEx is. We've sort of been tracking 1% to 2% below revenue in terms of growth rates on costs. It's not perfect that whole way through, but when we look forward, there's no reason to say we can't continue to do that.

Now the only caveat is if you're in a lower-revenue growth environment, obviously, you've got a fixed cost component, it's harder to do that. But this year, we've got some protection because we've obviously taken that $40 million of costs out at the start of the year. So even on flat revenue growth this year, we would expect to see EBITDA growth because of the better -- or some EBITDA growth based on the benefit of those costs.

On the asset recycling. Look, strategically, we've talked for some time now that we believe we need to maintain ownership of the gaming assets. And if we can provide demand drivers or supporting assets through a more capital-light structure, we see merit in that. That was ultimately the driving thinking behind doing mixed-use development with JV partners.

When we're looking at the current environment where bond yields are quite low, there's the opportunity, we think, for some of those supporting assets like carparks and some of the hotels, as Matt mentioned. Particularly the hotels that will serve mass customers, which allow volatility and less dependent on a gaming customer, we think they can be monetized and potentially recycle that capital into high-returning areas.

Look, as a group, we're significantly expanding our asset base. Once Queen's Wharf's on, we'll have about 8,000 car spaces, 2,500 hotel rooms across the group and our asset base, if we do some of the joint venture development in the Gold Coast, will continue to grow beyond that. So whilst this is a major opportunity, which is probably the first one we going to look at is the carpark in Sydney, we also see the potential to recycle more assets as a more substantial opportunity over time and we're going to be factoring that in as we [move with] this program.

Look, operationally, we will only do it if the supporting assets continue to function in the model we sell it in a way that supports the gaming assets. So that's not negotiable, but we think there are structures that you could put forward that could do that and we'll test the market and if we can find the right operating structure at the right value, then we think it's probably got merit doing it in the current environment.

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

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David? David, just on the expenses. So last year, our expense base was $1.065 billion. Of that, about 65% is labor. Labor you should just model as basically, if nothing happens, we have [EPAs] that are running on average about 3%. Salary increases are a bit below that. So [nonadjust], high 2s, it's just labor cost escalation is a good number.

The rest of the cost base moves with CPI, which has 2.2%, 2.3% on top of that. From then on, the only thing that really swings around our cost base is whether we pay bonuses or not and whether we have -- had volume growth in table games and in F&B.

A rough estimate would be that you say, for every percentage point of growth that you get in F&B and table games, you add $45 million worth of costs, labor cost. And against that, you offset productivity increases, which we've now pushed through and any additional savings that we get out of the phone cost labor base -- nonlabor cost base.

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Operator [46]

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Your next question is from Anthony Longo from CLSA.

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Anthony Longo, CLSA Limited, Research Division - Research Analyst [47]

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Actually, a quick one for me. Looking at the VIP business and I guess the impact of VIP from the recent press reports on Crown.

In the context of the trading update that you've given, understand the lower actual win rates. But do you think that's possibly factor as to why -- are you actually getting some share that may have been going to Crown, do you think?

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Gregory F. Hawkins, The Star Entertainment Group Limited - Chief Casino Officer [48]

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It's Greg here. Look, I think it's unlikely at this stage. It's pretty early in the trading year to call that out.

I'll just reinforce that the junket model, which is a well-established and legal one, obviously in our jurisdictions, is part of the inbound. We have direct customers as well. And other point worth reinforcing is that trending growth in international premium mass business that we had has been quite significant. In fact, for the financial year just finished, we grew by around 20% and had turnover of around $2 billion in it. So I think that's a positive for us as we see some of the broader pressures on VIP in Macau, whether it's flattening being offset by some of the premium mass and we're seeing that trend here as well.

So that IPM inbound business is quite a strategic focus for us moving forward. And we're seeing certainly positive growth and we're expecting that to continue.

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Anthony Longo, CLSA Limited, Research Division - Research Analyst [49]

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Great. Okay. Great. Second one from me. I just wanted to get a sense for some of the JV partners. So in the past -- can you possibly remind me as to how some of those approvals have gone for Chow Tai Fook and Far East in New South Wales and Queensland?

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

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In relation to their shareholding, I'm assuming, Anthony.

So yes, the Chow Tai Fook and Far East went through a probity review by the Queensland regulator in order to invest in Queen’s Wharf. So they're obviously combined a 50% shareholder in the Queen’s Wharf development and asset. As part of that, they've being through a full probity review reflecting that ownership proportion.

We, as part of the shareholding they took in April last year, they've subsequently also made an application to both New South Wales and Queensland regulator to increase the shareholding at The Star level above that 10%. That application is ongoing and we don't get a lot of visibility into the timing, but they continue to work with regulators around getting that approval.

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Anthony Longo, CLSA Limited, Research Division - Research Analyst [51]

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Yes, right. I guess the follow-up was -- I think in the context of where the share price has gone over the past 6 to 9 months, call it, I would've thought that at these levels, that they certainly would like to be upping their stakes. So I just want to get a bit more color on that.

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Harry Theodore, The Star Entertainment Group Limited - Chief Commercial Officer [52]

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At the certain -- at the current levels, I was hoping that all of the investors would want to up their stakes.

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Anthony Longo, CLSA Limited, Research Division - Research Analyst [53]

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Absolutely. Sorry, and then so look, on the JV partners. I remember at that Investor Day that you did in Queensland, I sort of recall you mentioned an annualized EBITDA benefit of $30 million, if you had a 1% penetration rate. What sort of signs are we seeing? Are we starting to leverage those relationships as yet? And what sort of benefits are you starting to see flow through? Or is that a more FY '20/FY '21 story?

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

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It's really an FY '22 story because we don't have enough hotel rooms right now. So we're trying -- the way into that customer base is through the non-gaming assets and that's what we're trying to market.

We've now established programs. We have had a couple of marketing pilots into the Chow Tai Fook customer base. It's fair to say the results for us have, so far, been not great. We've really haven't had enough cut through. Now the tourism travel to Australia out of China has slowed down as well. So hasn't been probably the best time to test it.

We will continue to work on that and make sure that by 2022, we have a program that will really allow us to fire up that customer base.

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Anthony Longo, CLSA Limited, Research Division - Research Analyst [55]

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Okay. Great. And sorry -- well, while I've got the floor, just last question for me. Just on the CapEx numbers, it looks like it's come down a little bit in terms of what they were previously. Are you able to give a sense as to what some of those catalysts are, as to why that's come down? And apologies, I've probably had limited time to look through the presso this morning, but just want to get a sense as to if that's a function of, I guess increasing the proportion of fixed contract work? Or is it sort of reduced [guide for] or some other things that you've managed to, I guess price more effectively?

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Harry Theodore, The Star Entertainment Group Limited - Chief Commercial Officer [56]

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Yes. I'll have a go, Anthony and Matt can add to it. So Matt referenced some of the drivers in his opening comments but really, there's 4 buckets that have driven the reduced forward guidance on CapEx.

The first one is, we've done a lot of work around planning in Sydney and the best plan in terms of the capital we're going to spend on the property and the returns we're going to generate. And as part of Sovereign room being delivered later this financial year, that's freeing up temporary Sovereign room and some other assets and we've decided, in terms of our forward spend to reprioritize those assets to other tiers.

So when the gold and diamond -- when the platinum and diamond customers move up to the new Sovereign room, we're repurposing the temporary Sovereign room to get an upgrade to the gold customers and then the Oasis rooms get an upgrade to the next tier down.

So as part of that CapEx, we are giving each of the customers a significant step up in terms of scale and quality of room, in a more capital-light way. That's one of the drivers of some of the reduction.

Matt talked about IT and some of the platforms. There was some spend there but as we've been through where sort of highest-returning spend is. We're going to keep some of the platforms and really prioritize our spend just on customer-facing initiatives. And that's been some of the reduction. And then you've sort of got some reduced maintenance as well. That really reflects, over the last couple of years, we've come off a peak level of spend. And we now have, particularly in the Gold Coast and Sydney, fresh properties where all of our rooms have been refreshed, a lot of public areas, we got a fresh gaming floor and gaming products.

We think we're in a position to leverage that and have lower spend on maintenance and some of the other areas for a time now where we still are delivering the growth project that are going to deliver appropriate returns.

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Operator [57]

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Your next question is from Rohan Sundram from MST.

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Rohan Sundram, MST Marquee - Gaming and Contractors Analyst [58]

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Just a question around the Ritz-Carlton. Are you able to shed a bit of light on what the alternatives might be around what you're planning and your proposal?

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [59]

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Yes. Look, so the Ritz-Carlton, the status is that on the 27th of August, the public hearing will conclude their presentations and their interactions with the Independent Planning Commission here. They then have 28 days to work out what their recommendation is and we'll see where we go with that. And that's it. That's the current plan. And I have to emphasize, we continue to be totally committed to this project. This is a great project. We think -- we are absolutely convinced that we've done everything that can be done and should be done to get the right approvals. And unfortunately, we've been caught up here in some darker, murky politics that have thrown us a bit of a wobbly. But we'll continue to pursue that. If the Ritz-Carlton doesn't get up in its current form, we'll have to see what the Planning Commission comes back with it, whether there is a compromise position that they put to us or whether there's a different planning regime that's going to be put forward and accelerated but then pushes out that Tower by a year or 2, until that planning regime is settled. That's probably the primary one.

In the meantime, we are very focused on just making sure that the Sovereign room gets completed. The Sovereign room, competitively, is the most important asset for us with the Crown -- when Crown opens up. We have, as you know, we've got The Darling that's the 5-star, Forbes' 5-star hotel. That's a very competitive asset. So I don't think there's sort of a disadvantage there. Just some rooms that we need to push more than anything else.

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Rohan Sundram, MST Marquee - Gaming and Contractors Analyst [60]

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Sure. Is there potential for alternate site in Darling Harbour for Ritz-Carlton? Or are you just going to work with what you're given at the moment?

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [61]

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Look, if this tower doesn't get up, it's very hard - there's not actually that many pieces of land in [PM under] Darling Harbour that are large enough to accommodate a tower of that height.

Our [town] planners and architects have done comprehensive studies and there's -- [PMI], it's pretty heavily overbuilt as it is, so there's not that much land available. If it's not on site directly adjacent, I'm not interested in building hotel, right. So it's got to be feeding the assets directly, otherwise we're not that interested.

We do have some alternatives but I don't really want to go too far down the track. Right now, we continue to be totally committed to push through Ritz-Carlton as fast as we can -- the Ritz-Carlton on our side, as far as we can.

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Rohan Sundram, MST Marquee - Gaming and Contractors Analyst [62]

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Okay. Understood. And just last question for me. Where is the potential for -- to do more around VIP in the Gold Coast? Is it at a property level or do you need more buy-in from governments or the like?

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

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I'm not sure -- what do you mean? So I mean, the...

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Rohan Sundram, MST Marquee - Gaming and Contractors Analyst [64]

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I'm sorry. Greg mentioned there was potential to -- maybe there's more scope to see further uplift in Gold Coast in VIPs. Is that to do with any refurb activity? Or is there just more marketing efforts? Or what's that involve in particular?

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Gregory F. Hawkins, The Star Entertainment Group Limited - Chief Casino Officer [65]

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Yes, I think it's more of the later. So I think we're very happy with the capital allocated in the level of amenity update now, which is fantastic to cater to that type of business.

So the reality then is exposing and marketing that property now more aggressively, once it's established to our customer base and we had a good example of that over the last couple of months as well. So then the word-of-mouth and the direct marketing will continue. So it's more about our channels of activation and we see that as being very positive.

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Operator [66]

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Your next question is again from Sacha Krien from Evans & Partners.

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Sacha Krien, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [67]

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Sorry, very quick follow-up. Just in terms of your asset sales. Harry, just wondering if there's going to be gearing benefits from these asset sales in terms of the way ratings agencies look at your gearing.

And then secondly, will you sell assets if the sale is not earnings accretive? Or is there a prospect that some of these sales might end up being little bit earnings dilutive?

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Harry Theodore, The Star Entertainment Group Limited - Chief Commercial Officer [68]

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Look, we expect it to be accretive. It all comes down to the value and the operating arrangements around that, Sacha. But we're only going to do it if we get the right value for these assets, in which case we'd expect it to be accretive.

And then on the gearing side, it will all be linked to value you get to the individual asset, relative to the earnings.

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Sacha Krien, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [69]

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Yes. But is it the case though that the ratings agencies -- I mean is there expected to be material gearing benefit from this or is it more capital allocation question rather than gearing?

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

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It's more -- in the short term, it's more capital allocation because they not -- yes, in terms of materiality asset base, today if you look at the carpark in Sydney, that's not really going to drive a material difference to gearing. It's more of our -- just what value we can achieve for that asset and what we can do with that capital. And as we get through Queen's Wharf, that gives you a much bigger and more material opportunity to recycle a lot of capital. And so we're sort of going to test the market on the structures and whether the value stacks up for us because it's a bigger opportunity long-term as well.

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Operator [71]

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And we have a question from Larry Gandler from Credit Suisse.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [72]

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Just a follow-up question from me -- or 2 actually. VIP, Judge [Bergin's] inquiry. Just wondering if you guys will be making submissions, I imagine you will. And can you describe how you, today, approve junkets? I imagine it's internal due diligence.

And could you imagine a regime where -- perhaps like Singapore where ILGA would need to conduct its own approval process for junkets?

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

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So Larry, you need to clarify the first question. I'm not aware -- what's the inquiry you're referencing?

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Larry Gandler, Crédit Suisse AG, Research Division - Director [74]

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ILGA's independent inquiry into -- I guess it's really into the Crown's -- the accusations made by the media against Crown. I understand that's specific to Crown, but I think she's probably going to do a review of the entire VIP industry and then make recommendations.

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

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Look, as we understand quality is not set up as an industry-wide inquiry. The inquiry is focused on Crown and that's all. You have 2 legs; one leg -- you should ask Crown next week, but one leg is focused on the acquisition of shares by Melco; and the second leg is the broad sort of catch-all around the allegations made by Channel 9 in Fairfax. So but we are not -- as we understand it, we're not -- we haven't been contacted, we haven't been approached by ILGA on that at all.

In terms of the junkets, we are currently operating under 2 regimes in our business. In New South Wales, we have the delegations from ILGA to approve junkets under a strict set of conditions that provide operating procedures. And ILGA has visibility over that and monitors the compliance with those conditions. In Queensland, the regulator licenses junkets, not us.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [76]

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Right, okay, so that's good, right. So the regulator's licensing junkets. How does the regulator in Queensland do its diligence?

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Harry Theodore, The Star Entertainment Group Limited - Chief Commercial Officer [77]

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Same way we do the -- same way we do it. We have the same -- they have access to the same information they request.

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Gregory F. Hawkins, The Star Entertainment Group Limited - Chief Casino Officer [78]

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Yes, so their imports, similar to ours, are by nature running appropriate global checks through various forms to flag any issues. And then if there's issues flag that has a deeper formalized investigation that follows that.

And of course, then liaising with relevant federal authorities, including AFP, if there's any alerts that are identified. So the regimen and rigor applied to approvals by us and on our behalf in Queensland, it's very deep. And obviously, we apply an overlay to ensure those checks are not just done once, but done on a regular basis. So from our point of view, as you would expect, it's extremely thorough and rigorously maintained.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [79]

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Okay. On international premium mass. Again just remind me, that business is unlikely be largely in China-contingent customer it's because it's difficult for them -- this is -- these people are not playing on credit. They're constrained on how much capital they can travel with. Is that correct?

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Gregory F. Hawkins, The Star Entertainment Group Limited - Chief Casino Officer [80]

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Yes. Look, that's generally right. So we're seeing growth in that international premium business across all product types, being table games and slots and generally, those customers rather cash-carrying or check or have the ability to TT funds to us.

As I said, they're really airfare and comp-based programs as opposed to commission-based programs. So that enables us to have a pretty solid margin that comes out of that business. Now I think in line with general trends across the sector, we see more customers at a lower level, from an international perspective, being a positive for us and it's one that we're resourcing to continue to grow.

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [81]

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And Larry, I just -- that's the -- our strategy of building out hotel assets, getting more hotel of capacity, that's why we need it, right. Because that for us is the sweet spot.

If we were reliant on just a few handful of whales to drive the VIP business, we wouldn't need all these. We will not need all these additional hotel rooms. So we look at that as a critical part of the very sustainable, long-term growth strategy.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [82]

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And some of these players can play under the 10% tax rate?

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [83]

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They all play under the 10% tax rate.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [84]

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They all play under the 10% tax rate, okay.

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [85]

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Well, all, as long as they meet the requirement. But they have to sign up to a program and play with a particular chip set. If they do that, then they fall under the 10%.

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Operator [86]

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We don't have other questions at this moment. Presenters, please continue.

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [87]

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Look, there isn't -- I think if there's no further questions, ladies and gentlemen, thank you for your time. We'll be doing the rounds over next few days, meeting with many of you. So if there's any additional questions, please reach out to us. Thank you very much. Bye-bye.

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Operator [88]

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Ladies and gentlemen, that does conclude our call for today. Thank you for participating. You may all disconnect.

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

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Thank you.