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RCL Q2 2014 CONFERENCE CALL

As we expected, Europe lead the Q2 beat despite lower onboard spend than we thought. 3Q net yield guidance was within expectations.  Quantum will be the next catalyst in November.

 

 

RCL Q2 2014 CONFERENCE CALL  - gg

 

CONF CALL NOTES

  • Double Double program (3-yr goal):  
    • Optimizing revenue
      • Structurally, had seen general pressure on pricing and compression on pricing
        • 4 areas of revenue expansion:
          • Strengthening brand
            • Azamara achieving double digit yield improvements
          • Enhancing global footprint
            • Bringing US guests on European itineraries
          • Asia
            • Quantum deployment to China is very exciting
          • Pullmantur
            • Cusp of turning an important corner.  Increased focus on Latin America.
    • Controlling costs
    • Moderate growth
      • 3-5% average compound growth is appropriate
  • Quantum of the Seas
  • 2Q
    • Better close-in pricing for Europe and Asia
    • Caribbean- highly promotional; ticket revenue yields down YoY
    • Onboard revenue yield:  +3% (10th consecutive quarter of onboard growth) - beverages packages and internet service drove the gains
    • NCC - better than expected, mostly timing related; balance of costs will be spent in rest of year
  • Booking environment:  significantly higher YoY.  Booking window continue to expand.  load and APD are up for rest of 2014.
  • Early 2015:  load and APD higher YoY
  • Caribbean:  very price sensitive.  Have implemented various promotions.  Expect Caribbean yield declines but see some improvement on Oasis ships.
  • Europe:   
    • Guests paying 20% more (in-line with our pricing survey)
    • Less supply to sell
    • Black Sea sailings pressured by conflicts in region
    • Med sailings doing well
  • Q3 guidance
    • Positive trends in Europe, China, and Alaska

Q & A 

  • Caribbean:  closer to inflection point; more pressure on 7 night and shorter itineraries.
  • Caribbean got quite a bit worse from 1Q to 2Q but has stabilized since.
  • Caribbean:  1Q 2015 comps will be harder than rest of quarters
  • Either higher dividends or stock repurchases in future
  • China:  proven to be a successful market but it is fairly young; but  investments have been costly, as with all new markets.  Still in the 1st inning.
  • 2015 NCC:  general commitment to cost cutting but there will be inflation pressures
  • Net Yield outlook:  +4% on average is a little on the high side
  • Q4 yield growth:  relatively consistent on bookings environment.
  • New onboard planning tool:  too soon to see how CruisePlanner will perform but doing well on Quantum
  • FY yield target unchanged due to rounding 
  • China vs Caribbean:  economically, Quantum should perform as well in China as in Caribbean (more costs but also more onboard revenues)
  • Demand will drive the profitability change.  Capacity has been set for the next 3 yrs.
  • Onboard revenue:  all categories up.  Doubled efforts on shore excursions.

PENN Q2 2014 CONF CALL NOTES

Solid quarter relative to expectations. Management guidance is setting up Q3 for another beat. July should prove a big improvement over Q2 when states release revs.


 

CONF CALL

 

Prepared Remarks


Upcoming Openings:

  • Hollywood Dayton, Aug 28
  • Hotel opening at Zia Park New Mexico, Aug 28
  • Mahoning Valley ~850 slots, September 2014 opening.
  • Plainridge MA - late Q2 opening
  • Jamul CA - mid 2016 opening, backed up by 2 months
  • New York - expect decision by end of 2014

 

Q2 2014 Results

  • Operating environment remained challenged, but positive on relative basis
  • Low end segments remain sluggish but health in VIP
  • MW and East improved trends
  • Corporate & Overhead expenses run rate $20m savings
  • $253 million cash on hand at end of quarter
  • CapEx $20.2 million in quarter and forecast at $72.5m for year
  • Preopening expenses forecast at $8.2 million for year
  • Argosy Sioux City Iowa: awaiting Supreme Court, disappointed with decisions thus far, rent reduction to GLPI of $6 million if asset closes. 

Q&A:

  •  Regional trends, what drove the June pullback?
    • Calendar driven: May better, June weaker
  •  Regional trends thus far in July?
    • MTD: mixed bag, some mkts better, some markets feeling saturation and competitive pressures and reflected in guidance.
  •  EBITDA flow through, why not greater?
    • Elevated pre-opening expenses in Q3 due to new facilities.  Outlook remains choppy and uneven.  No clear indication of meaningful movement to change previous guidance. 
  • Massachusetts
    • Other licenses will not impact the PENN facilities, expect to have 2 to 3 year opening advantage.
  •  MA Referendum
    • Public opinion polls show >10% lead
  • New developments expect to increase active database from 4 million to 5 million - current data base additions include 10k/month in Columbus and 6-8k/month in Toledo
  • Kansas JV restatement - why now and driving reason, coverage ratio impact to GLPI.
    • Change more appropriately reflects PENN, co-wide adjusted EBITDA, no impact on any ratios.
  • Upstate New York - how consider an upstate property as compared to Mid-Atlantic landscape and potentially Meadowlands/Jersey City casino?
    • Watching closely, New Jersey voters will need to amend state constitution.
  • Dayton is not in Cinci market which is crowded - separate MSA. Parking situation is good there
  • Youngstown over an hour away from nearest casino - great location off interstate 80. 
  • Unlike PNK's Belterra Park, PENN views Youngstown and Dayton as 2 new markets.
  • PA rightly being cautious and protecting existing casinos so not sure if more will be allowed
  • Cash flow should be immediately generated at new racinos
  • No change in acquisition strategy
  • Database under-leveraged without destination property (LV Strip).  Couldn't get to the right valuation on Cosmopolitan.
  • Atlantic City - mgmt not bullish on AC particularly with what is being considered in NY and North New Jersey. Further revenue declines likely.
  • Plainridge - stated in MA filing that $250m in revs is the number and that forecast hasn't changed.

PNK Q2 2014 CONFERENCE CALL

Slumped shoulders conference call. Deteriorating fundamentals finally catch up to PNK. Not many positive takeaways. 

 

 

CONF CALL NOTES

  • Weak consumer demand; broad softness across most markets
  • July:  better than 2Q overall (closer to May rather than June)
    • Broad softness continues in July although there have been some bright spots  (we think Missouri is one of them but offset by Louisiana)
    • We also think PA is tracking nicely for July but that doesn't impact PNK. Overall, our model and channel checks suggest July state revenue reports should look better than expected in most markets.
  • Gained 320bps in market share due to myChoice integration 
  • Visitation down, spend per visit up 4% YoY (driven by high-end);  retail segment and markets where there is competition saw weaker spend.
  • Most of myChoice loyalty integration costs were incurred in 2Q
  • Q2 marketing reinvestment down 40bps YoY
  • Hotel REVPAR grew +6% thanks to new yield mgmt program (ASCA St. Charles REVPAR up double digits)
  • 25% of Belterra Resort customers also visited Belterra Park
  • East Chicago:  highest market share since Q4 2009.  Highest table share since Q4 2011.  Highest slot share since Q3 2008.
  • Strong VIP table play at East Chicago and River City
  • L'Auberge properties:  strong VIP performance; 30bps improvement in marketing reinvestment
  • EBITDA margins relatively flat primarily due to synergies
  • Softness in electronic gaming business
  • Mostly cost-related synergies; expect revenue synergies to come
  • St. Charles/KC/River City:  some disruptions due to loyalty program integration
  • Expect severance charges/expenses for CO referendum in 2H 2014
  • Belterra Park:  slightly under budget, some hotel issues but will not impact construction budget of $20m; rolodex behind expectations
  • Today, new general mgmt at Black Hawk and ASCA KC (both internal transfers)

 

Q & A

  • Lake Charles:  record table volumes; do not want to quantify EBITDA impact of low hold
  • Rollout of myChoice:  Additional $6m in advertising costs were associated with the integration but will not be incurred in future quarters
  • Very careful with Belterra Park but clearly a slow start.  
  • L'Auberge properties and East Chicago outlook:  continue to see improvements
  • Visitor profile:  declines at lower end segment; continue to see good visitation and spend from VIP segment
  • Missouri approved credit issuance by casinos:  credit will begin at end of August; will be a benefit starting in 3Q
  • PNK evalutes performance on EBITDA, not on market share. But market share has held up despite challenging conditions
  • Visitor priority:  depends on market.  In Lake Charles, they focus both on new and existing customers.  
  • Properties stay well-maintained.  May do some refurb on restaurants.
  • Will continue to pay down debt

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ICI Fund Flow Survey - U.S. Equities Over the Waterfall...Bond Funds Bolstered

Takeaway: U.S. stock funds put up their 12th consecutive week of outflow with bond fund inflows holding steady

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

In the most recent 5 day period, the combined equity mutual fund complex had a moderate outflow with $2.2 billion being redeemed from the category. The culprit was U.S. stock funds which experienced a $3.9 billion outflow, its 12th consecutive week of redemption which was slightly softened by a $1.7 billion inflow into global equity funds. Aggregate bond funds conversely, including both taxable and tax free products, netted another $2.4 billion in new investor subscriptions making it 22 of 23 weeks of taxable bond inflows with 25 of 26 weeks of positive subscriptions into tax-free or muni bonds. We are growing increasingly cautious on the trends in U.S. equity funds with accelerating market share gains by passive ETFs and also entering the seasonally slower Summer months and the volatile Fall period. The U.S. stock fund proxies are T Rowe Price (TROW) and Janus Capital (JNS).

 

Total equity mutual funds put up a moderate outflow in the most recent 5 day period ending July 16th with $2.2 billion coming out of the all stock category as reported by the Investment Company Institute. The composition of the $2.2 billion redemption continued to be weighted towards U.S. stock funds with $3.9 billion coming out of domestic equity funds which was offset by a $1.7 billion subscription into international equity products. This drawdown in domestic equity funds has become an intermediate term trend with now the 12th consecutive week of outflow in the category. The running year-to-date weekly average for equity fund flow is now a $1.7 billion inflow, which is now below the $3.0 billion weekly average inflow from 2013. 

 

Fixed income mutual fund flows had another decent week of production with the aggregate $2.4 billion that came into the asset class besting the 2014 running year-to-date average inflow of $2.2 billion. The inflow into taxable products of $1.9 billion made it 22 of 23 weeks with positive flow for the category. Municipal or tax-free bond funds put up a $497 million inflow making it 26 of 27 weeks with positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $2.2 billion weekly inflow, an improvement from 2013's weekly average outflow of $1.5 billion, but still a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in bond fund inflow). 

 

ETF results were solid during the week with inflows into both equity funds and fixed income products. Equity ETFs put up a $5.0 billion subscription, making it 7 of 8 weeks with significant inflows, while fixed income ETFs put up a decent $1.2 billion inflow. The 2014 weekly averages are now a $1.8 billion weekly inflow for equity ETFs and a $839 million weekly inflow for fixed income ETFs. 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $914 million spread for the week ($2.8 billion of total equity inflow versus the $3.7 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $5.3 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   

 

ICI Fund Flow Survey - U.S. Equities Over the Waterfall...Bond Funds Bolstered - ICI chart 1

 

 

 

Most Recent 12 Week Flow in Millions by Mutual Fund Product:

 

ICI Fund Flow Survey - U.S. Equities Over the Waterfall...Bond Funds Bolstered - ICI chart 2

 

ICI Fund Flow Survey - U.S. Equities Over the Waterfall...Bond Funds Bolstered - ICI chart 3

 

ICI Fund Flow Survey - U.S. Equities Over the Waterfall...Bond Funds Bolstered - ICI chart 4

 

ICI Fund Flow Survey - U.S. Equities Over the Waterfall...Bond Funds Bolstered - ICI chart 5

 

ICI Fund Flow Survey - U.S. Equities Over the Waterfall...Bond Funds Bolstered - ICI chart 6

 

 

Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds:

 

ICI Fund Flow Survey - U.S. Equities Over the Waterfall...Bond Funds Bolstered - ICI chart 7

 

ICI Fund Flow Survey - U.S. Equities Over the Waterfall...Bond Funds Bolstered - ICI chart 8

 

 

Net Results:

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $914 million spread for the week ($2.8 billion of total equity inflow versus the $3.7 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $5.3 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 

 

ICI Fund Flow Survey - U.S. Equities Over the Waterfall...Bond Funds Bolstered - ICI chart 9 

 

 

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA


INITIAL CLAIMS: HOW LOW CAN YOU GO?

Takeaway: The labor market continues to improve steadily, auguring well for one of our favorite long ideas: the credit cards.

Crisis: Risk & Opportunity

Last week we flagged how the strength in claims represents both risk and opportunity. The opportunity lies in the fact that historically claims tracked at sub-330k for 24 months in the mid-to-late 1980s, 45 months in the mid-to-late 1990s, and 31 months in the 2005-2007 period. Currently, claims have been running at sub-330k for 6 months (though if you count from the initial drop in mid-2013 then we're closer to ~12 months). In other words, history would suggest (the last 3 cycles at any rate) there could be another 18-39 months of track left before claims begin to rise. The risk lies in the fact that major market downturns follow sub-330k claims periods. And, importantly, there's no guarantee the last 3 cycles will reasonably represent the blueprint for this cycle. We often work in close conjunction with our Macro Team on the labor and housing markets. The chart below, illustrating the dynamic, comes from Christian Drake on the Macro Team.

 

INITIAL CLAIMS: HOW LOW CAN YOU GO? - 20

 

Credit Cards

Credit Cards remain our favorite long on the improvement in initial jobless claims. We've been vocal in our enthusiasm for Capital One (COF) on the long side amid early signs of a resurgence in loan growth arising from increasing willingness to extend credit to subprime borrowers. So long as claims remain low, the coast is clear on the long side here and we expect both better than expected earnings and think there's good likelihood for some multiple expansion.

 

The Data

Prior to revision, initial jobless claims fell 18k to 284k from 302k WoW, as the prior week's number was revised up by 1k to 303k.

 

The headline (unrevised) number shows claims were lower by 19k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -7.25k WoW to 302k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -12.2% lower YoY, which is a sequential improvement versus the previous week's YoY change of -11.1%

 

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Yield Spreads

The 2-10 spread fell -5 basis points WoW to 200 bps. 3Q14TD, the 2-10 spread is averaging 206 bps, which is lower by -15 bps relative to 2Q14.

 

INITIAL CLAIMS: HOW LOW CAN YOU GO? - 15

 

INITIAL CLAIMS: HOW LOW CAN YOU GO? - 16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


BLMN: 2Q ESTIMATES ARE TOO HIGH

CAKE reported disappointing 2Q14 results, missing top line and bottom line estimates by 110 bps and 313 bps, respectively.  The miss was driven by lower than expected comparable sales growth of +1.2%, which missed consensus estimates of +2.1%, and significant margin pressure in the P&L as cost of sales and labor expenses muted earnings.  Traffic declined -1%, making it the seventh consecutive quarter of negative traffic.  Management guided down full-year same-store sales estimates from 1-2% to 1-1.5% and full-year earnings estimates from $2.24-2.33 to $2.19-2.25. 

 

Casual dining same-store sales are weak, we get that, but what did management attribute most to the miss?  Cream cheese.  Furthermore, CFO Douglas Benn noted that butter, which is typically a good proxy for cream cheese prices, spiked to all-time highs in late 2Q14. 

 

But we’re not here to talk about CAKE – that’s old news.  Instead, the aforementioned comment from Mr. Benn got us thinking about BLMN, which tends to use quite a bit of butter in their restaurants.  We’ve been bearish on BLMN since 11/27/2013, when we added it to the Hedgeye Best Ideas list as a short.  Despite removing it from this list on 05/14/2014, we've maintained our bearish bias and are more confident than ever that there’s another leg down to the stock. 

 

Not only have casual dining sales come in weaker than expected this quarter, but street estimates of $0.29 in EPS in 2Q14 are too high by about $0.03-0.05.  This estimate suggests BLMN will see 17% EPS growth on 7% sales growth in the quarter.  As we’ve harped on before, BLMN has very little leverage in their business model and the company is in no shape to handle the current commodity inflation (beef, shrimp, salmon, butter).

 

As it stands, FY14 estimates aggressive, but FY15 estimates for 19% EPS growth on 7% sales growth are even more egregious.

 

At any rate, at least there's no "love" inflation!

 

BLMN: 2Q ESTIMATES ARE TOO HIGH - 222

 

Call with questions.

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


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