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Takeaway: 1Q miss driven by weak VIP volumes. Lost more share to Marina Bay Sands (LVS) in 1Q.

Q & A

  • Environment for VIP market has weakened significantly 
  • Do not see this VIP business coming back anytime soon
  • VIP win %: 2.5%
  • VIP rolling volume market share: 48%
  • On gross level, 43% Mass/57% VIP
  • 41% GGR market share
  • 41% mass market share
  • No weakness on mass business as S'pore casinos are very regional 
  • Made some minor changes to VIP commissions paid
  • Mass hold rate: ~25%
  • 43% slot market share
  • Universal Studios Singapore spend $81; 9,000 visitors on a daily basis.
  • Marine Life Park spend $29; 6,700 visitors on a daily basis
  • VIP volume came down quite a bit
  • Gaming spend per visitor down as well
  • Industry Singapore hotel performance have come down as visitor arrivals have jumped
  • VIP relationships are much more difficult.  Bad debt provision will be similar in 2Q
  • VIP volume decreased by 18% QoQ, 48% decline YoY
  • Mass volume holding steady
  • Korea: Jeju general assembly passed casino ordinance this morning. Process of casino license should go smoothly.
  • Japan: casino bill introduced to national parliament.  Debate will start in next 2 months. More optimistic on bill than past months. 
  • Jurong hotel opened 144 rooms (~50% of inventory); full opening will be some time in June. Bookings are very encouraging. Weekends are running full with leisure and casino customers. Giving promotions to casino rewards customers. Running shuttle from hotel to RWS on a 24-hour basis. Gaining traction for family/wedding events.
  • Regional business is steady (mass/VIP)
  • Net win VIP/mass mix: mass 72%
  • Fair value derivatives loss not due to FX swings, but due to other hedges (e.g. utilities). These derivatives are being wound down.
  • Chinese visitors to Singapore have jumped significantly 
  • Hold-adjusted EBITDA: S$250m
  • Slot hold not major change
  • Share buyback program: no plans to reduce share buyback but will not disclose a specific target. 
  • Need to come to agreement with Jeju govt some time in 2016

REPLAY | The Macro Show with Keith McCullough

The Macro Show is Hedgeye's dynamic pre-market rundown highlighting the most important global macro developments where CEO Keith McCullough shares 15 minutes or less of prepared market analysis and commentary and then answers your questions in a live Q&A session. Today's edition even includes some analysis of the Rangers' Game 7 victory last night, plus a look ahead and both the Eastern and Western Conference finals.



Three’s Company ― A look into the Major Cereal Companies Earnings Season (GIS, K and POST)

Cereal Category

As we have continued to say over the course of our past couple notes, the cereal category is not dead, it is merely at a point of maturity. Cereal is still a staple product in many households across the United States, and a growing number of households in emerging markets.


GIS 3Q15 ― Looks to be Turning the Corner

General Mills delivered a good quarter beating consensus estimates on both the top ($4,351 million vs $4,340 million estimate) and the bottom line ($0.70 vs $0.67 estimate).  If you strip out the currency effect, quarterly net sales grew 3%, while EPS is up 13%. Segment operating profit performed similarly with profit up 3% to $698 million.


The Convenience Stores & Foodservice segment continues to lead the company in performance, with sales up 6% to $465 million and profit up 11% in the quarter, led by frozen breakfast up 49%, yogurt up 27% and cereal up 12%.  Net price realization and mix contributed 7 points of net sales growth, while pound volume subtracted 1 point of sales growth.




The U.S. Retail segment pulled together a solid quarter posting 1% growth in net sales. Net price realization and mix contributed 3 points of net sales growth, while lower pound volume reduced sales growth by 2 points. Within U.S. Retail there was strong performance in key categories, Snacks up 14%, Yogurt up 10% and Cereal was Flat, which in this environment may be considered a win.  On the other side, Meals down 2% and Baking Products down 9%, have been lagging the other categories for a while and continue to be concerning. The recent acquisition of Annie’s contributed 1 point of growth to U.S. Retail.  In our GIS Black book we highlighted Baking Products as one of the businesses the company should sell to improve the overall performance of the enterprise!


Three’s Company ― A look into the Major Cereal Companies Earnings Season (GIS, K and POST) - Three s Company Chart 2


The International division was up 6% to $1.23 billion, pound volume was flat and net prize realization and mix added 6% to net sales growth, although this strong performance was offset by 13% points of currency headwind. On a constant currency basis International has been an area of strength, with all major regions growing; Latin America up 20%, Asia/Pacific up 4%, Canada up 4%, Europe up 3%.


Three’s Company ― A look into the Major Cereal Companies Earnings Season (GIS, K and POST) - Three s Company Chart 3


As stated above, GIS experienced solid performance from key categories; RTE cereal, yogurt, snacks with strong market share gains.  The company reported that the strongest performing products in the first nine months of FY15 were; Yoplait Original, Greek Yogurt, Cinnamon Toast Crunch, Nature Valley, Cheerios Protein, Fiber One snack bars and Cascadian Farm organic grain snacks.



The cereal category is currently facing headwinds globally, U.S. Retail sales were flat, Cereal Partners Worldwide (CPW) declined 3%, but interestingly in Convenience Stores & Foodservice cereal contributed to the divisions’ strong performance. Our simple thesis to this case is that C&F’s areas of service, universities, corporate cafeterias etcetera are places where people come to sit and eat, so naturally cereal is a quick tasty meal or snack. While at home, people are rushing out the door, cereal is not an on-the-go item. This proves people still like cereal, producers just need to find a way to fit it into the consumers busy schedule. Bottom line is cereal is struggling, but General Mills is gaining share per Nielsen XAOC data GIS RTE cereal has a 31.6 dollar share +31 bps vs last year.



We are LONG GIS!  GIS is a great company and feel there is tremendous opportunity to make this company a premier company in the staples space.      

While Management is hopeful that they have turned the corner and they can put the poor performance behind them, we have our reservations.  We believe there is a high likelihood that GIS will be pushed into doing the right thing.


Three’s Company ― A look into the Major Cereal Companies Earnings Season (GIS, K and POST) - Three s Company Chart 4


Three’s Company ― A look into the Major Cereal Companies Earnings Season (GIS, K and POST) - Three s Company Chart 5


K 1Q15 ― Performance Lagging the Rest

Kellogg’s beat expectation on both the top ($3,556 vs $3,553 estimate) and bottom line ($0.98 vs $0.91 estimate) but that still equates to sales being down 0.3% on a constant currency basis. Operating profit totaled $548 million, a decline of 1.9%, driven by sluggish performance across segments.


North America performed poorly, posting $2.4 billion in net sales a decrease of 2.8% on a constant currency basis. The U.S. Morning Foods segment which includes cereal posted a 2.9% decline in net sales, which as management stated includes “improved trends in the Cereal business.” The U.S. Snacks segment net sales decreased 1.1%.  Reported operating profit in North America on a constant currency basis declined 8%, “largely as the result of lower sales.”  For K, 1Q15 is the toughest comp for our U.S. Snacks business, and with significant innovation in Snacks coming in 2Q/3Q, expectations are for sales trend to improve as the year progresses.


Three’s Company ― A look into the Major Cereal Companies Earnings Season (GIS, K and POST) - Three s Company Chart 13


Kellogg’s International segment is lagging that of the competition but leading K in growth; net sales in Europe on a constant currency basis increased 1%.  Pringles is the bright spot in Europe with double-digit net sales growth. In Latin America, net sales increase by 15.7% on a constant currency basis, and in Asia Pacific net sales on a constant currency basis increased 4%.  Expectations are for continued improvement from International.  K will introduce innovation in the Cereal and Snack businesses over the remainder of 2015. 


Three’s Company ― A look into the Major Cereal Companies Earnings Season (GIS, K and POST) - Three s Company Chart 14



Kellogg’s cereal is seeing improving trends and management has stated that Kellogg brands gained 30 bps of dollar share this quarter. Their international cereal business experienced similar softness to CPW’s, management stated that they are experiencing weakness in the Special K brand in foreign regions. K has branched out into more natural products like Muesli’s and Granola, but is pretty late to the game here, so we will see if their products are able to take significant market share.



WE are BEARISH on K.  K is likely one of the worst managed companies I have ever followed. 


The company is focused on executing on the largest restructuring in the company’s history, with key investments being made in sales capabilities and food.  While there is some top line improvement across some international businesses, the key U.S. market is not benefiting as much.  In the U.S., the investment in Origins is late to the game. 


Management has reaffirmed guidance and seems confident they are headed in the right direction.  Management has set expectations high for 2H15 performance, but the overall performance of the company suggests that there is a lot of work to do.  This scenario is setting up for a guide down in 2H15 


Three’s Company ― A look into the Major Cereal Companies Earnings Season (GIS, K and POST) - Three s Company Chart 8


Three’s Company ― A look into the Major Cereal Companies Earnings Season (GIS, K and POST) - Three s Company Chart 9


POST 2Q15 ― The (Leveraged) Acquisition Machine

Post Holdings missed consensus on the top line ($1,053 vs $1,071 estimate) but still put together a great quarter with comparable net sales up 3.8%.  The big news this quarter was the completion of the acquisition of MOM Brands, a leader in the RTE cereal value segment, on May 4, 2015.


The Consumer Brands which included Post Foods ready-to-eat cereal brands and active nutrition brands. Net sales were $378.5 million for Q2 up $68.4 million or 22.1%. On a comparable basis net sales were up 5.6%, with active nutrition sales up 15.9% and RTE cereal sales up 0.6%.


Michael Foods Group, which includes the foodservice, egg, potato, pasta and the retail cheese businesses. Net sales were $550.3 million up 1.8% on a comparable basis. Net sales for egg products up 2.0%, refrigerated potato products up 5.3%, pasta products up 2.2%, cheese products down 0.5%.


Private label, which includes the Golden Boy peanut butter, other nut butters and dried fruit and nut businesses and the Attune Foods cereal, granola and snacks businesses. Net Sales were $124.9 million, up 8.3% on a comparable basis.  Golden boy was up 5.3% and Attune Foods up 21.2%.


On May 4, 2015, Post announced the completion of the acquisition of MOM Brands Company, a leader in RTE cereal value segment. Post is estimating $50 million in run-rate cost synergies by the second full fiscal year.


The Avian flu has begun to make an impact on Post’s operations; it currently estimates that 20% of its egg supply has been affected, which equates to a negative impact of $20 million for the year.



Post doubled down on the cereal category this quarter with their acquisition of MOM Brands. They now cover the price spectrum in the cereal category with the most popular value brand as well as very competitive main brands.  RTE cereal sales were up 0.6%, which is better than GIS at flat and K’s decline.  Post will most likely always be a #3 competitor but, it will get interesting if they continue to steal market share from the top two.



Post has increased its guidance for the year, adjusted EBITDA is now expected to be $585.0 million to $610.0 million previously they were aiming for $540.0 million to $580.0 million.  There are significant issues with POST.   First, POST is not cheap vs. other uninspiring staples names and should trade in line to the protein names due to Michael.  Also, roll-ups in CPG work BUT they work only when you have experienced and disciplined managers like THS and BGS.  I think HAIN as a roll-up is a ticking time bomb.  POST is the current poster child for great banking "client" so it is loved by the street.   For POST the recent news flow on the progress of bird flu is troubling.


Three’s Company ― A look into the Major Cereal Companies Earnings Season (GIS, K and POST) - Three s Company Chart 10


Three’s Company ― A look into the Major Cereal Companies Earnings Season (GIS, K and POST) - Three s Company Chart 11


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Takeaway: Macau table minimum and average bets still moving lower for the high margin base mass tables

  • The following charts depict our proprietary monthly table bet data updated for April
  • While posted minimum bet levels could be stabilizing in premium mass, base mass minimums continue to accelerate to the downside
  • While somewhat anecdotal, observed average bet levels are still declining for both premium and base mass
  • The data suggests further EBITDA estimate cuts are in store for Macau gaming operators as the Street continues to underestimate the deterioration in high margin base mass. Margin estimates remain too high for LVS, MPEL, MGM, and WYNN.




Cartoon of the Day: Hyperactive

Cartoon of the Day: Hyperactive  - Bond cartoon 05.13.2015

"Epic moves, almost daily, now [in U.S. Treasury bonds]," Hedgeye CEO Keith McCulloug wrote earlier today. "But I’d have to see a sustainable close over 2.39% to shake me out of Treasuries."

U.S. Dollar Is Melting Like The Economic Data

U.S. Dollar Is Melting Like The Economic Data - z doll


The U.S. Dollar continues to break down from an immediate-term TRADE perspective as the U.S. economic data continues to slow in rate of change terms. The EUR/USD risk range has tightened up too (higher-low, which is new) to 1.09-1.13.


The latest #Growth slowing data point was today’s lackluster Retail Sales report which came in flat for April. Clearly no cause for celebration.


U.S. Dollar Is Melting Like The Economic Data - z 1 chart


On a related note, Oil loves Down Dollar; absolutely loves it – but does the consensus Consumer bull case on “lower gas prices” share the love? WTI up another +1.2% this am to $61.53 and is also signaling higher-lows within its $55.06-62.36 risk range.


Get the dollar right and you get a lot of other market things right.


U.S. Dollar Is Melting Like The Economic Data - z 3 chart


Editor's Note: This is a brief excerpt from Hedgeye morning research. Click here to learn more about how you can subscribe to our investing products.

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