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SGMS 1Q 2014 CONFERENCE CALL NOTES

Grim statistics on product sales and replacements  

 

MGMT COMMENTARY

  • WMS new product sales down:  reflect lower GGR in many domestic gaming jurisdictions.  Many customers have reduced their capital spending.  Their ship share decreased modestly from Dec Q.
  • Blade games continue to perform well, compared with casino average.  At end of March, launched 3-reel Blade.
  • WAP/premium:  New Clue game; New Willy Wonka 3-reel mechanical game
  • UK govt intend to increase commission tax on net win from 20% to 25%.  In addition, will take effect in Oct 2014, there will be additional player restrictions.  Will negatively impact UK customers.
  • Soft launch:  GoldFish social slots has been successful.  In current quarter, expanding distribution and growing player database.
  • JackpotParty:  new daily record revenues in April
  • Average installed base decline of 57 units:  decline in non-WAP offset by growth in WAP units
  • Average yield:  $70.13 highest since 2010 
  • Average DAU: 1.3 vs 0.6 in previous year quarter
  • ARPDAU from $0.26 to $0.23:  change in the reporting of Facebook payment process.  Impact is $6m
  • Product sales:  decline in replacements attributed to tough GGR and modest decline in ship share
  • Offering new CPUNEXT3 system and less expensive hardware than Bluebird 2 units to customers
  • Higher international lottery product sales, benefit from new lottery contracts (NorthStar NJ venture and Panama)
  • Renewed 3-yr contract for French national lottery
  • Awarded 6-yr instant games contract for Washington lottery
  • New contract with LottoQuebec will be in Q2; will be smaller than previous contract
  • Full launch instant games in Greece tomorrow. 
  • Instant product price-per-unit decline of $2.4:  attributed to quarterly changes in launch of marketing programs and other programs.
  • Lottery systems:  Higher sales in international markets grew product sales.  
  • WMS:  $157m EBITDA vs $178 EBITDA in previous year quarter
  • Cost synergies:  Elimination of duplicate corporate costs, lower compensation costs (reduced headcount by 4%- SG&A areas), lower employee costs, manufacturing, procurement savings, exiting interactive gaming ops in Belgium/UK and exiting certain lottery operations
    • Weighed more heavily to 1st half of year
  • Free cash flow:  +$24m; +$60m operating cf

Q & A

  • FCF:  does not include sell of Sportech, cash used to buyback shares
  • NJ lottery contribution:  important but not material contribution
  • Growing WAP footprint to generate higher yields
  • Leverage target:  no target to become investment grade
  • Replacement cycle:  server-based gaming business in UK had to get upgrades.  Innovations in cabinets/softwares will drive casino performance, not really just replacing machines that have considerable wear-and-tear issues.

Video: Conversation with YUM CFO Pat Grismer

YUM continues to be our favorite LONG in the big cap QSR landscape.

 

In case you missed it, earlier this week we held a call with Yum! Brands CFO Pat Grismer.  Our wide-ranging conversation ran the gamut from succession planning, business in China, Taco Bell breakfast and much more.  We learned a lot and we think you will too.

 

Here’s the full video from our call.  If you have any additional questions don’t hesitate to ping me. 

 

Video: CLICK HERE

 

Video: Conversation with YUM CFO Pat Grismer - 5 8 2014 3 23 22 PM

 

 

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst

 

 


You Can't Stop Howard! Penney Nails Another 'Best Idea' Short | $BLMN

Takeaway: Hedgeye restaurant analyst Howard Penney saw bad news for Bloomin' Brands coming back in November.

A couple of weeks ago, we highlighted how Hedgeye restaurants analyst Howard Penney nailed his short call on Panera Bread. 

 

He's doing it again today with Bloomin' Brands (BLMN) which he added as a Best Ideas SHORT back on 11/27/13. 

 

You Can't Stop Howard! Penney Nails Another 'Best Idea' Short | $BLMN - blmn

 

Not bad eh?

 

During his appearance on HedgeyeTV this past April 7, Penney discussed BLMN as one of his favorite short ideas. Here's the video and performance of the stock since then. 

You Can't Stop Howard! Penney Nails Another 'Best Idea' Short | $BLMN - blmn1

 

It pays to watch HedgeyeTV.

 


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STN 1Q 2014 CONF CALL NOTES

Business trends still slow in Vegas.  Increase in LV promotional environment.

 

 

MGMT COMMENTARY

  • 1Q revenues increased in casino, F&B, and hotel
  • Revenue environment still challenging; customer discretionary dollars still low despite uptick in casino visitation
  • Highest occupancy / cash revenues in 1Q
  • SS LV margins:  32.7%
  • 1Q LV EBITDAM:  $111m
  • $7.4m in mgmt fees earned from Graton
  • Graton will hold conference call on May 12
  • North Fork project:  no additional updates
  • Macro environment:
    • Las Vegas Strip:  continues to improve
    • LV Locals 1Q:  growth in population, employment, housing prices, retail sales
  • Existing LV home prices remain 40% below peak.  
  • Cautiously optimistic on future of LV market
  • Red Rock:  $35m F&B upgrade at Red Rock; will also upgrade suites and spa
  • Green Valley Ranch:  will upgrade F&B, suites, spa, and high-limit rooms
  • Owns 57% of Fertita Interactive
    • 1Q 2014:  STN recorded -$4.8m in investment; attributable to marketing and operation plans in NJ
    • On-line gaming slower than expected start
  • 1Q capex $21m; $110-120m expected for 2014 (includes Fertita Interactive)
  • Debt:  $2.15bn (excludes $112m non-resource land loan)
  • 5.1x leverage ratio

Q & A

  • Promotional environment at Graton:  little bit of step-up in promotions from Cash Creek and Thunder Valley
  • LV promotional environment:  select competitiors have gotten more aggressive i.e. point multipliers.  STN's promotional allowances down for 5th consecutive quarter
  • Genting project:  will start construction in Q4 2014
  • Shops at Summerlin will open in October;  traffic will increase for Red Rock; will benefit F&B
  • No comments on acquisition strategy
  • LV locals:  Higher-end performing better than lower-end
  • Promotional environment in NJ i-gaming:  very aggressive; reinvestment rates are double/triple than what you see at land-based properties; do not see cash flow positive for 2014 in i-gaming
  • Benefited from strong 1Q Strip convention calendar at Red Rock and Green Valley.  Strong REVPAR: up mid-single digits; some attribution from government rooms
  • NJ I-gaming payment processing:  improving but significant challenges in geolocation issues.  Also lack of awareness across the state- more on the casino side than poker side.
  • Graton money owed to STN:  total of a little over $48m.  Refinance is one option.

ECB Opens Door For Rate Cut?

Takeaway: The EUR/USD dips on ECB President Mario Draghi's shift.

ECB Opens Door For Rate Cut? - 4

European Central Bank President Mario Draghi made some noise in this morning’s ECB conference call (and it wasn’t by keeping the main and deposit rates unchanged) – he strongly hinted that the ECB could cut the main rate in its next meeting in June, citing:

  • “The strengthening of the exchange rate with low inflation is a serious concern.” 
  • “ECB is not resigned to have inflation too low for a long amount of time.”

The EUR/USD (up ~ +0.5% heading into the Draghi comments) backed off hard following them.

 

The cross is now flirting with a breakdown at our immediate term TRADE line of support @ $1.38 – we’d interpret that a breach of TREND support in the Euro and an associated breakout in the dollar would be cause for us to consider shifting our current positioning, but that’s not the case currently.  The USD is still broken in our model, so we’ll let the trade breathe for a bit here. The EUR/USD remains above our intermediate term TREND and longer term TAIL lines of support.


ECB Opens Door For Rate Cut? - vvv. eur large

 

Today’s shift in tone demonstrates that Draghi is focused on weakening the Euro and stoking inflation. 

 

This position inflects from more recent meetings that focused on how the Bank was managing a “prolonged period of low inflation” that it believed would grind higher to its 2.0% target rate over the longer term. It also deviates from recent focus on devising lending programs to support the flow of credit to the “real” economy.

 

The June meeting will also include updated GDP and inflation projection from the ECB’s staff. This data, which will likely lean light on GDP and inflation vs. previous projections in March, could further support a decision to cut the main interest rate.

 

For reference, here are the March projections:

  • GDP Staff Projections:  1.2% in 2014; 1.5% in 2015; 1.8% in 2016
  • CPI Staff Projections:  1.0% in 2014; 1.3% in 2015, 1.5% in 2016

Draghi said today that there are downward risks to the region’s growth based on 1) a weakening global demand; 2) geopolitical risks;  and 3) the (high) exchange rate.


Nothing like a rate cut to influence what he most directly can: the exchange rate (point #3)

 

*   *   *   *   *   *

 

Editor's Note: This research note was originally provided to subscribers on May 8, 2014 at 10:37 a.m. EST by Hedgeye Macro analyst Matt Hedrick.

Subscribe to Hedgeye.



ECB Opens Door For Rate Cut Next Month!

Draghi made some noise in this morning’s ECB conference call (and it wasn’t by keeping the main and deposit rates unchanged) – he strongly hinted that the ECB could cut the main rate in its next meeting in June, citing:

  • “The strengthening of the exchange rate with low inflation is a serious concern.” 
  • “ECB is not resigned to have inflation too low for a long amount of time.”

The EUR/USD, up ~ +0.5% heading into the Draghi comments, backed off hard following them. The cross is now flirting with a breakdown at our immediate term TRADE line of support @ $1.38 – we’d interpret that a breach of TREND support in the Euro and an associated breakout in the dollar would be cause for us to consider shifting our current positioning, but that’s not the case currently.  The USD is still broken in our model, so we’ll let the trade breathe for a bit here. The EUR/USD remains above our intermediate term TREND and longer term TAIL lines of support.


ECB Opens Door For Rate Cut Next Month! - vvv. eur

 

Today’s shift in tone demonstrates that Draghi is focused on weakening the Euro and stoking inflation. 

 

This position inflects from more recent meetings that focused on how the Bank was managing a “prolonged period of low inflation” that it believed would grind higher to its 2.0% target rate over the longer term. It also deviates from recent focus on devising lending programs to support the flow of credit to the “real” economy.

 

The June meeting will also include updated GDP and inflation projection from the ECB’s staff. This data, which will likely lean light on GDP and inflation vs previous projections in March, could further support a decision to cut the main interest rate.

 

For reference here are the March projections:

GDP Staff Projections:  1.2% in 2014; 1.5% in 2015; 1.8% in 2016

CPI Staff Projections:  1.0% in 2014; 1.3% in 2015, 1.5% in 2016

 

Draghi said today that there are downward risks to the region’s growth based on 1). a weakening global demand, 2). geopolitical risks,  and 3). the (high) exchange rate.


Nothing like a rate cut to influence what he most directly can, point #3, the exchange rate. 

 

Matthew Hedrick

Associate



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