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PNK 4Q CONF CALL NOTES

Takeaway: Bad demographics and consumer headwinds will make top line growth difficult at a time when margin expansion is behind the company

A bigger miss than even we expected and it wasn't just hold.

 


"As we move further into 2013, we look to build on our record 2012 performance and remain focused on increasing shareholder value. We are vigilant on maximizing the financial performance of our assets, and will continue to target profitable revenue growth and improved operational efficiency across our portfolio. We will also remain focused on executing the remaining projects in our growth pipeline in 2013, and will work diligently to bring the Ameristar transaction to successful completion and to achieve a seamless integration. We believe 2013 will be another year of significant growth for our Company."

 

- Anthony Sanfilippo, President and Chief Executive Officer of Pinnacle Entertainment

 

 

CONF CALL NOTES

  • Guests visited less often but their spending was flat YoY.  This trend continued into January.  They adjusted down their marketing spend as a result of these trends. Most of the weakness seen was in the retail customer segment.
  • Baton Rouge: Very strong trialing.  All LA properties have universal card functionality. 27% of the gaming revenue are coming from their marketing database customers.  Hosting high profile events throughout the year is key to developing VIP players and remains a priority for them
  • In March of 2012, they did a new bond issuance at attractive rates

 

Q&A

  • L'Auberge Du Lac:  weak flowthrough even taking account for low hold, why? Could be partly due to the rooms out of service.  They did see some softening in the business and did adjust marketing spend accordingly. They are going to stop renovations in time for the summer season and resume in the fall.
  • Had $500k of unusual expenses at Belterra due to a frozen pipe which broke and flooded some rooms.  They are in the process of ungrading some of their resort amenities by Spring which will hopefully help them compete more effectively in that market - which is weak.  They position themselves as a resort property.  Buffet will be completed by March.  Stadium done by late Spring /early Summer.
  • Baton Rouge: Very pleased with the performance and it gets really high guest ratings. Have continued to adjust labor and expenses to match volumes they see today.  That property was built to attract the high end and VIPs so they see the ramp up period being 12-18 months. They did a lot of advertising on the front end. Their marketing awareness has shifted now and they feel like their operating costs are more appropriate with their current level of business. Also feel pretty good about the airlift that comes into that city and the longer term prospects for the property.
  • Corporate overhead: Think that pre-ASCA is a decent run rate
  • ACDL net carrying value post write-down:  Invested $111MM all-in, capitalized interest so with that, it's gone up to $116MM. Post write downs, the investment is written down to the low 90s.  Hope that this will get resolved quickly. They thought that they would already by now and the linchpin would be getting that certificate amended.
  • Continue to attract new members to MyChoice. Parking garage opened over the Thanksgiving weekend and has been a good addition in the winter months.
  • Heartland Poker Tour is on a very good footing. Anticipate a strong year in the land based tournaments. Will use that brand in off and online. They are on the process of building out their play for fun strategy now.
  • They do anticipate integrating the loyalty program between PNK & ASCA but it's too early to talk about now. Launched myconnection - where the top 3 tier members can chat directly with property management and Anthony as well as each other.
  • Why are trips down as much as they are?  They have not polled consumers, but think that their customers are just reacting to the payroll tax and uncertainty in the 4th quarter.
  • They are very prudent in any investment they make whether in ACDL or anything else they do. Not sure if they would participate in a capital call at this time. Getting the investment certificate is really critical right now for them to remain an investor in that project.
  • Think that River Downs will exceed a 15% ROI
  • Until they close they will not have any say in the ASCA Lake Charles project
  • ASCA financing will likely occur in line with them receiving regulatory approval in the later part of 2Q
  • The write-down was really timing related, not a change of view on the ACDL project prospects
  • They do believe that there will be sources of financing once they get their certificate
  • Once the ASCA deal closes, they will be focused on the integration of the deal and then to reduce debt. For now the buyback program is suspended.
  • Will remain diligent in maintaining their properties
  • They can react very quickly to volume changes seen in their business and adjust marketing accordingly

 

HIGHLIGHTS FROM THE RELEASE

  • Adjusted EPS of $0.03 and Adjusted EBITDA of $63MM, missed consensus and our estimates
  • "Abnormally low table games hold percentage at the Company's Louisiana properties negatively affected Consolidated Adjusted EBITDA... ,anagement estimates Consolidated Adjusted EBITDA would have been $3.4 million higher had table game hold at these properties been at normal levels."
  • "Recorded $40.6 million of charges....including: 
    • a non-cash write down of approximately $25MM related to its ACDL investment (included in Loss on equity method investment)
    • a $10.2MM charge related to its St. Louis redevelopment agreement (included in Write-downs, reserves and recoveries, net) that reflects the aggregate impact of cash and land donation commitments made by the Company for various projects in St. Louis, and accelerated depreciation expense of $4.7 million stemming from the demolition of the grandstand and related facilities at River Downs (included in Depreciation and amortization)."
  • "In 2012, the Company repurchased 4.4 million shares of stock for $51 million under its $100 million repurchase program, representing an approximate 7% reduction in its diluted share count. Upon announcing the proposed acquisition of Ameristar, the Company suspended share repurchase activity"
  • PNK "Entered into a definitive agreement to dispose of its land holdings in Atlantic City for total consideration of approximately $30.6 million, subject to a financing contingency. The transaction is expected to close by the end of the 2013 first quarter"
  • "On January 29, 2013, the Company completed the previously announced acquisition of a majority interest in the racing license holder for Retama Park Racetrack"
  • "Consolidated Adjusted EBITDA margin decreased... principally due to L'Auberge Baton Rouge still being in its operational ramp up period. On a same store basis, Consolidated Adjusted EBITDA margin was essentially unchanged year over year at 22.5%."
  • "We are encouraged by the early performance of L'Auberge Baton Rouge, including its gaming volumes, strong cash non-gaming revenues, and market awareness growing with an over 100,000 strong mychoice member base. Looking forward, we are optimistic for the prospects in Baton Rouge and are focused on increasing regional awareness for the property, growing the high end business, and increasing the marketing and operational efficiency of the property."
  • L'Auberge Lake Charles: "Revenue and EBITDA performance was negatively impacted by abnormally low table games hold percentage, offset by an improvement in cash non-gaming revenues, efficient marketing, and operating expense discipline. In addition, the property began an extensive room remodeling program in the quarter, which displaced approximately 3,300 room nights. The property anticipates completing the first phase of its room renovation program in the first half of 2013."
  • "Due to the displacement of parking spaces, River City in St. Louis...  construction disruption.. reached its height during the 2012 third and fourth quarters with the concurrent construction of the hotel, garage, and event center elements of its expansion project. Pressure on parking capacity was partially alleviated with the opening of the parking garage in November 2012, which has driven improved visitation during peak operational periods, however, construction of the hotel and event center are still ongoing and are slated for completion in phases in 2013 and could continue to disrupt the property."
  • "The year over year decline in Belterra's 2012 fourth quarter Adjusted EBITDA was driven principally by lower gaming volumes and temporarily elevated repair and maintenance operating expenses." 
  • "Boomtown New Orleans did not perform up to its potential in 2012, and to help address this, changes were implemented during the fourth quarter to stabilize the property's operating performance and position it to improve its results in the coming quarters."
  • Boomtown Bossier City: "Adjusted EBITDA margin at the property was down...principally as a result of abnormally low table games hold percentage." 
  • "L'Auberge Baton Rouge revenue was $34.9 million in its first full quarter of operation, while Adjusted EBITDA was $3.4 million. Adjusted EBITDA margin was 9.7% in the 2012 fourth quarter. The Company expects L'Auberge Baton Rouge to continue to ramp up its operations and rationalize its operating expense structure in 2013."
  • "The reduction in 2012 fourth quarter and full year 2012 corporate overhead expense was driven principally by efforts to eliminate non-value added expenses at the Company's Las Vegas headquarters, as well as a ramp up of cost savings and property allocations related to the Company's shared service centers supporting its properties in the Midwest and Louisiana."
  • Redevelopment of River Downs: "Demolition of the existing grandstand and related facilities is nearing completion and we plan to commence construction of the new gaming entertainment center by the end of the first quarter of 2013. Our plans call for the property to comprise approximately 1,600 video lottery terminals, four food and beverage outlets, a VIP lounge, over 2,000 parking spaces, and new racing facilities...The project is expected to cost $209 million, excluding license fees, original acquisition costs and capitalized interest, and we plan to open the facility in the second quarter of 2014."
  • "The expansion of River City in St. Louis remains on budget and is ahead of schedule. The project reached a significant milestone during the fourth quarter with the opening of a 1,600 space enclosed parking structure on November 21, 2012. In addition, significant progress has been made on construction of the hotel and multi-purpose event center elements of this project. We expect the event center to open in the second quarter of 2013 and the 204-room hotel to commence operations by the Fall. The opening of the garage has alleviated pressure on parking availability at the property, and we look forward to the hotel and event center rounding out River City's amenity set as those elements come online in 2013. $38 million of the $82 million budgeted for this project had been incurred through the end of the 2012 fourth quarter."
  • "In New Orleans, we are preparing to commence construction of a $20 million, 150-room hotel, with ground breaking targeted this month. We expect the hotel to open in the first half of 2014."
  • ACDL has been expecting to open the first phase of the MGM Grand Ho Tram in the first quarter of 2013. While the application for the amendment is progressing through the government review and approval process, it is taking longer than expected. While it may be possible to open the facility in the first quarter, the amendment of the investment certificate has not been completed as of the date of this release. In accordance with GAAP, and in consideration of the uncertainty surrounding the timing of the amendment of the investment certificate, related risks associated with such amendment, reinstatement of funding under ACDL's current credit facility, the subsequent working capital financing needs, the Company recorded a non-cash write down of the carrying value of its investment in ACDL of approximately $25 million. Should the delay in obtaining the amendment and the resumption of funding by ACDL's lenders continue for a prolonged period of time, additional write-downs of the Company's investment in ACDL may be required."
  • ACDL completed an additional $30 million capital raise in December, in which the Company did not participate. As a result, the Company's equity stake in ACDL is approximately 24%... The Company retained an option to invest its pro-rata share of the $30 million capital raise, which would offset the dilution it incurred if exercised.
  • Cash: $102MM 

    Capex: $45MM. "Cash expenditures, including the settlement of prior period payables, totaled $16.2 million for L'Auberge Baton Rouge and $13.4 million for the River City expansion in the 2012 fourth quarter. Excluding land and capitalized interest costs, approximately $38 million of the $82 million budget for the River City expansion project has been incurred."

    "During 2013, the Company expects to spend between $60 million and $70 million on capital expenditures associated with its existing operating properties and corporate initiatives. The upper bound of this range is dependent upon the timing of phased hotel room refresh programs and the renovation of certain food and beverage outlets at select assets in the portfolio. The Company expects to incur between $160 million and $170 million on expansion capital expenditures during 2013, comprising the River Downs redevelopment, the River City expansion and New Orleans hotel construction." 

  • Capitalized interest was $2.6 million 

     

     



     





HOUSING: More Than Meets The Eye

With this morning's news that the MBA purchase demand index had fallen 10% week-over-week was quite a shocker to many after several weeks of positive outcomes. Did demand to buy houses really drop 10%? We don't think so. There was virtually no inflection on the year-over-year rate of change.This past week was up 20.5% vs. the prior year, which compares with the YoY growth over the preceding three weeks of: 22.6%, 20.3% and 20.7%. In other words, the weakness seems to be stemming from a recurrent seasonal adjustment distortion and not from a bona fide decline in demand. 

 

 

HOUSING: More Than Meets The Eye - MBApurchase1

 

 

Our bullish thesis on the housing recovery remains solidly in tact. As home prices rise, so will demand to purchase homes. We're also undergoing a cool down in refinancing activity as rates rise above 3.4% range we saw throughout most of Q4 2012 to 3.64% this week. The future of refi activity is uncertain due to the possibility of a rise in rates and President Obama's plan to help borrowers who are underwater. We'll keep an eye out on this one to see what direction refi heads.

 

HOUSING: More Than Meets The Eye - MBApurchase2


BWLD TALKING THE TALK

Buffalo Wild Wings is talking a big FY13 game but we believe they are running the risk of disappointing for a second consecutive year.  Raising guidance to 25% earnings growth (from 20%) is a big statement for a company facing some top-line uncertainty. Time will tell whether the company can walk the walk.

 

Recap

 

BWLD reported 4Q12 and FY12 earnings after the market close today.  4Q earnings came in at $0.89 versus $0.96 expected.  FY12 EPS grew by $0.26 cents year-over-year, $0.19 (73% of the full-year EPS growth) of which came from the extra week in 4Q. 

 

Buffalo Wild Wings’ comparable restaurant sales growth in the fourth quarter was slightly ahead of expectations at 5.8% versus consensus 3.6%.  The company revealed that the first six weeks of the quarter were seeing same-restaurant sales growth of -2.8% at company locations.  However, management estimates that when this number is adjusted to take into account the timing shift of college and football seasons for both seasons, the co-op comparable sales growth would be +2.6% at company locations.

 

BWLD TALKING THE TALK - bwld eps recap

 

BWLD TALKING THE TALK - pod 1

 

 

Outlook

 

We believe that casual dining trends, broadly, are likely to disappoint in 1Q and see BWLD as an attractive short at these levels.  The DFRH news was misinterpreted by the market yesterday, sending the stock on a surge; we believe that the shares should go lower from here.  Management raised its implied FY13 earnings guidance to $3.55-3.60.  We expect FY13 earnings to come in at $3.42.  

 

Call us at the number below to discuss in greater detail.

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst

 


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Client Talking Points

Golden Days Are Over

As employment and housing continue to stabilize, our growth thesis remains in tact. Consumption and growth are good for stocks, bad for bonds and gold. Although we're seeing gold flashing an immediate-term TRADE oversold signal at $1641/oz, it's still in bearish formation. Some people will never give up their long gold trade but eventually, they'll have to if we stay on the current path.

Our Best Ideas

After offering up our best ideas earlier this week, we'd like to reiterate two longs and two shorts that our sector heads are really passionate about. From Gaming, Leisure and Lodging Sector Head Todd Jordan comes LONG IGT. Jordan sees room for growth and a 3-5 year bull market for slot makers on the horizon. Retail Sector Head Brian McGough is LONG JCP as he thinks near-term sentiment is too bearish at current prices among other reasons.

 

On the short side, Consumer Staples Sector Head Rob Campagnino is SHORT KMB. Rob's talked about KMB before and commodity prices could become an issue in the pulp and oil areas. Restaurants Sector Head Howard Penney is SHORT BKW and has been making noise on the name with good reason: the company was never 'fixed' when it went private and the outlook for the co. isn't good.

Asset Allocation

CASH 55% US EQUITIES 10%
INTL EQUITIES 15% COMMODITIES 0%
FIXED INCOME 5% INTL CURRENCIES 15%

Top Long Ideas

Company Ticker Sector Duration
ASCA

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.

FDX

With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

HOLX

HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act

Three for the Road

TWEET OF THE DAY

"you know the stock market is on fire when I have to use the pan tool to move my charts down..." -@allstarcharts

QUOTE OF THE DAY

"About the most originality that any writer can hope to achieve honestly is to steal with good judgment." -Josh Billings

STAT OF THE DAY

Retail sales rose a seasonally adjusted 0.1% last month, or by 0.2% excluding the auto sector.


MCD: OUR BEARISH BIAS PERSISTS

The aggressive value message MCD has been communicating to its consumer may have put a band-aid on sales trends in December and January but, it seems, the impact may be waning in February.  We estimate that McDonald’s is likely to miss current consensus expectations by 100-200 bps in 1Q13.  We are adding MCD to the short side of our Position Monitor.

 

As we have discussed in prior notes, the Street is anticipating an inflection point in McDonald’s sales trends in 2013.  In late 2003, the aggressive push for positive comparable sales growth via the dollar menu did not fix the underlying problems with the business.  The 2013 rehash of this strategy is also unlikely to work.  Sustainable top line growth will be achieved through driving efficiency in the stores; this was the core objective of the Plan to Win.  Changes in this regard will also address operational issues that are having a negative impact on store-level margins.

 

In February, the company moved fish bites onto the dollar menu to help sales gain traction in the U.S. but the consumer response has been disappointing.  We are now looking for MCD U.S. same-restaurant sales trends to be down -3.5% in 1Q13 versus consensus at -1.2%.

 

MCD: OUR BEARISH BIAS PERSISTS - mcd us hedgeye

 

MCD: OUR BEARISH BIAS PERSISTS - mcd us hedgeye vs consensus

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst

 

 

 


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