Our Expert Call With Jim Rickards

Today we held an expert call for our Hedgeye Risk Manager and Macro vertical subscribers with CEO Keith McCullough and currency expert, lawyer and investment banker Jim Rickards. We live tweeted the call so that everyone could get insight into what Rickards’ thoughts are on the global currency wars, the US dollar, reverting back to the gold standard and monetary policy in the US and Europe.


Below are some of the highlights we think best represent the call and the ideas behind it. You can check the @Hedgeye Twitter account for a full play by play.


-John Taylor, Bob Barbera would make excellent replacements for Federal Reserve Board of Governors.


-In a crisis, there's not a central bank that wants gold. If you get CHAOS, countries may have to go to gold standard.


-Regarding the Eurozone crisis: you don't need to diffuse debt of Italy, etc. you just need to take care of enough to reinstate confidence in the markets.


-China is dying to diversify away from dollars and is looking at Euros. Once Europe has act together, China will invest heavily.


-50-year-old Greeks will throw Molotov cocktails rather than take pay cuts. 25-year-old Greeks will take entry level jobs with pleasure as they just want to work and have a different set of future incentives laid out for them.


-The Euro is getting stronger and stronger. Those thinking of par? No country is leaving the Eurozone; new members will be added.


-If GDP growth expectations are at 2% but we really want 4%, delivering something like 3% looks really good psychologically. So when the Fed says it expects 2% GDP growth, it really wants something more like 4% in order to manage expectations.


-Net exports are the key to getting out of this mess. Double exports in 5 years, we have a 1-1.5% increase in GDP which is decent.


Takeaway: Despite the ugly quarter, IGT gains share

Now that Aristocrat has reported its 1H2012 results, we can tally up results for ship share in 1H2012.  Below are our observations:

  • IGT gains the most share in 1H2012, garnering 33% share of the market, up 350bps YoY
    • An abnormally large number of used units and shipments to Canada drove part of the gain.  In 2Q12, IGT shipped 1,700 used units to N.A. compared to a normal run rate of 500 used units.  If we strip out the used units, then IGT’s share would have increased over 2% YoY to 30% in 2H12.
  • WMS was the biggest share loser in 1H12, with ship share falling to 19% from 23% in 1H11
  • Konami wasn’t far behind WMS, losing 300bps of market share YoY.  Konami ended 1H12 with ship share of 12%.
  • BYI gained less than 1% of market share, ending 1H12 with 16% share.  Despite having better product, their share could have been impacted by maintaining higher pricing and less discounting than their competitors.
  • ALL’s share fell over 100bps to 10% in 1H12.   
    • The company’s share loss would have been greater if not for the estimated 370 refurbished units sold in 1H12.  If we strip out the refurnished units and IGT’s used units, ALL’s share should have fallen slightly less than 2% YoY.
  • MGAM, while very small, was the second largest share gainer in 1H12.  They gained almost 1% of share, moving up to 2%.
  • We suspect that Speilo’s share also saw a big spike in 2Q12 given their material participation in the Canadian replacement market.  This should hold true through 2013, given their large market share in Canada. 


CRUISERS: Navigating Choppy Waters

Takeaway: Cruisers have a rough road (or is it sea?) ahead of them as they continue to offer aggressive promotions and pricing $RCL $CCL

Pricing trends continue to worsen although not dramatically as cruise line operators lose steam. The two big players in the space, Royal Carribean Cruises (RCL) and Carnival (CCL) have provided tepid guidance and we believe that trends are slightly worse than what management has put forth. Our proprietary cruise survey data remains choppy for 2012 and 2013 (pardon the pun).


There’s some good news, however, in the form of continued strength in Europe and Asia/Australia. While not enough to offset the weak market in North America, pricing for Europe has improved for CCL since July and pricing in Asia/Australia remains robust for both RCL and CCL in the fiscal fourth quarter of 2012. Heading into 2013, summer pricing for the year suggests a small pick up for both operators.



CRUISERS: Navigating Choppy Waters - YTD cruisers



In terms of stock performance, RCL is clearly the winner, up 10.5% year-to-date compared with CCL, which is up only 7.8% YTD. Both companies have a tough road ahead of them as they continue to aggressively offer discounts and promotions for various areas, especially Mexico and South America.

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Takeaway: Pricing trends a little worse

Our proprietary cruise pricing survey continues to provide choppy data for the rest of 2012 and early 2013.  Unfortunately, the incremental good news of European improvement and continued strength in Asia/Australia is more than offset by North America weakness.  Overall, we think trends are slightly worse than when CCL and RCL management gave guidance on their respective earnings releases and calls.


Our pricing model tracks price changes relative to that provided on the last earnings call i.e. RCL - July 20 and CCL - June 22.  Since CCL reported earnings a month earlier than RCL, we have confirmed that the conclusions described below also apply if the reference date is July 20.  


First, the good news.  FQ4 2012 is looking better for CCL relative to what we saw at the end of July.  CCL European pricing, while lower YoY, continues to improve since the end of July.  Costa pricing has somewhat stabilized.  Europe accounts for 35% of CCL’s total capacity in F4Q.  As for RCL Europe, improvement in Royal Caribbean and Azamara pricing offset discounting in the Celebrity itineraries in F4Q.  Pricing in Asia/Australia also remains robust for both RCL and CCL in FQ4 2012.


Now, some bad news.  RCL’s FQ4 Caribbean pricing seems to be losing steam, which may push yields closer to the flat line.  More importantly, 2013 is not off to a good start for both cruise lines.  Weaker Caribbean could pressure upcoming earnings if current trends hold.  CCL mentioned in its 2Q conference call that F1Q 2013 will be the toughest fiscal quarter comp in ’13 due to an exceptionally strong performance from North America 1Q 2012.  Our survey indicates CCL pricing is under further pressure in F1Q than just tough comparisons.  Also, keep an eye on Mexico & South America as there is some pretty steep discounting and aggressive promotions occurring in those regions. 


Summer 2013 pricing may pick up given easy European comps but expectations are not necessarily low.  For FY2013, the Street is anticipating 3.1% and 2.6% net yield growth (current dollars) for CCL and RCL, respectively. 


We mentioned in our June 4 note, CHART DU JOUR: CRUISE VALUATION SPREAD, that there was a pair trading opportunity by buying RCL and shorting CCL due to a valuation disparity and RCL's better positioning post-Costa Concordia.  Since early June, CCL's valuation premium has shrunk from 6x PE to 3x PE (where it was on the day of the Concordia incident).  While RCL has gained some market share in Europe, the company’s disappointing results show it is certainly not immune to the slowdown in European consumer demand.




Takeaway: Weak quarter but low expectations resulting in relief rally.



"While the economic softness being experienced across our industry clearly impacted our results, we successfully increased revenues and EBITDA at several of our properties during the quarter... However, our results at certain properties were impacted by construction disruption, transition costs associated with our enhanced Fan Club and an increased competitive environment." 


- President and Chief Executive Officer Virginia McDowell




  • ISLE has been impacted by a general weakening in economic activity in F1Q
  • Have begun the process of installing slot machines on Cape Girardeau's floor
  • 493MM T/L; 300MM 7.75% senior notes; 357MM 7% sub notes and other debt of $4MM
  • Leverage ratio: 5.6x 
  • $257MM borrowing capacity at F1Q end


  • Not seeing an impact specifically from the drought, but they have seen a pull back in general customer activity starting in April.  Probably won't know the full impact from the drought until the fall since the existing crops are priced at a premium, farmers carry insurance, and lots are sold in the futures market.
  • M&A: Will look at the right opportunities.  Until then, use cash to de-lever.
  • The market near Nemocolin shouldn't be impacted by Ohio.  They are just working to finish the project design and get all the necessary approvals before commencing construction. 
  • Pompano margins, why so weak? 
    • Had a plan prior to the Coconut Creek expansion.  They marketed to the locals and the West.  Their property is battling for market share. Miami Hai Lai also opened.  Wanted to protect rated customers.  Margins were compromised by giving away untaxed promotional dollars. They are figuring out the most efficient way to compete.
    • Since the last call, Coconut Creek has became more aggressive in their promotional activity so ISLE felt like they needed to protect their customers. CC's mailings increased from 3-4 a week to over 10. 
  • Don't expect the storm to expect the closing of Biloxi
  • D&A guidance:  people straight-lined the guidance rather than ramping it - still on target for original FY guidance of $76-78MM, once Cape Girardeau opens, there will be a ramp.
  • Corporate expense: they are at an $8-9MM (closer to $8MM) quarterly run rate. They did have a favorable benefit insurance settlement this quarter. $40MM/year run rate for corporate is still intact; it includes stock comp.
  • Running at $40-50MM range in any given year for maintenance and that should remain a good number going forward. Feel like their slot floors are in good share.
  • Low tax rate in the Q?
    • They are reversing their valuation allowance that they recorded last year. Still expect that going forward, their tax rate will remain in the prior guided range. But as they make money they can offset some of the taxes with their allowance.
  • Lake Charles: Had a big player in 1Q12 last year that contributed to $12MM of table revenue and they aren't there this year. Had about 80 rooms out of service this year (8-10th floor is out of service) and that especially impacts them on the weekends. They also reduced the size of their poker room. They do expect margins to increase, though.
  • The issue in MS is really driven by Lula. Business levels just never moved back to pre-flooding levels they had over a year ago. They are continuing to modify the way they market the property to adjust to current run rates. They believe that they are at a steady run rate now. At Vicksburg, the renovations are having a material impact on the quarter, but that should subside towards the end of the year. 
  •  They are re-evaluating the budget for Nemacolin, but their goal is to build it as economically as possible
    • Sounds like the budget will increase
  • No impact from change of ownership of one of the properties in Black Hawk
  • In Black Hawk, they had a bit of disruption due to the carpet change over, but since then, they have seen good reactions to their renovations. The road disruption is impacting them. They are the last stop now for many visitors vs. being one of the first stops. They are benefiting from the better food mix.  Starting July 1st, they had the tax increase kick in.
  • Florida:  There are a few companies trying to approach expansions through referendums and they expect that activity to increase after the 1st of 2013. Most legislative sessions start in mid-to-late January.
  • Hurricane Isaac: At this point in time, they don't think that they will hit the deductible
  • Comfortable with the game mix they have on their slot floors. Not too much left to do in terms of "right-sizing" their floors. Most of the demand adjustments they are making are on the slot side vs. table side. They have pulled games off the floor (reducing slot floor sizes) and likely have a little more room to do so.  Lula is the property that they spend the most time thinking about how much they may need to reduce the slot floor size.  
  • Still think that the tax guidance they gave on the last call is valid
  • MS river levels are very low. They are monitoring it.  They had to close for a few hours in Natchez last week.  They may need to close the casinos if the vessels sit on the bottom of the river. So far, they have been fine. 


  • "We are making great progress towards the fulfillment of our three primary strategic initiatives.
    • "Our business is more efficient as we continue to trim our costs, realign our casinos and decrease our corporate spending."
    • "Targeted capital improvements and improved service and loyalty programs are elevating the guest experience, attracting new guests and repeat visitation."
    • "We look forward to opening Cape Girardeau at least two months ahead of the original schedule and to beginning construction on Nemacolin, once we complete the design and regulatory processes. We will also soon complete the rebranding of Vicksburg, and the renovation of our main hotels in Lake Charles and Black Hawk by the end of the calendar year." 
  • "Our Pompano and Kansas City properties continue to face increased competitive pressures from major expansions or new competitors in their markets."
  • "Lake Charles, Vicksburg and Blackhawk properties experienced construction disruption from on-going facility enhancements. We also incurred significant transition costs associated with our improved Fan Club in Lake Charles."
  • "Corporate and development expenses were $8.5MM for the quarter, a decrease of $3.8MM compared to prior year, primarily the result of lower incentive compensation and decreased insurance costs."At
  • "Rainbow Casino in Vicksburg, we expect to complete the $5MM Lady Luck Casino rebranding by the end of the 2Q of fiscal 2013."  
  • "We are currently renovating 253 hotel rooms in the main hotel tower in Lake Charles and 237 rooms in the Isle Black Hawk Hotel. We expect the $15MM complete refurbishment of the main hotel tower in Lake Charles to be complete by the end of the calendar year. In Black Hawk, we are replacing carpet, wall coverings, furniture and fixtures at an expected cost of $2.0MM, and expect to be complete by December 1, 2012."
  • "We intend to open four additional Farmer's Pick Buffets in fiscal 2013 at our properties in Cape Girardeau, Pompano, Black Hawk and Waterloo. Additionally, a Lone Wolf bar at our Waterloo facility will open during September 2012."
  • "Our enhanced customer loyalty program, the Fan Club, has been implemented at nine of our properties, and continues to deliver more guest satisfaction through a more efficient platform. We intend to have it fully implemented across the portfolio by the end of fiscal 2013."
  • "Expect to open our new $135MM facility in Cape Girardeau, Missouri by 11/1/2012, two months ahead of the initial schedule. Isle Casino Cape Girardeau will feature 1,000 slot machines, 28 table games, 3 restaurants, a sky deck lounge overlooking the Mississippi River, and a 750-seat event center."
  • Lady Luck Casino at Nemacolin Woodlands Resort:  "Construction of the project is expected to take 9 to 12 months once we begin, and is planned to include 600 slot machines, 28 table games, an Otis & Henry's restaurant, and a Lone Wolf bar."
  • "We continue to move forward with the sale of our Biloxi property and expect to close the transaction by the end of October, subject to regulatory approval."
  • 1Q Capex: $43MM ($27.7MM at Cape Girardeau, $4.1MM at Lake Charles and Vicksburg, and $11.2MM of maintenance)
  • Maintenance capex for the remaining 9M of FY13: $40MM
  • Project capex for the remaining 9M of FY13: $70MM
  • August 7, 2012: Completed $350MM of 8.875% Senior Subordinated Notes offering. ISLE expects to incur charges of ~$3.0MM in F2Q13 related to the write-off of deferred financing costs, issuance costs and other related fees.
  • Interest expense for the remainder of fiscal 2013: Approx $66MM


Takeaway: Nothing to see here. Quarter was not good but expectations were low.

In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance




  • WORSE:  EBITDA missed due primarily to Lake Charles and Waterloo.  Stock is up showing the "soft bigotry of low expectations"



  • SAME:  expects the $135 million facility to open by November 1, two months ahead of the initial schedule.  


  • SAME:  $15 million refurbishment of the main hotel tower in Lake Charles will be done by end of 2012.  In Black Hawk, $2 million of carpet, wall coverings, furniture and fixtures is expected to be complete by December 1, 2012.
  • PREVIOUSLY:  "We're currently renovating rooms in Lake Charles and Black Hawk, and adding a new Lone Wolf Bar in Waterloo "


  • SAME:  $5 million Lady Luck Casino rebranding will be done by the end of F2Q 2013 
  • PREVIOUSLY:  "Our Lady Luck rebrand at Vicksburg will be completed about the same time as the expected opening at Cape Girardeau, with upgrades that will enhance the customer experience, including a Lone Wolf bar and Otis and Henry's casual dining restaurant."


  • WORSE:  Heavy construction impacted F1Q results.  Performance should improve as construction subsides later in 2012
  • PREVIOUSLY:  "Vicksburg, we think we've turned the corner. We have made some improvements to the staff." 


  • SLIGHTLY WORSE:  Kansas City properties continue to face increased competitive pressures from the new competition
  • PREVIOUSLY:  [Kansas City Speedway opening promotional activity] "It hasn't got completely out of hand, but we don't necessarily expect anything long-term, but we have seen an uptick there.”

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