Normalizing for taxes, WMS would have reported $0.49 which amounts to a disappointing quarter in light of "great expectations". Our long term thesis hasn't changed
WMS reported an inline quarter as we expected. However, given the "great expectations" going into the call, inline proved not to be good enough. Our long term thesis on WMS's outlook remains unchanged. We will have further thoughts on the quarter out shortly. Below are our notes from the call.
- Expect only modest increases in customer budgets in 2010
- Based on IGT's and WMS's replacement units, we estimate replacements will be up nicely y-o-y to roughly 12k units
- Think that they got higher ship share gains in the quarter
- Bluebird xD getting launched in the June quarter and should help them to continue gain ship share
- Repurchased $25MM worth of shares during the quarter (So $5MM post Q filing)
- 55% product sales margin target
- Overall environment of constraint and conservative in NA - however, it's the first quarter where units increased y-o-y
- Expect to deliver higher y-o-y unit increases in the June quarter due to entry into new distribution avenues and launch of xD
- Expect strong ASP's again in the June quarter, more of their customers are opting to upgrade to their BB2 line when ordering new units
- Australia will have a drag on ASPs, but will largely be offset by launch of BBxD which will sell at a premium price
- Increase in their Average Daily Revenue in game ops is largely driven by higher mix shift of WAP units as a % of the overall install base
- Gross margin decline in their gaming operations was due to mix shift towards WAP games and a benefit of favorable jackpot expense last year. They also had some royalty contracts roll off and are now servicing those customers directly (at a lower margin)
- Expect their tax rate to be btw 36-37% in the F4Q2010
- Had a $20MM WC benefit in the quarter partly due to lower demand for extended credit terms - however they are still above historical norms.
- Expect an increase in capital expenditures to expand gaming operations footprint
- September 21st analyst day in Chicago
- 26% ship share in calendar 2009, and believe they had better ship share in the March 2010 quarter
- Launching BlueBird xD cabinet in the June quarter. Has a smaller footprint than comparable products. Performing very well in current trials
- Launching Price is Right in June Q and Lord of the Rings in July. Lord of the Rings will have player recognition like Star Wars.
- Shipped games to New South Wales in the the March quarter. Expect to increase shipments to that market in the June quarter
- Mexico - shipped Blue Bird 2 units again this quarter and expect to gain further penetration in that market
- Italy - expect first revenue earning units to be placed this fall
- IL - expect first units to ship at the end of this calendar year
- Expect commercial applications of Wage Net and first portal applications to launch at the end of this year (Jackpot Explosion - first commercial application). Working with 9 casinos to trial Jackpot Explosion
- Revised 4Q Guidance of $213-223MM (lowered the range by $3MM)
- Ship share in March?
- Think they gained share in the March quarter vs. Dec Q
- 50% of profit came from gaming operations
- Expect to keep disciplined on supply of participation games
- Thoughts on IGT's discounting - "dynamix package"
- Continue to believe that as long as their games perform well, pricing will not be an issue
- Will bring out 105 new titles this year
- Would they have been able to sell more units if IGT had not bundled or if they had lower prices?
- Not concerned about their WAP footprint for Q4 given their product pipeline
- Got approval for Ruby Slippers at the end of March - so very few of those units are in the March 31st footprint - but they will be accretive to the footprint in June
- Refresh the stand alone participation footprint each quarter (Monopoly/etc) so they aren't ignoring them at the expense of WAP
- Why xD vs. BlueBird 2?
- Same themes run at significant premium on the xD vs the BB2 - pricing is north of $20K at same margins as BB2
RCL 4Q09 "YOUTUBE"
TRENDS & OUTLOOK
- "Looking forward to 2010, the year is looking much stronger than many thought possible only a short time ago. We're expecting good yield growth despite a continued poor economy. Wave season's off to a strong start with good volume and even higher pricing. While we are also not seeing a dramatic run-up in pricing, our numbers demonstrate a slow but steady improvement in our revenue environment, consistent with a slow but steady improvement in the economy. This improving environment combined with continued focus on cost will be meaningfully accretive to earnings this year."
- "It's encouraging to note that our yield guidance would still be positive for 2010 even if we excluded the Oasis- and Solstice-class ships."
- 4Q09 "Ticket revenue benefited from stronger-than-expected close-in bookings, and even onboard revenue was slightly stronger than we had forecasted."
- "Wave season is off to a promising start. Each of the last three weeks have generated record booking volumes for us at pricing that is running ahead of the same time last year. Clearly, we are not back to pre-recession demand level, but we are pleased to see yield recovery underway. As of today, our booked load factor and average net per diem are ahead of the same time last year for all four quarters and the full year."
- "We currently expect yields to improve around 2% in the first quarter and between 3% and 6% for the full year."
- "We once again had healthy close-in demand for our cruises in both Europe and the Caribbean. In general, volume was a bit better than what we thought at the time of our previous earnings call. Our onboard revenue also performed better than we had planned driven by shore acts [ph], gaming and onboard communications. And expenses were slightly under where we thought they would be driven by our focus on costs."
- "In the Caribbean, we've continue to see close-in bookings for the first quarter. Some of this closed-in business is being driven with discounting. But overall, Caribbean pricing remains consistent with our expectations a few months ago."
- "This summer's European season is looking very strong for Celebrity. Both Equinox, operating 10- and 11-night Med cruises from Rome, and Eclipse, our first ship dedicated to U.K. market operating summer cruises from Southampton, are performing well at very healthy prices. I'm pleased to say bookings are also performing quite well on our non-Solstice-class ships operating in Europe."
- SG&A? "Cost on a reported basis will be flat to slightly up. And when you factor in base exchange rates, it'll actually be flat to slightly down next year."
- "I think the Spanish economy continues to be likely the weakest that we are operating in these days. But I think we are feeling that Pullmantur has an opportunity of yield accretion in 2010."
Daily Trading Ranges
20 Proprietary Risk Ranges
Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.
HST 4Q09 YouTUBE
- “On all fronts, demand is improving on a relative basis, however, we continue to see those improvements at lower room rates compared to the prior year.”
- “The favorable trends we experienced in the third quarter accelerated during the fourth quarter as transient occupancy turned positive for the first time this year driven in part by increased special corporate bookings.”
- “Starting with our transient business, volume was very strong with an increase in room rates in the fourth quarter of nearly 7% compared to the fourth quarter of 2008, and perhaps even more noteworthy, up almost 1% compared to 2007.”
- “The increase in transient occupancy stemmed primarily from additional demand in both with discount … and special corporate segments..Rates continue to be a challenge as the average trends in rates declined by 15% for the quarter which led to an overall transient revenue decline of 9.6%.”
- “Group business trends have begun to turn the corner as the run rate of declines in group occupancy continues to improve and the outside levels of attrition and cancellation activity are reverting back to historical norms.”
- Group booking – booking window:
- “We're not seeing any sign yet that they are beginning to lengthen.”
- “Economic indicators present a very mixed picture with GDP improving, business investment expected to be relatively flat while unemployment remains high and job growth is not expected to accelerate until next year. Even with the recession ending in 2009, we believe that the pace of recovery in 2010 will be somewhat moderate as concerns over unemployment and consumer spending linger.”
- “The bigger challenge is on the rate side as we begin this year with average rate running around 10% below last year’s level. While comparisons will become easier as we move into the second quarter, we see pricing power returning only slowly on a market-by-market basis as demand begins to improve. Unless we experience a far more robust recovery that is currently anticipated, we would expect to endure a third consecutive year of decline in RevPAR and EBITDA.”
- “2010, we are expecting a solid increase in transient occupancy, although this may be offset by a decline in transient rate.”
- “Looking at 2010, at this point our forward bookings represent more than 70% of the group room nights we achieved in 2009… Our group room night bookings for this year are approximately 5% to 6% behind 2009’s pace. Based on the strength of our short-term bookings, we would expect to close much but not all of that gap by year end.”
- “However, we believe that rate crisis will persist on the group side in 2010, and that the decline in average rate will be higher for groups than on the transient side of our business. This will likely lead to a reduction in group revenues for the year. Of course the final results for both of our group and transient business will depend on the ultimate strength of the recovery and the economy in 2010.”
- “In a more favorably scenario, where there is significant business investment in job growth, which result in flat RevPAR for the full year, we would anticipate the comparable adjusted margin will decline a 175 basis points, leading to adjusted EBITDA of $750 million and FFO per share of $0.57.”
- Markets with a position outlook for 2010:
- “We expect the Miami/Fort Lauderdale market to perform very well [in 2010]. The outperformance will be driven by the late 2009 Ballroom addition at the Harbor Beach Marriott and demand generated by the Super Bowl and Pro Bowl.
- Boston will also be a top performer, benefiting from the 2009 renovation at the Sheraton Boston, Boston Marriott Copley Place and the Hyatt Cambridge. In addition, leisure and in-house group demand to help to offset weak citywide activities.
- We also expect New York City to outperform in 2010. We believe that occupancy will continue to strengthen across all transient segments, and may allow us to stabilize and eventually increase rates.
- San Francisco will also perform well, the Ballroom renovation at the San Francisco Marriott Marquis will negatively affect the first quarter but improve fourth quarter comparisons. While the citywide pace is down, transient demand is recovering well.”
- Markets that will continue to struggle in 2010...
- Phoenix, where substantial decline in group room nights is expected along with the 2.5% increase in supply. The ballrooms at the Ritz-Carlton and Phoenix in the Westin Kierland will be renovated and we are adding a ballroom in Kierland which will be disrupted and further reduce group room nights.
- The Hawaiian market will continue to be challenged by the lack of airline capacity and airline price increases. Although we have started to see a recent increase in flights, they are still well below 2007 level. In addition, both of our hotels will undergo room renovations.
- The San Diego market will struggle due to a substantial decline in citywide demand and the absorption of the new Hilton that opened in 2009, and room renovation at the San Diego Marina Marriott will also negatively effect our performance.”
- We expect the European joint venture portfolio to have RevPAR of +2% to -2% for 2010."
- “Looking forward to 2010, we expect occupancy to increase, which will lead to growth in wage and benefit costs, slightly less than inflation… we expect unallocated costs to increase less than inflation except for utilities, where we expect higher growth to an increase in rates in volume due to 2010’s cold winter compared to the mild winter of 2009. We expect property insurance to increase because of inflation, and property taxes to rise in excess of inflation.”
- Real estate taxes going higher:
- “I think the problem we are running into is that we know that single family values are down throughout a lot of markets. There is a reluctance on the part of most local governments to increase tax rates, especially as it relates to residential customers. And so, even though our value should be lower, at the end of the day we are assuming that we're going to pay a bit more.”
- “Given the current operating environment, tight capital markets for potential buyers and our strong capital position, we have not included any additional dispositions in our guidance for the remainder of the year, although, we still expect to market a few assets this year.”
- “While we are fairly confident we’ll acquire assets including debt instruments this year, we have not built any acquisition assumption into our guidance at this point.”
- “For all of 2009, attrition and cancellation fees were approximately $40 million higher than a typical year.”
- “I think you are seeing the conservatism of an owner who is basically paid and focused on the bottom line as the somewhat normal optimism of the operator to the little bit more top line focus. The truth is that I don’t think there is a huge difference in the way we are looking at next 2010 compared to Marriott and Starwood. They represent together probably 75% to 80% of our portfolio. So, to the extent that the way the years plays out is closer to the midpoint of their guidance and necessarily the midpoint of ours, you will see that benefit in our performance. I don’t expect that we would really ultimately perform much differently from them.”
- “I suspect that if we do underperform at all it would probably be because we have a slightly larger group presence, and it may take a bit longer for that to come back."
- “I suspect that if we do underperform at all it would probably be because we have a slightly larger group presence, and it may take a bit longer for that to come back."
We don't have a huge call in front of HOT's Q1 release but we do have a few thoughts. We've also included management's forward looking comments from their Q4 release and conf call.
“While it’s tempting to extrapolate the most recent trend all the way through 2010, we think it would not be prudent to do so this early in the year for several reasons. Firstly, we lap the steepest declines in the first two quarters. Comparisons get somewhat tougher in the second half. Second, GDP growth right now is above trend, with inventory replenishment, fiscal and monetary stimulus. Will this be sustained as we enter the back half? Countries like China, India, Australia, and Brazil are all taking steps to prevent their economies from overheating. Could things cool down a bit in some of our fastest growing markets? And finally, we’ve taken a massive hit on rates. What will be the pace of rate improvement? It’s too early to tell.”
- Vasant M. Prabhu, Executive Vice President and Chief Financial Officer, Starwood Hotels
Vasant's comments from the last earnings call where more conservative than the typical HOT commentary. Given the recent STR numbers and guidance from MAR, the commentary is likely to be more bullish on HOT's coming earnings call this Thursday. We expect that HOT will meet raised Street expectations and raise guidance for the balance of the year. Our revised 2010 Adjusted EBITDA estimate is $785MM, $35MM ahead of HOT's guidance and $25MM ahead of the Street. However, at north of 16x EBITDA does it really matter?
FORWARD LOOKING COMMENTARY
- “Looking ahead, it’s safe to declare that our headwinds of 2009 – luxury brands, owned hotels, global footprint, and even foreign exchange – will soon be tailwinds.”
- “Just like prior cycles, ADR improvements will lag the general environment.”
- “We expect 2010 to be the third-straight year of 8%-plus gross unit additions.”
- Comments from Barclay conference on 3/25: "We’re targeting mid-single-digit growth on a net basis in 2010."
- “Leisure travel continues to rebound after the depths of 2009. Group is improving, with new leads up in the mid-teens. Business travelers have returned, as witnessed by improving Monday-to-Thursday occupancies. New York, a good leading indicator, saw occupancy levels of roughly 88% in Q4. That’s just short of the peak of 88.5% in 2007.”
- “Based on what we see unfolding today, we expect worldwide company-operated REVPAR to be between flat and plus 5% in 2010 and REVPAR at our owned hotels to be roughly flat year-over-year.”
- “In developed markets, we do not expect much growth. North America could be flat to down 3% and Europe only up modestly, flat to up 3%.”
- “Positive REVPAR growth will be driven by emerging markets, Asia, Latin America, the Middle East, and Africa, where we earned more than 40% of our fees in 2009.”
- “We expect owned REVPAR to be flattish, down 2% to up 2% in local currencies. Occupancies are likely to be positive, but rates will stay negative. With flat REVPAR and occupancies up, we will need to continue to work hard to limit cost growth. Our intent remains to offset wage and expense inflation with various productivity and procurement programs, as we did in 2009. However, 2010 will be another year of declining owned EBITDA.”
- “You should assume that there is another year of somewhere in the range of 10 to 15% declines in owned EBITDA”
- “With salary adjustments, incentive compensation resets, the negative impact of the weak dollar, and a couple of other items moving in the wrong direction, SG&A in 2010 will be up 3 to 5%.”
- “On an operating basis, our vacation ownership business will be down 40 million or so versus 2009. 23 million of the reduction would be from securitization gains, which we will not have in 2010 due to the change in accounting rules... As a result, interest income this year will be 15 to 20 million lower. This 40 million or so decline in vacation ownership operating results is offset by a 40 million add-back from the adoption of FAS 166/167.”
- “At the midpoint of the zero to up 5% REVPAR range and the plus two to minus 2% range for owned hotels, baseline company EBITDA would be $750 million. Each point of REVPAR adds or subtracts 15 million in EBITDA. For an apples-to-apple comparison to 2010, you have to adjust 2009 down by around 20 million for asset sales and the de-flagging of the Sheraton Manhattan.”
- “Our D&A… is down about 10 million or so due to asset sales. Our book interest expense is up by about 20 million from the accounting change. With a 22% tax rate, the 750 million scenario for EBITDA translates to $0.63 of EPS.”
- “In 2010, we’ll spend 250 million in hotel capital. Investment capital spending will be 100 million, as we undertake some ROI projects which were on hold. Maintenance and IT spending will be 150 million, as we step up spending on technology.”
- “SVO will generate over $150 million in cash flow, more than adequate to cover capital deployed at Bal Harbour. Bal Harbour capital is estimated at 140 million but could be lower as we receive deposits from additional condo sales. Both inquiries and contract activity at Bal Harbour have picked up meaningfully after the turn of the year”
- “Assuming we receive 200 million plus from the tax refund, after paying dividends and before any additional asset sales, debt should come down another 100 to 200 million by the end of the year.”
- Net pipeline additions in 2010?
- “Yeah, if you say about 80 hotels opening, we would say exits are probably in the – hopefully in the 25 to 30 range. So a net 50 with an average of about, let’s say, 300 rooms. So that would give you 15,000 rooms a year on a base of 300. So it’s about 5%.”
CURRENT STATE OF AFFAIRS
- “Guests are coming back to luxury. With higher occupancy, REVPAR for this segment was down roughly 3%. Regionally, Asia Pacific stood out, with REVPAR plus 1%. Yes, folks, you heard correctly, that was plus 1%. But it does include 600 basis points of foreign exchange tailwind.
- “We exceeded our REVPAR expectations as late breaking, in particular corporate transient, business was stronger than we had anticipated around the world, and the recovery trend accelerated as the quarter progressed.”
- “In North America, REVPAR improved from down 11 to 12% in October-November to down 6.5% in December and down 3% in January at company-operated hotels. This pace of improvement was entirely driven by occupancy, which went from being flat to up one point in December, to up over six points in January. And most of the occupancy increase was driven by weekday room nights, which grew 6 to 7% in December and January. Leisure transient room nights remained consistently positive, offsetting group declines. Rate continues to lag, but periods of compression in December and January allowed us to improve rate realization from negative 12% in October to negative 9% in January.”
- “Local currency REVPAR at company-operated hotels in Asia went from negative 10% and 6% in October and November to positive 7% and 12% in December and January, a 20-point swing over the past four months, as occupancy jumped from up three points to being up nine points, while the rate decline in local currency moderated from minus 14% in October to minus 7% in January. The recovery was broad-based across Asia, led by China. The only market that lags is Japan. Powering the recovery was in-the-quarter, for-the-quarter business up 20% in transient and up over 60% in group over the last year.”
- “Europe, Africa, and the Middle East REVPARs were down 2% in December-January after being down 12% in October-November. Once again, occupancy turned positive and rate declines moderated.”
- “South America is coming back strongly as H1N1 effects fade, but Mexico, which is tied closely to the U.S., remains weak.”
- “In our vacation ownership business, the trend towards stabilization continued. Tours and close rates are holding up; pricing is under some pressure.”
When it comes to GS, we aren’t trying to be anything other than right on this stock. Our role as The Risk Manager is to tell you where this stock has the highest probability of going in the immediate term; not to pander to the many friends we have who work at Goldman Sachs. This isn’t about them. This is about re-regulating the financial system.
Today you are seeing lower-lows in the stock (post the SEC charge) on another day of heavy volume (16M shares traded as of 1130AM EST). Below the $151 line of support we issued last week is no quantitative support to $142.89/share (green line in the chart below).
Interestingly, GS’s credit default swaps are widening by almost +13% today to 162 basis points. While this isn’t in the area code of Bear/Lehman days of 2008, on the margin it’s certainly not a bullish development. The chart of Goldman CDS is outlined below.
As we have highlighted in the past, keeping abreast of the credit default swap market can be a great leading indicator for what will happen in the equity markets. Or currency markets, as the case may be.
On April 19th we highlighted a similar point in a note titled, “Keep Your Eyes on Greek CDS . . .”, which emphasized the Greek CDS had expanded to levels similar to February of this year. Since that date, the Greek stock market has declined 7.7%.
The point is not to pile on with the Goldman bears, but rather just to highlight a risk factor when thinking about the equity of Goldman.
Citadel’s Chief, Ken Griffin, just explained risk management in two words to an awestruck crowd at the Milken Institute today – “it's math.”
Well done, Ken. And thank you.
Keith R. McCullough
Chief Executive Officer
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