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EAT – FOCUSED ON MARGINS AND GROWTH

 

Brinker Analyst Day – March 2010, Dallas Texas

 

On Thursday after the close, Brinker announced the sale of its On the Border concept and expects the transaction to close in late June, if not earlier.  Proceeds are $180 million and OTB generates about $330 million in revenues.  Management anticipates recording a gain on the transaction at closing.

 

Management also revised guidance upward on Friday:

  • $1.40-$1.44, excl MG
  • Better comps with decline of (1%)-(2%) vs. (2%)-(4%)
  • Cost of sales at 28.5% vs. previous guidance of 27.5% (the increase is pro-forma for OTB)
    • Reflects the impact of promotions and OTB sale
  • Interest expense down $5 million
  • $50 million payment on term loan will reduce balance

Despite the downturn, EAT now has the opportunity to create value for shareholders over the next five years.  While nothing comes easy, I like the direction the company is headed.  Brinker is doing to its Chili’s store base what Applebee’s can’t, given DIN’s excessive leverage.   

 

Brinker’s analyst meeting focused on the company’s ability to move to the next level from an operations standpoint.  As the company has navigated these turbulent times, it has disposed of non-core assets, refranchised a significant amount of stores and reduced leveraged, while returning free cash flow to shareholders.  More recently, Doug Brooks, CEO, hired and promoted talented people to the senior leadership team to help implement a plan to reinvest the company’s substantial free cash flow back into the business.

 

The goal is to grow EBIT margins by a net 400 bps (or more) and double EPS in 5 years. 

 

The bulk of the margin improvement will be accomplished by using new technology in retrofitted kitchens across the company, allowing the company’s kitchens to be more efficient. 

 

Notes and commentary on the analyst meeting are below:

 

Some of the margin and growth drivers to focus on for next five years: 

  • Chili’s remodel program - $300,000 per store
  • Kitchens being modernized and made more efficient - reduce ticket time by 5 minutes
  • Doubling the size of international presence to take advantage of demographic trends
  • Expanding Maggiano’s reach

A look at the international opportunity:  The goal is to get to 425 restaurants by 2014 from the current level of 218.  Importantly 70% of the unit growth is locked down with franchise agreements in place. 

  • Opening 95-105 in 2011 and 2012

EAT opened 50 restaurants outside the U.S. in 2009 - most ever for Brinker or any casual dining brand.

  • Partnership with CMR in Mexico will be expanded
  • Already opened 19 JV restaurants there
    • Largest international market

Overseas, the casual dining market is where the U.S. market was 20 years ago:

  • Middle class expanding
  • Need for convenience
  • Buying patterns becoming more sophisticated
  • Making choices based on quality

 

Potential markets….

  • The U.S., U.K., Japan, and Germany are more mature
  • BRIC’s are at the bottom provide more where the US was 20 year ago.  On the BRIC side, there is an opportunity to take advantage of brand attachment

Only pursuing markets that can sustain more than 5 markets:

  • Agreed franchise agreements in India and Russia for 25 units in each market
  • 2 franchises open in India

Franchise partners are rigorously vetted in terms of financial stability and reputation.

 

Tailoring business for local tastes:

  • Business doesn’t depend on expats
  • Don’t serve pork in Middle East, serve more vegetarian options in India

Real Estate costs are higher in international markets.

 

Investment costs are calibrated according to volumes of each restaurant to maximize volume.

 

EAT can penetrate markets quickly and profitably seen as QSRs have laid the roadwork in terms of supply chain:

  • Model provides a compelling business model with high margins
  • EAT knows how to maintain strong franchise relationships
  • Doubling size of international business by end of FY14

 

 

Carin Stutz

 

Carin is the operators’ operator at EAT.  As such she is in charge of the biggest part of the Chili’s turnaround.    She is empowered to reengineer kitchens and operations to innovate and improve margins.  She views the restaurant as two distinct operations:

 

(1)    Retail business

  • What guests see
  • New initiatives on retail side of the business

(2)    Manufacturing operation

  • Food
  • Quality
  • Process hasn’t changed much since the segment began to grow significantly
  • Equipment, flow, and process have remained relatively unchanged
  • Shoehorning new products into kitchen
  • Menus getting bigger, consistency challenged

The idea is to introduce new technology into the kitchen that will make it faster and more productive.  A comparison to QSR was used where the efficiencies in the back of the house have not been as technologically advanced. 

 

Use of technology and back-of-house processes will give 300 of 500bps improvement EAT is seeking to achieve.

  • Cooking technology
    • Accelerated cooking to increase speed in kitchen
    • Consistency in proteins
    • Overall margins (lower labor)
    • Improved workflow
  • Today’s station based kitchen is being adjusted
    • Retrofit of kitchen, menu items will be prepared more sequentially to stop cooks having to cross kitchen
    • Allows more efficient staffing
    • Building kitchens from scratch, reduce overall space requirements
    • Most efficient operating model
  • New POS and back office systems
    • Enable EAT to better understand exactly what customer wants
  • Kitchen Display System (should be able to drive more than half of the margin improvement)
    • Tool’s in place and working well
    • Allows for significant through put enhancements
    • Improved efficiency of kitchen staff
    • Reducing ticket time by 5 minutes, delivering a faster yet appropriately paced experience for guests

 

Where the 300-400bps will come from:

  • Higher execution, fewer voids and therefore better sales
  • Inventory management
  • Fewer labor hours
  • Easier to use equipment
    • Possible better wage rates

 

THE TIME LINE IS KEY

 

The time line here is very important to mapping out the success and when is expected to hit the P&L  Currently EAT plan to have KDS process improvements in place by start FY11, POS by 2QFY11, retro fits of kitchens by FY2013.

  • Closing for less than a day for retro fits
  • No closure for POS, KDS (should be able to reduce some technology related G&A)

New tech + lower investment costs +elevated margins = effective business model

 

 

Steve Provo, President at Maggiano’s

 

Maggiano’s

  • Maggiano’s “ain’t no Ringo”
  • Maggiano’s is a very strong brand, in a segment of industry that is still growing post recession
  • Poised for aggressive expansion

45 restaurants, 21 states, 1 international.

 

Maggiano’s is doing $8 million dollar AUVs.

 

Maggiano’s is a 20 year brand with three points of differentiation:

  • Is it real?
  • Is it truly not replicable?
  • Can you make money?

Maggiano’s ability to handle large parties is a differentiating characteristic.  Banquet facilities can handle, and feed, 200 people.  All the differentiation in the world is meaningless without delivery.

  • External survey of casual dining - Maggiano’s outperforms on taste, hospitality, and is getting better
  • Internal survey - Last two years have seen significant improvement

 

CHALLENGES FOR MAGGIANO’S

  • Business is not as strong as brand
  • 1/3 of units built from 2002-2007
  • 74% only use Maggiano’s once per year or less
    • Birthdays, anniversary, proms
  • 30 times a year, average casual dining
    • Only 1 or 2 Maggiano’s occasions per year
  • Need to move beyond special occasions

 

AWARENESS

  • Marketing strategy being changed
  • Email, direct mail, and social media
  • Very strong returns on these marketing strategies
  • Far away from Nieman Marcus type returns
  • With loyalty and average check, it is possible to emulate

 

RELEVANCE

  • Today and tomorrow
    • Order on of the pastas and you take home another one for free
    • Strengthens differentiation
    • Value strategy – pasta is lowest food cost item
    • Mixed at 20% on average in testing and food costs declined
    • Doubled guest perception
    • First time in 19 years the primary reason was no longer a birthday
  • New promotion
    • Meal for two
    • Price is $40, shared appetizer, two entrees, shared dessert
  • Loyalty program for preferred guest
  • Refer a friend program
  • Targeting admins and party planners
  • Private dining sales and corporate has returned to sales growth

Returning to new restaurant growth is not about sales alone.

 

Variable cost structure needs to improve:

  • Attacking cost of sales
  • Waste-management process
  • Testing baking bread again
  • POS

3 closest competitors are PFCB and CAKE:

  • Both have 3 times the numbers of units
  • Italian bigger than Chinese, private dining capabilities are superior
  • High end and corporate guests that are leading
  • Next 15 years are about the baby boomers

 

Wyman Roberts - President of Chili’s

 

A lot of negativity around bar and grill.  However, that is where the game is, that is where people will continue to gather with family and friends.  Maggiano’s lives and dies by what it does: make a promise and then deliver, which is where the company is going with Chili’s - everyone knows Chili’s.

  • 4.2 billion dollar business globally
  • 1,500 restaurants
  • Strong AAV – 2.8 million
    • Company domestic are at AAVs of over 3m
  • 55% company domestic, 32% domestic franchise, 13% int’l franchise
  • Maintain a lot of share (9% of bar and grill) of market
    • Competitors are vulnerable, chains should have advantage over independents also
  • Scale, brand
  • National network presence
  • Chili’s and Applebee’s are the only ones that it continually works for (national network, effective business model, marketing all in sync)
  • Affordability
  • Good food
  • Quick meal
  • Powerful brand

 

Customer survey has been going on for decades and Chili’s has grown:

  • 1999 Chili’s still a growing brand
  • Last year Chili’s took a hit
    • Almost all brands took a hit
  • Leadership and operational excellence needs to sustain vision held with partners to get desired results

 

Brands in bar and grill can be schizophrenic:

  • Promotions and specials can send contradicting messages with no clarity of focus
    • 5 dollar sandwiches, high price steaks
  • Best CD brand has boring marketing
    • Bore you with marketing, wow you with consistency and delivery

 

Chili’s aligns with older and younger demographics very well:

  • Not barbelled, not skewed
  • Chili’s skews more to higher income demographics
    • Less need for these people to eliminate occasions in casual dining

Why do people come?

  • Don’t want to cook
  • Night out
  • Want to unwind with friends
  • Treat myself

Focusing on the “not cooking tonight” category

  • Great for Chili’s
  • Handheld food
    • Burgers, tacos, quesadillas, chicken tenders

 

Advertising needs to gain traction with social media:

  • National media needs to be complemented with electronic marketing
  • Bennigan’s never maintained relevance

***Better food***

  • Upgraded burgers
    • Better beef, better preparation, fresh product
  • Ribs
    • Elongated smoking process, will fall off the bone
  • New tacos
  • New pulled pork sandwich
  • New soup
  • Caribbean salad

Difficult sometimes to get permission to move forward from the core customers.

  • Have received positive feedback from customers

Efficiency:

  • Shrunk menu from 12 pages to 8 pages
  • Reduce time, greater focus

Remodel program

  • Ignite revitalization of the brand
  • Fleet isn’t that old
  • A lot were built in the last ten years
  • Target budget for first remodel opening this summer is 300k
  • Getting the chain back to a position where they can start thinking about growing again

Business model

  • Casual dining in the last two years has focused on deals
  • 3C has been a bold strategy
  • Brand building message was incorporated with the deal

Mix lowered in promotional package

  • Goal is to become less dependent on mix
  • Focus on quality and freshness
  • Using promotions as a key messaging platform

Competitors driving core customers but Chili’s has been focusing on exposure and changing how people perceive the brand versus competition.

 

Marketing

  • Make sure that staying focused and resonating in key markets
  • Use media and focus it, use scale, TV, electronic, direct mail
    • Bringing Maggiano strategies to Chili’s
  • Less aggressive promotions
    • Will, however, remain competitive
    • MRT and RUTH would never have anticipated the promotions they are doing right now
    • But the goal is to build a strong brand and not be too promotion-focused
  • Seeing a $5 increase on to-go check because of new online ordering program
    • Prompts customers to have a dessert etc.
  • Virtual gift cards
    • Go online, customize gift cards, and print it out
    • No need to ship, passes a major hurdle for online gift cards
    • Grew gift card sales this year, even in this economy

Looking to improve margins 300 bps target in next few years in “manufacturing” process - Looking at front of the house, 3 benefits:

  • Better guest experience
  • Costs less money, less ancillary support
  • Teammates make more money

Franchisees

  • “Big 6” franchisees
    • Meet quarterly, share P&Ls, best practices and initiatives

Utilities

  • Reducing energy costs
    • Lightbulbs – changing to LED bulbs
    • Return is instant, customer looks better

Hoping to be focusing on new unit growth in the not-too-distant future

 

 

Chuck Sonsteby - Financials

 

Strengthened business model while improving balance sheet

 

  • Goal wasn't merely survival
  • Rationalized asset base
    • Prepared for success with improving macro environment
  • Closing 59 under performing restaurants
  • Constantly evaluating portfolio

Returning cash to shareholders - from 2004 to 2008 the share base shrank by 37%

  • Paid down 295m of long term debt in a difficult sales environment during downturn
  • Improved margins without compromising quality

Introduced new items that favorably impacted cost of sales that, in checking with guests, did not negatively impact the brand or the experience:

  • G&A held steady at 4.5% of sales
  • Maintained dividend while others did not, actually increased it
  • Strong free cash flows
  • Cash of 110m
  • Free cash flow continues to grow
  • $237m in FCF this year

Annual cash flows for chili's restaurants that have been open for at least a year

  • None is negative
  • Underlying asset base is very healthy
  • A lot of earnings power left in the system

Signs that the macroeconomic environment is improving

  • Need to focus to maximize earnings stream
  • How can we get margin improvement without taking away from experience?

Trend in operating margins?

  • Average annual sales hasn’t changed much in last few years
  • Operating margins have decline significantly since 2004
  • Biggest driver of this increase is labor
    • Wages and wage hours have been increasing over time
  • There is a lot of room for progress
    • Need to improve in the kitchen and provide a better product and experience
  • More consistent food and faster service while eliminating some kitchen positions and inefficiencies
  • Operating margins will improve 300 bps with 100m in investment
  • ROI of over 50% after tax, payback in two years

Labor has always been cheap in the U.S and technology has been expensive

  • The lines have now crossed

Credit markets opening up

 

Capex in 2011 will be 125m, 2012 will be 160m

  • Cost of 100 bps of depreciation that will offset 500 bps of improvement

Not anticipating much investment in domestic market until it can be justified

  • It will be some time before capital will be committed to domestic growth

Use of free cash flow

  • Dividends and share repurchases
  • 27% increase in dividends, as announced this morning

Authorized 250m of share repurchases

  • Total authorization of 300m+

Maintaining investment grade rating is crucial to maintain ease of access to capital

 

Existing term loan due in October this year

  • Will pay down 50m in 4QFY10

Expecting to refinance term loan over three-to-five years

  • Provides additional liquidity without needing to draw down on revolver

Impact on EPS

  • Capital investments
  • Proceeds from OTB

Full year guidance will be given in August on 4Q earnings call.

 

Long-term growth model - 10-12% EPS growth per year:

  • Operating margin expansion accounts for 1%
  • International and domestic growth development  accounts for 2-3%
  • Share repurchases accounts for 3-4%
  • Same-store sales accounts for 3-4%

 

 

Q&A:

 

Q: Expound on the GEM guest satisfaction scores at Chili’s.

A: Guest scores at Chili’s are mixed.  Some solid improvement and scores that typically align with traffic growth, like value. Also saw pressure in operations around other scores, like pace. The speed and the pace issue came home to roost for us.

Got pushback from people who didn’t like change but slowly people are starting to move back up.

 

There hasn’t been much reduction at restaurant level, in operating cost. Cost of sales, and labor, have not been significantly cut. The new menu improvement didn’t cut portions.

 

 

Q: Understanding 300 bps…

A: A lot of room to improve was observed. Burger cooked in 7 minutes, shouldn’t take till 15 minutes to deliver. In KDS, instead of using it as a ticket system, now will be used as a throughput tool.  New kitchen and cooking equipment. 

 

 

Q: Refranchising?

A: Going to read an analysis the company carried out before we get back into further refranchising.

 

 

Q: 300 bps…are incremental benefits a couple of years out? What is the timeline?

A: You’ll see it step up a bit. 2011 before we start to see progress.

 

Building restaurants with new technology in place in international markets, like in Mexico.  In December, did a full mock up. Could produce up to 200 plates per hour. Went from eight cooks down to five. Back to front manufacturing process is being streamlined effectively. The cook times are significantly faster. In the first month, month and a half, the cook times are impacting the front of the house.

 

Another opening in May with that technology and another in July.

 

 

Q: Detail about Mexico and 5 minute time vs restaurant itself?

A: Technology helps to cook food faster. Medium rare burger will be the same every time. Engineering the guest experience.  It does cook the product faster.

 

 

Q: The online ordering system, a 5% increase…percentage of online vs to-go business?

A: Without any marketing, above 5% of to-go are already using online where available. The 5% impact is significant. Don’t want to get into too much detail.

 

 

Q: BPS improvement, when it will take, plus or minus for OTB, comps?

A: Assumption for margin expansion is on an apples to apples basis, applies to chili’s. If you look at today’s release vs comparable quarter, the difference is about 20 cents per share. On discontinued operations for OTB, it does not include shared cost, cannot break out anything but directly attributable costs for OTB.

 

 

Q: G&A leverage coming from OTB deal?

A: Has not been determined as yet with deal not being closed.

 

 

Q: 400 bps is as reported, not excluding OTB?

A: Yes.

 

 

Q: Implicit SSS number included in assumption?

A: Between 1% and 2%.

 

 

Q: Increased profitability as scale grows in global business?

A: Anticipate that to be quadrupling in size, in terms of where we are today.

 

 

Q: Return on investment?

A: 15% return on gross investment is the aim while holding the topline. That’s a low target but as volume grows we see returns get very substantial: similar to that of a Chipotle.

 

Looking at more JV opportunities.

 

 

Q: More detail on remodeling program versus the one you did in 2007?

A: Expecting a return…franchisees won’t invest unless it’s worth it. They keep us honest.

Versus the one a couple of years ago, this remodeling effort is clearer as to what’s going to revitalize the brand and drive traffic. We saw traffic improvement with the last remodel.

 

 

Q: The Maggiano’s consumer demographic vs competitors?

A: High end casual dining guests do have more of a population of every day guests. Sliver of population use Maggiano’s regularly. Our guest base are generally more affluent and are heavy users of the category. 

 

 

Q: How do you view the business in a couple of years?

A: We can drive sales higher but there is a lot of work to do and it is a choppy environment out there. Comps at a 1 or 2% in the shorter term.

 

 

Q: Investment and returns…

A: Kitchen technology will drive 300 bps of margin improvement. 100m of investment.

Reimage program is more modest, looking at 18m in first year and 35m in the second.  They are still looking for 15% ROI.

 

 

Q: How will you strategize reinvestment and reimage based on profitability of store base?

A: Benchmark is 300k. Will fluctuate depending on whether there is a need, whether it can be afforded.

It’s going to be done case by case. From a marketing perspective we would like to bring the message from market to market, although that’s easier said than done.

 

 

Q: Portion and price…

A: Grain based proteins will be up, will have price uncertainty in that regard. There is a connection between commodities and the topline and economy. Escalating commodity costs generally mean escalating sales…

 

 

Q: How is the impact of healthcare imbedded in labor line?

A: Trying to understand how it will impact, just like everyone else. Reconciliation bill got passed. Brinker covers students on policy and no preexisting conditions so short term no incremental cost. Everything we’re talking about from remanufacturing and remodeling puts more pressure on us to make effective impact on the operating margin.

 

 

Q: Same restaurant sales…

A: Still a company with multiple brands. Our focus is on getting better before getting bigger. Two differentiated brands right now. Iconic brand in Chili’s, have to reposition it in the market. Italian brand is very strong. Down the road we will have more businesses.

 

Weekday night and lunch business, banquet business coming back.  Chili’s is choppier; consumer confidence is still bad.

 

 

 

Howard Penney

Managing Director


SJM HOLDINGS ANNUAL RESULTS CONF CALL: "NOTES"

SJM HOLDINGS ANNUAL RESULTS CONF CALL: "NOTES"


HIGHLIGHTS FROM THE RELEASE

  • Gaming revenues grew 21.7% to HK$34.1BN (US$4.4BN) and Adjusted EBITDA increased 41.8% to HK$2.27BN (US$293MM). If calculated on a US GAAP basis, EBITDA margin would have been 10.8%.
  •  In 2009 SJM's overall market share gaming revenue rose to 29.4% from 26.5% in 2008.
    •  Share of Mass market table revenues was 40.7% and SJM's share of VIP gaming revenue was 25.8%.
  • VIP table revenues accounted for 58.8% of total gaming revenues. At Dec 31, 2009, SJM had 320 VIP tables with 30 junkets compared to 180 VIP tables with 40 junkets at the end of 2008.
    • Average net daily win per table increased to HK$229,536 (US$29.6K).
    • RC Volumes increased 29.8% y-o-y to HK$718.8BN
    • Hold rate decreased to 2.78% in 2009 from 2.88% in 2008
  • Mass market revenues accounted for 38.3% of total gaming revenues in 2009. At Dec 31, 2009, SJM had 1,404 mass table, including 249 new mass tables at Oceanus and 99 mass tables at Casino L'Arc, compared to 1,154 mass tables at Dec 31, 2008.
    • Average win per daily table increased to HK$29,978 ($US 3,866)
  • Slot machine revenues comprised of 3% of SJM's total gaming revenue in 2009. SJM had 4,567 slot machines at year end, compared to 3,867 last year.  The increase was mainly due to the addition of 521 slots at Oceanus and 383 slots at L'Arc.
    • SJM operated slots in 15 of its casinos and 4 slot halls.
    • Average win daily per machine increased to HK$3,955 (US$510)
  • Casino Grand Lisboa Adjusted Property EBITDA was HK$1,654MM (US$213MM) with an EBITDA margin of 17.5% (or 25.8% if prepared on a US GAAP basis) 
    • Daily win per Mass table increased 23.6% to HK$35,908 ($4,630)
    • Net win per VIP table increased by 12.9% to HK$329,905 (US$42.5K)
    • Net win per slot grew 27% to HK1,241 (US$160)
    • "During the year two VIP promoters relocated from Casino Grand Lisboa to satellite casinos, and in October 2009, 16 new VIP gaming tables were added to the 36th floor of Grand Lisboa. After October 2009 the property’s VIP gaming revenue increased, and Casino Grand Lisboa contributed $22,974 million in VIP chips sales in the month of December 2009, or 32.9% of the Company’s total VIP chips sales for that month"
      • We understand that this is where SJM is offering a 55% payout to junkets in return for absorption of certain costs
    • Average daily visitors were 26,241
  • Casino Lisboa contributed gaming revenues of HK$9.4BN
    • VIP operations accounted for HK$7.76BN and RC VIP volume of HK$290.2BN
    • Average VIP win per table of HK$347,141 (US$44.8K)
    • Mass market revenues were HK$1,630 and slots revenues were $27MM. Average net win per mass table were HK$30,942 (US$3,990)
  • Casino Jai Alai & Oceanus contributed gaming revenues of HK$681MM
  • "During 2009 SJM obtained more attractive terms in revised service agreements for its satellite (third party-promoted) casinos, and opened three additional satellite casinos: Casino Jimei, Casino Lan Kwai Fong Macau and Casino L’Arc Macau."
  • CAPEX projects:
    • Grand Lisboa: The 2 additional VIP floors are scheduled to open with 31 tables in 4Q2010.
    • Lisboa: Will renovate certain mass market and VIP gaming areas in 2010
    • Casino Jai Alai & Oceanus:  In April 2010 they will open a new set of escalators leading to the overhead walkway to Casino Oceanus from the ferry terminal. Later in the 2010 SJM will open a second walkway connecting Oceanus to Jai Lai.  Subject to approvals, SJM will also commence renovation plans at former Casino Jai Alai premises.
    • Longer term plans for 2 sites on Cotai:
      • 10,000 square meter site directly across from LVS's convention center
      • 73,856 square meter site adjacent to the Macau East Asian Games Dome
      • No timeline - but they are taking a wait and see approach - want to see how 5 & 6 do.

CONF CALL

  • Dividend of 9 cents per share was recommended by the Board and will be considered at May's Board meeting
  • Opened/ Reopened 4 casinos in 2009
  • Improved operational efficiencies, only increased employees by 300 despite large gaming increase
  • They are very optimistic about the future
  • Will renovate some part of Casino Lisboa and install some IT and player tracking systems. Will also outfit more floors of Casino Grand Lisboa for additional VIP tables
    • BYI is installing the mentioned tracking systems

Q&A

  • Oceanus is ramping up nicely using their yield management systems. Target is 20k win per table and they believe they will hit that.  The initial ramp was slow.
  • New service contracts with promoters clearing 5% net share of gaming revenues. Have 13 to 14 of the 3rd party casinos on the new form of contracts.  New contracts allowed them to increased EBITDA by HK $500MM
  • Will start breaking out quarterly numbers going forward and provide more disclosure
  • Old Lisboa is making positive EBITDA and the promoters casinos are also positive EBITDA contributors in 2009
  • Don't think that the table cap will have much of an impact on them. They don't plan to add more capacity over the next 3 years. They can always reshuffle their tables to increase their efficiency
  • Would they consider going to Cotai?
    • Taking a wait and see approach on Cotai
    • Want to see the timing of 5 & 6 and how well it does when it opens
  • Given the liquidity in available opportunities in Macau they will continue to hold a lot of cash
  • L'Hermitage?
    • They have a strategy there.  Its built to lease but they aren't planning on doing anything there imminently
  • Commission rate that they are paying to junkets
    • EBITDA margin was 17.7% in 1H09 and 17.5% for FY meaning that they got no leverage in commission caps
    • Not a VIP business at Lisboa - increased the VIP mix there - and therefore decreased the margin
    • Moving forward if they continue to expand VIP as a % of total their margin will be impacted
  • Wouldn't assume that just because of the table cap that SJM won't be building anything new over the next 3 years. They have 1,700 tables out of 5,000 or so in the market. If they want to open something new they can reshuffle their tables
    • Pursing the Portuguese school site next to Grand Lisboa
  • EBITDA at Grand Lisboa going forward? In 2010 - VIP has been the source of growth in the market, and that growth comes at a lower margin, though still additive. So margins will be down in 1Q2010 y-o-y.
  • Will they continue to payout their historical payout ratio of 50% 
    • Yes - for the time being unless they have a very strong financial commitment to make
  • Hard call to say how VIP and general Macau growth will trend for the rest of the year.
  • Why report quarterly results?
    • BC their competitors do it and HK will move to a quarterly system within the next few years
  • Don't know the impact of tightening measures in China on the rest of the year.  Don't see this level of business activity as a bubble. Have no idea how the rest of the year will grow.
    • China says GDP growth will be close to 8% and thinks that Macau will do a little better
  • Minority interest is all Ponte 16
  • What is driving this huge growth in VIP business. 
    • Think its money supply - there is lots of cash floating around... you can put your cash in the bank or lend it to your junkets to lend out to gamblers... and make a return that way
    • Thinks that the government has continued with the loose monetary policy
  • Risk of the government clamping down on growth
    • China has not changed the visitation scheme.  China wants a rotation of visitation vs. operators just tapping the same players repeatedly
    • China said that they will continue with monetary easing and that should continue to benefit them
  • CoD hasn't generated the level of business that many expected - so they are still taking to a wait and see approach to Cotai (in regards to the site across from LVS's convention center that they were looking at developing at some point in the future)

Aussie-Rules Economics

“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

-F.A. Hayek

 

Either the Reserve Bank of Australia’s Chief, Glenn Stevens, has it really right these days or he is setting himself up to get this really wrong. Economics is not a science of laws. After all, as American historian Ben Bernanke recently told Congress: “Monetary policy is an art.”

 

It’s no secret that I am fond of Mr. Stevens ability to stand outside the political arena in making tough monetary policy decisions. He has raised interest rates multiple times since the narrative of a Great Wall Street Compensation Depression began. In doing so, he has actually seen the Australian unemployment rate drop and domestic consumption rise.

 

No, these aren’t Japanese or Americans style policies. These are Aussie-Rules Economics, mates. In Australia, the man who runs the place isn’t on 60 Minutes or writing Op-Eds for the Consensus Street Journal either. Glenn did his FIRST television interview last night since being appointed head of the RAB (he was appointed in 2006). Rock-star member of the Global Bubble in Politics this man is not.

 

When you read his quotes, consider them within the context of Washington’s current buy-in to government bailout Keynesian economics:

  1. “It’s not wise to leave interest rates right down at rock bottom any longer than you need”
  2. “It would be not doing people any favors to have a prolonged period of very low rates and then hammer them unexpectedly”
  3. “I think it is a mistake to assume that a riskless easy guaranteed way to prosperity is just to be leveraged up into property… It isn’t going to be that easy.”

You’d think with a radical hawk flying around the East side of this world like this that his stock market would be collapsing? Or would you? What is the best way to measure a country’s long term health anyway – by the recent up or down tick of its stock market? How about the strength of its currency; its bond market; or its international credibility?

 

Maybe I have a bias towards Glenn Stevens because he obtained his Masters in Canada (University of Western Ontario). Maybe I’m just a stickler for getting a rate of return greater than zero on moneys I have in a US Savings account for my children. Heck, maybe I’ll go hire another 30 people during the next economic downturn without government support if I actually generate some fixed income on those savings!

 

These are fascinating times by any economic measurement. I often wonder how our accomplished historians running on fear-mongering US politics think about where John Maynard Keynes’ fame came from – challenging the bureaucracy of Perceived Wisdoms that were born out of the last mega-cycle of government excess (the 1920’s in Britain).

 

Too much to think about on this rainy morning in New Haven. That’s a good thing, but I need to give you some macro meat to chew on in the meantime. Shifting gears, here’s where our Hedgeye macro lines washed out into last week’s end:

  1. The Buck Breakout continued to the upside – the US Dollar Index was up another +1.1% last week, taking its rise since the late November lows to +9.4%.
  2. The Euro was oversold again on the news of another lagging indicator (Portugal’s debt downgrade) – my immediate term risk management range remains 1.33-1.36.
  3. The CRB Commodities Index closed down another -1.8% on the wk and remains below my intermediate term TREND line of 275 (interest rates and US Dollar up hurts).
  4. WTIC Oil finally broke my immediate term TRADE line ($80.78); we sold out of our 3% position in Oil in the Asset Allocation Model on the breakdown.
  5. Volatility (VIX) in US Equities rose +5% on the week, but the VIX remains broken across all 3 of our investment durations (TRADE, TREND, and TAIL).
  6. 2-year Treasury Yields continued to breakout to the upside (we call this the Rate Run-up); the long term TAIL line of resistance at 0.96% is now support.
  7. 10-year Treasury Yields continue in what we call a Bullish Formation (bullish across all 3 investment durations); immediate term TRADE support = 3.71%.
  8. 3-month LIBOR continues to rise 1 basis point at a time and now stands at 0.29%, up +16% from where that reference rate was at the beginning of the month.
  9. 10-year swap spreads went negative for the first time (by 10 basis points); this means said ‘AAA’ rating of American finance is finally under attack by the quants.

On the calendar this week you have 3 big factors to proactively prepare for: the end of the Fed’s MBS bailout program and month/quarter end for the asset management industry on Wednesday; then the US unemployment report on Friday.

 

I am thankful that US Congress has gone to recess until April 12th. It will give me less morning news-flow to read that saddens me. Aussie-Rules Economics are making me feel better already.

 

My immediate term support and resistance levels for the SP500 are now 1157 and 1173, respectively.

 

Best of luck out there today,

KM

 

Aussie-Rules Economics - Pic of the Day

 


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US STRATEGY - CHARACTER CORRECTIONS

The S&P 500 was mixed on Friday. At the end of the day, it was clear the character of the rally was weaker at the end of the week than at the beginning. The Hedgeye models still have Energy (XLE) and Utilities (XLU) broken on TRADE and TREND. On the MACRO front, there was some support that the euro-zone reached an agreement on a plan in which they would jointly bail out Greece with IMF help. 

 

In the US, there was a positive tone set from the better-than-expected final reading of the March University of Michigan Confidence. Final March University of Michigan Confidence was 73.6; higher than consensus 73.0 and up from preliminary reading of 72.5.  That said, confidence in this country continues to make a long term series of lower-highs.

 

The third report on Q4 GDP came in at 5.6%, which was lower than consensus and the second read, both of which were 5.9%.

 

The Dollar index corrected 0.54% on Friday, but was up 1.18% for the week.  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy TRADE (80.59) and sell TRADED (82.52).  The Materials (XLB) benefitted from the weaker dollar as it was the best performing sector on Friday.  Steel stocks outperformed, as the NYSE ARCA Steel Index was up 1.5%.  With crude weaker on Friday, Energy underperformed on Friday and continues to be broken on TRADE and TREND.

 

The commodity correction continues on the back of anticipated higher interest rates. The CRB was down 0.2% on Friday and down every day last week. 

 

Consumer discretionary (XLY) outperformed on Friday and was the best performing sector last week.  The retail sector, leads by apparel companies were especially strong. In addition, homebuilders were up on the day; closing higher five days in a row. 

 

Financials (XLF) only slightly outperformed on Friday, but was the second best performing sector last week.  Last week, the Obama administration introduced a new mortgage plan that seemed to provide support for the XLF. 

 

The VIX rallied 4.7% last week, but remains broken on all three durations - TRADE, TREND and TAIL.  The Hedgeye Risk Management models have levels for the Volatility Index (VIX) at: buy TRADE (16.01) and sell TRADE (18.45). 

 

In early trading, crude oil rose for the first time in four days on expectations demand will increase as the global economic recovery gains momentum.  In early trading oil is trading higher for the first day in the last three as the dollar weakens.  The Hedgeye Risk Management models have the following levels for OIL – Buy TRADE (77.79) and Sell TRADE (80.76). 

 

Gold is higher for a third day in London as the dollar index weakens.  The Hedgeye Risk Management models have the following levels for GOLD – Buy TRADE (1,080) and Sell TRADE (1,116).

 

In early trading, copper rose to a 2 1/2-month high in London as inventories are declining and a weaker dollar is making all metals more appealing.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy TRADE (3.35) and Sell TRADE (3.47).

 

In early trading, equity futures are trading above fair value despite Friday's late day sell-off and volatility higher last week.  This week's highlight will be the March employment report on Good Friday, though equity markets will be closed.  As we look at today’s set up the range for the S&P 500 is 16 points or 0.8% (1,157) downside and 0.5% (1,173) upside. 

 

Today's MACRO highlights are:

  • February Personal Income& Spending
  • February PCE Deflator 
  • Mar Dallas Fed Manufacturing activity

 

Howard Penney

Managing Director

 

US STRATEGY - CHARACTER CORRECTIONS - S P

 

US STRATEGY - CHARACTER CORRECTIONS - USD

 

US STRATEGY - CHARACTER CORRECTIONS - VIX

 

US STRATEGY - CHARACTER CORRECTIONS - OIL

 

US STRATEGY - CHARACTER CORRECTIONS - GOLD

 

US STRATEGY - CHARACTER CORRECTIONS - COPPER


The Week Ahead

The Economic Data calendar for the week of the 29th of March through the 2nd of April is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.

 

The Week Ahead - cal1

The Week Ahead - cal2

 

 


Politics vs. Pragmatism

“Europe’s problem is not its institutions, its Council, the Commission or Parliaments, the problem is  very often nationalism, populism, and narrow-minded parochial views of people who do not believe in the common project for Europe.” 

-Jose Manuel Barroso, 3/25/10

 

Late yesterday Jose Manuel Barroso (President of the European Commission) and Herman van Rompuy (President of the European Council) held a press conference in which they stated the willingness of Eurozone member states to take coordinated action with the IMF to “safeguard financial stability” for Greece, and the Eurozone members as a whole.

 

The “mixed formula” of financial support came without such details as:

  • When Greece, if needed, would receive loans or the value of said loans?
  • How much of the bilateral loan would come from the Europeans versus the IMF?
  • What budget deficit reduction requirements will be issued for other/all member states?

And to the first bullet point van Rompuy responded, “All this, we’ll work it out later.”  Is this policy?

 

While the Greek market shot up over 4% today and investors’ fears may be allayed for at least a day, Eurozone leaders have done little to address policy measures for the sovereign debt issues of its members.  And surely the debt obligations of the other PIIGS aren’t going away just because the fear of a Greek default becomes yesterday’s news…

 

To return to Barroso’s quote above, Eurozone skeptics exists. And one could argue that the decision by Eurozone leaders to support Greece in a coordinated fashion—rather than a unilateral IMF-led loan—is born out of the desire of the European community to further substantiate the existence of the Eurozone as an entity. While Barroso as President of the European Commission will put his best foot forward in confirming that the Eurozone has a sound governing body, the fact remains that the Eurozone is young, only 10-years old, and still working through honing policy to benefit the whole.

 

Clearly, finding consensus on policy from country members with vast histories, and divergent economies and cultures, will remain a challenge. Countries will differ on stance; having a unified currency will put additional challenges (handcuffs) on exercising monetary and fiscal policy measures with such issues like debt restructuring and default.

 

Equally, imbalances in terms of economic weight and political influence will continue to weigh on decision making. These points were put on center stage with German Chancellor Angela Merkel’s full support of a unilateral IMF-led bailout for Greece. The fiscally conservative Chancellor wasn’t questioning the validity of the Eurozone, but suggesting that Greece continue to work to clean up its own “house” (budget deficit) before monies were placed on the table so as to not reducing Greece’s incentive to issue austerity measures to shave its imbalances. 

 

Merkel approached the issue from a pragmatic level, conscious of her own political and fiscal constraints at home—confidence in her party’s management has waned in recent months and reaching into German coffers for Greek aid would put further strain on the German taxpayer.

 

While pundits could endlessly debate the benefit of a large economy like Germany to the Eurozone and vice-versa, we’ll spend our time understanding the dichotomy that exists within the Eurozone, and collectively throughout Europe, to drive our investment decisions.  Despite Greece getting a hall pass for now, in light of the increasing global sovereign debt issues, things continue to shake. 

 

The charts below show divergence between Germany and Spain based on the DAX vs. the IBEX.  While the IBEX is broken on its intermediate term TREND (3 months or more), the DAX continues to trade above its TREND line. For more on our fundamental stance on Germany, see our note from yesterday titled ‘Frau “Nein”’.

 

Matthew Hedrick

Analyst

 

Politics vs. Pragmatism - DAX

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%
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