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NCLH 2Q 2013 REPORT CARD

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


 

OVERALL:  

  • IN-LINE:  Decent 2Q results are offset by lower 3Q yield guidance.  We have been seeing pricing weakness in Alaska from our surveys for the past couple of months.  NCLH is the 1st cruise operator to acknowledge the heightened discounting environment that is impacting bookings there.  Overall, NCLH's guidance range at the start of the year was wide enough to accomodate the volatility in quarterly performance.  

NCLH 2Q 2013 REPORT CARD - nclh2

 

2Q GUIDANCE

  • BETTER:  2Q EPS of $0.29 came in above its guidance of $0.24-0.28.  Adjusted for the dry docks and other supplemental costs (e.g. Breakaway advertising), NCC ex fuel of 4.8% also was better than its guidance (5.0%-6.0%).

PRIDE OF AMERICA DRY DOCK

  • WORSE:  Dry dock will be completed by the end of the year, later than previously estimated
  • PREVIOUSLY:  "During her two-week dry dock, we commenced a project which converted the space previously housing an under-utilized conference center into 32 staterooms, including 24 luxury suites and 4 studio staterooms, allowing more families and, now, solo travelers to experience this unique product. Completion of this project is expected to be in early September, if not sooner. 

ALASKA

  • WORSE:  Mgmt blamed the additional capacity in the market for the underperformance in 3Q
  • PREVIOUSLY:  "The Alaska market is very, very strong. And you're right, it's absorbing a lot of new capacities for the industry. But we understood what was happening when we went into it, so it's pretty much operating the way we had expected it in our budget."

EUROPE

  • SAME:  Believes ticket yield has bottomed in this region.  
  • PREVIOUSLY:  
    • "We're starting to see some real momentum going with our booking activity in Europe through the season, so we're pretty happy about that. The pricing has come back to be more moderate to where we were hoping it would be, so check the box on that one. So I would say we're confident with the itineraries that we have around the globe and I guess confirmation of that is seeing our guidance for the rest of the year being right in the same sweet spot."
    • "The Europe market is interesting because the booking volume has really accelerated in the last number of weeks. So we're very encouraged about where we are with Europe vis-a-vis our budget anyway for the rest of the season."

CARIBBEAN

  • WORSE:  Mgmt commentary was much more subdued this time saying bookings are 'ok' and there were several weeks of disappointing results
  • PREVIOUSLY:  "On the margin, the Caribbean, there was just a short period there that it wasn't as strong as we would have liked it. It's back, being booking well. I would say that over the last 10 weeks as an example, we've had very strong bookings other than one week where it was still almost double-digit booking levels. I probably said too much there. But as well, the booking period has extended as well."  

BREAKAWAY

  • SAME:  After a strong start, it looks like Breakaway bookings are now trending below that of Epic in its inaugural year
  • PREVIOUSLY:  
    • "The Breakaway is booking very well. I would say, for the most part, the ships have booked a little bit different according to the time of the year, but right now we're right in the zone of where we were hoping to be, again, which is why we have the confidence with our guidance for the rest of the year.
    • "We're expecting to exceed the onboard experience." 

2014 OUTLOOK

  • SAME:  2014 continues to track ahead on pricing and load factor  
  • PREVIOUSLY:  "We have a higher booked position and at a higher price...we actually have some pretty decent visibility on 2014 and we're feeling pretty confident."

NCLH 2Q 2013 CONFERENCE CALL NOTES

FY 2013 guidance range (mid-point) unchanged but 3Q yield pressured by Alaska 

 

 

"While the addition of Norwegian Breakaway to our fleet was undoubtedly the highlight of the quarter, our strong results, which include our twentieth consecutive quarter of year-over-year Adjusted EBITDA growth, are equally as notable. Other initiatives in the quarter, from the refinancing of certain credit facilities to further optimize our capital structure, to the enhancements carried out on Pride of America at her recent dry-dock, demonstrate our culture of leaving no stone unturned in order to add incremental value for our shareholders and enhance the cruise experience for our guests."

 

- Kevin Sheehan, president and chief executive officer of Norwegian Cruise Line

 

CONF CALL 

  • Breakaway Plus1 -coming 4Q 2015; Plus 2 -coming Spring 2017
  • Guest satisfaction at record levels
  • Tempered expectations 'on the margin'
  • NCC within expectations

Q & A

  • Disappointed with several weeks of bookings (1st-time cruisers slow to book) but believe bookings are back to normal
    • 3Q:  Alaska pressured with more capacity 
    • Caribbean/Bahamas holding on
    • Europe is settling out
    • 3Q/4Q/2014:  feeling pretty good with bookings (higher YoY)
    • Pricing is 'ok' for the rest of the year
  • Onboard revenues were strong - Breakaway had positively impacted #s, casino strength, Breakaway had great business at specialty restaurants; US customers continue to drive onboard spend
  • Breakaway not as positive when compared with Epic's inaugural bookings
  • Some of cruise players are doing more promotions to fill their ships
  • Europe - bottoming out in terms of ticket yield
  • Quantum competition: not worried, New Jersey port is not New York
  • 2013 midpoint expense guidance moved up 50bps - 3 dry docks (new timing), additional advertising for Breakaway
    • Conservative?  Confident on reaching where analysts expect the company to be.
  • Did not reduce headcount through economic downturn
  • Potential secondary offering from Apollo?  No comment
  • FCF - believe in 2H 2014 that stock repurchase is most attractive option

Morning Reads on Our Radar Screen

Takeaway: A look at some stories on Hedgeye's radar screen.

Morning Reads on Our Radar Screen  - Screen Shot 2013 07 29 at 11.17.43 AM

 

 

KEITH McCULLOUGH: CEO

Alwaleed Warns Saudi Oil Minister of Waning Need for Oil

http://www.bloomberg.com/news/2013-07-28/alwaleed-warns-saudi-oil-minister-of-waning-need-for-oil.html

 

Moelis, Rothschild Take Lead on Omnicom-Publicis Merger

http://www.bloomberg.com/news/2013-07-28/moelis-rothschild-take-lead-on-omnicom-publicis-merger.html

 

 

 

HOWARD PENNEY: RESTAURANTS

States that spend the most on fast food

http://finance.yahoo.com/blogs/big-data-download/states-spend-most-fast-food-180357748.html

 

The £250,000 hamburger: First test tube-grown beef will be served in London restaurant this week  

http://www.dailymail.co.uk/sciencetech/article-2380308/250-000-hamburger-First-test-tube-grown-beef-served-London-restaurant-week.html

 

 

 

JOSH STEINER: FINANCIALS

Washington area homes fly off the listings fast

http://www.washingtonpost.com/business/economy/washington-area-homes-fly-off-the-listings-fast/2013/07/26/43245ae8-e8bf-11e2-aa9f-c03a72e2d342_story.html 

 

 

 

TOM TOBIN: HEALTHCARE

Hospital Choices Shrinking

http://www.thesunchronicle.com/news/local_news/hospital-choices-shrinking/article_814d8694-68b9-5fa6-ac56-cb457d320973.html#.UfZQlvl585k.twitter


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Contra-indicator Alert

Client Talking Points

CHINA

The great deceleration in growth continues.   Alongside a sequential slowdown in industrial profits in June, the Chinese Central Government looks to be passing the growth-slowing buck a bit this morning with the government ordering a “nationwide audit of government debt” down to the local government and village level.  The markets didn’t like the move with Chinese equities adding to double digit YTD losses (-1.7% to -11% YTD).   China remains in a Bearish Formation (bearish TRADE/TREND/TAIL) and we remain out of the way of Chinese stocks. 

OIL

Oil’s advance took a respite last week and remain red this morning despite Saudi Prince Alwaleed’s weekend commentary cautioning against increasing production capacity in the face of flagging demand.  Domestic consumption is the primary beneficiary of down energy prices, but we remain in no man’s land here with Brent holding above it’s $105.86 TREND line of support.  Meanwhile, someone was betting big on a big oil event that didn’t materialize, as net long positioning in CFTC futures and options contracts moved to its highest ever – yes, ever is a long-time.  

UST 10YR

With the Nikkei, China, and S&P futures down, 10yr yields haven’t moved a beep 2.56%.  The bond market has front-run the equity market more times than not over the last 5 years.  Is the long end of the curve sniffing out another upside surprise in the jobs report on Friday? Don’t rule it out. The Initial claims data continues to register accelerating improvement and consensus has been on the wrong side of the strong growth call all year. 

Asset Allocation

CASH 38% US EQUITIES 23%
INTL EQUITIES 14% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 25%

Top Long Ideas

Company Ticker Sector Duration
WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

MPEL

Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016. 

HCA

 Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road. 

Three for the Road

TWEET OF THE DAY

Buy Homes, Rent Stocks @KeithMcCullough

QUOTE OF THE DAY

"if BOJ's quantitative easing is seen as financing debt, this could lead to rise in yields" Haruhiko “Captain Obvious” Kuroda

STAT OF THE DAY

Contra-indicator alert.  Net long (Speculative) Positioning in Crude oil is at the highest level ever at 334,094 contracts. 


WYNN 2Q 2013 REPORT CARD

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

 

 

 

OVERALL:  IN LINE

  • The headline was a miss from Consensus but the Street was too high in Macau given the monthly numbers.  Vegas performed very well even after excluding the $12m favorable adjustment to the receivable allowance.  July is off to a great start for Wynn despite lower market share.  While not a raging bull, overall we feel better about the WYNN story following the release and call.

 

PROVISION FOR DOUBTFUL ACCOUNTS

  • BETTER:  WYNN recorded credits to the provision for doubtful accounts in 2Q. The adjustment was $14.9MM, consisting of a $12.2MM credit at Wynn Las Vegas and a $2.7MM credit at Wynn Macau.
  • PREVIOUSLY:  "Provision for doubtful accounts, this is about the appropriate run rate. There's maybe a little more going forward. So it fluctuates as we get large collections in Macau that are fully reserved and we feel pretty good with this run rate."

LAS VEGAS ROOMS

  • BETTER:  REVPAR was $233, up 4.7% YoY.  WYNN continues to see non-gaming drive Vegas growth.
  • PREVIOUSLY:  "Looking out over the rest of the year, we also see that, that's a pattern that we feel confident that is going to continue to repeat itself. And then, if we're looking out to grow out into 2014, which we've always talked about as what we felt the best as far as where we knew the room contribution was really going to bounce back in that segment. 2014, its way ahead of pace of where we actually thought it would be."

COTAI BUDGET

  • SAME:  Maximum budget is $4 billion.  Projected to open by Chinese New Year 2016.
  • PREVIOUSLY:  "The budget is still just under $4 billion and 6 million feet."

WYNN ENCORE NEW AREA

  • SAME:  Well-received response to the new high-limit rooms
  • PREVIOUSLY:  "We continue to upgrade our high-limit areas. We just opened a new high-limit slots area as Phase 1, with 96 slot machines. And we're opening up our Phase 2 with another 50 machines this weekend, in time for the May holiday.

MASS

  • SAME:  Mass (table + slots) experienced low hold in June but that has been corrected in July.  WYNN sees July mass win up 22% YoY and 13% sequentially.
  • PREVIOUSLY:  "Our mass business overall is very healthy. Our high-limit (mass/slot) business remains strong, so we're pretty confident going forward."

MONDAY MORNING RISK MONITOR: SETUP STILL FAVORABLE / PLS JOIN US FOR OUR 11AM CONF CALL

Takeaway: The intermediate term FIG setup remains favorable with only a handful of minor watch areas. Short-term XLF upside modestly exceeds downside.

***** EXPANDING COVERAGE TO U.S. ASSET MANAGEMENT STOCKS *****

CONFERENCE CALL TODAY 11 am

 

Please join us for a conference call today, July 29th at 11am EDT, to discuss our top ideas and the outlook for the

U.S. Asset Manager space. The dial-in and materials for the call are below.

 

This call will be the inaugural roll-out of Asset Management coverage by Jonathan Casteleyn, CFA, CMT.

Stocks that will be covered on today's call: (BLK, BEN, LM, IVZ, TROW, JNS) 

 

  (Toll Free) or (Direct)
Conference Code: 948342#

There will be a 90+ page slide deck for today's call. The link to the deck is here: Slide Deck

 

 

Key Takeaways:

Last week was rather unremarkable from a risk monitoring standpoint. We saw modest widening in US Financial credit default swaps (+4 bps) and a 21 bps increase in high yield rates to 6.17%. Also, there is a modest, but consistent, rising trend in the TED Spread over the last few weeks - a measure of systemic risk in the US banking system. Outside of these three areas, however, most of the rest of the world is behaving pretty well. On an intermediate term basis, we continue to see a lot of positives. Note the preponderance of green in the middle columns (MoM) of our summary table below. 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 3 of 13 improved / 2 out of 13 worsened / 8 of 13 unchanged

 • Intermediate-term(WoW): Positive / 9 of 13 improved / 2 out of 13 worsened / 2 of 13 unchanged

 • Long-term(WoW): Positive / 3 of 13 improved / 0 out of 13 worsened / 10 of 13 unchanged

 

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1. U.S. Financial CDS -  Bond insurer, Assured Guaranty (AGO) saw its swaps widen 48 bps last week as follow through the Detroit situation. Interestingly, the municipal bond credit default index, MCDX, actually tightened by 2 bps last week. Otherwise, swaps were generally wider, though for the most part only narrowly. Overall, swaps widened for 23 out of 27 domestic financial institutions last week.

 

Tightened the most WoW: MTG, SLM, JPM

Widened the most WoW: AGO, TRV, MBI

Tightened the most WoW: AIG, GNW, SLM

Tightened the least MoM: AGO, UNM, MBI

 

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2. European Financial CDS - Russia's megabank, Sberbank, saw its recent trend of tightening swaps come to an end, with a 17 bps increase last week to 224 bps. Sberbank swaps effectively reflect Brent crude oil prices. Bank swaps followed the lead of respective sovereign swaps, for the most part, with Spanish and Portuguese swaps tightening noticeably. UK bank swaps also tightened last week by an average of 7 bps.

 

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3. Asian Financial CDS - A relatively uneventful week for Asian Financials, with swaps widening by an average of 1 bp and a median of 2 bps. Daiwa saw the largest WoW move, at +6 bps.

 

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4. Sovereign CDS – Sovereign swaps were tighter across the board last week, led by Portugal (-53 bps), Spain (-19 bps) and Italy (-16 bps). The U.S., Germany and Japan were all tighter by 1-2 bps as well. 

 

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5. High Yield (YTM) Monitor – High Yield rates rose 21.2 bps last week, ending the week at 6.17% versus 5.96% the prior week.

 

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 0.5 points last week, ending at 1805.25.

 

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7. TED Spread Monitor – The TED spread rose 0.5 basis points last week, ending the week at 24.7 bps this week versus last week’s print of 24.17 bps.

 

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8. Journal of Commerce Commodity Price Index – The JOC index rose 0.9 points, ending the week at -0.33 versus -1.2 the prior week.

 

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9. Euribor-OIS Spread – The Euribor-OIS spread widened by 1 bps to 12 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

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10. ECB Liquidity Recourse to the Deposit Facility – Deposits were essentially unchanged last week. The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

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11. Markit MCDX Index Monitor – Last week spreads tightened 2 bps, ending the week at 91.05 bps versus 93.03 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1. 

 

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12. Chinese Steel – Steel prices in China rose 0.6% last week, or 20 yuan/ton, to 3470 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

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13. 2-10 Spread – Last week the 2-10 spread widened to 225 bps, 6 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

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14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.7% upside to TRADE resistance and 1.4% downside to TRADE support.

 

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Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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