In preparation for IGT's FQ4 2011 earnings release Tuesday afternoon, we’ve put together the recent pertinent forward looking company commentary.




  • U.S. Court of Appeals for the Federal Circuit affirmed a district court's judgment against Bally for infringement of two of IGT's patents.
    • IGT's patents (U.S. Patent Nos. RE37,885 and RE38,812) claim certain methods of paying bonuses at gaming machines.  Two of Bally's products, Power Rewards and ACSC Power Winners, were found to infringe.


  •  IGT and Aristocrat have cross-licensed each other to their patents and they will have the right to offer all the products which were the subject matter of the litigations subject to certain royalty obligations. This settlement ends all present patent litigation between IGT and Aristocrat and their subsidiaries.



  • "We believe the improvements we are driving across the organization have the potential to generate steady,
    attractive returns."
  • "We will continue to remain focused on efficiently deploying capital to drive positive returns for our shareholders."
  • "Strong performance of our domestic wide area progressive games positively contributed to the increase in yield. Consistent with last quarter, our coin in machine per day was up 13% in our wide area progressive units. Average revenue per day decreased sequentially due to a higher mix of lower yielding international units."
  • "The games that support Center Stage are performing extremely well. We expect to leverage this platform by introducing new content and themes to extend the life of the hardware."
  • "Our international organization continues to break records. Driven by strong replacement demand for our premium products in Europe and Australia, we achieved an average selling price of $16,600 in international product sales, our highest ever. While our ASPs are setting new benchmarks, our product gross margin is also healthy at 57%, a 400 basis point improvement over last year."
  • "Early returns on our six new Asian-themed games are encouraging and a testament to the demand for localized content. We will continue to deliver games in greater volume that are specifically designed for our international markets"
  • "Our interactive business grew revenue over 20% and increased gross profit nearly 30%."
  • "We also demonstrated several new applications for our sbX system. We expect to be delivering a steady flow of new bonus, community, and game-play applications in the coming quarters."
  • “We are raising our 2011 earnings guidance to $0.89 to $0.93 per share on an adjusted basis.”
  • “Our strategy in our purchase of Entraction and the work we’re doing to integrate Entraction into IGT is a 100% ex-U.S. strategy...So what you’ll see us doing is expanding from casino into poker, bingo, and sports betting on a B2B basis in legalized markets likely outside the U.S., in the short term, moving to the U.S. when and if those markets open."
  • [Product sales margins] "I think if you look at the 59% gross margins that we enjoyed this quarter... it’s a combination of mix... And the mix can be the variable component between whether or not you can get to 60% or not"
  • [Size of the online business as a percentage of total] "I’d like to think it never gets to 10%... because it’s shaking our core business revenue as it grows. So that’s going to be one of the challenges, as the market gets healthier in the core business, then it has to chase that up. But I don’t think it’s unrealistic to think in 2013-2014 we could see this playing a significant enough role that you all start getting all visibility into it" 
  • "We’re very focused on outside the U.S. on our Casino Link product"
  • [New opportunities market share] “We set our sights on kind of a north of 50% number on a new opening.”
  • “A stabilization in the wide area progressive component – that’s where we had suffered previously a fair amount of degradation over the last three years.  And then slightly you’re starting to see a shift in favor of wide area progressive in lieu of standalone.”
  • "Internationally, average selling price was up 16% year over year, primarily due to favorable shifts in product mix and foreign exchange rates...A number of things contributed to the lift. It was regional mix, it was product line mix, and it was foreign exchange. So foreign exchange was less than half of the impact on lift, and the other two were the balance.”
  • [seasonality of slot play] “We’ll watch it as we go into FQ1, because that’s generally the quarter where you see slot play decline somewhat sequentially.”
  • “You should expect to see units continue to grow in the international marketplace. They tend to be lower yielding, so you’ll see yields on a per-unit basis a bit lower. And I think that’s kind of the trend that we have seen in the international marketplace. But the profit per unit, which is what we probably focus more on here in the company, continue to see that expand as well.”
  • “I would say South America, Latin America, Caribbean, and Asia, which is generally where we’re focused.  More so than Australia and Europe. You see the game ops side of our business expanding in those two regions.”


In preparation for IHG's Q3 2011 earnings release Tuesday morning, we’ve put together the recent pertinent forward looking company commentary.



IHG Shares GLobal Repositioning Strategy for Crowne Plaza Hotels & Resorts (10/25/11) 

  • "Crowne Plaza is a top priority for IHG, and the time is now to differentiate the brand from its competitors in a meaningful and relevant way."
  • 3 phases repositioning strategy:
    • Phase 1 (Freshen Up) Now - 2012:  "Focus on raising product quality and consistency, primarily in the Americas, driving revenue and performance across the portfolio, refreshing the Sleep Advantage program in the Americas and launching a new brand identity with a modern look and feel."
    • Phase 2 (Move Up) 2012-2013: "New global branded service training program, development and distribution in major gateway cities and resort markets, increasing trial and brand awareness, and delivering on key drivers of guest satisfaction."
    • Phase 3 (Shine) 2013-2015: Testing of new brand hallmarks



  • "Our reported EBIT margins are already significantly ahead of our peers, 27% last year compared to 23% for Marriott and 20% for Starwood."
  • “We are committed to maintain an investment grade credit rating through the cycle, which we consider to be 2.0 to 2.5 times net debt to EBITDA. We currently stand at a trailing last 12 months ratio of 1.4 times, giving ample headroom.”
  • "July RevPAR was up almost 6% with a further improvement in rate growth to 2.7%. U.S. RevPAR was up almost 7% with more than half of the growth driven by rate. On a total basis, our U.S. RevPAR grew over 8% once again outperforming the Smith Travel industry data."
  • "In terms of system size, we still expect modest growth this year even after the expected exit in the second-half of the almost 7,000 rooms relating to the HPT management contract. In future years, the level of removables should revert to historic norms and this in turn should mean annual net systems growth of between 3% and 5% over the medium-term."
  • "Visibility hasn’t really changed… visibility remains quite short.”
  • "We’re seeing quite good performance in the UK, particularly in London actually."
  • “We’ve now got about a quarter of our business on to dynamic pricing, which we think is much more beneficial to the hotels and to customers and, in fact, one of the key focuses there is rather than talking absolutely about rates, people tend to talk about rate and rate growth – what we are actually seeing is big market share gains.”
  • “I do think clearly with the share price down if you were to do buybacks, it’s a lot better at £10 than it was at £14. But I also think just given the uncertainty out there right now, it’s sensible just to wait and see what happens. So, that’s what we’ll do.”
  • [Pipeline reduction impact] “We're more skewed to midscale, and we’re more skewed to non-U.S. where there has been much less of an impact.”
  • “Overall our pipeline is about 40% under construction. In U.S. it’s below 25% under construction.”
  • “Our pipeline still remains at around 16% of the world’s global branded pipeline, which is still significantly ahead of any of our competitors.”
  • “The total demand for room nights in July... it’s going to be well over 100 million room nights for the industry, which will be a record ever for room nights sold in the U.S.  So it is important to put that in context and also obviously think about emerging markets where we’re seeing very strong growth, but the point is, we’re seeing it both across leisure and business travel.”
  • "60% of the pipeline is financed." 
  • "Supply growth is very low, but there is growth in midscale."
  • "Cash flow in the second half –  there will be some reversal of the outflow that we saw in the first half clearly as business ramps-up – if it continues to ramp-up, observe some working capital with effectively receivables growing. Days sales outstanding hasn’t been growing but the quantum has been growing as the business ramps up. But overall, we expect cash to be broadly neutral for the full year, barring any major disposals."
  • [Depreciation charge] “Three (million) in the second half.”

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Weekly Latin America Risk Monitor: FX Sees Easing; Breeds Contempt

Conclusion: Recent moves throughout Latin American FX markets are supportive of our expectation for broader monetary easing across the region. Additionally, they are making the region’s most active government react rather squirrely.



Latin American equity markets broadly declined last week, falling -2.4% wk/wk on a median basis.  Declines were led by Argentina, which closed down -8.4% wk/wk. Latin American currencies also broadly declined, closing down -1.8% wk/wk (vs. the USD) on median basis. The -3.6% declines in both the Brazilian real and Mexican peso led the way to the downside.


Latin American sovereign debt markets continue to price in expectations of slower growth and looser monetary policy – particularly in Brazil, where the central bank has already cut rates by -100bps in the current policy cycle. This regional slower-growth scenario is contributing to heightening expectations of credit risk, as evidenced by the region-wide widening of 5yr CDS (+5.6% wk/wk on a median basis). Latin American interest rate swaps markets are also pricing this outlook via easing speculation. 1yrs swaps tightened -19bps and -25bps wk/wk in Brazil and Colombia, respectively.



Rather than delineate these data points by country, given the varying size and importance of these economies, we thought we’d try something different by grouping them by theme. Ideally, this should make it easier to absorb and contextualize anything of significance. Lastly, the callouts below are from the prior seven days:


Global Growth Slowing:

  • Mexican consumer confidence ticked down in October to 90.6 vs. 92.4 prior.
  • Brazilian vehicle production and domestic sales growth tanked in October, falling -3.4% YoY (vs. +7.2% prior) and -7.5% YoY (vs. 1.5% prior), respectively.

King Dollar:

  • In the minutes of the Banco de Mexico’s October 14thmeeting, policymakers signaled that they would “react opportunely” to lower interest rates if an economic slowdown became a headwind for inflation.
  • In a mere 10 days after President Fernandez ordered Argentinean energy companies to repatriate export revenue (on a go-forward basis in a bid to prop up the Argentine peso amid heightened capital flight) Cnooc’s bid for BP Plc’s $7.1 billion stake in Argentine crude producer Pan American Energy LLC fell apart due to “legal reasons”. We’ve been vocal about the prospect of Fernandez’s recent spate of Big Government Intervention having a negative impact on Argentine trade and investment and this canceled transaction is in confirmation of that view.

Sticky Stagflation:

  • Colombian CPI accelerated in October (alongside global crude oil prices) to +4% YoY vs. +3.7% prior.


  • Mexican PMIs (both manufacturing and non-manufacturing) ticked up in October. The former advanced to 51.4 from 50.3 prior and the latter advanced to 53 from 49.5 prior. The country’s equity markets liked these extremely positive deltas, closing down only -10bps wk/wk (outperforming). Its currency market saw them as a head fake, however, falling -3.6% wk/wk vs. the USD.


  • Argentine benchmark dollar bonds yields fell on Friday by the largest amount on record (-113bps) after the President Kirchner surprise decision to cut utility subsidies for all commercial users. This is a definite positive for the Argentine government on the fiscal front, but a disaster for Argentine corporations who suddenly and abruptly have to remodel their cash flows and adjust their operations to comply with this new, higher-cost environment. No surprise to see the Merval index underperform the region substantially last week, as mentioned at the onset of this note.

Darius Dale



Weekly Latin America Risk Monitor: FX Sees Easing; Breeds Contempt - 8


Weekly Latin America Risk Monitor: FX Sees Easing; Breeds Contempt - 9


Weekly Latin America Risk Monitor: FX Sees Easing; Breeds Contempt - 10


Weekly Latin America Risk Monitor: FX Sees Easing; Breeds Contempt - 11


Weekly Latin America Risk Monitor: FX Sees Easing; Breeds Contempt - 12


Weekly Latin America Risk Monitor: FX Sees Easing; Breeds Contempt - 13

European Risk Monitor: Papandreou and Berlusconi on the Precipice

Positions in Europe: Short France (EWQ)

On this Monday the 7th of November it is acutely evident how governed capital markets are to the political positioning of European leaders.


As expected, nothing concretely came out of the G20 meetings on Thursday and Friday on the big three issues: expansion of the EFSF, the terms of bank recapitalization (contingency if bank not able to meet a 9% capital ratio), and Greek haircuts. One topic that was given much attention was expansion of the IMF’s contribution to the EFSF, however here too there was no consensus or concluding statements. Finally, the Chinese remain on the sidelines as a “white horse” bailout candidate.


The political risk however has mounted over the last week. Papandreou won the confidence vote late Friday in exchange for his consent to be replaced as PM, the announcement of which could come this week. The front runner looks to be the current Finance Minister Evangelos Venizelos.  As we’ve said all along, Papandreou’s decision to call a confidence vote and referendum on the bailout package was reckless—despite his attempt to win the backing on his fellow citizens, Greece is taking its orders from Brussels to meet its nearest maturities and pay its pensioners and government workers to addressing its longer term issues of reducing its outsized deficit and debt loads. Look for an interim government to be formed, probably with the PASOK party holding a slim majority in Parliament over the next months, or as long as is needed for the country to secure its next bailout, before early elections may be held at the end of February or early March. 


Shifting westward, Italy’s political machine appears on the verge of cracking. However, this time around what’s on the line doesn’t seem that different from previous months—Berlusconi’s credibility, or the lack thereof.  The authoritarian Berlusconi this time around seems bent on intimidation as the parliament must sign-off on the 2010 budget tomorrow. This weekend saw mass rallies calling for his resignation and two Berlusconi allies defected to the opposition last week, and a third quit on Sunday.  What should be a routine measure, as this after all is the 2010 budget, did not receive a majority when it was called last month, which caused a confidence vote that Berlusconi narrowly won. This time around, we may see a different outcome. Bond yields (more below) are reflecting this risk. Ultimately, the fractured state of Italian politics bodes poorly for the international community’s expectation for budget consolidation over the coming years to bring in the country’s ballooning debt (119% of GDP).


Finally, France issued another austerity package this morning worth €18.6 Billion in spending cuts and tax hikes. While austerity is needed to reduce budget debt levels, expect this package to not cure market concerns that its AAA credit rating could be reduced. For more, see our post on 11/2 titled “Shorting France”.


Turning to the ECB, its secondary bond purchasing program, the Securities Market Program (SMP), upped its purchases in the week ended November 4th to €9.5 Billion, bring the program to €183 Billion collectively since May 2010. In his first week as ECB president, Draghi not only cut the main interest rate by 25bps, but may soon realize how necessary the Bank’s purchases are in attempts to quell Italian yields, despite the mandate that the SMP is a temporary program.


Unfortunately, what’s clear is that there are no major meetings scheduled into year-end around which we’re likely to get resolve on Europe’s big issues. This portends that Eurocrats will be held hostage by the market and will likely call short term meetings to answer big-term questions in response to ballooning risk.  While equity markets may have perversely gained today in Greece and Italy on leadership changes, we’ll continue to take our cues from bond yields and expect more downside in European capital markets than upside into year-end, as the region has yet to deliver any confidence to the market in concrete terms on further subsidizing the member states.


A look at our risk metrics below tells a clear story.


European Bond Yields – European bond yields across the PIIGS were up week-over-week, with Greek 10YR yields jumping a full 460bps from Friday’s close to today’s intraday level of 27.98%, as Italy’s 10YR jumps to a new high of 6.66% intraday!


European Risk Monitor: Papandreou and Berlusconi on the Precipice - 1. 10


European Sovereign CDS – European sovereign swaps mostly widened last week. Spanish sovereign swaps widened by 18% (+60 bps to 399) and Italian by 19% (+82bps to 516).  US CDS widened off a low base, rising from 40 bps to 48 bps.


European Risk Monitor: Papandreou and Berlusconi on the Precipice - 2. cds


European Risk Monitor: Papandreou and Berlusconi on the Precipice - 3. cds


European Financials CDS Monitor – Bank swaps were wider in Europe last week for 36 of the 40 reference entities. The average widening was 7.6% and the median widening was 14.6%. Swaps for Credit Agricole and the Deutsche Bank widened 31.7% and 31.3% respectively. The nine French and German banks we track saw swaps widen an average of 19%. 


European Risk Monitor: Papandreou and Berlusconi on the Precipice - 4. banks


Matthew Hedrick

Senior Analyst

Weekly Asia Risk Monitor: Growth Is Still An Issue

Conclusion: Both Asian economic data and financial markets are signaling to us that global growth remains under assault.


Positions in Asia: Short the Aussie dollar (FXA); Short a basket of Asian currencies (AYT).



Asian equities were generally softer over the prior week, falling -0.8% on a median basis. Declines were led by Japan, closing down -2.5% despite the Bank of Japan undertaking in a record intervention in the FX market to weaken the yen and boost exporter earnings. Asian currencies also finished generally weaker vs. the USD in the prior week, closing down -0.5% on a median basis. The Aussie dollar, a currency we’re short in the Virtual Portfolio, led declines across the region (-1.8% wk/wk).


On the short end of Asian sovereign debt yield curves (2yr), we’re seeing intra-regional divergences being created by the widening delta in monetary policy expectations based on individual growth/inflation dynamics (Australia -16bps wk/wk vs. Philippines +18bps wk/wk). Slowing growth continues to be priced into the longer dated maturities (10yr), with Australia (-24bps), Hong Kong (-16bps), and Indonesia (-11bps) leading the way to the downside wk/wk. 5yr CDS widened across the board in the last week, closing today at +7.2% wider on a percentage basis. Japan led the way to the upside, closing +15bps (+15.6%) wider.


Looser monetary policy continues to get baked into Asian interest rate swaps markets, with China closing the week down -35bps on the 1yr tenor. Australia, whose swaps have tightened the most in Asia in the YTD, closed the week down another -20bps. The Philippines, which put up a Sticky Stagflation-type inflation reading for October, saw their swaps widen +44bps wk/wk.



Rather than delineate these data points by country, given the varying size and importance of these economies, we thought we’d try something different by grouping them by theme. Ideally, this should make it easier to absorb and contextualize anything of significance. Lastly, the callouts below are from the prior seven days:


Global Growth Slowing:

  • Chinese non-manufacturing PMI ticked down in October to 57.7 vs. 59.3 prior.
  • Despite Japan’s record sales in the FX market (~¥8 trillion), the yen is essentially unchanged vs. the USD from where it closed on the day of the intervention. By not sterilizing the excess yen, the Bank of Japan is sending a key signal to the markets that economic growth remains a key issue for the world’s third-largest economy (currently mired in recession). JGBs were beneficiaries of the excess funds: 2yr, 10yr, and 30yr yields declined -9.9%, -4.9%, and -1.7% wk/wk, respectively. 
  • Thai industrial production growth slowed dramatically in September to -0.5 YoY vs. +6.8% prior. The multi-generationally large floods sweeping across the nation currently have contributed to the slowdown, shuttering  over 10,000 factories, displacing over 660k workers, and inundating roughly 15% of the homes across the country (population = 67 million).
  • Australia’s serviced PMI ticked down in October to 48.8 vs. 50.3 prior. Aussie retail sales were also weak (in Sept), slowing to +0.4% MoM vs. +0.6% prior.

King Dollar:

  • The Reserve Bank of Australia cut its growth forecast for the four quarters through 2Q12 by -50bps to 4%, citing “subdued conditions” as a result of slower private sector spending and borrowing and, of course, Europe. The markdown of growth assumptions alongside a reduction in inflation estimates as well (also -50bps), paves the way for another RBA rate cut in December – an event currently being priced into Australia’s interbank cash futures market (implied December yield of 4.235%) and into its overnight index swaps market (100% chance of a -25bps reduction being priced in; 16% chance of a -50bps reduction).

Eurocrat Bazooka:

  • Two Chinese officials reiterated our view that China is unlikely to take part in bailing out Europe as a source of uninformed, unlimited capital. Zhang Tao, director of the international department at the PBOC suggested that China needs further details regarding the options for bailing out Europe: “At present there’s no specific plan that people have clear understanding of,” he said. Zhu Guangyao, vice finance minister, had similar remarks regarding the EFSF: “There’s no concrete plans yet so it’s too early to talk about further investments in these tools.”

Deflating the Inflation:

  • In China, fixed-rate corporate debt has outperformed its floating-rate counterparts for the third consecutive month in October  (+2.9% vs. +1.1%) – the longest winning streak in over a year – as expectations for lower benchmark interest rates continue to gain traction. The PBOC injected $96 billion into the Chinese economy via open-market operations, causing the 7-day repo rate to fall a full -35bps since the start of last week.
  • Taiwanese CPI slowed in October to +1.2% YoY vs. +1.4% prior.

Sticky Stagflation:

  • Indian food inflation hit a nine-month high in the week ended 10/22: +12.2% YoY vs. +11.4% prior.
  • Philippine CPI accelerated in October to +5.2% YoY vs. +4.8% prior. Core CPI also accelerated: +3.9% YoY vs. +3.5% prior.


  • Hong Kong’s manufacturing PMI ticked up in October to 49 vs. a prior reading of 45.9. Still contracting sequentially, but a positive delta on the margin.
  • Singapore’s manufacturing PMI ticked up in October to 49.5 vs. a prior reading of 48.3. Like in Hong Kong, this measure is still contracting sequentially, but a positive delta on the margin.
  • Indonesian real GDP came in flat in 3Q at a +6.5% YoY clip – the third consecutive quarter of unchanged growth. Not bad, but not good either. Our models have Indonesian real GDP slowing 10-40bps from here in 4Q11E. Private consumption lagged other key growth drivers in 3Q, so the acceleration in consumer confidence in October (116.2 vs. 115 prior) may be supportive for consumption growth in 4Q.


  • The State Bank of India is getting a 30 billion rupee ($611 million) capital infusion from the government to bolster its capital ratios amid a rising defaults spurred by the RBI’s aggressive monetary tightening. This is part of a larger 200 billion rupee investment the government is making in state-run lenders to ensure the banks have Tier 1 capital ratios north of 8% each.
  • Thailand’s government has proposed a $26 billion fiscal package to aid flood recovery efforts. Details are still being ironed out, but, for reference, that amount is equivalent to 8.2% of Thailand’s real GDP, which is a rather sizeable stimulus package by global historic standards. This is on the heels of an October 30thAssumption University poll that showed three-quarters of Thais found the government’s relief efforts “inadequate”.

Darius Dale



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