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  • 5% of employees (450 positions) eliminated by end of 2014
  • Gaming consolidation underway in Las Vegas
  • Highly confident in seeing improvement in FCF starting in 2H 2015
  • Gaming ops:  Average daily revenue/footprint increased 10% YoY in 2014
  • Lower installed base: One single customer reduced slots by 259 in 4Q 
  • $18.5m not added to Attributable EBITDA -consisting of $6.2 million of impairment charges associated with the Monopoly Millionaires Club™ game (of which $5.7 million impacted cost of instant games and $0.5 impacted depreciation and amortization), $5.2 million of impairment charges related to inventory obsolescence (of which $3.1 million impacted cost of services and $2.1 million impacted cost of sales), $4.0 million write-down of certain receivables from international customers included in selling general and administrative expense and an incremental $3.1 million charge in earnings (loss) from equity investments related to the additional shortfall payment booked by the Northstar Illinois joint venture for the lottery's fiscal year ended June 30, 2014.
  • No significant maturities until 2018.  Paid down $18m in revolver to fund Bally acquisition. 
  • Currently liquidity of $538m
  • FCF: priority is to pay down revolver
  • 2015 Capex: $320-$350m (15-25m integration related capex)
    • Spending mainly on lottery side of business
  • SG&A:  $85m of charges previously described; $11m restructuring expenses ($1m WMS-related)
  • 7% increase revenue in UK installed base
  • 4Q: 228 IL VGT units shipped
  • 4Q replacement: 4,511 (848 units YoY increase)
  • Maintenance revenue virtually flat
  • Table revenue down $1m 
  • Lottery services revenue declined $5m (low performance of Powerball and MegaMillions). 2015 better start due to large Powerball in February.
  • Lottery: benefited from lower OpEx and lower termination expenses  
  • Interactive: $3m from Bally
  •  Key priorities:
    • 1) customers
    • 2) focused on integration initiative
    • 3) discipline in management of deployment of capital

Q & A

  • Feedback from customers: similar budgets as last year
  • Believe increased wallet share in Q4
  • Leverage:  Q4 included $135m of cash-based charges. Continue to invest wisely and get appropriate returns. 
  • 2015 Gaming:  relatively flat with a slight increase in share 
  • 2015 Lottery: Europe doing better
  • Gaming systems:  long lead time. Expect some big sales.  ALH rollout is very exciting - for the smaller-end market.
  • NOL balance at end of 2014: will be in the 10K (will be filed on Monday)
  • Cash taxes:  tens of millions from foreign results
  • Q4 Replacement units:  Bally had a stellar performance with Wave cabinet and Shuffle products. 
  • Gaming ops: customers are used to operating in 'new' environment. Mixture of luck, lower gas prices, and better weather also playing impact.
  • Salesforce integration:  training session. So far, so good.
  • Pro-forma 12mth ended: Cash based interest expense was $615m 
  • In purchase accounting, eliminated deferred revenues that Bally had ($27m). $5m of that $27m would have been in Dec Q. The other $22m will be impacted in 1H 2015.
  • Greece (OPAP):  contract being finalized now. SGMS was selected as a contractor. 
  • Can you get Interactive margins to 30-35%?  Rolling out mobile part of interactive.  Spending more there which has adversely impacted margins. 
  • Area of disappointment:  non-WAP premium units declined in 2014.  Customers had to reduce costs in that sector.  
  • Good performance with Wonder Woman and Flintstones 
  • S23 Cabinet will be launched this year and a couple of more products
  • The $15-25m of integration capex is in addition to the $70-80m disclosed previously
  • Low Gas price impact:  instant ticket sales are up but don't know definitely if there is an impact
  • Attributable EBITDA from Equity investments: $70.8m in FY 2014
  • Writedown in receivables:  related to Gaming business in Latin America


Takeaway: Stocks are down a lot but still at July 2013 levels – a time when estimates were higher, the outlook brighter and risks greater.


It’s been a year since we made the first call of our three pronged short call and we remain bearish on Macau stocks. Yes, the sell side has caught up and most analysts are bearish. While the stocks have fallen a lot, they have only reached July 2013 levels. We’ve made the bear case in many ways over the past year but the purpose of this note is to show that there is downside precedent. In July of 2013, 2015 Street EBITDA estimates were much higher than they are now and the short, intermediate, and long term growth forecast was much greater.


Please see our detailed note: 


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Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.

What is the Risk of Oil Storage Capacity Constraints?

Takeaway: If current trends can continue (which would be a stretch for the bull case), we could likely see a problem by June in Cushing, OK.

The domestic production machine goes on for now, but a sequential deceleration in production growth is well underway.

The EIA released its monthly drilling productivity report Monday which showed more of the same. Production levels and efficiency continue to increase as storage capacity dwindles:

  • Rigs continue to come offline at an ACCELERATING rate
  • Production levels are still delta positive on both a m/m and y/y but  DECELERATING
  • Production per rig is also delta positive on a m/m and y/y basis but DECELERATING

What is the Risk of Oil Storage Capacity Constraints? - Rig Table


What is the Risk of Oil Storage Capacity Constraints? - Baker Hughes Rig Count Chart


In the recent past we have been producing approximately ~1MM B/D in excess of what we’re consuming domestically. And now the question becomes… When will this present a big problem? The case that an infrastructure lag will put a floor in prices is straightforward, but considering we’re only 2/3rds full in aggregate, there is plenty of pain between now and the point in time where the production surplus will be at a critical state.

  • For 9 consecutive weeks the EIA has reported an AGGREGATE crude oil inventory build to new all-time highs
  • For 14 consecutive weeks, the country’s main trading hub in Cushing, OK has reported a positive inventory build

Cushing, OK remains a focal point because of the transportation constraints that excess crude flow could cause if pipelines are forced to be utilized in a storage capacity. Storage capacity at Cushing is also being filled much faster than the country’s storage availability in aggregate as it is a main crossroads for crude flows to the Gulf. 


What is the Risk of Oil Storage Capacity Constraints? - DOEvf vs. Cushing Change in Inventory Build


Inventories in Cushing remain well short of full capacity, and well short of levels reached as recently as 2013.


In January of 2013, Cushing had 51.675MM barrels of Oil in storage and only about 65MM barrels of capacity which translated to:


  • January 2013: 80% capacity utilization (Spot WTI moved -12% peak to trough from January to April after capacity utilization peaked)
  • March 2015: 66% capacity utilization (using the methodology outlined below)

Cushing inventories have only recently turned positive on a Y/Y rate-of-change basis and remain below 2013 levels (a point in time where storage capacity was much lower). 


What is the Risk of Oil Storage Capacity Constraints? - Cushing Inventoriesvf


What is the Risk of Oil Storage Capacity Constraints? - Cushing Capacity Tablevf


Should current trends continue, which we peg as unlikely, storage capacity in Cushing may be full by June. The EIA only reports storage capacity data semi-annually (September 30th and March 31st), so we have assumed the average increase in 6-Month storage capacity above since the shale revolution started. 


WTI crude oil remains in a BEARISH FORMATION (TRADE, TREND, TAIL) with our intermediate-term TREND duration price deck in a range from $36.38-$58.02. 


Please feel free to ping us with comments or questions.


What is the Risk of Oil Storage Capacity Constraints? - levels chart


Ben Ryan











*UNLOCKED RESEARCH* ICI Fund Flow Survey: Performance Chasing

Takeaway: As the Fed pushes the first rate hike back and Greece buys more time, fund flows have become incrementally more aggressive.

This unlocked research note was originally published March 05, 2015 at 09:36 by Hedgeye's Financials sector team led by Josh Steiner and Jonathan Casteleyn. For more information on our services click here.

Investment Company Institute Mutual Fund Data and ETF Money Flow:


With the S&P 500 up over 5.0% in February alone, investors are chasing that performance with above average equity trends. In the most recent five day period ending February 25th, total stock products outpaced total fixed income for the second consecutive week. Stocks (both funds and ETFs) took in +$5.0 billion versus total bond products with a +$3.8 billion weekly take, representing another +$1.2 billion incremental weekly total for equities. Our research shows that this performance chasing phenomenon is most commonly displayed when year-over-year equity averages are positive which pulls along the 6 month moving average for global equity fund flows. Thus as long as equity markets stay positive on a year-over-year comp basis (which stays easy until June), equity flows should remain stubbornly high.  


*UNLOCKED RESEARCH* ICI Fund Flow Survey: Performance Chasing - ICI signature


Last week's slightly higher appetite for stocks followed three events that decreased risk perception in the market: (1) the Federal Reserve on February 18th releasing its January minutes in which it continued to indicate that it would be patient in raising rates, (2) Eurozone finance ministers on February 20th agreeing on a four-month bailout extension for Greece, and (3) Janet Yellen's February 24-25 testimony in which she emphasized that even once the Fed removes "patience" from its verbiage a rate increase will not be immediate.


*UNLOCKED RESEARCH* ICI Fund Flow Survey: Performance Chasing - ICI 1


In the most recent 5 day period, ending February 25th, total equity mutual funds put up net inflows of +$2.4 billion according to the Investment Company Institute, outpacing the year-to-date weekly average inflow of +$1.7 billion and the 2014 average inflow of +$620 million. The inflow was composed of international stock fund contributions of +$2.4 billion and domestic stock fund contributions of +$72 million.  International equity funds have had positive flows in 48 of the last 52 weeks while domestic equity funds have had only 16 weeks of positive flows over the same time period. We continue to flag caution in shares of Janus Capital (JNS) despite a slightly improved equity category because of the domestic bend to the JNS product suite (with domestic ICI trends still soft) and also that the Bill Gross fund raising and performance trends continue to be lackluster (see our latest research here)


Fixed income mutual funds put up inflows of +$2.9 billion, lagging their year-to-date weekly average inflow of +$3.0 billion but outpacing their 2014 average inflow of +$929 million. The inflow was composed of +$1.9 billion of contributions to taxable funds and +$1.0 billion of contributions to tax-free or municipal bond funds.  Munis have had a solid run with subscriptions in 51 of the last 52 weeks.


Equity ETFs gained +$2.6 billion in contributions, outpacing the year-to-date weekly average outflow of -$787 million and the 2014 weekly average inflow of +$3.2 billion. Fixed income ETFs took in +$927 million, trailing the year-to-date weekly average inflow of +$2.6 billion and the 2014 weekly average inflow of +$1.0 billion.


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.   


Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2014 and the weekly quarter-to-date average for 1Q 2015:


*UNLOCKED RESEARCH* ICI Fund Flow Survey: Performance Chasing - ICI 2


*UNLOCKED RESEARCH* ICI Fund Flow Survey: Performance Chasing - ICI 3


*UNLOCKED RESEARCH* ICI Fund Flow Survey: Performance Chasing - ICI 4


*UNLOCKED RESEARCH* ICI Fund Flow Survey: Performance Chasing - ICI 5


*UNLOCKED RESEARCH* ICI Fund Flow Survey: Performance Chasing - ICI 6



Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2014, and the weekly quarter-to-date average for 1Q 2015. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:


*UNLOCKED RESEARCH* ICI Fund Flow Survey: Performance Chasing - ICI 7 2


*UNLOCKED RESEARCH* ICI Fund Flow Survey: Performance Chasing - ICI 8


Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR call-outs, investors used defensive funds such as the utilities XLU and long treasury TLT as sources of funds, withdrawing -3% (-$249 million) and -3% (-$259 million) respectively.


*UNLOCKED RESEARCH* ICI Fund Flow Survey: Performance Chasing - ICI 9



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a positive +$1.2 billion spread for the week (+$5.0 billion of total equity inflow net of the +$3.8 billion inflow to 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 +$1.3 billion (more positive money flow to equities), with a 52 week high of +$27.9 billion (more positive money flow to equities) and a 52 week low of -$15.5 billion (negative numbers imply more positive money flow to bonds for the week). 


*UNLOCKED RESEARCH* ICI Fund Flow Survey: Performance Chasing - ICI 10


Exposures: The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:


*UNLOCKED RESEARCH* ICI Fund Flow Survey: Performance Chasing - ICI 11 



Jonathan Casteleyn, CFA, CMT 




Joshua Steiner, CFA





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