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PNK 3Q11 CONF CALL NOTES

PNK breaks the string of blow out quarters with just an in-line performance. Concerns remain surrounding capex program.

 

 

"On an operating basis, Pinnacle had another very strong quarter led by record performances at our L'Auberge Lake Charles and St. Louis properties.  While several charges and other items affected year over year comparability, our third quarter results again highlight the effectiveness of our revenue growth and operational improvement initiatives"

 

- Anthony Sanfilippo, president and chief executive officer of Pinnacle Entertainment

 

 

CONF CALL NOTES

  • They continue to be focused on removing non-value added expenses from their cost structure
  • Seeing strong increases in the number of new guests - especially at the top tiers which have grown double digits since the launch of myChoice
  • 3 of 4 hotels have had record RevPARs, 3 were up more than 11% and total RevPAR growth was 9.5%
  • Anticipate finishing the redesign of all of their property websites by 1Q12
  • Growth from customers under 40 has been strong
  • Saw growth in 3 of their 5 primary markets
  • In St Louis, 19% of guests contributed 49% of results
  • Not seeing any evidence of a pull back in spending from their guests
  • Bossier continues to be a difficult market; they believe it will remain under some pressure
  • Belterra - dynamics in the market will remain challenged for sometime.  Competition should intensify.  Will work at rationalizing expenses.
  • Reno- looking to sell the property as well as the land adjacent to it in 2 separate discussions.  Are far along in their negotiations.
  • Normal reward expenses under mychoice were being expensed as incurred but now need to be expensed upfront and expenses should be accrued as earned before they are used. 
  • Expect to get a refund of their $25MM deposit at Baton Rouge once the property opens
  • 3Q Capex: $40MM; expect 4Q to be $65MM - $45MM of which should be Baton Rouge

Q&A

 

Accounting change should be smooth going forward barring changes

  • Q3 would’ve been $0.5 million better with no accounting change

Why didn’t you get the flow through on St. Louis and L’Auberge from the revenue growth?

  • A little bit of noise because of accounting change.  Thinks that there are meaningful improvements at those properties to come.

River Downs – any sense of budget or timing?

  • Waiting to see what Ohio is going to do

How much of $10.2 million Q2 accounting adjustment relates to 2011 and 2012?

  • $2.5m was for 2011, the rest for future years

Progression of capital spend for St. Louis expansion

  • 2/3 won’t get spent until 2013
  • Project should be done by end of 2013

What inning are you in for margin expansion?

  • Still in middle innings – haven’t gotten to “7th inning stretch yet”

Vietnam project financing?

  • Financing in place already even before PNK got involved
  • Still need working capital financing

Target margin

  • They don’t target margins
  • They target profitable growth

Sustainability of favorable promotional environment

  • Didn’t really provide an answer

Can River Downs be profitable before slots?

  • Highly unlikely

Why is there so much left to spend on BR when it is opening in 3Q?

  • Flooding slowed it down – were not released until mid-July to work on the site
  • Focused on the budget – will stay within budget and timeline
  • A lot of the spend doesn’t come due until after they open

Bonds bought back are not retired but for all practical purposes they are

 

 

HIGHLIGHTS FROM THE RELEASE

  • "This performance continues to demonstrate that our strategies to elevate the guest experience at our properties, leverage the industry-unique benefits of our mychoiceguest loyalty program, and a team-wide commitment to implementing operational best practices are driving profitable revenue growth.  At the same time, Pinnacle's strong operating results provide a solid foundation and financial flexibility for the Company to build shareholder value from our diversified, return-focused growth pipeline."
  • "Our St. Louis segment and L'Auberge Lake Charles are consistently achieving record or near their highest-ever levels of monthly market share as guests increasingly choose these properties as their preferred gaming entertainment destinations"
  • "As a result of our comprehensive approach to growing revenues and implementing operational best practices, we are generating steady increases in spend per visit, particularly in our most profitable customer tiers, as well as operating margin improvements which together result in profitable revenue growth."
  • "Construction of the facility is moving at a faster pace since waters on the Mississippi river subsided earlier in the third quarter to allow construction to resume on the hotel and casino.  Reflecting the combination of nearly seven months in construction disruption and previously unanticipated site preparation work recently mandated by theArmy Corps of Engineers following historically high river levels earlier in the year, management expects the construction budget for L'Auberge Casino & Hotel Baton Rougeto increase by up to 3.0% from the prior budget of $357 million.  As of September 30, 2011, approximately $110 million of the budget had been invested."
  •  "Plans to redevelop River Downs Racetrack in southeast Cincinnati, into a premier racing and gaming entertainment destination that is planned to include up to 2,500 VLTs and new amenities, continue to progress. Timing will be dependent upon, among other things, the finalization of authorization of VLTs in Ohio."
  • "Completed its previously announced transaction with Asian Coast Development (Canada)... The first phase of the development, which will be the first fully integrated resort project in the country and will be managed by MGM International, is expected to open by the end of the first quarter of 2013."  
  • "In August, the Company entered into an amended and restated revolving credit agreement.  Among other changes, the size of the credit facility was increased from $375 million to $410 million and the maturity date was extended from March 2014 to August 2016.  Additionally, the effective interest rate was reduced throughout the pricing grid, with a current interest rate of 250 basis points over LIBOR compared to the previous effective interest rate of 375 basis points over LIBOR."
  • "During the quarter, the Company made open market purchases, at par and from cash on hand, of $10.0 million of its outstanding 7.5% Senior Subordinated Notes due 2015. The Company recorded a $0.2 million loss on early extinguishment of debt as a result of these transactions, related to the partial write off of unamortized deferred financing fees."
  • Balance sheet: $83.3 in cash & equivalents, "an estimated $65 million of which is used in day-to-day operations". Debt: $32MM drawn on $410MM R/C and approximately $9.8MM LOC's O/S
  • Capitalized interest: $2.9MM
  • Unusual charges in the Q:
    • "Net revenue and Adjusted EBITDA for Boomtown New Orleans was impacted by the property's closure for several days over Labor Day weekend due to Tropical Storm Lee and subsequent flooding disruption in the region... Management estimates Boomtown New Orleans Adjusted EBITDA was negatively impacted by approximately $0.9 million due to this closure and disruption."
    • "Adjusted EBITDA for Belterra Casino Resort and River Downs were impacted by unusually high medical claim expenses of $0.5 million and $0.3 million, respectively.  Belterra's Adjusted EBITDA in the 2010 third quarter included a one-time benefit of $0.8 million from the resolution of a tax matter, affecting comparability with the 2011 third quarter."
    • "River Downs recognized a $0.3 million charge during the 2011 third quarter related to abnormally high medical claim expenses."
    • "During the quarter, Boomtown Reno was classified as a discontinued operation.  The Company recorded a non-cash charge of approximately $11.9 million or$0.19 per share to write-down the assets."

 


RCL 3Q CONF CALL NOTES

4Q guide down expected but near term visibility still cloudy.  positive 2012 commentary

 

 

CONF CALL

  • 2 main observations: 1) 3Q and 4Q on target with expectations; 2) solid forward bookings
  • Costs remain contained
  • Strong 3Q close-in bookings in Europe and Caribbean
  • Caribbean/Alaska were better than expected and offset areas hurt by political/economic turmoil
    • This year, Alaska hit record yields
  • 2012: comfortable with level of bookings (higher load factor and price vs year-ago)
    • But not ready to give specific guidance yet
  • 2012: Not expecting yield improvement from economic tailwinds but will benefit from low capacity
  • Reduced Eastern Med itineraries for 2012
  • Will not need to access capital markets for next few years 
  • 3Q yields:
    • Ticket: +6.8% YoY, driven by all itineraries except Eastern Med and Asia; Alaska was +15%
    • Onboard: up marginally--increase spending among NA guests offset mix shift towards lower spending among European guests
  • Some modest cost shifting into 4Q
    • Some marketing expense moved from 3Q to 4Q
  • Realizing small gain in 4Q for selling 2012 fuel options 
  • 4Q yields: Caribbean (double-digit growth); lower yields in Eastern Med/Asia
  • 2012
    • "Things look pretty good but hard to ignore economic concerns in Europe" 
    • 2012 Booked APD trending higher YoY on a constant-currency basis; steady improvement from end of July to present day mainly due to sale activities
  • 2011 guide down: -12 cents due to FX; -8 cents from fuel options; +5 cents coming from better operating performance
  • Grandeur of the Seas/ Rhapsody of the Seas revitalization in 2012
  • Onboard rev outlook:
    • Anticipate modest improvement 
    • Onboard rev hurt by decreased gaming spend and change in composition in guest mix
      • Carrying more European guests (they spend less than US guests and are spending less YoY)
  • Fleet deployment outlook:
    • Since Q2 earnings, RCL Int will replace Vision of the Seas (Holy Land Itineraries); Celebrity Solstice will ship 50% of fleet to Western Med from Eastern Med
    • Overall, reduce planned Eastern Med deployment by 17% in 2012
  • Caribbean: 60% capacity in fall and winter and into 2012
    • Performing well; will grow YoY in 4Q
    • Celebrity Infinity, Summit, and Millennium (April 2012) upcoming Solsticizing
  • Customers still prioritizing vacation/travel; cruise travel still on top

Q&A

  • Q4 close-in bookings: October was fairly solid, but are taking conservative view on winter months; Caribbean holding up fairly strong
  • 2012: 29% inventory in Europe; Eastern Med/Holy Land: 9% in 2012
  • By normal trends, by year-end of 2011, 2012 itineraries should be 50% sold-out
  • Too early to say about 2012 Alaska bookings
  • This year, Alaska did benefit from Europe dislocations 
  • 3Q yields are still 4% below yields achieved in 3Q 2008 yield
  • Wider than normal 4Q guidance range (10 cents):
    • Because of economic uncertainty
  • In a de-levering mode right now
  • Overall customer mood: no difference between Q4 2011 and 2012
  • FY 2011 Med yields: Western Med up slightly; Eastern Med down; 
  • 2011 Eastern Med impact: $90-100MM hit, 150bps hit in yields
  • Legend of the Seas had double digit yield declines recently vs. double digit increases earlier in the year
  • Eastern Med pricing still discounting?
    • Somewhat better pricing 
  • Corporate sourcing: 3/4 of US and 1/4 from Europe 

 

HIGHLIGHTS FROM RELEASE

 

2012 Outlook: Though economic uncertainty is elevated and it is still early in the booking cycle, 2012 demand thus far has been solid.  Booked load factors and pricing are both running ahead of this time last year, which supports the company's expectation of continued yield accretion during 2012.  

 

3Q results

  • $1.90 EPS in-line with us, 4 cents higher than Street (excludes a $0.08 charge related to mark-to-market revaluations of fuel option portfolio)
  • Net Yields (current currency) rose 5.3%, beating Street and guidance of 5%
    • On a constant currency basis, yields rose 2.6% (Street: +1.7%)
  • Net Cruise Costs per APCD ex fuel:  +2.5% (+0.7% on constant currency basis)
  • Fuel: $608 per mt
    • Consumption at 333,000 mt

4Q guidance

  • EPS: $0.09-0.19 (Street: $0.22)
  • Net yields: +3-4% (current and constant $) (consensus: +4.9%)
  • NCC: +6% (current and constant $)
  • NCC ex fuel: +4% (current); +3-4% (constant)
  • EPS: $1.85-$1.90
  • Capacity: +7.3%
  • D&A: $180-185MM
  • Net Interest Expense: $82-87MM
  • Fuel expense: $204MM
  • Fuel consumption: 344k mt
  • % fuel hedged: 57%
  • 10% fuel price change sensitivity ex fuel options: $9MM

 FY 2011 guidance:

  • Net yield (current): +4% from +5-7% previously due to adverse currency movements; constancy currency +2-3% unchanged from prior guidance
  • EPS: $2.70-$2.80 ($0.15 reduction from prior guidance primarily due to stronger US Dollar and fuel option revaluation loss)
  • NCC ex fuel: +2-3% (current); +1-2% (constant)
  • Fuel expense: $761MM
  • Fuel consumption: 1317MM metric tons
  • Capacity: +7.5%
  • D&A: $702-707MM
  • Net Interest Expense: $357-362MM

 Guidance commentary:

  • Close-in demand was strong in the third quarter, but the company does not anticipate this strength will continue for the seasonally weaker fourth quarter.
  • Forecasted consumption is now 57% hedged via swaps for the remainder of 2011 and 55%, 47%, 30% and 20% for 2012, 2013, 2014 and 2015, respectively.  For the same five-year period, the average cost per metric ton of the remaining hedge portfolio is approximately $490, $520, $520, $575 and $580, respectively
  • The company recently sold its options for 2012, which were at a strike price of $100 and will recognize an associated small gain in the fourth quarter. The remaining WTI fuel option portfolio consists of options expiring in 2013 at a strike price of $90 bbl that covers an estimated 11% of 2013 consumption.

FX guidance

  • EUR: $1.39
  • GBP: $1.60

Other

  • $1.3BN: cash and undranw RC
  • Remaining debt maturities for 2011, 2012, and 2013: $250MM, $600MM, and $1.6BN respectively 
  • Capex for 2011, 2012, 2013, 2014: $1.1BN, $1.2BN, $500MM, and $1.1BN respectively
  • Capacity for 2011, 2012, 2013, 2014: +7.5%, +2.1%, +2.4%, and +0.8%, respectively

HOT: Q3 NOT THE STORY

Like every other release, Starwood beat consensus estimates and put forward lackluster guidance.  While the quality of the Q was just OK, 2012 RevPAR guidance shows the health of this business.

 

 

Core results in the quarter were softer than top line results imply.  While owned, leased and consolidated JV revenues were stronger than we estimated, flow through was weaker due to higher CostPAR.  The beat on fees was largely due to a boost from the conversion of 19 European hotels from franchise to more lucrative management contracts.  VOI and residential was below our estimate for both top and bottom line results.  Lower SG&A, interest expense and D&A all helped the bottom line and drove the beat in the quarter.

 

 

Detail:


Revenue of $783MM was 1% ahead of our estimate and adjusted EBITDA was 2% better than we estimated.  

 

Owned, leased and consolidated JV revenue of $441MM was 1% above our estimate but lower margins resulted in segment results that were $9MM below our estimate.

  • Given higher RevPAR, we were surprised that owned hotel revenue didn’t grow more than just 2.4% YoY
    • Room count was down 7.5% YoY but SS WW RevPAR was up almost 15%
    • We estimate that room revenues grew 11% YoY but that ancillary revenues including F&B were down 11% YoY.  We don’t think that this is surprising as many hotels that raise ADR’s are giving more away like free breakfast, local calling, free parking and internet which used to be a source of incremental revenue.
  • RevPOR increased 8.9% while CostPAR increased 8.2%, resulting in poor flow through consistent to what we saw in 2Q11

Management, franchise fees, and other income came in 5% better than we estimated – with most of the upside coming from management fees benefiting from the conversion of 19 European hotels from franchise to management contracts during the quarter.

  • Net of the conversion of the European hotels, room growth was 30bps better than we estimated
  • Management base fees were 6% higher than we estimated, while franchise fees were 6% lower - for reasons already mentioned
  • Incentive were $3MM better

VOI and residential revenue and segment results were 5% lower than we estimated

  • Originated sales revenue was $3MM lower than we estimated – likely due to lower pricing on sales mix
  • Other sales service revenue was $4MM lower than we estimated
  • Deferred revenue was in-line

Lower SG&A, interest expense and D&A all helped the bottom line and drove the beat in the quarter.

  • SG&A was down in the quarter vs. general guidance for a 3-5% increase
  • D&A was $3MM below guidance
  • Consolidated Interest expense was down $7MM sequentially and $8MM lower than our estimate

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CLAIMS REMAIN FLAT YEAR-TO-DATE, ALONG WITH THE MARKET

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Initial Claims Close to Flat

The headline initial claims number fell 1k WoW to 402k (down 1k after a 1k upward revision to last week’s data).  Rolling claims actually increased week over week, rising 2k to 405k.  On a non-seasonally-adjusted basis, claims increased 17k to 374k. 

 

While flat week-over-week, initial claims remain high (over 400k), and are essentially flat year-to-date (405k rolling today vs. 410k at the start of this year). We've been arguing for the last several weeks that the largest divergence between the S&P and claims that we’ve seen in the last three years would likely result in mean reversion facilitated by a rise in jobless claims to the 450k+ level. Rather, thus far, the mean reversion has been driven by the market rising from 1100 to around 1 this morning. We remain skeptical that claims and economic activity will not be adversely affected by the profound loss of consumer confidence shown over the last few months. We continue to expect claims to rise, but are willing to strap on the accountability pants in the here and now and acknowledge that thus far we've been wrong.

 

It is interesting to note that in spite of a year's worth of record volatility, the market and claims are both essentially flat. These series are, in fact, co-integrated, as one would expect. In layman's terms that means that they tend to move together over time even if they are not especially correlated with one another in the short term. What that means is that you should pay special attention to periods in time when they materially diverge as they are likely to mean-revert going forward.  

 

CLAIMS REMAIN FLAT YEAR-TO-DATE, ALONG WITH THE MARKET - Rolling

 

CLAIMS REMAIN FLAT YEAR-TO-DATE, ALONG WITH THE MARKET - Raw

 

CLAIMS REMAIN FLAT YEAR-TO-DATE, ALONG WITH THE MARKET - NSA chart

 

CLAIMS REMAIN FLAT YEAR-TO-DATE, ALONG WITH THE MARKET - S P and Claims

 

CLAIMS REMAIN FLAT YEAR-TO-DATE, ALONG WITH THE MARKET - Fed and Claims

 

2-10 Spread

The 2-10 spread widened 3 bps versus last week to 192 bps as of yesterday.  The ten-year bond yield increased 5 bps to 221 bps. This remains a very difficult environment for net interest margins.  

 

CLAIMS REMAIN FLAT YEAR-TO-DATE, ALONG WITH THE MARKET - 2 10 Yield Spread

 

CLAIMS REMAIN FLAT YEAR-TO-DATE, ALONG WITH THE MARKET - 2 10 Yield Spread QoQ

 

Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 

 

CLAIMS REMAIN FLAT YEAR-TO-DATE, ALONG WITH THE MARKET - Subsector Performance

 

 Joshua Steiner, CFA

 

Allison Kaptur

 

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THE HBM: PNRA, PFCB

THE HEDGEYE BREAKFAST MONITOR

 

MACRO NOTES

 

Initial jobless claims came in at 402k versus Bloomberg survey 401k.  The jobs picture remains poor and consumer confidence is reflecting that.  Later this morning the Bloomberg Consumer Comfort Index will be released and tomorrow morning the University of Michigan Confidence print will hit the tape.  It will be interesting to see if these two data points corroborate with the sharp drop in the Conference Board consumer confidence metric earlier this week.  There has been some debate as to why retail sales and confidence data has been diverging recently.  As our retail team pointed out during the week, at some point, the spread between these two trends is likely to come in.

 

THE HBM: PNRA, PFCB - initial claims 1027

 

 

SUBSECTOR PERFORMANCE

 

THE HBM: PNRA, PFCB - subsector fbr

 

 

QUICK SERVICE

 

PNRA: Panera Bread was downgraded to Neutral from Buy at SunTrust.

 

PNRA: Panera Break was reiterated Equal Weight at Barclays.

 

PNRA: Panera Bread was downgraded to Hold from Buy at Miller Tabek.  The twelve-month price target is $133 per share.

 

 

CASUAL DINING

 

PFCB:  P.F. Chang’s reported earnings this morning.  EPS came in at $0.29 cents ($0.27 adjusted) versus expectations of $0.32.  Comps were -3.7% at the Bistro which was in line with expectations.  Pei Wei’s top-line trends were below expectations, coming in at -3.6% versus -2.2%.  Consolidated restaurant margins came in at 16% versus 16.4% consensus.  The call is going on and management has stated that the company is not for sale, despite rumors of PE interest.

 

THE HBM: PNRA, PFCB - bistro pod 1

 

THE HBM: PNRA, PFCB - pei wei pod 1

 

 

EAT:  Brinker International was downgraded to Underperform from Neutral at Stern Agee.

 

THE HBM: PNRA, PFCB - stocks 1027

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


THE M3: SJM, UNEMPLOYMENT SURVEY; TRANSFORMERS; S'PORE 2012 ECONOMIC FORECAST & INFLATION

The Macau Metro Monitor, October 27, 2011

 

 

SJM TO EVALUATE SALARIES Macau Business

SJM may soon raise worker salaries.  The move comes after Grand Lisboa’s cage cashiers held two demonstrations complaining that their wages only went up by MOP500 (US$62.5) since the property opened in February 2007, far below the increases enjoyed by their fellow croupiers.  Asked about the future ferry terminal, SJM CEO Ambrose So said, “Building one more terminal is necessary, but it should only be there to help divert the flow of visitors, and not replace the [peninsula] terminal.”  3Q earnings will be released Nov 7.

 

MACAU EMPLOYMENT SURVEY FOR JULY- SEPTEMBER 2011 DSEC

Unemployment rate for July-September 2011 held stable at 2.6%, same as the previous period (June-August 2011).  In comparison with July-September 2010, the unemployment rate dropped by 0.3% points.  Total labor force was 344,000 in July-September 2011 and the labor force participation rate stood at 72.5%, with the employed population increasing by about 300 over the previous period to 335,000.

 

TRANSFORMERS RIDE TO OPEN IN S'PORE ON DEC 3 AsiaOne News

On December 3, RWS's Universal Studios Singapore (USS) will launch the world's first theme park attraction based on Hasbro's iconic Transformers brand.

 

SINGAPORE INFLATION WILL REMAIN HIGH: MAS Channel News Asia

Inflation is likely to remain elevated until mid-2012 before easing as the economy slows, the Monetary Authority of Singapore (MAS) said.  The central bank said inflation will average above 5% for rest of this year.  It may fall to around 4% in the first half of 2012, before easing to close to 2% in the second half of next year. 

 

SINGAPORE'S ECONOMIC GROWTH TO STALL OVER NEXT FEW QUARTERS Strait Times

According to MAS, Singapore's economic growth will stall over the next few quarters before seeing a modest recovery late into 2012.  Continued uncertainty in economic activity as well as financial volatility will be a drag on growth, affecting both the domestic electronics sector and financial and tourism-related services, the central bank said in its twice-yearly macroeconomic review.

 

These factors have raised the possibility that Singapore could only grow below its potential growth rate of between 3% and 5% the MAS said.  It added: 'The Singapore economy is expected to grow at below potential in 2012, due in part to the near-term weakness of our key trading partners. However, the downturn is unlikely to match the severity of the global financial crisis (in 2009).'  The slowdown means that the labor market is expected to ease going forward, as demand for workers falls. This will also bring down wage growth from around 5 to 6% in 2011, to 2 to 4%, said the MAS.


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