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Edited Transcript of SGR.AX earnings conference call or presentation 20-Feb-19 11:00pm GMT

Half Year 2019 Star Entertainment Group Ltd Earnings Presentation

Queensland Jun 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Star Entertainment Group Ltd earnings conference call or presentation Wednesday, February 20, 2019 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chad Barton

The Star Entertainment Group Limited - Group CFO

* Gregory F. Hawkins

The Star Entertainment Group Limited - Chief Casino 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

* Larry Gandler

Crédit Suisse AG, Research Division - Director

* Mark Wilson

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

* Matthew H. Ryan

UBS Investment Bank, Research Division - Executive Director and 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 The Star Entertainment Group's Half-Year Results Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today, Thursday, the 21st of February 2019.

I would now like to hand the conference over to your first speaker today, Mr. Matt Bekier, Chief Executive Officer for The Star Entertainment Group. 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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Great. Thank you, Vincent, and good morning, everybody. Welcome to our first half 2019 results discussion. I'm here, joined today by Chad Barton, our CFO, who will cover the financials; and Greg Hawkins, our Chief Casino Officer. He's in charge of the newly created Gaming Center of Excellence as well as the International VIP business and we will get him to talk to those results.

If I can ask you to turn to Page #4 of our presentation where they touch on the highlights on Pages 4 and 5. I'm pleased to report that from a statutory point of view, we've had record results in this half and pretty much by any metric that you would choose to apply. NPAT is up 350%. That's impacted by solid underlying domestic business, a very strong VIP win rate as well as abnormal items last year, particularly relating to the refinancing of some debt facilities. That's a good result. On a normalized basis, we report reasonable numbers and they are obviously also impacted by the record win rate but in the inverse. I'll let Greg talk to that a bit more. I think what we're seeing is solid VIP volumes but just an abnormally high win rate, which meant that the players didn't stick around for long enough.

In terms of -- about the way we look at it is we think this is a high-quality, broad-based result that has generated a maximum amount of cash for us. I would especially like to point to the strong domestic performance, which is essentially generating 85% of our earnings. Slots increased in all of our markets -- slot market share increased in each one of our markets. We had solid table growth and I think the standout performance for us was the derisking of our performance through the great work that the team put together with the interim Sovereign resort that has shown very good performance. The VIP performance, as I've said, solid sales. Our visitation was up 10%. Our front money was up -- our front money was pretty much flat but our win rate was very high, 1.62% relative to last year where it was substantially below normalized. That has impact on how long players stay around and therefore produce the normalized turnover.

Over the page, our CapEx program continues to go well. Our new assets are performing well. The Gold Coast visitation, for example, is up 11.8% on pcp. The other capital programs are all performing as planned and we are looking forward over the next few months to be able to derisk Queen's Wharf further because we're in the final stages of negotiating a fixed price contract, a very large component of that development, which will then see us having about 60% of their CapEx contracted at fixed-price. The dividends, our reference is up 40% to $0.105. That reflects the performance that we had as well as our strong balance sheet.

In terms of our trends, it's more of the same. It's very -- what we're seeing in the first 6, 7 weeks of the second year is very similar to what we've seen in the first half. Positive domestic revenue trends and the VIP trends, while it's been early and a bit difficult to read through with the timing of Chinese New Year, but we think it looks very similar to the first half. And I'll let Greg talk about that a bit more.

Now, let me now turn to the business and to the performance of the individual properties. On Page #6, we talk about Sydney. Strong statutory results, up 59% of EBITDA. Down 6.3% at normalized. That's impacted by the win rate on VIP. Domestic gaming is a stand-out performance. Visitation was up 1.7% but the team was able to bend this visitation growth into very strong gaming growth, so slots up 9.9%, table revenues up 4.9% and as I said, the highlight -- absolute highlight for us is the performance of the Sovereign resort, the interim Sovereign resort. I know that, that was one of the big concerns that investors had at the beginning of the year, how that temporary facility would perform. I think we've now demonstrated that it performs exceptionally well. Our costs were well-managed. Operating costs were down 3.9% despite grow -- higher domestic volumes, but obviously, low VIP volumes.

Page #7, we show some of the pictures of recently completed assets.

Page #8, we reference the performance in Queensland. Queensland has delivered very pleasing results, and I'm confident that we have more in the tank in Queensland. EBITDA at statutory -- at both statutory and normalized EBITDA, are at record levels. And what's driven that is both strong domestic performance as well as a very strong VIP performance in property.

You may recall that when we built The Darling at the Gold Coast and the integrated gaming rooms, we really pitched it as a premium offer that the Gold Coast didn't have. And it was aimed at both the domestic as well as the international high roller. And I'm pleased to see that, that's exactly what's happening in the property. So you see that table revenues is up 10.6%, particularly in the PGRs. And then VIP turnover is up to $6.8 billion. That's pretty much from a standing start 3 years ago, it's about 2.5 times the size of Perth. It's a great result for that property. And it's pleasing to see that there's a lot of first-time customers that are coming to the property that we haven't seen before because it's quite a unique proposition. And we show you the market share and the growth rates in these market -- segments on Page #9.

Page #10 shows you some of the pictures of recently completed assets as well as the master plan for which we approved -- got approval from the state in November 2018.

Finally, our next -- on Page #11, the EGM market share. I think in my 5 years as CEO, I've never been able to report market share growth at the same time in each one of our markets in slots. So I'm very happy that we're seeing that now. Sydney continues to stand out. We are at 9.4% in the first half. That really speaks to the interplay -- the effective interplay between loyalty for our migrating customers up from the main gaming floor into private gaming rooms. Interplay of our gaming optimization. Work that's happening to optimizing the product, product selection, the location, the configuration, jackpot management and so on. So a lot of work has gone into it and it's delivering results. So market share up in Sydney but also up in Queensland. I would say Gold Coast probably as expected because of the new asset. Brisbane has now stabilized and the Brisbane property performance, if you just call that out, is very pleasing overall. We have previously said we need to stabilize it and remediate it. That is progressing really well and we're happy with the performance of the team there.

Now, let me hand over to Greg to talk -- take you through the results in the VIP business.

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Gregory F. Hawkins, The Star Entertainment Group Limited - Chief Casino Officer [3]

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Well, thanks, Matt. I'll now take you through VIP results in a bit more detail. Yes, there's a few moving parts in the result, which I'll step you through.

Firstly on the sales side. We saw solid demand particularly in the context of softer market conditions globally. Customer numbers were up on last year, which is important, and front money, which we point to the best proxy, the underlying health of the business was flat on pcp, which in itself was a particularly strong period. A solid visitation converted to strong actual results with gross revenue at $337 million, up on last year on a high actual win rate. 1.63% win rate is the equal highest in 5 years, supporting the record cash generation that Matt referenced. When you look at turnover, however, the normalized results look worse than they are because of the very low turn rate. While it's normal to see an inverse relationship between the win and turns, and you can see an abnormally high win rate in this period, you can see how unusual the 9.7x turn was with the chart on Page 12.

The context in the first half of '17, we had a similar win rate at 12.2x turns, and the average turn is 13x over the last 5 years. The key driver of the variance on the pcp is driven by a small number of players last year generating significant volume in Sydney, which we didn't have this year. This underlines some of the volatility in the business when assessing it across short periods. EBITDA margin is being preserved despite lower volumes and is a continued focus. We adjusted our base rate card for the current financial year as previously guided and continue to monitor this against market conditions.

Turn over the page. Our normalization will now include commissions given the increased materiality of revenue share deals. So commissions involving a revenue share, now represents 40% of the turnover, just up from 2% 5 years ago. Our credit performance continues to be solid. There's no change in bad debts as a percentage of net revenue. The 30 to 365-day receivables are up driven by a small number of players with progress made in collections since the end of December.

In closing, let me give you some color on our fundamental competitive position. So Sydney is the gateway to Australia and the most sought-after Australian experience with a number of our patrons also having family, children and education (inaudible). The Gold Coast with the addition of The Darling is now an explicit part of the sales kit with growth from new and existing players appearing and solid additional demand to what is a relatively immature market. In addition to Sydney and Gold Coast as separate destination propositions, we continue to incentivize players to visit both Sydney and Gold Coast as opposed to solo trips to Melbourne or Auckland. It's clearly been a growth year for us and so far, we've only seen 3 of the top 10 customers shared between the 2 properties. Whilst we continue to monitor macro conditions across the region including capital availability of liquidity, I remain confident of the attractiveness of this business and the competitive position we're establishing.

I'll now hand over to Chad to take you through the financials.

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Chad Barton, The Star Entertainment Group Limited - Group CFO [4]

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Great. Thanks, Greg. Good morning, everyone. I'm pleased to highlight the financial implications of these results, touching on capital and our continuing focus on costs. With our capital program, our delivery in the first half has been well executed both on time and on budget. We remain intently focused on ensuring that we spend your capital in the most cost-effective way, in turn maximizing shareholder returns on what remains an exciting pipeline of opportunities. Our expectations around full-year CapEx and joint venture contributions remain unchanged from our prior guidance. Our balance sheet remains supportive of our growth with conservative gearing and appropriate funding facilities in place. We delivered strong cash generation driven by the performance of our domestic business and high win rate in VIP. With our cost base, we continue to ensure it reflects the business conditions we are experiencing as well as ensuring our customers are provided with a high-quality, on property experience. At its

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Our approach is designed to maximize margins and returns across the business. For the half, we've delivered a pleasing performance on costs being flat on pcp despite visitation growth. The cost drivers for the half include solid domestic table revenue growth of 6.6%, offset by lower VIP table volumes. Our larger footprint in the Gold Coast and higher service levels in Sydney following the successful transition in the southern route as well as inflation and enterprise agreements continue to impact our cost base and next year we seek to offset these with cost efficiencies. We continuously monitor our cost base against prospective revenue opportunities to retain the ability to flex our labor and variable cost. Looking ahead, we expect revenue will continue to outpace any growth in costs in future periods.

Turning to the waterfall on Page 16. This shows the drivers of our half-year gains across the group. Critically, our most reliable and high-margin domestic business has delivered a strong performance and growing visitation to increase our share of the domestic gaming and non-gaming markets. Executing on this strategy has meant that in a period where VIP earnings were unusually soft, our total earnings still grew to record levels. This combined with our focus on actively managing our cost base has led to an increase of 200 basis points to 23.3% margin.

Looking at our P&L on Slide 17, our actual win rate of 1.62% compared to a normalized win rate of 1.35% and is the driver of the difference between statutory and normalized results at both revenue and EBITDA level. AASB 15 requires separate disclosure of player rebates and commissions, which are down on pcp. This is not only from lower VIP volumes but also managing margins with rate card improvements.

Depreciation and amortization for the half was up reflecting new assets commissioned in 2018 and $9 million of accelerated depreciation for assets being refurbished in Sydney. Our expectations remain unchanged for the full year D&A to be between $200 million and $210 million. A significant profit of $4.6 million is from a $9 million gain on disposal of land for the first joint venture tower at the Gold Coast, offset by costs associated with the organizational restructure to Centers of Excellence. Given the strength of the business and cash flows, dividends are up 40%.

In regards to the balance sheet, the main movements are reflective of the progression of our CapEx program and receivables in the VIP business. VIP collections remain solid with $146 million outstanding at the end of December. This is lower than both half and full year balances in FY '18 even with the high win rate. Our balance sheet remains strong enabling efficient use of your capital and delivering improved dividend returns to shareholders.

Looking at our financial metrics on Slide 19. We have trended positively over an extended period of time focusing on returns and increasing momentum of our business. This half pleasingly underpinned by high-quality domestic growth.

I'll now hand back to Matt.

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

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Thank you, Chad. And ladies and gentlemen, if I can ask you to turn to Page 21 where we now start to look at the future, trading updates, and our priorities. I've already referenced the trading updates by saying domestic trends very similar to the first half and before the VIP business, the Lunar Chinese -- Lunar New Year is creating a little bit of noise but to the best of our read-through, the trends of the first half are holding up into the second half. I just want to say on the VIP business, also, there is a little bit of volatility in that business. We are comping the largest year we've ever had last year. The global market continues to expand albeit at a slower rate, and there's some really bright spots for us in this business with solid visitation, a great performance of the new asset and 30%-plus growth in the premium mass business. The fact that some of the larger players aren't staying as long and it's swinging around, that just happens in this business. So I just want you to keep that in mind as you analyze this performance.

In terms of our priorities, they remain largely unchanged. We want to focus on driving performance across the group, deliver on the next stage of our capital plans and further commercialize our relationship with Chow Tai Fook and Far East. So we -- last year, we've referenced the fact that we are starting -- will be starting to market our assets into the Chow Tai Fook customer base including the VIP program. Both of these initiatives have been implemented and we're starting to slowly expand them now. They will only be at full traction when we have more hotel rooms and when Queen's Wharf is in -- will be ready to open up. But we are making progress in operationalizing those relationships.

And last one, and before that, implement our operating model -- new operating model around the Centers of Excellence, I'd like to just spend a couple of more minutes on that to explain what we have done here over the last 9 months. So our Centers of Excellence on Page 22, there's 2 of them right now, Gaming led by Greg Hawkins, our Chief Casino Officer; and marketing led by our Chief Marketing Officer. What we're doing in the Centers of Excellence is rather than fragmenting the decision-making, we are really consolidating all of our talent and all of our capability in one spot to drive the performance across all of our properties. That gives us leverage. That gives us, we think, better decision-making and it gives us productivity improvements as we don't have to scale up as the business expands. As we look over the next -- look out over the next 5 years, you all know that we have fantastic -- a fantastic development pipeline. That is, executing that is obviously the strategy. What we're trying to do with these Centers of Excellence is to underwrite the performance of these new assets. We don't just want to get bigger. We want to make sure that our performance lifts at the same time. That's what we're doing here and the Centers of Excellence have also created the platforms for us to recruit and bring in global talent from Macao, the Philippines and Australia to round out the capability that we already have announced. Now, it's early days, but we feel pretty positive about what we've seen so far and if you look at the performance, particularly in slots, I think that's one of the pieces of evidence that we would be pointing to.

Let me now turn to what's going in properties over the next few pages. Page 23 in Sydney, you'll be -- the Sovereign Resort development is on track and the time line as indicated continues on. There is a fair bit of jackhammering right now but that disruption should start to abate over the next 6 weeks. All of the other sort of property development that's underway, particularly the porte cochere, the main casino entry, the bar in the main gaming floor and so on, that's all on track and will open in the fourth quarter of this financial year. The delivery for the Sovereign room, as I said, remains unchanged. The only additional one that I want to put on everybody's horizon is that there will be a refresh of the Darling Hotel that will commence in FY '21. That hotel will be then about 8 years old. The hotel's the best hotel in Sydney, we just retained the Forbes 5 Star rating for the third year in a row. We want to make sure that the property continues to be fresh and retains its title as the Best Hotel in Sydney, but that's a bit further down track and it's not a particularly large project.

Over the page on page Sydney -- in Page 24, Gold Coast. In the Gold Coast, relative peace will now resume fairly -- will now resume. We only have 1 major project underway, which is Tower 1, the Dorsett Tower, has been built adjacent to the existing site, so it's not that disruptive. We may, subject to market conditions, tackle the next tower later this year but as I said, that depends on what the market conditions are.

Page 25, Queen's Wharf. Queen's Wharf continues to be on track. Timetable is progressing well. The contracts we've let so far are all on budget and performing well and as I said in the introduction, we expect that in the final quarter of this year, we'll be able to let a very large contract that covers the basement, the shell and core of the integrated resort. Once we've let that, about 60% of the total project cost will be let at fixed-price. And then the project, from our point of view, will be very substantially derisked. And I know that, that's been the second big concern that investors had earlier in the year and I look forward to taking that off the table as well. The key delivery dates remain unchanged.

Page 26 shows you some of the updated renders of where the design has gotten to.

And finally on Page 27, we just close by recapping the strategy. Our strategy is simply to develop attraction drivers in a capital-light fashion. These attraction drivers drive visitation, which in turn drives earnings into our properties, that we then hope to reinvest into additional attraction drivers and have a reinforcing cycle. How have we delivered against that? I think the scorecard has been good this first half. We have demonstrated above system growth in domestic gaming and the new assets are performing well. Capital projects are on budget and on time and the dividend is evidence of our continued focus on shareholder return.

So in summary, we think it was a pretty solid first half, with an absolute highlight around our Sovereign Room 1.5 and derisking the performance there and I look forward to derisking our company further with -- over the next quarter, with the Queen's Wharf contract and to drive performance through full implementation of our Centers of Excellence.

That's the agenda going forward. At this point, ladies and gentlemen, I'm going to stop the presentation and Vincent, I'd like you to open up the lines for any questions that we might have on the phone.

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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 Mark Wilson from Deutsche Bank.

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Mark Wilson, Deutsche Bank AG, Research Division - MD, Co-Head of Company Research Australia & NZ and Analyst [2]

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Matt, just on the VIP side, were those trends sort of fairly consistent throughout the period in terms of the win rate, the number of turns? And also, I'm just sort of wondering, yes, to what proportion do you attribute at the lower number of turns in the period purely to that higher win rate. Or is it just that general slowing in the Chinese VIP segment?

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Gregory F. Hawkins, The Star Entertainment Group Limited - Chief Casino Officer [3]

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Yes, it's Greg Hawkins here. I think we called out that the turns were abnormally low, particularly against the 5-year average. Sydney, based on our weighted percentage, had most of the impact on that low turn rate, so that was just about 9 turns as well. I think it's a relatively short period to call any significant trends in terms of what's impacted. So you have a higher win rate, low turns and we have referred to strong inbound visitation across the 2 periods. I think [May] visits were actually up, period-on-period. At the same time, front money was basically in line with last year as well. So I think these are positives to take out. That being said, we continue to watch what's happening in the broader economy from a mainland China point of view and competition in the sector. So I think they just watch us, from our point of view, too early to call a trend. And as Matt mentioned, particularly the Gold Coast with the new asset which has been sold very aggressively, the market -- we remain very confident on our market share growth, which continues to be #1 into Australia to continue to grow.

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

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Mark, if I can just add one more thing to that. One thing that we are looking at and we're trying to run down is whether the growth in profit share agreements changes the profile of play. So in the olden days, if you're on a turnover based program, they're jumping at the incentive to keep players at the table for as long as possible because that's the only way for them to make money. Now, if a player loses quickly, then the junket's happy and there's really no incentive to keep them at the table. So there may be a little bit something there. So we're doing -- we're able to track, obviously, each program and each player bet by bet and we are analyzing and monitoring that. So, if we've got greater insight, we'll let you know.

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Mark Wilson, Deutsche Bank AG, Research Division - MD, Co-Head of Company Research Australia & NZ and Analyst [5]

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Okay, great, and sorry, just one follow on there. Did you see similar trends across junket play -- such as direct premium play and premium mass?

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Gregory F. Hawkins, The Star Entertainment Group Limited - Chief Casino Officer [6]

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It's effectively dominated by the junket business. So the way the position -- is all junket play. Premium mass continues to be a much smaller percentage of our total turnover. So the turn rate was just heavily influenced by what is effectively 85% to 90% of our total players through junkets.

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Operator [7]

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

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Anthony Longo, CLSA Limited, Research Division - Research Analyst [8]

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Firstly, I had a question on the domestic business, particularly Sydney. So I just wanted to get a sense of the growth rates of the Sovereign room versus the rest of the main gaming floor. Are you able to give a bit more context around that?

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

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We used to disclose that but we no longer are. And the reason why we no longer are was because we noticed, particularly as some old Sovereign rooms getting old and full, that more and more players were migrating to different levels of private gaming rooms. So we no longer disclose that. I can tell you though that if you look at the performance of the top tier of the loyalty base, relative to the unrated business, it's a substantially higher growth rate. So our performance is heavily skewed towards the top end of the pyramid and all of that play or most of that play now having seen the private gaming rooms.

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Anthony Longo, CLSA Limited, Research Division - Research Analyst [10]

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That's great. And also, I had a question on VIP as well. So -- I mean, completely appreciate the volatility -- or the inherent volatility of the business. And I do appreciate the trend we have seen in the first half. But from where you sit, given the backdrop, in your view, what do you think would be an appropriate passmark for the business, for FY '19 and the second half?

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [11]

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Sorry, the line just dropped out. What's an appropriate what?

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Anthony Longo, CLSA Limited, Research Division - Research Analyst [12]

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Sorry, what would be an appropriate passmark for the VIP business, in your view, just given the backdrop of what you're seeing regionally?

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

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Look, we obviously don't give guidance and particularly not in this business because of the volatility. But structurally, Anthony, I don't see this market having changed all that much. I know that Macao, if you look at the Macao numbers, which is the bulk of the market, they're okay. They're not that terrible. And when we look at our frontline and our visitation, we're getting good business through the year. And as I said, particularly premium mass, the lower end of that, is actually pretty active. So I'd like us -- and the team continues to be very focused on driving into the relationships that we have through the junkets in Macao and in the markets outside of North Asia on the strategy that we have forged in the past and I don't see a change. Longer term, I've previously said, longer term, we model this business on a 10% growth year-on-year, underlying. Excellent, what wealth creation hedge has been doing, and given patterns around travel and tourism, that's what we should be achieving over the next 5 years. Now this year, having had that bumpy -- having had that bumpy win rate in the first half, it's going to be hard but longer term, we model it on 10% growth.

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Anthony Longo, CLSA Limited, Research Division - Research Analyst [14]

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Okay, that's great. And sorry, final one for me, just looking at the Gold Coast apartments and that first tower coming up. So I think late last year you did mention that presales had been going well late last year. I just wanted to get a sense for how you're seeing apartment sales prices in the context of the local property market?

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

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We are pretty happy with what we're seeing, Anthony, so we -- once we went past 70% of presales, we were able to get bank funding for the tower, which allowed us to give -- press the button on proceeding on that. And we are now past 88% presold and we sell a couple of apartments every day so on the current trajectory, we'll be 100% sold out by about April or May. So -- and all of the sales now are essentially domestic sales. So I don't know whether we just have a good product or it's a good price point but we are comfortable with the position that we have for that tower. Subject to our read of the market and our partner's read of the market, as I said, we made them open up for the next tower sale, which may take longer. And the rules for the next tower are exactly the same as the first. We need to get to an appropriate level of presales to be comfortable to press the button.

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Operator [16]

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

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David Fabris, Macquarie Research - Research Analyst [17]

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Just looking at cost, it looks like you've done a really good job managing through the period. But I'm just wondering if you can split out the impacts and just look at the domestic business because obviously VIP volumes were down significantly in Sydney and up in Queensland. So what was the underlying cost growth ex-VIP?

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Gregory F. Hawkins, The Star Entertainment Group Limited - Chief Casino Officer [18]

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David, excluding VIP with the domestic business underlying, we're tracking about 2% cost growth in the domestic business. I would point out as well with the international business and the volume coming off, we have actually been able to maintain margins there as well within that. So on a mix of taking some OpEx out but also the [rate-light] structures. But underlying the domestic business, around 2%.

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David Fabris, Macquarie Research - Research Analyst [19]

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Okay. And just looking at that cost base, how comfortable are you with the structure? I mean, we are seeing a challenging macro backdrop across some of your competitors and the local market. How quickly could you respond to a cost-out program if we do see domestic revenues sort of slow down?

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Gregory F. Hawkins, The Star Entertainment Group Limited - Chief Casino Officer [20]

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Well, I think, yes, David, we've proven our growth over a number of years now, that they're very nimble on the cost base. And, yes, we continue to drive efficiencies around our cost base and adjust for the volume. So obviously, we look at rosters very carefully. We can adjust rosters in a short period of time. I mean our table game labor in particular, based on the volume that we are seeing, as well as F&B outlets on what times that we open them during the week and whether we shut them in certain periods of time when we're not seeing the volume. So at the end of the day, 60% of our costs come from [labor] within our business and importantly, the roster is the most important thing for us to be managing effectively as we go through.

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [21]

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And David, the only additional point I want to make is, we won't shy away from taking the cost out, obviously. But right now, we've got -- there's life, there's life in the business, right? So we are gaining market share. We are -- we've got good momentum. We're busy. So we certainly don't want to torch that momentum in the business and take full advantage of it.

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David Fabris, Macquarie Research - Research Analyst [22]

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That makes sense. Just a follow-up question to earlier, just back on that Sovereign resort, I know you're not willing to give too much color on it but slots growth was really strong in Sydney. And you've got that new Sovereign resort slot parlor that, I think, was opened late in the period. Are you able to give us any indication of how that performed and how much of a contributor that was to the first half result?

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

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Without getting into the specifics, I think we sort of are re-enforcing the premium local performance of the business particularly in Sydney has been very strong and that's been split across both table game and slot product. Yes, we put a lot of effort into the capital allocation into a temporary room, the capital allocated to the product and any allocation is by indoor and outdoor zones for customers to play. All that was then overlapped with a very aggressive relationship marketing model and direct marketing model as well. So I think they're both significant contributors. And we took every effort to make sure that we protected the business from that top 10,000 customers and that focus remains.

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [24]

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The only additional point, David, is that interstate high-end business is doing well for us. So Greg answered this question because Greg has to be our [PE] salesforce as well as the interstate salesforce reporting to him as Chief Casino Officer. But that business continues to make very good headway and is showing very nice growth. And that flows essentially into the private gaming room numbers, in slots as well as in tables. And we're happy with the continued expansion of that salesforce, right? And the results that, that could bring. So that just says that the whole proposition around product, customer service, the hotel and the food and beverage experience in our destination is compelling.

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Gregory F. Hawkins, The Star Entertainment Group Limited - Chief Casino Officer [25]

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Interesting (inaudible) apart from domestic and I think our assets experience is increasing even with the greater inbound domestic play. Our international premium mass is one that's also, I think, growing significantly as we are focused on that, and that's right across table games and slot machine. High profile activity inbound from North Asia as well. So they continue to be a focus to the sales team and present quite exciting growth opportunities moving forward.

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David Fabris, Macquarie Research - Research Analyst [26]

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And just to clarify, when did that slot area open? The secondary temporary area?

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

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The secondary, that opened in late November. David, that is there -- that helps, but it's -- I don't think we've seen a dramatic uptick in December as a result of that. So I wouldn't model an acceleration of that just because of those extra (inaudible) slot machines that we have upsized.

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Operator [28]

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

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Larry Gandler, Crédit Suisse AG, Research Division - Director [29]

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A few questions on VIP. I don't know why we are disclosing turnover any more. I guess my question is management. Greg and Matt, are you managing the business to turnover? Or are you managing to -- managing it to VIP and visitation?

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Gregory F. Hawkins, The Star Entertainment Group Limited - Chief Casino Officer [30]

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From our point of view, we're managing the business to EBITDA growth and contribution from that particular sector. So that's the primary focus. So the margin, we continue to focus. And incentives and type of program commissions we have in the market are all there to balance volume generation that ultimately drives profit growth within that sector as well. So that's our continuing focusing on that.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [31]

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So, I mean, but EBITDA if it's a function of normalized turnover, that would seem strange to manage a business that way considering it's pretty much an output. If you get the visitation, you get the front money. Your players have a good time even though they may not have turned it over as much. That to me would be a good management outcome.

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

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Larry, you are taking us back to where we stopped, where we were in 2015, which I salute your intellectual rigor. Because you're now endorsing the position we had back then saying we normalize around essentially front money because at the end of the day, we want people to come in, bring in a lot of business and stick around and take risks with that front money. But unfortunately, you may recall that normalization around front money wasn't a particular success with investors. So we've gone back to an approach that is more widely accepted in the market. I also want to say, Larry, just I know VIP is -- everybody is excited about VIP. So are we. And it's icing on the cake for us. But it's only 15% of EBITDA. It swings around a lot. It swings our results around a lot, I understand that. But the domestic business is the engine room of our profitability.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [33]

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Yes. Understood. But I might continue my line of questioning around VIP, Matt. Just maybe, Chad, the bad -- the overdue receivables, more than one year, they seem to have ticked up. I'm just wondering what your sense is there? Whether it is an air of nervousness around that? And also, the other part of that bar chart is 30 to 100 days and that line jumped up significantly as well. I'm just wondering, within the range of 30 to 100 days, is it aging more towards 100? Or is it still maybe closer to 30?

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Chad Barton, The Star Entertainment Group Limited - Group CFO [34]

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Larry, the big one there on the gold bar, the 30 to 100 days is really across a few players as we've already mentioned before, earlier in the presentation, right? And some of those players have continued to pay us since half year end. So on the outstanding players, we've actually known for quite a period of time. They have played here before, they've had some significant debts with us before and have paid them fully and we fully believe they have the capacity to continue to pay the debt. So it's nothing that is worrying us at the moment but there is always a little bit of an arm wrestle at times that you want to get your debts paid.

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [35]

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The only other thing is, we have a provision policy that does not allow for judgments. Our provision policy is fully driven by the actual aging of the debt. And so whether we like it or not, whether we know the customer or not, if that customer doesn't pay back [in a rather invoice], we start to provide appropriately.

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

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Okay, that's good to know.

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

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That mechanism has been consistent now for the last few results and so that's why we're pretty comfortable with the position here.

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Gregory F. Hawkins, The Star Entertainment Group Limited - Chief Casino Officer [38]

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I should have said, Larry, not sure if you made the point, but 1 year to 3 year debtors, too, has actually reduced on prior periods as well, so there's nothing there that's really concerning us at the moment. It's just the process we go through at times on getting some of these payments through.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [39]

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Okay, excellent. Two more questions. The restructuring costs, what were they -- I mean, were they previously flagged? And are you flagging any for FY -- or 2H '19?

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [40]

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Look, the restructuring costs relate to the creation of these Centers of Excellence. We have had over the last 6 months, we've turned over about 15% of our general management pool and that's created the opportunity for us to bring in some of that international talent that we said and refresh the pool of capability. And so it's all done through cost -- largely we've done through cost and restructuring cost. That's now largely behind us. There's a little bit that's dribbling into this second half but I don't think it will meet the standards of obviously [moving] an item at this point.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [41]

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Okay, and the last question, if I can. Just on coming back to VIP, we had that exchange control regulation modified in China. And as I understand it, Chad, with your front money, you would take a deposit into your bank from a junket's bank. Is that correct?

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Chad Barton, The Star Entertainment Group Limited - Group CFO [42]

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No, Larry, most of the time is we're giving what are called check-cashing facilities, effectively a credit line for the junkets [to be in it]. So it's not front money in terms of how you think of cash being deposited. Some junkets do. Some clients do. But in the main, we're giving credit lines to those junkets.

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [43]

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It's probably relevant in terms of the settlement because at the end of the month, so every month we then square out with the junkets. And then the direct players and they then have to settle. Somehow, money has to change hands and get into our system. That continues to be not a straightforward and sometimes problematic situation. Particularly, it's not a problem when it comes in through the national banking system. It's a problem if somebody wants to bring you $10 million worth of cash.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [44]

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Yes, of course. And if it comes in through an international bank, is that an issue for you guys?

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

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No, that's great because ultimately, we are under the same AML and CTF regulation as any other financial institution. So if it comes in, it's much beneficial -- it's beneficial for us if it comes through a recognized institution with a great AML track record that we can rely on.

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Operator [46]

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Your next question today comes from the line of Rohan Sundram from MST.

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Rohan Sundram, MST Marquee - Gaming and Contractors Analyst [47]

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I might just start with a question for Matt. Mindful of the solid growth you're achieving across all of your segments in domestic but how would you describe the consumer environment right now amongst top-end versus the low-end given the growth you've reported?

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [48]

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Rohan, I am -- I mean, some of your colleagues have done some fantastically interesting work around the impact of house prices on discretionary expenditure and so on. And when house prices started to turn, I think we were all sort of a little bit nervous. We're not really seeing all that much. And if I look at the business, the private gaming rooms continue to perform well. Now, I realize we are probably taking a bit of share. But the top end of the pyramid is performing well. And the mass market is probably not as exuberant as it was a little while -- 12 months ago. But that's often got to do with the uncertainty around elections. There's a fair bit of electioneering that's happening in New South Wales and now it will soon happen federally. So I think there's a bit of nervousness that we have but I can't see it in the numbers at this point.

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Rohan Sundram, MST Marquee - Gaming and Contractors Analyst [49]

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That's helpful, thank you.

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

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I'm not sure it's helpful because all I'm saying is we share your concerns but we can't see it.

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Rohan Sundram, MST Marquee - Gaming and Contractors Analyst [51]

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That's fair enough. I guess it was -- [you could say] I was assuming a slower second half anyway and had concerns around the election. So I just thought the first half numbers were quite encouraging.

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

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That's good. The momentum is there. Absolutely, and I also -- I also look at the second half and think we've been to construction site on the porte cochere and the main entrance for such a long time because we were held up with planning approvals -- that is now coming to an end. Right now, there's a lot of noise still on the floor because of the heavy works of the Sovereign room. That's going to stop to quieten down. The cranes aren't going to disappear but [the way we structure this stuff] it's going to quiet down in the next 6 weeks. I'm very optimistic about Sydney. Gold Coast is a great looking asset. Gold Coast market is probably a harder one to read. And Brisbane is doing well. I'm very happy with what the team is doing in Brisbane and we gave them a mandate to keep earnings flat to -- until the opening of Queen's Wharf, and they're doing much better now. So I'm not entirely naïve here but I'm feeling pretty good about the medium-term outlook for us.

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Rohan Sundram, MST Marquee - Gaming and Contractors Analyst [53]

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And how's the Darling tracking relative to your expectation in Gold Coast?

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

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Look, I do come back to the numbers that we're showing around private gaming rooms and the VIP business. The Darling in Sydney is a leisure hotel. And it's doing exceptionally well on -- as part of leisure customer. The top end of the game is also frequented but a lot of them actually prefer the Astral. In Gold Coast, The Darling is a gaming hotel. It's vastly -- 90% of visitation is used for gaming. And from that point of view, we're very happy with the way the property is performing.

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Operator [55]

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Your next question today 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 [56]

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I just wanted to follow up on that last question. So I too thought the -- I guess the trading update for this year was pretty solid. In particular, The Star performance within that must be pretty good. You've obviously explained the disruption that's going on. I saw it firsthand the other day. It's probably some of the worst disruption that I've seen. So is it fair to say that the property has actually done a lot better than what you would have thought over these weeks? And can you just confirm that comment, before that major pace of disruption below the Sovereign room? I'm speaking about the main -- center part of Sydney's main floor, that will be pretty much complete in 6 weeks, did you say?

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [57]

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Yes. I can confirm that. So I can confirm -- look, in terms of our expectations, you may recall the discussion we had 6 months ago and the question was, "Is Sydney going to be stable?" And we said, "Yes, look, we expect some disruption but we hope to offset it through organic growth." I think we've demonstrated that we're doing that and then some. So that's certainly pleasing. In terms of disruption on -- from the Sovereign room. Right now, we have during the peak work periods which are 10:00 to 4:00, we have to take certain sections of the main floor out because of OHS and operating risks and so on. All that we expect will disappear within the next 6 weeks. So that's why I'm pretty positive.

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Matthew H. Ryan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [58]

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Okay. And then just trying to sort of back out the impact of the turns, the lower turns within VIP. So the $60 million to $100 million in revenue that you sort of talked about in the presentation, obviously, you could take tax off that -- the 10% -- and then commissions about 55% of revenue according to the disclosure. So you'd really need to add back something like $20 million to $30 million to normalize EBITDA. Is that a rough estimate of where you guys got to?

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

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This sounds very similar to the bonus discussion that I'm having with the team here.

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Matthew H. Ryan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [60]

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Is that a yes?

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

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That's a yes.

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Matthew H. Ryan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [62]

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Okay. And just one last one. So I think it was spoken about in the past, benefits to VIP margin from low commissions et cetera. So looks like that benefit in the half would have been about 4% to revenue. I'm just trying to think about whether I'm missing anything else. But it sounds like your VIP margin has probably moved from, let's say, low-teens to high teens now on a go-forward basis?

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

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No, actually, margins have stayed pretty much the same, Matt, from half to half. What you've got is your rebates and your commissions are down. And OpEx is down. And combined together, they are down pretty much the same level as revenue. So we've been able to maintain margins within the business. Not expanding at this point.

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Matthew H. Ryan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [64]

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I guess revenue during this period was disproportionately hurt by an abnormal turn rate? So I guess just looking forward into a normalized world, can we start to think about high teens EBITDA margins where previously we were thinking about low-teens? Is that a fair assumption?

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [65]

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No, I wouldn't be going there at this point.

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Matthew H. Ryan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [66]

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But I guess your rate cards have come down 4% of revenue and assuming a normal period of turn and the adjustment that you've made to your cost base, wouldn't you be getting a margin improvement moving forward?

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [67]

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Matt, you're right. If all things being equal, if the fixed cost hadn't changed and we wouldn't have had that normalized rate card on the expanded revenue, you are right we would have margin expansion. All, I guess, what we're saying is, look, the rate card has allowed us to offset the impact of the negative operating leverage on the fixed cost. And that's why we've maintained margin.

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Chad Barton, The Star Entertainment Group Limited - Group CFO [68]

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There's also the variable cost in your OpEx line as well, Matt. So it's not just purely in your rebates.

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Matthias Michael Bekier, The Star Entertainment Group Limited - MD, CEO & Executive Director [69]

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Great. Thank you. All right. It looks like we're out of questions. Thank you, everybody, for calling in, and I'm sure I'm going to see many of you over the next little while. Take care. Bye-bye.

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Operator [70]

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Ladies and gentlemen, that does conclude our conference for today. We thank you all for your participation. You may now disconnect.