Solid quarter and guidance. Resumption of guidance probably mean its conservative.
"Our results for the second quarter reflect continued positive momentum in our business. The improvements during the quarter were broad-based, as all three operating regions posted year-over-year EBITDA gains, and operating margins in our wholly-owned business rose by 240 basis points. We were especially pleased with the continued strong performance of our Midwest and South properties, which reported a 19% EBITDA gain for the region's third consecutive quarter of growth."
- Keith Smith, President and Chief Executive Officer of Boyd Gaming
HIGHLIGHTS FROM THE RELEASE
- "Our Las Vegas Locals segment....results reflect stable business volumes and effective cost-control measures, as our EBITDA margin rose 140 basis points over the prior-year period."
- "Net revenue growth in our downtown operations was almost entirely offset by significantly higher fuel costs at our Hawaiian charter service."
- "In our Midwest and South region...operating results were impacted by the flood-related closure of Sam's Town Tunica for 25 days in May; however, all five other properties in the region reported EBITDA growth in the quarter. EBITDA margin for the region improved by 370 basis points. We saw particularly strong growth at Treasure Chest, Delta Downs and Par-A-Dice."
- "Borgata continued to outperform the market despite heightened regional competition, boosting its market share by 80 basis points. The property also posted increases in non-gaming revenue, primarily from improved hotel ADRs and occupancy. These gains, however, were offset by increased promotional expense."
- "The Company is in the final stages of due diligence related to its acquisition of the IP Casino Resort Spa in Biloxi, Mississippi, and expects to complete the process by August 4. Assuming this process is completed satisfactorily, we will pay a $10 million non-refundable deposit to the sellers on this date. We expect to close this transaction early in the fourth quarter."
CONF CALL NOTES
- Believe that strengthening trends on the Strip will begin to help their locals business and they are beginning to see that happen
- Sale of Dania Jai Lai: Process continues to move forward and is scheduled to close in late September
- They are confident that they can increase IP's earnings potential once they fold it into BYD's operation
- Focused on finding more growth opportunities
- Las Vegas locals business: Orleans posted 7% EBITDA growth on higher revenue. Multiple properties recorded YoY gains. Growth in convention and meeting business increased more than 20% and they expect that run rate to continue. Promotional environment remains elevated but they feel like they have the right strategy. Feel that locals business has returned to YoY growth.
- Downtown: If not for much higher fuel costs, EBITDA would have been up 8%. Starting in September, they will convert to a Boeing 767, making their business more competitive and increasing capacity by 12% for fly-in business.
- Midwest and South: Strongest margins since 1Q09. Sam's Tunica returned to pre-flood levels of business in July but forward bookings are weak.
- IP will create substantial cross marketing opportunities
- Increased promotional spending at Borgata in response to elevated competition for customers.
- Share based comp was $2.1MM
- Expect 3Q interest expense to decrease $5MM sequentially due to expiration of swaps
- 3Q Guidance:
- Wholly Owned EBITDA (incl. corp exp): $65-70MM
- Borgata EBITDA: $52-55MM
- EPS: $0.00-$0.03
- Las Vegas Locals: Orleans has been a standout for 3Q's in a row. Rest of the year, they still expect increases in results despite harder comps.
- They don't have a lot of room to cut expenses but as revenue recovers they should have really good flow through
- Treasure Chest: continued to expand operating hours where they are now opened 24 hours on weekends and longer hours mid week. New Orleans market never got hit as hard as other areas and has therefore improved faster.
- Lake Charles has benefited from smart marketing to Texas. Their unrated play has picked up.
- Balance sheet: $330MM maturity of their non-extending R/C and IP acquisition expense. Sources of cash: $350MM of availability of the extending portion of the facility, $80MM of non-cage cash available, Dania sale: $80MM of proceeds upon closing. So that leaves them with $250-300MM of financing that they need to do - sometime before 1Q2012.
- The $1.1MM of expenses related to Tunica is the deductible plus some additional expenses - that was added back in the adjusted EBITDA calculation
- Increased promotional activity at Borgata?
- Have continued to see elevated promotional environment over the summer that they have seen over the last few quarters. By 3Q they will cycle through the PA table game addition comps.
- Feel like their results are pretty good given the elevated competition
- Dania: Received a non-refundable $5MM deposit. Buyer is spending a lot of money preparing to close on the acquisition. Feel like the buyer is showing every indication of intending to close. The buyer does have the option to extend closing by 60 days under certain conditions.
- Not commenting on revenue growth in the Las Vegas locals market but do think that results will increase in the 2H. Flow through on revenue increases - 1% increase in revenue = 2% increase in EBITDA
- Summer is the peak season along the gulf coast for hotel occupancy and visitation, but the seasonality isn't huge.
- 2Q: $12.5MM (including $6MM at BYD and 7MM at Borgata)
- They are consistently underspending their capex budget - run rate of $15MM in 3Q and 4Q
- Promotional environment in locals LV market. They are using a lot mailers. Have stayed away from big ticket /broad based promotions as they tend to have a lower ROI
- Echelon site?
- Continue to monitor the recovery of the Strip, but there are no current thoughts or conversations to commence construction there. It is important to have a site on the Strip for them at some point in the future.
- Have not seen any easing of promotional spending in locals LV since Stations re-emerged from bankruptcy
- Their visitation in Vegas is healthy but spend per visit is down. They don't need to increase FTE's - just maybe increase hours.
- Cost of charter service increased $1MM YoY and will likely have a similar increase YoY in the 3rd quarter
- Spend per visit trends in the LV locals market - they have seen improvements in the top two tier segments of their database across all regions.
- Share losses in Nevada are largely due to promotional expenditures in their opinion.
- IP strategy: they are looking for acquisitions that are a good fit, help them to diversify, have a top competitive position, and are accretive and provide a good return. They are agnostic of future geography outside of the mentioned criteria above.
- Proposed project in Bossier City- challenging market to consider additional capacity
- Room renovation at Borgata: Includes all the rooms at the original hotel completed from fall of this year through spring of next year to be completed before Revel opens. It's a comprehensive room overhaul. There shouldn't be a lot of disruption.
The commodities we follow in our commodity monitor, on average, went higher over the last week although the most important items were flat-ish.
A stronger dollar would do a lot to relieve cost pressure for food, beverage, and restaurant companies. This past week, however, saw the majority of names move higher. Specifically, Sugar, Chicken Breast, Rice, Pork and Beef moved higher.
The table below details the price action in commodities.
Coffee continued its slide downward this week, declining -1.6% following a -8.9% slide last week. News emerging that Brazil, the world’s largest producer of the commodity, may reach a record level next season on favorable climate conditions are helping ease supply concerns. Further supply increases are likely necessary to bring the price of coffee down to more “normal” levels; growing demand from international markets is catching investors’ attention. Countries like Vietnam, Brazil, and Colombia are seeing increasing domestic consumption.
The coffee concepts in the US are seeing tremendous growth and DNKN’s IPO is a sign of that. If coffee costs were to come down from here to more normalized levels, it would be an intermediate term positive for SBUX, PEET, DNKN, GMCR, CBOU, and THI. Below is a selection of comments from management teams pertaining to coffee prices from recent earnings calls.
- PEET (5/3/2011): We believe we're better off lowering our earnings guidance by $0.10 this year and continuing with the plans we have in place than we would be curtailing spending activity or taking extraordinary pricing action that would be inconsistent with our long-term business interests, and the more sustainable long term cost of coffee we foresee. As a result, you will see throughout our call today that we have a very strong performing fundamental business, but we have to buy some unusually high priced coffee in the short term, then we're not going to do unnatural things in reaction to an unnatural market environment short term. Hedgeye: While it seems that price may have been “unusual” to management teams in May, it is taking quite a while for prices to adjust, making these levels less and less unusual. New coffee consumers are entering the market place and a “new normal”, albeit likely lower than April’s peak, may be reached.
- GMCR: (5/3/11): Before closing, I also want to touch on rising coffee costs and the effect of our business. Like others in the industry, we are closely watching coffee prices. When we announced our last price increase in September of 2010, coffee prices had increased roughly 30% from $1.45 to $1.90 per pound over the course of roughly three months. Since then, costs have continued to escalate, recently hitting historic highs of more than $3 a pound, a nearly 60% increase since September. In attempt to offset rising green coffee costs, as well as increases in other input costs, we are currently in the process of raising prices for all packaged types. We expect that consumers will see an increase of approximately 10% at the point-of-purchase as the result of this price increase. We expect to see the full benefit of this price increase during our fiscal fourth quarter of 2011. We generally fix the price of our coffee contracts three to nine months prior to delivery so that we can adjust our sales prices to the marketplace. Hedgeye: Coffee has backed off the “historic” high of more than $3 per pound but is still at roughly $2.50. Demand remains strong; without a rising dollar, expect price to continue to pressure retailers.
- SBUX (4/27/11): Regarding coffee costs, as I have indicated previously, we have fully locked our coffee costs for 2011 and are price-protected for a couple months into fiscal 2012. As we progress through the balance of 2011, we will progressively take actions to secure our coffee needs and lock coffee costs for additional months into 2012. While we expect that the costs we pay for coffee may be higher in '12 than they are in '11, we remain confident that we can offset those increased costs and preserve our long-term earnings growth targets. Hedgeye: SBUX is confident that it can pass on price and offset coffee inflation with other efficiencies. It is interesting that it expects higher coffee prices in 2012 than in 2011, which would somewhat contradict PEET’s assertion that in May that prices at the time had been unusual. SBUX expects higher prices to come.
Cheese prices are sky-high at the moment and caused DPZ management to raise guidance for its full year 2011 food basket to 4.5%-6% from 3%-5% yesterday. We continue to believe that others (like CAKE) will have to follow suit. Below is a selection of comments from management teams pertaining to cheese prices from recent earnings calls.
- DPZ (7.26.11): “Given higher than originally anticipated cheese prices, we currently expect our overall market basket for 2011 will increase by 4.5% to 6% over 2010 levels. This was up from our previously communicated range of 3% to 5%.” Hedgeye: Last week we highlighted the fact that DPZ’s last earnings call took place during a trough in cheese prices and we expected a change in tone from the commentary in early May. CAKE is likely, in our view, to make the same transition in tone at some point this year.
- TXHR (5.2.11): “We've also got a lot of flow in the dairy markets, in cheese, so there's other things beyond produce that do move around throughout the year.” Hedgeye: In 1Q09, TXRH called out favorable beef and cheese prices as being primary drivers of cost of sales being down 126 bps in the quarter. We think it is highly likely that cheese will be a contributor to a cost of sales increase in 2Q11.
Corn prices are continuing to trade largely sideways since mid-July despite Goldman cutting its forecast for U.S. corn production and highlighting “upside risks” in price . Higher corn prices would support higher protein costs. At the same time, however, it is worth noting that the increased number of cattle being slaughtered due to the increased costs of maintaining cattle in the current drought that is marring much of the country’s farmland may also decrease demand for corn prices. Below are two comments on corn prices pertaining to corn. CMG has a contract on corn and MCD is seeing strong enough comps that it was able to maintain its commodity basket inflation guidance of 4-4.5% in the U.S. for the year.
- CMG (4/20/11): The only things we have locks on corn for most of the year, rice for the entire year, our tortillas and beans for most of the year as well. Hedgeye: CMG will likely have to renew any corn contract at a level far higher than the one it currently holds.
- MCD (4/21/11): And so if the commodity markets move significantly from here and the main ones obviously looking at beef, looking at corn, wheat, coffee, et cetera, our guidance reflects where the markets are today. Hedgeye: MCD is driving top-line trends so well that commodity cost concerns are being pushed aside. Additionally, the stronger sales of the higher-margin beverage product helps offset any inflationary pressure from other COGS.
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In preparation for RCL's Q2 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from RCL’s Q1 earnings call and 10Q.
Outlook from 10Q
- Net yields: +5% (current currency): +1-2% (constant currency)
- Net Cruise Costs per APCD: +5% (current currency); +3% (constant currency)
- Net Cruise Costs per APCD ex fuel: +4-5% (current currency); +2 (constant currency)
- "6.6% increase in capacity, primarily driven by a full quarter of Celebrity Eclipse and by the addition of Allure of the Seas which entered service during the fourth quarter of 2010."
- D&A: $170-175MM
- Net interest expense: $75-80MM
- "If fuel prices for 2Q remain at the level of current "at-the-pump" prices, fuel expenses would be ~$189MM. Our fuel expense is approximately 58% hedged and a 10% change in fuel prices would result in a change in our fuel
expenses of approximately $9.0MM, after taking into account existing hedges."
- "Assuming that fuel prices remain at $596 per metric ton and 2Q 2011 foreign currency exchange rates are $1.47 to the euro and $1.66 to the British pound, we expect 2Q 2011 EPS to be in the range of $0.40 to $0.45."
- Net yields: +5-7% (current currency); +3-5% (constant currency)
- Net Cruise Costs per APCD: +5-6% (current currency); +4% (constant currency)
- Net Cruise Costs per APCD ex fuel: +4-5% (current currency); +2-3% (constant currency)
- "7.5% increase in capacity, primarily driven by a full year of service of Celebrity Eclipse, a full year of service of Allure of the Seas and the addition of Celebrity Silhouette which will enter service during the third quarter of 2011." (Celebrity Silhouette launched on July 23)
- D&A: $705-715MM
- Net Interest expense: $310-320MM
- "If fuel prices for 2011 remain at the level of current "at-the-pump" prices, fuel expenses would be ~$770.0MM For the remainder of 2011, our fuel expense is approximately 56% hedged and a 10% change in fuel prices would result in a change in our fuel expenses of approximately $31.0MM for the full year 2011, after taking into account existing hedges."
- "Assuming that fuel prices remain at $581 per MT and full year foreign currency exchange rates are $1.47 to the euro and $1.66 to the British pound, we expect full year 2011 EPS to be in the range of $3.10 to $3.30."
Youtube from Q1 Conference Call
- “The Mediterranean became softer as a result of Libya. Obviously the events in Asia and Egypt and Tunisia had an impact. I would say all those product lines are down from our expectations when we had our last call. But our expectations related to the Caribbean, Alaska and the other product lines are the same to slightly better. And the net effect of it is, excluding the direct impact of Egypt, Tunisia and Japan, net, net it’s all about the same as it was three months ago.”
- “At that time, we provided initial guidance for the year of $3.25 to $3.45... the direct impact of the geopolitical events is expected to be about $0.20. At today’s pricing, fuel expense, net of our hedges, cost us another $0.30. But we were covered about a $0.11 of this in the first quarter from the change in the value of our fuel options. In addition, when fuel prices are increasing, the U.S. dollar more often than not is decreasing in value, which has a positive effect on our earnings. Since our last call, we’ve picked up about $0.15 in our forecast from currency. So on a nutshell, the midpoint of our guidance has been lowered by approximately $0.15.”
- “With regard to cost, we are feeling the pressures... in precisely the areas that we said we were most concerned about: food and transportation in particular. However, our team has managed to offset these cost pressures without sacrificing our customer engagement initiatives.”
- “Each additional 1% we can improve pricing, moves our earnings per share up by about $0.25... You should expect to see us toeing the line on costs, but pushing harder than ever to enhance our pricing, both by being more attractive to the guests and by strengthening the support we provide to our travel agent partners. This will continue to include sales and marketing commitments, our hardware investments, better deployment or enhanced websites, just to a name a few. These actions do put pressure on costs, but we only intend to pursue them if they generate disproportionate benefit on revenues.”
- “You’ll note that we have modestly increased our CapEx estimates. Part of this relates to Project Sunshine, which we’ve previously announced and which we’ve recently finalized the contract for. Another part of the increase relates to our revitalization programs, which have been underway for some time now. Our results from the refurbishments we have already completed have been so compelling, both in terms of guest satisfaction and returns that we feel it’s appropriate to accelerate and expand these.”
- “In addition to our fuel swaps, as we have previously disclosed, we have numerous WTI fuel options which provide additional insurance against rising fuel prices. These options are at strike prices ranging from $90 to a $150 and have various maturities running through 2013.”
- “Prior to the earthquake in Japan, we were forecasting double-digit yield improvement for the Legend of the Seas. Unfortunately, our spring deployment of this vessel was targeted to the Chinese market with Japan as the featured destination. In total, we have already rerouted 21 sailings as a result of the tragic events at Japan and it is likely we will need to make further modifications going forward."
- “Prior to the Libyan uprising, Mediterranean bookings were running ahead of the same time last year despite significant increases in capacity... During the months of February and March demand softened considerably, particularly out of the U.S. and UK markets. Over the last few weeks, however, bookings have returned to normal levels albeit at reduced pricing.”
- “We still expect our European product line in total to finish the year with yield increases in the mid single-digits. Additionally, our other product groups, including the Caribbean and Alaska, continue to show strong year-over-year improvements. We expect this strength to substantially offset the discounting you’ve witnessed in the Mediterranean.”
- “Pullmantur has recently expanded its air and distribution operations in Spain. Both of these initiatives are expected to strengthen our brand and improve our market position in the future. And while this area may cause some volatility in our metrics, we expect little to no effect on earnings for the balance of the year. We currently expect about a 1% increase in yields and about a 1.5% increase in costs due to these initiatives.”
- “We’ve been able to offset virtually all of the increases in oil prices through our hedges, options and currency gains. The demand environment remains sound and for the vast majority of our products demand is as good as or better than it was in January. And with the exception of Asia, we are forecasting yield increases for all of our other product groups.”
- “Although there is of course very limited visibility for the 2012 Europe season at this time, we remain bullish on our brands prospects for next year in Europe and view the Navigator situation as a unique one.”
- “In May, we will revitalize the already beautiful Radiance of the Seas, again adding a number of features from our more recent ship classes. And in the fall, we will do the same for Splendour of the Seas.”
- [UK pricing] “In the last month or so, we have seen pretty solid demand, some of it at lower prices than we would have received if we had been in the absence of these events... We expect to sail our ships and we expect it will have a reasonable pricing as the season moves on. It’s very hard to divorce what’s happening in the UK and the EMEA market from the rest of what we’re doing, because they’ve just become so strategic and that’s the primary source market for us that we take them sort of integrally into the mix as we do our business.”
- “The Mediterranean, we’re still discounting. We have got the volume back where it needs to be. But it is discounted from before the Libyan situation but the volume is back and our yields in aggregate from the other products are substantially offsetting that discounting. We are looking at peak yields in the third quarter, in part because of the impact of the items that we talked about but also as we alluded to on our last call, the third quarter is probably where we have the most ground to make up to prerecession levels.”
- “At this point, we are not adding discounts other than the normal tactical things that go on in the marketplace. But I think our pricing is more back in equilibrium with the demand environment and relatively stable at this point.”
- “Generally speaking, we’ve talking about being 50% booked in the trailing 12 months period.”
- “We are seeing outside of the Med the ability to raise prices. We’ve also been able to raise the prices in Northern Europe. So, we are able to largely offset the shortfall in the Med and then the Med promotions are typical promotions that we do anywhere when we run into a situation where we aren’t getting the demand that we’d like."
- “I think we do see that the investments that we are making ...relates either to sales and marketing efforts in the U.S. or to our growth internationally. So we have significantly expanded our focus in your offices in places like China and Brazil et cetera. We are also investing in things that will hopefully make us even more attractive to the travel agent community in terms of systems and programs. So all of those are expensive, they’ve been included in our forecast and our expectations and while we’re coming back to a question that was asked earlier, while we are trying to control costs and seem to have done so, we are not doing and sacrifice those things which we think payoff.
- “The constant currency yield increase for the quarter is low relative to the full year. This is driven by two factors. First, the majority of the impact from events in Northern Africa and Japan are expected to be felt in the second quarter. And secondly, most of the revenue upside from Pullmantur’s increased tour operation will fall in the second half of the year with very limited impact in Q2.”
POSITION: No Position SPY
We are getting a lot of inbound request for levels. That’s a signal in and of itself, but the timing of the requests is very appropriate. With the VIX immediate-term TRADE overbought at 22.01, we are testing the SP500’s intermediate-term TREND line of support.
For scenario analysis purposes, I stress tested some of the volume, volatility, and duration assumptions in my model to make sure I am not hanging on 1319 instead of a tighter range of probabilities. What I come up with instead is a 1 range of intermediate-term TREND line support that I am comfortable managing risk around.
The core tenant to our “Risk Ranger” Theme for Q3 plays right into this. If we go bearish TREND, I’ll get more aggressive on the short side. If we remain bullish TREND, I’ll lean longer (like I am now).
Put another way:
- If we breakdown and close below 1316 (closing prices), I sell
- If we hold and close above 1316 (closing prices), I buy
Our long-term TAIL durations of support and resistance wrap around immediate-term TRADE range of 1.
- TAIL resistance = 1377
- TAIL support = 1251
So, again, those are your fractal points of reference above or below 1316.
This is manageable.
Keith R. McCullough
Chief Executive Officer
Decent results and the MGM catalyst
After reporting what looks like a decent quarter, BYD’s stock is trading lower. The stock traded up into the quarter but once those gains are booked we expect a sharp reversal in the stock. While the quarter was not a blockbuster, it did beat our expectations, particularly in the regional markets. Importantly, BYD’s locals Las Vegas business reported YoY growth and beat our estimate so that market may have stabilized.
We think the stock could bounce significantly off of its morning lows. Anecdotally, there seems to be a lot of interest in the hedge fund community for the next big gaming idea, given the terrific moves that a lot of gaming stocks have had year to date. BYD had a good week of trading but is still lagging the big movers over the past few months. Moreover, with a likely very strong MGM quarter coming up a couple of weeks (August 8th), people will be looking for the usual derivative Strip play – exposure to the Las Vegas locals market. MGM is up over 30% in the last month alone. Watch BYD closely today.
Here are the results from the quarter:
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