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VIDEO | Real Conversations: Improve Your Probability of Success and Invest With Conviction

Part 1: Improving Your Probability of Success

In the first of three parts of an interview with Chris Ciovacco, the founder of independent money management firm Ciovacco Capital, Keith and Chris discuss the cornerstone to a top investor – the investing process.

Part 2: The "Three-Legged Stool"

In the second of three parts of an interview with Chris Ciovacco, Keith and Chris discuss three market bubbles and their overall effects.

Part 3: Investing with Conviction

In the third of three parts of an interview with Chris Ciovacco, Keith and Chris discuss how to invest with conviction in an indecisive market.


BYI F3Q 2014 CONF CALL NOTES

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

 

 

PREPARED REMARKS

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

Q&A

  • 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. 

WYNN 1Q 2014 CONFERENCE CALL NOTES

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

 

WYNN 1Q 2014 CONFERENCE CALL NOTES - wynn

 

CONF CALL NOTES

  • 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

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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.”

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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

 

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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.

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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


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