CHART OF THE DAY: Realist Risk Managers


CHART OF THE DAY: Realist Risk Managers - Chart of the Day

Realist Risk Managers

“You have to be realistic even if you’re an idealist.”

-Izzeldin Abuelaish


Ideally, the US stock market would never go down (its biggest down day of 2012 = -0.57%). Realistically, that’s not going to happen.


Ideally, you can wrap a Global Macro Risk Management Process up in a baby blue Tiffany box and slap a white ‘here’s what will happen in 2012’ bow on it for your clients. Realistically, you need to do the opposite of that and Embrace Uncertainty, every day.


The aforementioned quote comes from a book I am in the middle of reading right now called “I Shall Not Hate” – a Gaza Doctor’s story about managing life’s risks – those that are far greater than that of a Greek politician’s career this morning.


Back to the Global Macro Grind


After spending the last few days risk managing with some of our most thoughtful clients in Boston, I came to the simple conclusion that Greece has become a tree within a forest of globally interconnected risks.


The deep simplicity of that conclusion shouldn’t be a surprise. What’s happening to the rest of the world’s Growth and Inflation Expectations certainly didn’t cease to exist because the manic media doesn’t have an analytical process to absorb it.


The Top 3 Risk Management Topics our clients wanted to focus on in the last few days had nothing to do with Greece:

  1. Japan’s Sovereign Debt Maturity spike in March
  2. China’s Inflation Rising Post #BernankTax
  3. Down Dollar = Rising Inflation = Slowing Growth

Unlike some pundit spewing their qualitative views, a Realist Risk Manager (a Buy-Sider) is held accountable to real-time risk ticking on their screen every hour of every day. Being early in this business can also mean being wrong. Being late can also mean you blow up.


Maybe that’s why Japan was such a hot topic on the road. People are no longer allowed to blow up. Blowing up client moneys in 2008 was, allegedly, what “everyone” (other than those of us who didn’t) missed. Getting tagged for another -10-50% loss of capital in 2011, for some, made 2008 + 2011 a trend. And a 3rdtime probably means prepping your resume for an interview at Chipotle.


Why Japan? Why now?


We’ve been making this call since 2010, “The Sovereign Debt Dichotomy”, which attempts to simplify trading the short side of stock markets (long CDS) by waiting and watching for the Keynesian policy makers of that country to bump up against the biggest sovereign debt maturity within their economic region. Timing is critical.


That’s why we got bearish on Spain, then Italy, then France – in that order – in the order that their respective monthly sovereign debt maturities ballooned. After their stock markets imploded, we covered and got out of the way.


In today’s Chart of The Day, you’ll see that Japan’s March Debt Maturity Spike is:

  1. The largest, nominally, that Japan will ever have to bring to market
  2. Larger than any other European debt maturity by a considerable margin

Every client pushed our lynx-eyed Asia analyst, Darius Dale, and I on the next obvious question – why aren’t Japanese spreads and CDS blowing out yet?


A: throughout the entire European Sovereign Debt crisis, they didn’t either. They started to when it became clear to the market that their largest maturities couldn’t be absorbed at lower/stable yields.


Ideally, everyone would be able to price everything’s risk, efficiently, in real-time. Realistically, markets don’t trade that way. They trade on the expectations and emotions associated with last price.


Sometimes markets don’t go down, literally, until the day of the “new news”. Look at China in the last 48 hours:

  1. Inflation Rising = Consumer Price Inflation (CPI) up to 4.5% y/y (versus 4.1% last month)
  2. Growth Slowing = Chinese Exports down -0.5% y/y (down y/y for the first time in 2 years)

On that “news” this morning, US centric stock market investors who are still staring at the tree (Greece), now have to react to “China Slowing” as a Top 3 Most Read Bloomberg story. Unlike the US stock market, which has not yet had a -1% down day in 2012, Hong Kong was down -1.1% on that (Indonesia -1.7%, South Korea -1.3%, etc.).


Ideally, I’d like to sleep once in a while. Realistically, that’s not going to happen either. Global Macro market risk never sleeps.


My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, Shanghai Composite, France CAC, and the SP500 are now $1, $114.12-119.02, $1.31-1.33, 2, 3, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Realist Risk Managers - Chart of the Day


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February 22nd is a great date for birthdays and should be for earnings too.  MGM is probably a beat and while that is probably expected, 2012 should be a good year on the LV Strip.



For the first time since Q1 2011, MGM may produce EBITDA solidly ahead of expectations.  We are above the Street, mostly driven by Macau.  Our recent favorable view on the stock has been predicated on a hearty recovery in Vegas, however.  MGM has been and should continue to be the best way to play that recovery.  While Strip RevPAR has been strong for some time and expectations are for continued strength, we think the real delta going forward will be growing slot volume.


MGM will report Q4 earnings on February 22nd.  We estimate $2.3BN of net revenue and $502MM of consolidated property level EBITDA.  We also look at wholly-owned EBITDA plus MGM’s pro-rata share of MGM China and City Center, less corporate expense which produces EBITDA of $416MM.  Our net revenue estimate is 5% above the street while our comparable EBITDA is 6% above consensus. 





MGM’s Strip properties should produce net revenue of $1,166MM and EBITDA of $265MM, a little ahead of Street numbers. We mostly assume teens to low 20’s RevPAR growth (which includes resort fees), low single digit casino and other growth, and low single digit expense increases.

  • Bellagio: $286MM of net revenue and $84MM of EBITDA
    • 17% increase in RevPAR
    • 4% growth in casino & other
    • 5% expense growth
  • MGM Grand: $234MM of net revenue and $39MM of EBITDA
    • 23% increase in RevPAR (Paquio fight and 2 Eagles show)
    • 5% growth in casino & other
    • 5% expense growth
  • Mandalay Bay: $186MM of net revenue and $38MM of EBITDA
    • 19% increase in RevPAR
    • 2% growth in casino & other
    • 2% expense growth
  • Mirage: $137MM of net revenue and $24MM of EBITDA
    • RevPAR: $134; 18% increase in RevPAR or 9% adjusted for resort fees
    • 3% decline in casino & other
    • Flat expenses

Other US

  • MGM Grand net revenue of $140MM and EBITDA of $38MM
  • Mississippi net revenue of $116MM and EBITDA of $21MM

MGM Macau should report $738MM of net revenue and $172MM of EBITDA.  Our assumptions in HK$MM’s are:

  • Net casino revenue of $5.7BN and total revenue of $5.8BN
    • Net VIP win of $4,144MM
      • VIP Turnover: 201,750 assuming 8% direct play
      • Hold of 3.16%
      • Rebate rate of 35% or 1.11%
  • Mass table win of $1,154MM
  • Slot win of $406MM
  • Variable expenses of $3,657MM
    • $3,125MM of taxes and gaming premiums
    • $500MM of commissions to junkets
  • Fixed expenses of $625MM
  • $101MM of branding fees

We estimate that City Center will report $63MM of EBITDA on $278MM of net revenues.

  • Aria: $231MM of net revenue and $57MM of EBITDA
  • Mandarin Oriental: $10MM of revenue and ($1MM) of EBITDA loss
  • Crystals: $12MM of revenue and $7MM of EBITDA
  • Vdara: $20MM of revenue and $4MM of EBITDA
  • $4MM of development and administrative expenses

Other stuff

  • D&A: $247MM
  • Net interest expense: $274MM
  • Income from unconsolidated affiliates & non-operating items from unconsolidated affiliates of ($27MM)
  • $34MM of tax credits
  • Minority interest of $39MM

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JNY: 9W & Other

Liz just changed its name to 5th and Pacific after consolidating into a focused portfolio of three relevant growth (either current or potential) brands. Jones, however, is as unfocused as ever. We think Jones should change its name to 9West & Other.


The following chart of JNY’s brand make-up tells a pretty good story. The simple fact that ‘Other’ accounts for the greatest revenue contribution is a massive risk. Our sense is that most consumers would not be terribly upset if half of JNY’s portfolio simply went away. That’s not a very defendable place to be -- -especially in 2012 where we think the competitive climate will be the toughest it’s been in over 5 years due to higher inventories, and more price compression sparked by JCP, KSS, SHLD, M, and TGT.


JNY: 9W & Other - JNY brand contribution


One of the biggest callouts in the quarter, is that regardless of what the P&L tells you, sales declined. Kurt Geiger, which is primarily a piece of JNY’s international retail Segment (90-92% of the brand’s sales) contributed an incremental $100mm to the top line. Excluding Geiger, Jones’ 2.3% top line growth is reduced to a 4.2% organic contraction in sales (see chart below). That’s its slowest organic growth rate since 2009.


JNY: 9W & Other - JNY organic growth


Yes JNY is in the process of rightsizing its brand portfolio by reducing the domestic retail door count however that only accounts for $13mm in the YoY reduction in organic sales. The domestic wholesale sportswear business, jeanswear business and FW/Accessories businesses were also down accounting for an additional $64mm in sales decline. To stop the bleeding, for the second quarter in a row, JNY pulled back entirely on any incremental investments in the core, increasing SG&A only $46mm YoY with $47mm of operating expenses coming from Kurt Geiger, netting a $1m reduction in organic spend. How does a company “revitalize its core” without increasing its investment spend? Enter 2012.


We’re coming in at $1.17 this year, and we’re taking down 2013 materially. Our prior view has been that JNY would ‘pull the goalie’ and give people hope of a $2.00 earnings number – even if doing so for all the wrong reasons, and setting up a massive miss in 2014.


Now, we don’t think JNY has that luxury. It’s going to have a very very tough 2012. Stay away.


JNY: 9W & Other - JNY SIGMA


JNY: 9W & Other - JNY RNOA


Below are our notes from the call:


Quarter Roundup:

Adjusted EPS of $0.10 (including $0.07 benefit from income tax) vs. $0.03E

Top line of $894 includes $100mm from Kurt Geiger


P&L performance in line with pre-announcement

  • Q4 GAAP results
  • 2011: net loss of $21mm, ($0.27) EPS (includes pre-tax non cash asset impairment charge of $33mm related to impairment of trademarks primarily in jeanswear business)
  • 2010: net loss of $40mm, ($0.47) EPS (included $38mm impairment from jeanswear business)


Gross Margin improved 480 bps

  • 240 bps contribution from Geiger
  • 240 bps contribution from core business


"We remained very focused on gross margin and believe that we will continue to favorably impact margins through tight inventory control and other initiatives. "


SG&A:  +$46mm (+18%)

  • 47mm from Geiger (organic SG&A down)
  • Additional investments made in Stuart Weitzman retail openings
  • Incremental investments in Jones business in Spain (not present in SG&A last year)
  • Spending in domestic retail and other areas down YoY  due to lower store count and other businesses due to lower revenue levels


Interest expense: +$4.5mm reflecting issuances of notes in March 11


Income taxes: lower than anticipated reflecting favorable state tax settlements and larger impact of foreign tax differentials (total impact of $0.07 benefit)


Inventories controlled: Trending down sequentially, in line with future shipping plans



Comments re Overall Environment:

  • Comps store sales of customers were strong over holiday period but January was softer; sales continue to be promotionally driven (particularly in traditional apparel and footwear sectors) which will continue to impact sales
  • Promotional cadence applies at international with Europe especially weak
  • Consumer confidence softening in light of worldwide economic uncertainty and political noise


Taking steps to Enhance Profitability:

  • Focusing on unlocking value in core through enhancement and innovation
  • Filling white space in portfolio with strategic investments


5 Pillars of Growth:

  • Revitalize core brands
  • Essential to driving performance in traditional sportswear, an area of weakness in the Dept store channel throughout 2011
  • Expanding destination product strategy has improved brand resilience to marketplace challenges
    • Have expanded the Jones New York Easy Care destination products into a larger porgram which saw a significant increase at whole sales YoY during the quarter
    • Drove a strong overall AUR increase in Jones New York collection business in 2011
    • Transforming Jones New York Retail experience: 2011 increase in conversion is helping challenges with traffic
    • Lord and Taylor flagship location reported DD comp in Q4
    • Nine West showed gains as a result of more innovative destination products
      • Sales up season to date
      • AURs have increased at key accounts
      • Destination products include trend boots, loafers, mary janes (responsible for increases at largest retail account)
  • Invest in emerging brands
  • High potential emerging brands showed solid progress and momentum in Q4
  • Stuart Weitzman showed strong demand for global sales, up 19% driven by strong retail comps
    • Opened 5 Weitzman locations in the US in 2011- planning 50 franchise locations in 2012 & 2013
    • Kurt Geiger Q4 sales up amid solid comp growth
      • See significant brand and distribution synergies from acquisition
      • Distribution of Jones brands across Geiger network in Europe doubled in 2011
      • Significant launch at retail in Germany to occur in 2012
  • Expand international footprint
  • Anne Klein gaining traction out side of North America
    • Improve DTC Performance
    • Operational Excellence


2012 Domestic Retail launches:

  • Kurt Geiger retail and E-commerce launch in the US
  • B Brian Atwood, was top contemporary shoe launch at Saks, Bloomingdales, Neiman Marcus and Nordstrom in 2011
  • Name Footwear new launch of the year


Commentary on 2012:

  • Has purchased 750,000 shares at an average price of $9.13
  • Full year:
  • Revenues to range $3.8bn to $4bn
  • GM: Goal to build on 2011
  • SG&A: $1.21-$1.25bn (increase of $70 to $110mm, majority of full year impact from Geiger)
  • Operating Cash Flow:
    • 2011 benefitted from reduced investment of working capital from lower income tax payments; not expected to continue into 2012
    • 2012 target for cash flow is $150mm
    • Make final payments related to SW acquisition in December
    • Cash: Expect to end 2012 with $100mm in cash & nothing drawn of revolver with no other debt coming due until November 2014
      • Q1
      • Revs: $930 to $955 (down 1.2-3%)
      • GM: could increase 120 bps primarily as a result of the KG business
        • Will see only 50 bps improvement should the quarter become more promotional/challenging
        • SGA: $295mm to $305mm (+10 to 13%) due to Geiger
          • 2Q flat YoY





Retail Business: Updated timeline for profitability

  • Environment (heavy promotions) set the company back, disappointed with setbacks
  • Aggressively closing underperforming stores
  • Converted several of the high overhead underperforming stores to Stuart Weitzman flagships
  • A lot of work has been done to retool product in outlet stores, those in the FW area are highly profitable
  • Will continue to trim stores
  • Has taken a long time to right size the portfolio
  • Close to 4 wall profitability in 2012
  • Loss will be reduced significantly in 2012 from 2011


Potential for more Aggressive Share Repurchase

  • Given prices, first use of cash would be for share repurchases


Stephani Greenfield: Scoop experience vs. expectations on JNY

  • Experiences prior to Scoop with DKNY and Spree
  • Scoop was a breakthrough retail concept
  • Merchant at heart- can translate retail merchandising across any platform
  • Ability to navigate a customer at different price points such as HSM and Scoop
  • Have seen impact in few short weeks

 Shoe Business: AUC/ASP esp. at Nine West

  • In terms of the category, expecting a very good FW year, FW accessories and cosmetics have been strong, expect that to continue
  • Seeing very strong interest in boots for the fall
  • Styling moving more towards the casual, riding, western style boots- less emphasis on dress boots
  • Weather patterns did impact business this year but looking good for next year
    • Differentiating and elevating view at nine west in own stores
    • Higher fashion level and more forward looking products
    • Costing:
    • Done on a product by product basis
    • Labor component going up
    • Benefit on apparel side down YoY
    • Leather is up YoY
    • Oil based products up slightly
    • Working with distribution system to offset increases there
    • Availability of factory business should propose the opportunity for some cost benefits there
    • Expect AUC and AUR increases to largely offset one another in 2012


Sales projections for international retail

  • Geiger expectations
  • 90-92% of volume there is retail
  • Total year 360mm
  • 90-92% of $360mm would end up in retail component ($324-$331mm)
  • Kurt Geiger operation is launching more of JNY brands in international
  • 42% of WS business at Stuart Weitzman was international wholesale accounts


Mid Tier: Projecting mid tier channel to contribute 13% of sales (implied increase reflect growth)

  • JCP is a good company, has not reached reporting threshold of 10%, forecasting reflects some drop in sales there
  • Attended the meeting, have meeting scheduled with lots of thoughts how to go forward, not prepared to discuss where the company might be headed with that, might be some dropouts but not jumping the gun before sitting down with senior management


Traditional/modern traditional: Has it come to an end?

  • JNY continues to believe in the traditional sportswear business
  • Brand itself/category represents the working career woman
    • Business is soft reflecting consumer sentiment
    • Great degree of conservatism reflected in the customer
    • As the economy improves, sentiment will drive comfort and thus sales
      • Overtime, expect sales mix to shift to a greater portion of contemporary brand sales but will still see a significant portion coming from traditional sportswear


  • 0 reflux and renewed interest in the creative/marketing community
  • Changes will be ongoing to bring on new talent and creativity


Nine West FW Exclusive mix (currently 60%)

  • Will continue to differentiate own stores with new product, % will continue to increase in favor of exclusives
  • Will be on trend at greater value
  • Customers have a lot of variety to choose from
  • Stores have a natural edit process


Domestic vs. international market- how far behind is international from the domestic market (Comments re 3Q12 & Fall orders)

  • Just now starting to book into fall, very positive reaction
  • Retailers are concerned about back half and how conservative it's going to be
  • European Luxury business (which is a big percentage of Geiger business) has held up
  • Europe's economy fluctuating wildly
  • Business skyrockets a few weeks ago with Jones boots as well as Geiger sales strengthening (saw double digit increases during the period)
    • Large variable cost base with a concession business



In the near term, strong same-store sales trends are maintaining sentiment around the stock and for that reason we do not hold a view on the short term TRADE (3 weeks or less) duration.   The TREND and TAIL are less convincing for us and, we believe, investors are going to be more adamant in their demands for disclosure as time goes on.  We see this already happening; when the press release hit this morning, the stock reacted strongly in the premarket before reversing during the earnings call at 8 a.m. 


Dunkin' Brands makes more money by opening a new store than it does from an incremental 1% in same-store sales.  Dunkin’ Donuts, its primary source of revenue, is heavily franchised and for that reason we are far more interested in its backlog of prospective new unit openings and franchisee commitments than we are in comps when assessing the viability of the company’s growth plans.  In 4Q11, the company opened 120 new Dunkin’ Donuts stores and announced 25 new franchise commitments.  In the absence of disclosure from management on this, we can only deduce that the backlog is declining. 


A friend in the analyst community did ask specifically about this and the response he got was that the backlog is “growing”.  If there is not issue around the topic – and it would certainly be a positive for the stock – why not disclose the details?  We will remain skeptical until we see the numbers.









Dunkin' Donuts' U.S. (70%+ of consolidated revenues):

  • 7.4% same store sales in 4Q11
  • Increased marketing – in 2011 the number of weeks on national TV doubled versus 2010
  • Breakfast sandwiches drive higher average ticket - in Q4 the Smoked Sausage Breakfast Sandwich was offered nationally as a limited time offer
  • Driving lunch with the bakery sandwich platform - chicken and tuna salad sandwiches along with the new Texas toast grilled cheese sandwich in December
  • Began selling Dunkin' Donuts K-Cups halfway through 3Q11 – in 4Q11 K-Cups represented a little less than 30% of our total comp increase
  • Dunkin' Donuts and Baskin-Robins as well benefited from the warmer weather in 4Q11
  • Signed a long-term agreement with our Dunkin' Donuts franchisee owned procurement and distributions co-operative - impact will be the greatest of franchisees in new markets where we estimate we will see between 200 and 300 basis-point reductions in food costs
  •  Franchisees opened 120 net new restaurants for a total of 243 net new restaurants in 2011. More than 80% of these restaurants are outside our core markets, and more than 90% of new developments were with existing franchisees
  • Additionally, our franchisees completed 248 remodels during the quarter for a total of 636 in 2011


  • Announced that Giorgio Minardi has joined us as President of International for Dunkin' brands
  • The new Baskin-Robbins international store design is in more than 200 stores in the Middle East, Singapore, Russia, Canada, Korea and China.  Management is focused on China
  • Operating income was impacted by an $18.8 million impairment charge related to the company's investment in the South Korea joint venture.  Management said that "the Dunkin' Donuts Brand had a challenging year in Korea and we are working with our joint venture partners to help them to improve the performance of the business."



  • Dunkin' Donuts U.S. business comp store sales growth to be in the 3.5% to 4.5% range during 2012
  • Baskin-Robbins U.S. business comp store sales growth to be flat to 2%
  • Management is not providing guidance on the international comps in 2012
  • Expect to open between 550 and 650 net new units globally
  • Expect to open 260 to 280 net new Dunkin' Donuts restaurants in the U.S.
  • Close between 60 and 80 Baskin-Robbins locations in the U.S.
  • Franchisees will remodel between 600 and 650 Dunkin Donuts U.S. restaurants
  • Plan to open between 350 and 450 net new units between Baskin-Robbins and Dunkin' Donuts internationally - weighted toward Baskin-Robbins.
  • Revenue growth for 2012 is expect to be in the 6% to 7%
  • “Adjusted” operating income growth in the 10% to 12% range
  • Grow revenue at roughly twice the rate of expenses
  • Guidance of adjusted operating income margin of 45% to 46% and this is all off a 52-week base in 2011.
  • Guidance of adjusted earnings per share between $1.19 and $1.23 for fiscal year 2012.
  • 2012 share count is expected to be $122 million.
  • Generate between $100 million and $110 million in free cash flow


DNKN provides very detailed guidance on a number of business metrics just not the one that drives the long term growth of the company – the backlog of franchise store openings.  Again, the company opened 120 net new Dunkin’ Donuts stores in 4Q11 and announced only 25 new franchisee commitments.


In the short run we would expect to see the potential for a future dividend and/or a share repurchase announcement to serve as a catalyst for some activity on the long side. On the call, management indicated that it is does not plan to deploy excess FCF to pay down debt.  Having said that, until further notice we are contending that the back log is declining and the long-term growth story – as yet – does not warrant a premium multiple.


Howard Penney

Managing Director


Rory Green




MAR has been on a tremendous run since the spin which gives us a little pause heading into what promises to be a confusing quarter.  Long-term, not much not to like or as the optimists would say, much to like.


We’ve been on the MAR bandwagon since before the spin.  While we’re still positive on the story and near-term RevPAR trends, the stock has been on a tear and MAR’s quarter (announcing next Thursday) is likely to be confusing.  MAR spun off VAC on November 21, yet many sell-side models do not reflect the spin.  Other factors to focus on are Q1 RevPAR trends – we think they are good – and trends in DC which have been disappointing lately.


We have Marriott reporting $363MM of Adjusted EBITDA and $0.49 of EPS.  We treat the timeshare business as fully consolidated up to November 21 and then give Marriott credit for their pro-rata fees on timeshare for the balance of 4Q.




  • World Wide RevPAR growth of 7.3% (non-comparable), with roughly 75% of the growth coming from ADR
  • System-wide room increase of 2.4% YoY
    • 3.3% growth in franchised rooms
    • 1.4% managed rooms
  • $355M of owned, leased, corporate housing and other revenue and $52MM of gross margin
    • Our revenue estimate is 3% below the street but our margin are $3MM higher
    • $141MM of owned & leased revenue
      • Leased revenue makes up the bulk of this number and is up 17% YoY, offset by a 9% decline in owned revenue
    • $179MM of F&B and other revenue, down 3% YoY
    • 4.25% increase in CostPAR
    • $30MM of branding fees and $4MM on termination fees
  • $429MM of fee income, which is close to the upper end of management guidance and a little above consensus
    • Base management fees of $187MM
      • We estimate $17MM of base fees related to timeshare, which MAR is no longer entitled to post spin-off. 
    • Incentive fees of $83MM
    • Franchise fees of $159MM, which include $7MM of fees related to VAC post spin
  • We’re only modeling timeshare through November 21.  We expect most analysts are modeling a full quarter for simplicity purposes.  We assume timeshare sales and service revenue of $243MM and $45MM on a net basis. 
    • For the full quarter:
      • Sales and services revenue estimate is $370MM
      • $69MM net timeshare sales and service income
      • Segment results of $47MM
  • Other stuff:
    • SG&A: $229MM (excludes some timeshare related costs post spin)
    • Net interest expense: $41MM (excludes timeshare interest post spin)
    • Tax rate: 34%
    • Diluted share count: 348MM

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