Solid Q, particularly in systems. Wide FQ4 guidance equally brackets consensus.




Financial Results:

  • F(x) losses FYTD $0.09/share
    • $0.02 impact in FQ2
  • Sold, 5,278 with 3,459 units in North America and 2,496 were replacement units
  • ASP $17,203, up 7% 1,100 premium Pro Wave cabinets and higher ASP in Int'l markets and lower VLT/VGT  
  • Gaming Ops: down based on rental and daily fee revenue due to customer buy-out of older non-premium units.  Gross Margins were 65% driven by higher Jackpot expenses of $1.5M vs. last 8 qtrs   2,198 leased at lower margins and $1M of asset charges - expect segment annual Gross Margin 67-71%
  • Systems Revenue:  ahead of expectations due to end game hardware upgrades.  Gross Margins 71%, down from 73% due to higher mix of hardware revenues = 45% of total revenues vs. 38% last year.
  • Maintenance Revs:  $24.4M
  • Table Products:  $29.5M of utility  $14.6M proprietary table game revenues.  Leased 70% of total revenues.  Margin 76% ex $2.3M of charges
  • Eff Income Tax Rate 37%,  F4Q 36%-37%
  • $1.9B of debt outstanding, since SHFL paid down $102M of debt.
  • FCF was $166M YTD, inclusive of acq costs vs. $150M year ago
  • Paid down $64M of debt, 3.9x leverage debt while repurchasing approx 150,000 share for $10M of common stock
  • Leverage Ratio below 3.75x, then borrowing cost fall by 25 bps
  • Allocate majority of FCF to debt repayment to reduce leverage to 3x by end of Calendar Year 2015.
  • Updated full year fiscal 2014 guidance for adjusted EPS to a range of $4.35 to $4.50.
  • Annual guidance includes $3.21 per share for the nine months ended March 31, 2014, which is comprised of adjusted earnings per share of $3.12 plus add-back of $0.09 per share loss from unfavorable foreign currency movements incurred during the first nine months of fiscal 2014.
  • This results in a range of adjusted EPS expected for the remaining three months of fiscal 2014 of $1.14 per share to $1.29 per share. - consensus is $1.21

General Commentary:

  • First full quarter of combined, SHFL $40M cost synergies by end of calendar year 2014
  • Reorganized sales structure by region and yielding value
  • Good utilization of India development centers for SHFL products
  • EGM sales good quarter 22% 
  • First YoY increase in NA replacements ex Canada
  • Illinois during FQ3: 739 VGT units sold, sold >4,100 units thus far, expect to continue to sell into IL until 2015
  • Expect to sustain the year-over-year improvements in North America replacement sales during Q4 as well.
  • Equinox cabinet doing well in Asia (Macau, Philippines, Singapore and Cambodia), Australia - 1,819 units shipped to international regions in Q1
  • Optimistic to leverage SHFL content worldwide,
  • SHFL EGMs shipped 5,278 across the globe
  • Despite a 60 units sequential decline in overall WAP installed base, cash connection grew by 30 units and WAP revenue set an all-time quarterly record with yields up about 11% versus the previous quarter.
  • MD3 Shuffler replacing MD2 and MD1 Shufflers
  • Interactive: I-Gaming gaining traction in NJ and more free to play gamers signing up daily
  • Systems: iVIEW, iVIEWDM and Elite Bonusing Suite - top 5 customers = 35% of revenues vs. 45% previously.
  • Added two new Ohio casinos to systems business.
  • The majority of the 450,000 slots connected to BYI systems are still either without an iVIEW or have an old version of it and thus may not be capable of leveraging the newer system software features including the Elite Bonusing Suite, bonusing modules. And to-date, there are only 34,000 iVIEW DMs in the field.
  • Systems revenues at least >25% greater in 2014 than prior year, but 2015 likely lower than 2014 but at higher margin than 2014.
  • TableView optical chip recognition product is very close to completing its field trial at two casinos with a very high accuracy level. 
  • Strength of BYI and SHFL, producing higher revenues and add'l cost saves.   
  • Gross profit from North America replacement sales represented only 11% of gross profits during the quarter and in Gaming Operations, only 45% of revenue was variable fee based. Even within variable fees, a significant portion was based on the highly stable New York lottery market.
  • Asia: strong systems pipeline
  • More than 50% of revenues are recurring.
  • R&D spend rising with revenues
  • Focused on innovation and the future - core business will never waiver as look to drive new revenues
  • Look to new technology areas that will accelerate revenue and profit growth


  • ASP trends, seeing any aggressive pricing or financing? value is found in BYI products, maintaining price discipline on game content, pricing flat to better since G2E.
  • ASP 7% increase - how frame ex. Star Games?   Domestic ASP +7% (Wave) and overall ASP +7% (Australia higher ASP and pulled overall ASP higher).
  • $10M repurchase, how frame vs. debt reduction - when see dislocation in market, will enter market.  Currently have just under $140M of add'l share repurchase activity remaining, also limited by debt covenants. Focused to achieve 3x leverage or lower.
  • Why 15c spread to guidance with two months remaining - delta of range is 3%...and early in integration of SHFL and now more broadly based
  • Pipeline - a lot more visibility by customers and hardware across all segments, and seeing lots of interest in I-View products. Customers desiring upgrading software.
  • Quick customer decisions may repeat, not specific to this quarter - was two customer specific. 
  • Systems maintenance side - why decline last two quarters while rest of systems increasing - FY15 > FY14 > FY13, last few quarters unique due to game count reductions, maintenance happening later.
  • Back out 1x, SGA line, adjusted SGA be down FY14 vs. FY 13, but look at SGA as % of revenue and drive toward an adjusted operating margin and want to increase adjusted operating margin. 


Q1 almost exactly in line with our property level EBITDA estimate and nicely above the Street. Positive forward commentary





  • Construction of Wynn Palace on schedule, will open 6 quarters from now (552 tables).  Still want to open up in 1Q 2016 before CNY.
  • LV hotel occu +12.6%, REVPAR up 12.7%; ADR; most profitable hotel in Nevada
  • Low hold impacted LV by $10MM.  Hotel room pace for 2014 is going well.
  • LV 2Q:  6-7% higher than previous year
  • Steve Wynn thinks LV is growing into additional capacity that was added in the past and feels good about it, finally
  • Wynn Macau:
    • No hold impact in 1Q; junket margins stable
    • Flow through very very strong
    • Moving poor performing mass tables into premium table games (62 premium mass tables games); 492 total tables
    • April mass revenues up 55%; April: VIP up 10% (outpaced the market)
      • This translates into US$122m in mass revenues and US$257m in VIP revenues
      • We think Wynn gained mass share in April and possibly VIP share as well if the VIP market was flat or worse.
    • Slot win outpacing market 
    • EBITDA per position trending 35/40% higher than nearest competitor
  • Wynn Palace:  no trouble finding construction workers.  Have 2,000 workers on site; will have 3,000 people by October.  
  • Other Cotai sites under construction look more disoriented
  • In 60 months, Macau/Henqian Island will be most robust tourist destination in the world, competing with Orlando, Los Angeles, etc.

Q & A

  • Macau:  213 average mass tables in 1Q; converting some of junket space into premium mass business
  • $5MM receivable credit in Macau:  collected receivables that were 100% reserved
  • % of EBITDA coming from Mass:  not buying the business
  • Table win per unit
  • LV:  when customers get lucky, drop goes down.  When win is down, credit is also down.
    • Handle:  credit slips with markers and cash
    • Do not have 'table drop' until the customer loses
  • No construction disruption on mass business
  • Table mix at Wynn Palace will be similar to Wynn Macau
  • In the past few weeks, have migrated some VIP tables to premium mass tables. 
  • Wynn Palace:  Hotel Cash room:  700 sq ft; majority of rooms will be +900 sq ft
  • Do not advance VIP credit for more than 30 days.  WYNN settles at end of every month.  Not worried about VIP credit.
  • Thinks Venetian Macau cannibalized Sands Macau
  • Wynn Macau earnings went up, even with all the new casino openings; has held their market share; believes market share will hold its own at Peninsula when Palace opens.
  • China:  Corporate credit is very different from consumer credit
  • Finished financing recently.  Last tranche: $750MM bond at 5.09% with no covenants, non-recourse.
  • Total Cotai financing at $3.85bn at average cost of 3.3%
  • Capital structure is in 'nirvana' - low interest rates, long maturities, low covenants
  • Highly confidence in getting the 552 tables for Palace
  • Want to do the basics better in Macau
  • Most successful largest grossing casino on Gulf Coast is Beau Rivage.
  • Japan:  Diet will discuss study bill in May.  Tokyo, Osaka, Okinawa - potential sites.
  • More optimistic than ever on Japan

Poll of the Day Recap: 71% Believe the Economy Is Getting Worse

Takeaway: 71% WORSE; 29% BETTER

The U.S. economy stalled in the first three months of 2014 "growing" at a dismal 0.1% annual pace. "Don't panic," say consensus economists, "it's probably just the winter weather."


We know what we think, but we wanted to get your opinion in our poll of the day: Do you think the U.S. economy is getting better or worse?


Poll of the Day Recap: 71% Believe the Economy Is Getting Worse - brokenpig

At the time of this post, 71% agreed that it’s getting WORSE; 29% said BETTER.

Believing that the economy is getting WORSE, voters largely pointed fingers at the Fed:

  • “The real economy is getting crushed by the inflation that ‘doesn't exist.’ If the economy was really improving, the Keynesian demagogues wouldn't have to cheerlead so hard to convince everyone.”
  • “The market is where it is because of the FED, as they keep tapering the market will crack, they will then come back and confidence will be shot!”
  • “Consumer spending and borrowing will not come back for real until there are structural changes in this country to support job growth and keep real inflation under control.”
  • “I don't care what the stats/Fed/academics say about economy. If you don't see inflation accelerating across the broad in your daily living expenses, then you really have been living under a rock. Inflation slows growth = Fact.”

However, those who said the economy was getting BETTER noted these signs in contrast:

  • “Consumer spending, which accounts for roughly two-thirds of the economy, finally seems like it's picking up again.”
  • “Exports continue at a record pace and that's good for an economy in transition back to more manufacturing based economy.”
  • “A lot of stats look weak right now, but the Fed looks like they will actually prolong the taper. If they really shut down the printing press, the economy will finally be able to stabilize. It’s a longer term view - for the next quarter or two, things could suck wind and the equities market will probably correct - in this context a correction could be a harbinger of a stronger economy.”


Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Jobless Claims: Less Good

Takeaway: This morning's print shows considerable week-over-week softening.

Labor Data Hits a Speed Bump

As we pointed out last week, Easter week is notoriously choppy from a data standpoint so investors should take the data with a grain of salt. Based on this distortion, we've seen significant volatility in the data in the last couple weeks. For instance, on a year-over-year NSA basis, this week claims were up 5.1% as compared with down 8.3% in the prior week. The 4-week rolling average, the better measure, showed a decelerating rate of improvement, moving to -8.2% from -10.9% on a year-over-year basis.  


Jobless Claims: Less Good - 3 

We're not overly concerned by the sudden deterioration in this week's print as the ADP number for April was reasonably strong and the Challenger report, while up slightly month-over-month, was in-line with recent trends. That said, should we see a continuation of this week's print in next week's data that would be more disconcerting.


For now, it appears the labor market recovery remains on track, albeit at a moderately decelerating rate of improvement.

The Data

Prior to revision, initial jobless claims rose 15k to 344k from 329k week-over-week, as the prior week's number was revised up by 1k to 330k.


The headline (unrevised) number shows claims were higher by 14k week-over-week. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 3k week-over-week to 320k.


The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -8.2% lower year-over-year, which is a sequential deterioration versus the previous week's year-over-year change of -10.9%


Jobless Claims: Less Good - 2


Jobless Claims: Less Good - 5


*   *   *   *   *   *   *


Editor's Note: This is an excerpt of a research note that was originally provided to subscribers on May 1, 2014 at 10:27 a.m. by Hedgeye’s Financials team Jonathan Casteleyn & Josh Steiner. Follow Jonathan and Josh on Twitter @HedgeyeJC and @HedgeyeFIG.

Subscribe to Hedgeye.

Cartoon of the Day: Bloody Dollar

Takeaway: Give thanks for the Fed as the U.S. Dollar gets devalued to year-to-date lows following yesterday's Q1 GDP disaster.

Cartoon of the Day: Bloody Dollar - Dollar Dracula


Superb start to 2014: strong group bookings, higher ADRs and improved F&B spend + higher transient ADRs = expanding operating margins and a strong outlook for several quarters. 




  • 2014 is off to a strong start - hotel demand continues to grow, particularly in our group business, allowing for increased ADRs across all segments.
  • Solid group demand in Q1 drove exceptional growth in F&B
  • Adjusted EBITDA for the quarter was $308 million. +8.8% YoY
  • Strong results due to:
  • RevPAR +6.8%
  • Occupancy +1.5%
  • Group business revenues +11% as demand increased by more than 6% and average rate improved by nearly 4.5%. All segments of group benefited from rate increases, and our corporate demand was up by more than 10%.
  • While the calendar change of Easter to April clearly boosted group activity, we saw solid demand improvement throughout the quarter.
  • Transient room nights were flat to 2013, but ADR +3.5% driven by both rate increases and positive mix shift especially in our higher price segments.
  • Transient revenues +3.3%
  • F&B and AV was +13.5% due to strong group activity
  • Banquet - revenue per group room nights >5%
  • Total F&B revenues +9.5% as catering activity was exceptionally strong in New York (Super Bowl) and West Coast hotels.
  • Strong flow through resulted in adjusted operating profit margin expansion of the 120 basis points and comparable hotel adjusted operating profit growth of 12.5%
  • Investment activity in Q1 saw the purchase of Powell Hotel in San Francisco for $75 million.
  • Invested $6 million in ROI CapEx - completed the expansion of the Willow Stream Spa at Fairmont Kea Lani in Maui
  • Invested $5 million in a series of energy conservation projects and the repositioning of the Cast & Plow Restaurant at the Ritz-Carlton Marina del Rey.
  • Invested >$13 million in the Novotel, Ibis,
  • Projects represent a total investment to date of approximately $105 million. 
  • Have a few assets currently on the market for sale and continue to pursue acquisitions given the difficulty in predicting the timing of completing these transactions - guidance does not assume the benefit of any transactions other than the ones we have already closed.
  • The remainder of 2014: demand growth throughout the U.S. should continue to be strong; GDP growth and business investment trend positively for the full year, and international travel continues to demonstrate robust growth.
  • Overall, occupancy in the portfolio is ahead of 2007 peak
  • Expect group demand to remain strong throughout the remainder of the year
  • Second quarter group activity will be lower, primarily because of the year-over-year Easter Holiday shift. O
  • Booking pace for 2014 continues to be quite strong as revenues are up 5.5% compared to last year. 
  • ITQFTY:  room night booked for the remainder of the year exceeded last year’s pace by more than 4%, with bookings for the month after April up nearly 10%. Approx 85% of our full-year expected group bookings on the books
  • Comparable hotel RevPAR growth for the year will be between 5% and 6%.
  • Expect comparable food and beverage revenue to increase 4% to 5%, which is a full point above prior estimate of the 3% to 4% increase.
  • Margins - incremental profitability and strong flow through from ADR and group results in adjusted margin guidance to 70 basis points to 120 basis points for the full year.

Operating & Financial Performance

  • West Coast RevPAR +14%, occ 450 ADR 700, expect continued out peformance
  • SF RevPAR +25%, Group +15% while transient +8%, mix shift ADR +16%, expect hotels to continue to outperform for 2014
  • Central & South RevPAR +250 bps, weak convention calendar and weather hindered Chicago; Florida less vacation travelers due to Easter shift; expect RevPAR to increase vs. Q1 and in-line with portfolio
  • East Coast RevPAR +260 bps, Boston weak down 270 bps, WDC flat, NYC +420 bps.  Boston weakness due to room renovations.  WDC negatively impacted by YoY comp to 2013 inauguration - expect challenges to persist due to new competition.  NYC - pursued group strategy for SuperBowl with NFL and Media also aided F&B uplift.
  • International: constant $ RevPAR +10.3%.
  • Lat Am RevPAR +21%, expect continued strong performance across Lat Am
  • Asia/Pac RevPAR +8.2% strong group and transient, Oz transient rates +9% in Q1. 
  • European JV +2.8% in constant Euro; increased F&B at 11 of 18 assets.
  • Costs: ex higher utilities operating margins +120 bps, F&B flow through 58.5%.
  • RevPAR driven by ADR = strong flow through.
  • 28% of full year EBITDA earned in Q2, therefore Q2 lwoer than 2013 because 1) sold land adjacent to Newport Beach  2) lost ebitda for assets sold  3) Hyatt Maui timeshare sales ($5M)
  • Redeemed/repaid $675M of debt with available cash and ended Q1 with approx $392M of cash and $782M of capacity under the credit facility.


  • Recovery of Group - seeing deeper trends to resort locations from gateway markets -- seeing growth across all markets, Q1 centered in NYC and West Coast.  Seeing growth across price points.  Catering contribution F&B per Group night up each of last two quarters, but increasing aggressively. 
  • Supply growth - mid 7% range in NYC in 2014 but strong 5% Group growth in NYC, likely struggle to generate ADR growth in NYC.
  • Why transaction market so quiet - pricing working way higher, fundamental problem is view cycle has a long runway as such sellers have no interest to sell nor impetus to sell. Expect 2014 activity to be greater than 2013.  
  • International transactions - capital global moves to opportunities, Asia, Middle East, US, etc.  Run into different investors in different markets, but sovereign wealth funds see consistently.
  • Acquisition market - given capital availability by PE and leverage, looking at more non-core (International, non-branded, etc)?  Looking internationally, would love to do more Palm San Francisco, some add'l limited service in certain markets, no plans for the Caribbean and would look to avoid Caribbean.  
  • Have teams focused on opportunities within global regions - each office focused on specific region.
  • Development opportunities - when not make sense vs. cycle - market by market analysis.  Repositionings still look good in most markets, new development limited, but select service development appears okay for now.
  • F&B guidance - also include F&B revenue increase?  View remainder of year based on Q1 results, also feel Q1 success portends better results for remainder of 2014.
  • Given guidance of 21% EBITDA in Q1 and revised 2014 EBITDA guidance - how big was Q1 beat?   $17M but also $3M insurance gain (was expected but not in Q1), so more like $14M. 
  • Holiday calendar shift in Q1 vs. Q2 - have not run analysis, but expect Q2 to be less strong vs. Q1.
  • Balance of dividends vs. opportunity to purchase assets - what prevents higher dividend - expect as EBITDA increases, so should taxable increase and such dividend should also grow.  Then what to do with FCF of $300M/year - acquisitions (property) or reinvestment in current portfolio.  If unable to grow through investment, then return capital to shareholder.
  • Brands with better/stronger RevPAR trajectory - no comment on brands within portfolio, ask the lodging operators. 
  • Why 2014 RevPAR guidance not increased based on Q1 strength - more comfortable after mid-point of the year, patient, but more comfortable in the higher end of the range for now. 
  • How/why outperform in WDC - better group strength in March as well as transient.
  • Banquet/F&B per room vs. prior peak and trajectory - 
  • Seattle or Denver transactions - Seattle convention center 
  • Chicago trends - harsh winter in Q1 and remainder of 2014 not as strong of a convention year
  • Renovations pipeline and benefit - relatively consistent levels of maintenance capex, not significant disruption which provide uplift.
  • Gain on Sale - why so large and tax impact small is there a 1031 exchange plan.  Philadelphia asset, gain baked into 2014 forecast and dividend. 
  • Pace  ITQFTQ +19% vs. Q1 2013, ITYFTY +4% room nights for year but for May - Dec +10%
  • Later Easter because stretched out spring break travel in Florida.
  • What percentage of portfolio needs higher maintenance capex - very small deferred capex, consistent capex investment, accelerated capex in 2010 and 2011.  Maybe six assets have some level of deferred capex but usually assets thinking about selling.
  • $70-$80M of reinvestment in portfolio
  • Group by month in Q1: Jan weakest; Feb slightly above 6%; March double digit growth%; April likely weaker than 2013
  • Group vs. Transient mix: leave $ on the table but how weather impact?  Yes weather impacted transient, but also transient rate was stronger 3.5% but increased transient business in lower priced markets while group was stronger in higher priced markets.
  • Balance Sheet:  V and Z notes - pre-payable, yes callable in 2016.

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