In preparation for the RCL Q2 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from RCL's Q1 earnings release/call and CCL's recent FQ2 release




  • “The economy is clearly still weighing on our performance, and the improvement that we’ve had is off of a dismal base. But we have now reached an inflection point on yield and that’s an important milestone worth noting. We’re certainly not where we want to be, but turning the corner is the first step to real and significant improvement and we have clearly turned that corner.”
  • “On January 28 …We were about a month into the Wave Season and felt confident we would see yields improve between 3 and 6% for the year. Those projections have proven to be fairly accurate, although since our last call the demand environment has continued to gradually improve.”
  • “Sales since the start of the year have been very healthy, with booking volumes running about 20% ahead of the same time last year. We have also seen a modest improvement in the booking window, with European and Alaska itineraries being the biggest beneficiaries. As of today, the second, third and fourth quarters are booked well ahead of the same time last year.”
  • “Pricing is clearly better than last year, but frankly the comparables are pretty low by historical standards, especially in the second and third quarter. We expect all of our major product groups to show yield improvement this year, but we are especially pleased with the performance of our developmental itineraries.”
  • “We currently expect yields to improve around 6% in the second quarter, and between 4 and 5% for the full year…. From a business perspective, we are feeling better today than we were three months ago. However, since we provided guidance at the end of January, the dollar has strengthened about 4.3% versus the British pound and 6.7% versus the euro, and consequently devalued the European point-of-sale business. The travel disruptions resulting from the volcanic ash also had a negative impact on yields. Absent these changes, we would be improving our full year guidance by about 100 basis points based on the improvements we have seen since the middle of the Wave Season.”
  • “I had said last time that Spain has stabilized and it has. And in fact, we are a little bit ahead of budget with respect to Spain. The bad news is that it stabilized at a terrible level and the Spanish economy frankly doesn’t show a lot of signs of improvement yet.”
  • “Most of the first time cruisers we’re introducing our product to are international guests. In fact, our North American guest sourcing has been flat for the past several years.”
  • “We will continue to grow (new ships) but probably at a slower pace than heretofore.”
  • “Based upon our current guidance, many of our credit metrics will show significant improvement this year and we expect to maintain an improving trajectory over the next few years.”
  • “We have traditionally guided the Street for roughly $200 million in non-new build CapEx and for now, we would continue to maintain that guidance as we look to work on our fleet.”




Pricing & Geographic trend commentary:

  • For net ticket yields, we saw a yield increase of 1.6% in local currency. Our North American brands were up 3.8%, driven by increases in Europe, Alaska and other exotic itineraries. Our European brands experienced 1.2% lower local currency ticket yields... Similar to the first quarter, the declines were driven by challenging winter season in the Brazilian market, with significant capacity increases this past winter. If you exclude the five ships that Costa and Ibero had in Brazil in the month of March, the European brands’ net ticket revenue yields in local currency was flat.”
  • For net on-board and other revenue yields, we reported a yield increase of 3.1% in local currency. The increase occurred on both sides of the Atlantic. Our North American brands were up 4.6% and our European brands were up 3.2% in local currency.” 
  • “We expect greater improvements in yields for the remainder of the year.”
  • “On a fleet-wide basis, booking volumes and pricing …in the last 13 weeks or so, covering the next three quarters have held up quite well. Even booking volumes for the last six weeks during a significant downturn in global equity markets have held up well, although we have seen reduced booking volumes for certain itineraries”
  • “For our North American brands on slightly lower year-over-year booking volumes for the last 13 weeks, we have experienced double-digit price increases. Keep in mind our comparisons of this year’s booking volumes are against a 26% increase in booking volumes for the same period as last year, when we were selling at deeply discounted prices to move our inventory.
  • “With respect to bookings by itinerary during the last 13 weeks for North American brands
    • We have seen strong volumes and pricing for Caribbean programs…
    • Alaska...on lower booking volumes has experienced significantly higher year-over-year pricing…
    • Europe itineraries have also experienced lower booking volumes but with significantly higher pricing…
    • We have also seen stronger year-over-year pricing for our Mexican Riviera itineraries”
  • "For our European brands during the last 13 weeks, booking volumes for the next three quarters have been quite strong, with moderate year-over-year local current pricing improvements."
    • "Booking volumes for European itineraries…have been higher and are keeping pace with year-over-year European brand capacity increases. These bookings are showing moderate increases in prices on a local currency basis…”
  • “Beginning in early May, the effect of the volcanic ash issue in the UK and Western Europe did cause nervousness about air travel, particularly for North American consumers taking airline flights across the Atlantic. Compounding this was the European sovereign debt crisis and the resultant negative effect it had on global equity markets… from late April through late May, U.S. equity markets…were down about 12% or so. We believe this caused consumers, especially those in North America, to re-think their discretionary travel decisions. But even with these events, fleet-wide bookings for the last six weeks for our cruises over the next three quarters continue to run ahead of last year on a fleet-wide basis, significantly ahead for Europe… and just slightly behind for North American brands. And prices for bookings for North America and Europe brands continue to be running nicely higher.”

CCL Cost commentary:

  • “Cruise costs per available lower berth day, excluding fuel and in local currency, were down 4.9% versus the prior year. The decline was driven by fewer dry docks, economies of scale relating to double-digit growth at certain of our brands, benefits from cost reduction programs, a low inflationary environment and the timing of certain SG&A expenses.”
  • “Net cruise costs per available lower berth day, excluding fuel for the third quarter, would have been projected to be flat to down 1%.  For the full year, net cruise costs per available lower berth day, excluding fuel and in local currency, are projected to be down 2.5 to 3.5%. The decline is driven by our ongoing cost reductions, the first-quarter gain on the sale of the P&O Cruises’ Artemis and lower dry dock costs.” 

Fiat Guns

“You can get further with a kind word and a gun than you can with just a kind word."

Capone - The Untouchables


Yesterday’s intraday rally in the US stock market was decorated with rumors of Spanish politicians prancing around talking about successful “stress tests” and Ben Bernanke pulling out the “quantitative easing” gun. Thank God for the modern day Triumvirate of Fiat Fools (BOJ, ECB, and the Fed). Without professional politicians deciding our fate, what hope would we western capitalists turned socialist turtles have left?


Hope, of course, is not an investment process; neither is hanging your hat on economies that allegedly only work with financial aid’s heavy hand of Big Keynesian intervention. Fear is the cement that provides the Fiat Triumvirate its political platform - and their podium is shaking.


I couldn’t make this up if I tried, but one of the top headlines from Bloomberg this morning takes the fear mongering by Fiat Fools running global monetary policy to new heights:


“Bank of Italy Says Financial Crisis Fosters Mafia”


As Western governments continue down the political path of scaring the hell out of you, be afraid fellow citizens, be very afraid – the Fiat Guns of quantitative easing and piling Debt Upon Debt Upon Debt will continue to kill both your domestic currencies and employment prospects.


This Italian headline, by the way, didn’t come from Rome’s version of Drudge. The manic media’s guns came out after the Italian Central Bank’s Deputy General Director, Anna Maria Tarantola, made explicit fear mongering statements that would make Julius Caesar’s messengers proud:


“The crisis has given organized crime room to thrive because access to credit has become more difficult… Whoever holds large amounts of cash, like crime groups, can make investments that aren’t possible for others. They can now invest in fully legal businesses.”


Wow. I guess cash really is king. Maybe we should start to take the government’s word for it and up our asset allocation to cash before Michael Corleone sends Timmy after us…


The catalysts for Spaniard and US Federal Reserve rumors were centered around 2 very clear and present dangers:

  1. Ben Bernanke’s semi-annual Revisionist Forecasting Report to the Senate of Modern Day Rome (today).
  2. Results for the made-up European “stress tests” that already have a prescribed (positive) outcome.

If there is one thing that the Fiat Fools have taught modern day risk managers who trade markets, it would be not fighting the Fiat Gun of intervention that they hold so dearly in their heavy government hands.


That’s why 32% of companies in the so called “great earnings” season of the US can miss the revenue line for the Q2 reporting period to-date, and you can see a monster intraday reversal of earnings oriented stock market weakness turn into a melt-up of short covering. As Max (James Woods) said in “Once Upon A Time In America”: “This country’s still growing up. Certain diseases, you’re better off having when you are still young.”


We have no idea what Ben Bernanke is going to say about quantitative easing programs today, but we do understand the basic algebra associated with adding more US debt to the US DEBT/GDP ratio (email if you want to see how we get to triple digit percentage US DEBT/GDP ratios for 2011; slide 11 of our Q3 Macro Themes presentation is in our Hedgeye Picture of The Day).


If he pulls out the Fiat Gun, at least we’ll continue to get paid on the short side of our US Dollar (UUP) position!


Back to the non-rumor mill oriented macroeconomic facts, Japan’s quarterly loan index plummeted in July to minus -17 (lowest since 2004) from minus -10 in the prior period. Japanese stocks closed down for the 6th day out of the last 7, taking the Nikkei to -12% for the YTD.


All the while, the great Japanese “quantitative easing” experiment that has spanned 2 decades reminds me that living in fear on the short side of a conflicted and compromised government balance sheet is no risk management life to live.


As Carlito said in Carlito’s Way, "there is a line you cross, you don't never come back from. Point of no return. Dave crossed it. I'm here with him. That's means I am going along for the ride. The whole ride. All the way to the end of the line, wherever that is."


My immediate term support and resistance lines for the SP500 are now 1059 and 1103, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Fiat Guns - mob


The Macau Metro Monitor, July 21st, 2010




According to a SEC filing, LVS has drawn down the first US$750 MN tranche of its US$1.75 BN syndicated loan for its Sites 5 & 6 on Cotai.  Venetian Orient Limited (VOL), an indirect subsidiary of LVS, received the tranche on July 16.  In addition to the first tranche of money, the credit agreement makes available a US$750 million term loan offered on a delayed draw basis until 11/17/2011 and a US$250 million revolving credit facility available until 4/17/2015.


The ten lenders of the syndicated loan include Goldman Sachs Lending Partners LLC, BNP Paribas, Citibank and three Chinese banks– Bank of China, Industrial and Commercial Bank of China, and Oversea-Chinese Banking Corporation.


June CPI increased 2.68% YoY and 0.32% MoM.



Macau registered a budget surplus of MOP 26.6 BN in the first half of 2010, with direct taxes from gaming increasing 63% YoY.  Macau's surplus since 2002 reached more than MOP 122 BN, enough to cover the government’s budget for four years.  Direct taxes from gaming in the first half of 2010 totaled MOP 30 BN, representing 85% of the public finance revenue.


Early Look

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Following a sharp, albeit somewhat expected, decline in two-year average trends in May in the U.S., MCD trends need to rebound.


McDonald’s is scheduled to report its June sales numbers, along with its 2Q10 earnings, before the market open on Friday.  Relative to earnings, it is important to remember that 2Q10 is the last quarter of easy comparisons on the food and paper expense line.  To recall, MCD reported its highest restaurant level margin in the U.S. in 1Q10 in nearly 16 years.  The 210 bps of year-over-year margin growth was driven largely by lower food and paper costs, which management said “have allowed [them] to continue to grow margins, while holding the line on price increases.  “Specifically, the company’s basket of goods decreased about 5% in both the U.S. and Europe during the first quarter, but full-year guidance assumes only a 2%-3% decrease in the U.S. and a slight decrease in Europe.  Although food costs likely remained favorable in 2Q10 on a YOY basis, this benefit will go away in the second half of the year (with comparisons becoming increasingly more difficult as we trend through the year).  Given the current unemployment picture and the still fragile state of the U.S. consumer, MCD may have to choose between driving traffic by keeping prices low and holding the line on margins.



June sales preview:


McDonald’s is scheduled to report its June sales numbers before the market open on Friday.  On a year-over-year basis, June 2010 has one less Monday, and one additional Wednesday, than June 2009.


June’s results will likely reflect the impact of the company recalling the “Shrek Forever After 3D” collectable drinking glasses due to potential cadmium risk.  For reference, MCD partly attributed the momentum in May in the U.S. to the popularity of its Shrek-themed Chicken McNugget and Happy Meal promotions.  June also is the last month of the summer without any impact from the rollout of the new smoothie beverages.  The impact of the McCafe smoothies, and the heat wave that gripped most of the country in early July, will be seen next month.


Below, I am providing my view on comparable sales ranges for each of MCD’s geographic segments as indicators of what I would rate as GOOD, NEUTRAL, or BAD results based largely on two-year average trends (adjusting for calendar shifts).



U.S. (facing a relatively easy 1.8% compare, including a calendar shift which impacted results by -2.0% to +0.2%, varying by area of the world):


GOOD:  4.5% or greater  would be perceived as a good result because it would imply that the company was able to improve U.S. two-year average same-store sales (by 30 bps) on a sequential basis.  Given the current unemployment picture, together with the recent drop in consumer confidence, a 30 bps sequential increase would be meaningful.  While May’s U.S. result was less-than-stellar, and therefore does not pose a lofty sequential hurdle for June, a 4.5% number would be the best result this year.


NEUTRAL:  Roughly 3.5% to 4.5% implies two-year average trends that are roughly in line with those seen in May.


BAD:  Below 3.5% would indicate that two-year trends have deteriorated sharply on a sequential basis.  May had already seen a decline from April; further decline would be decidedly negative and would imply a two-year trend below 3%, a level not seen since January. 




Europe (facing a 4.7% compare, including a calendar shift which impacted results by -2.0% to +0.2%, varying by area of the world):


GOOD:  6.5% or above would be a good result for McDonald’s European operations.  This print would imply a roughly level-to-slightly lower two-year average trend with May but would still be in the 6%+ area which is traditionally the “GOOD” level for Europe.  The two-year trend in Europe accelerated rather significantly in May from the April level so maintaining that trend would be viewed positively. Although the heavy involvement of the European nations in the World Cup may have had somewhat of an impact on McDonald’s sales, economic issues in Europe – such as unemployment – are still weighing heavily on consumer behavior.


NEUTRAL:  5.0% to 6.5% would imply two-year average trends roughly in line with what we saw in the months preceding May’s tick up in trend.


BAD: Below 5.0% would signal that two-year trends have declined sharply from May and decidedly back into the sub-6% region.



APMEA (facing an easy +0.3% compare, including a calendar shift which impacted results by -2.0% to +0.2%, varying by area of the world):


GOOD: A print of +9% or higher would be a good result for the APMEA branch; this number would imply that two-year average trends held steady or improved in June.  APMEA is lapping an easy compare of +0.3%.  The slowdown in APMEA in June last year was attributed to weakness in Japan and China, with China running negative comparable store sales.


NEUTRAL: Comparable-store sales of 8% to 9% would result in two-year average trends slightly lower than those seen in May, but 8% still represents a strong comparable-sales number when compared to the past three months.


BAD: Below 8% would result in a significant sequential deterioration in two-year average trends and, therefore, would be perceived as a negative result.



MCD JUNE SALES PREVIEW - mcd june preview


Howard Penney

Managing Director

Bear Market Macro: SP500 Levels, Refreshed...

Conclusion: We remain short both the SP500 (SPY) and US Dollar (UUP).


Gotta love a bear market that rallies on rumors of “Fed cuts”, when they can’t cut from zero. I suppose if the rumor is that Bernanke could implement more quantitative easing, that would be more believable. If he does that, the US Dollar and balance sheet position will weaken further…


We continue to believe that the 7 consecutive weeks we’ve seen of the US Dollar trading lower (week-over-week) bodes ominously for both future US economic growth and equity performance. Unlike the bullish REFLATION trade we made in 2009 (Dollar down = stocks up), this time US Dollar weakness won’t have accelerating global and domestic growth at its back.


The Bear Market Macro intermediate term TREND line of resistance remains firmly intact up at 1144, and our refreshed immediate term TRADE line of resistance is now 1080. We probably should have covered our SPY short position on this morning’s open near our immediate term TRADE line of support (1058), but shoulda, coulda, woulda, only works in men’s league hockey when you are on the bench talking to yourself.


Keith R. McCullough
Chief Executive Officer


Bear Market Macro: SP500 Levels, Refreshed... - 1

IGT 3Q2010 Preview

IGT is now officially cheap but near term catalysts remain elusive. Whisper expectations for the quarter are pretty low. The focus will be on replacement demand.



The sell side remains stubbornly above IGT’s fiscal 2010 guidance of $0.77-0.85.  We suspect that buy side expectations are lower, however, so a reiteration of guidance should not disappoint.  For FQ3, our projection of $0.21 is in-line with the Street.  Replacement demand should be a major focus for both the quarter and the outlook.  Despite investor pessimism, replacements have been accelerating, which should bode well for next year’s earnings.  Of course, if casino revenue trends don’t recover, all bets are off.  In that environment, no gaming company will do well but the suppliers should be better off.


Here are the details of our projections:


FQ3 Detail


Product revenues of $231MM with gross margins of 49%

  • North American product revenue of $146MM and gross margin of $73MM
    • 6,350 new units ( 4,700 replacement) at $14.4k.
    • As we wrote about on 7/1/2010, “Q2 AND Q3 MARKET SHARE COULD BE MISLEADING”, IGT typically sees a big sequential increase in ship share in the June quarter, which is also typically a seasonally stronger quarter for replacement orders than March.  Since 2006, IGT’s replacement orders have seen some sequential pick up in June. 
    • While new and expansion shipments are nothing to write home about, we estimate that June shipments will be roughly 1,200 better than March shipments.
    • IGT’s Dynamix package offer, which was supposed to expire in May, was extended through the end of June, so we expect similar pricing to March.
  • International product revenue of $88MM at a 47% gross margin
    • 5,300 new units at $10.8k.
    • Our sequential decline is due to the removal of 2,200 units shipped to Japan in March, and less units shipped to Asia, since March included shipments to Singapore, and is offset by higher shipments to Australia, UK, and S. Africa.
    • Better margins due to the removal of impairment charges related to Japan last quarter.  Pachislot also had lower margins.

Gaming operations revenue of $281MM and gross margin of $171MM

  • Average install base of 60,300 with an average win per unit of $51.30.
  • June has seasonally lower yields than March for IGT.
  • Given the shipment of a lot of new product, we assume a small pickup in D&A and therefore, a small tick down in margins.

All the other stuff:

  • SG&A (including bad debt) of $89MM.
  • R&D of $52MM.
  • D&A (expensed) of $19.8MM.
  • Net interest expense of $23MM.
  • Tax rate of 38%.

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