Unless G2E shows us a slew of must have new products, 1H 2009 slot sales are going to be ugly. Q2 seems to be the at risk quarter for a number of companies in terms of potential covenant violations. I don’t care what the casino slot managers are telling the slot companies, corporate CFOs are controlling the slot procurement process. Most slot Capex will be pushed back to 2H 2009, if not later.
Slot functionality exceeds the actual average life cycle of 5-6 years by at least 5 years. Slots don’t breakdown. If an operator needs liquidity, they will cut slot Capex. Delaying Capex is the number one consideration for CFOs as they prepare their 2009 budgets. As soon as their budgets are communicated to the slot companies, 2009 guidance should come down. Analysts haven’t yet embraced this reality. As we discussed in our 11/2 post, “CAPEX, COVENANTS, AND CORPORATE CONTROL”, they continue to project roughly 10% revenue growth for WMS and BYI and still positive revenue growth for the slot industry in 1H 2009.
If you don’t believe me, check out the following management YOUTUBE from the Q3 conference calls. Remember, slots comprise the largest portion of maintenance Capex.
BYD Q3 2008
Question: “Do you think you maintenance is sub $100 million right now or can you get away with spending $80 million a year in maintenance?”
Answer: “We can probably at this point run the business sub $100 albeit some of the things that we opportunistically put off we will deal with in future quarters or in the following year.”
LVS Q3 2008
My guess is that LVS may not buy a single replacement slot machine next year given its financial situation.
ISLE FQ1 2008
Guiding $40 million in Capex for this fiscal year, which is about 30% below normal just for maintenance Capex. Next fiscal year will likely be even lower.
ASCA 3Q 2008
“So I guess at this point in time, in that $40 to $50 million range of maintenance CapEx again for next year, obviously subject to change based on the economy.”
The midpoint of the range is 30% below normal levels even before the “based on economy” adjustment.
PENN 3Q 2008
“Well I think maintenance CapEx next year should be between $75 and $80.”
The midpoint of the range is 36% below normal levels, and these guys have liquidity and are underleveraged!
PNK 3Q 2008
Question: Is the $9 million in the quarter sustainable or will that go back up?
Answer: Between 9 and 10, but it was running as high as 11 for a while there. Look, we'd like to get it as low as we can but we're not going to do miracles here. In fact, let me step back. It's an interesting environment we're in, in a lot of ways, especially in the casino business. “A lot of our competitors are in pretty rough shape and we hear the same stories you have that their not buying a single slot machine this year, or their cutting their maintenance CapEx to the bone.”
Harrah’s 3Q 2008
“Maintenance capital expenditure usually runs 4-5 percent of net revenue. That is being reduced to half of the normal amount or less.”
TRMP Q3 2008
Question: I wonder if you can give us a little more clarity as to what minimum maintenance CapEx might be and a sense for what your minimum cage cash could be next year.
Answer: “The CapEx we're going to limit to only essential compliant or life safety issues. We're not anticipating any more than $10 million between the three properties next year for maintenance capital.”
Station Casinos
This bankruptcy candidate may not buy any replacement slots next year.
Slot functionality exceeds the actual average life cycle of 5-6 years by at least 5 years. Slots don’t breakdown. If an operator needs liquidity, they will cut slot Capex. Delaying Capex is the number one consideration for CFOs as they prepare their 2009 budgets. As soon as their budgets are communicated to the slot companies, 2009 guidance should come down. Analysts haven’t yet embraced this reality. As we discussed in our 11/2 post, “CAPEX, COVENANTS, AND CORPORATE CONTROL”, they continue to project roughly 10% revenue growth for WMS and BYI and still positive revenue growth for the slot industry in 1H 2009.
If you don’t believe me, check out the following management YOUTUBE from the Q3 conference calls. Remember, slots comprise the largest portion of maintenance Capex.
BYD Q3 2008
Question: “Do you think you maintenance is sub $100 million right now or can you get away with spending $80 million a year in maintenance?”
Answer: “We can probably at this point run the business sub $100 albeit some of the things that we opportunistically put off we will deal with in future quarters or in the following year.”
LVS Q3 2008
My guess is that LVS may not buy a single replacement slot machine next year given its financial situation.
ISLE FQ1 2008
Guiding $40 million in Capex for this fiscal year, which is about 30% below normal just for maintenance Capex. Next fiscal year will likely be even lower.
ASCA 3Q 2008
“So I guess at this point in time, in that $40 to $50 million range of maintenance CapEx again for next year, obviously subject to change based on the economy.”
The midpoint of the range is 30% below normal levels even before the “based on economy” adjustment.
PENN 3Q 2008
“Well I think maintenance CapEx next year should be between $75 and $80.”
The midpoint of the range is 36% below normal levels, and these guys have liquidity and are underleveraged!
PNK 3Q 2008
Question: Is the $9 million in the quarter sustainable or will that go back up?
Answer: Between 9 and 10, but it was running as high as 11 for a while there. Look, we'd like to get it as low as we can but we're not going to do miracles here. In fact, let me step back. It's an interesting environment we're in, in a lot of ways, especially in the casino business. “A lot of our competitors are in pretty rough shape and we hear the same stories you have that their not buying a single slot machine this year, or their cutting their maintenance CapEx to the bone.”
Harrah’s 3Q 2008
“Maintenance capital expenditure usually runs 4-5 percent of net revenue. That is being reduced to half of the normal amount or less.”
TRMP Q3 2008
Question: I wonder if you can give us a little more clarity as to what minimum maintenance CapEx might be and a sense for what your minimum cage cash could be next year.
Answer: “The CapEx we're going to limit to only essential compliant or life safety issues. We're not anticipating any more than $10 million between the three properties next year for maintenance capital.”
Station Casinos
This bankruptcy candidate may not buy any replacement slots next year.
Not many of these will be sold in 1H next year