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RCL 2Q2010 CONF CALL NOTES

 RCL beat consensus driven by better cost controls but net yields were softer than guidance.

 


"Demand for our cruises remains on track with our earlier projections. The strengthening of the US Dollar will clearly result in a reduction of our reported yields, but also provides a corresponding reduction in expenses. Most importantly, our continued focus on cost controls and efficiency is driving improved earnings."

- Brian J. Rice, executive vice president and chief financial officer

 

HIGHLIGHTS FROM THE RELEASE

  • "Business conditions have remained on target in each of the company's main markets while improved cost control has enabled the company to raise its earnings guidance for the year"
  • "Operating costs were lower than expected due mainly to strong cost control, energy conservation measures, expense timing and currency fluctuations"
  • "Based on current estimates for 2010, the company anticipates that 30% of its net revenues, and 20% of its NCC excluding fuel will be denominated in currencies other than US Dollar, with the British Pound and the Euro being the most significant components."
  • Guidance:
    • Net Yields: 4% for 3Q and 3% - 4% for FY2010 (7% and 4% - 5% respectively on a Constant Currency basis).
    • NCC: -1% for 3Q and -1% to -2% for the full year.
    • EPS: FY2010 increased by $0.10 from $2.25 to $2.35 and 3Q EPS from $1.52 to $1.57.

 

CONF CALL NOTES

  • Only negative factor in results is weakness of Euro and Sterling.  Cost management will help alleviate currency impact.
  • Already assumed "lackluster 2010 with a slow and steady recovery."
  • Do not see immediate need to tap capital markets.
  • Strong dollar adversely impacted EPS by 2 cents.
  • Net ticket yields up 7.1% YoY
  • Timing of maintenance and marketing expenses shift also impacted lower NCC. (100 bps)
  • 3% improvement in fuel consumption, mainly from newer vessels... these improvements will carry forward.
  • Booking environment: "stable and remarkably consistent"; revenue projection unchanged. Volume of bookings up 11% since 1Q.  Much higher advanced bookings as % of load factor.
  • Domestic bookings very consistent; European bookings showing resilience despite credit crisis.
  • Since beginning of 2010, booking window expanded, close to pre-recession times. Buying patterns are positive at this time.
  • 1/2 of revs come from non-US guests.
  • Revs impacted by Euro, Pound, and Canadian Dollar (degree of impact in that order).
  • Currency has lowered yields by 100bps since last guidance.
  • For 2011,
    • "steady and consistent, off to an encouraging start"; low visibility.
  • In 2Q, increased % of debt of fixed interest--fixed debt ratio from 45% to 55%; entered into fixed-to-floating swap, obtained $100 MM cash proceeds.
  • 3 vessels on order--Allure of the Seas, Celebrity Silhouette Solstice IV, and V.
  • Dreamworks element on Allure of the Seas.
  • Allure of the Seas to be delivered in October; will start trip in Port Everglade on Dec 1.
  • Celebrity Silhouette--to be delivered in July 2011.
  • Alaska and European pricing strong for Celebrity ships.
  • 50% of capacity will be Solstice class once Silhouette joins--will be youngest fleet in the market.

 

Q/A

  • On-board spending
    • On-board rev up modestly in 2Q; Pullmantur revs in Dominican Republic hurt by Haiti in 2Q.
    • +1 to 2% YoY for 2010.
  • Spain market
    • Seriously depressed, no signs of nearby recovery; hasn't gotten better or worse since 1Q.
  •  Booking
    • Booking window: pricing up a bit YoY
  • Euro down 7% from peg since 1Q; Sterling down 3% from peg since 1Q; Canadian $ slightly favorable.
  • Net Cruise Costs per APCD, excluding fuel guidance:
    • Benefiting 100bps from FX
    • 5 cents of benefit of "absolute lower costs."
  • 4Q pricing weakness?
    • 4Q as expected.
    • Most sensitive to significant changes, but no indication of any changes at this time (e.g. bookings).
  • Expense cuts permanent?
    • Low inflationary period have helped.
    • Won't see 100% of reductions as seen in 2009.
  • No change in ship building philosophy
    • Talking to shipyards: more margin improvement in future rather than just capacity growth.
  • Oasis and Allure of the Seas together for 2011: do not expect same yield performance as Oasis by itself.
  • On-board revs: beverage doing well; art auctions not going well.
    • Revs from Non-US customers: flat to slightly up YoY.
  • Close in bookings and pricing:
    • 2Q exactly as expected.
  • FX Impact:
    • 100% of FX impact on revs will be on ticket.
  • Solstices doing well in Caribbean; Eclipse doing well in UK market.
  • Higher pricing for Solstice ships; other ships as expected in terms of pricing.
  • Crawling back 30-33% of what happened last year--North America contributing, improvement in European pricing.
  • Current cost of capital:
    • WACC: just under 9%; will climb as de-leveraging continues.
    • Cost of debt is very low: solstice ships--LIBOR+100bps
    • Interest expense guidance unchanged despite the new swap.
  • Book to load factor:
    • Customer source-- for 3Q, increase in European guests, particularly UK guests; for 4Q, more guests coming out of North America and more European guests source into the Caribbean.
  • Pleased with Developmental products--sourced with non-US customers.

PENN SURPRISES US TO THE UPSIDE-QUICK THOUGHTS

A surprisingly good quarter out of PENN and solid guidance.

 

 

Once again, PENN did well on the cost side to offset the sluggish regional gaming trends.  EBITDA of $142.2 million beat our estimate by almost $5 million, driven primarily by better than expected margins at the two big racinos:  Charles Town and Hollywood at Penn National Raceway.  PENN raised 2010 EBITDA guidance slightly from $578m to $580m, again a surprise given the top line trends. 

 

EPS guidance is a little confusing as PENN includes non-recurring items, so it appears they are lowering guidance from $1.13 to $0.98.  However, that is not the case.  Q2 Adjusted EPS of $0.29 beat our $0.25, so we will likely be raising our full year Adjusted EPS estimate of $1.12 by $0.04, give or take a few pennies.

 

We’ll have more details later but if PENN can hit its guidance, the stock looks very cheap given the long-term growth associated with the high ROI projects in new markets, particularly Ohio.  We think PENN can grow EPS at a 25% CAGR over the next 3-4 years.

 

The table below summarizes the property performance in Q2 relative to last year and our estimates.

 

PENN SURPRISES US TO THE UPSIDE-QUICK THOUGHTS - PENN EBITDA6


HOT 2Q2010 QUICK THOUGHTS

HOT’s 2Q2010 results blew past consensus numbers and bested ours. The beat was solid and the raise in guidance – in our opinion – was way too conservative.

 

 

The high end of HOT’s new FY guidance touches our prior estimates while 3Q guidance looks like a sandbag – with the high end of guidance meeting the Street as usual.  If it were another company, we would be worried that they were back end loading results, however, this is classic HOT fashion – beat, raise for the year, and sandbag the coming quarter.  If HOT’s results aren’t up on these results, then only a change in Macro sentiment will help them.

 

2Q2010 Detail:

Starwood reported $723MM of revenues and $226MM of EBITDA, beating our estimates by roughly 4% on both metrics. 

  • Owned revenues of $437MM came in $21MM above our estimate and owned EBITDA of $90MM was $16MM above our estimate or 17% better.
    • The entire beat on Owned, leased, and other hotel revenue came from F&B and Other.  RevPAR of $143.09 was actually $0.07 lower than our number and room revenues were spot in line with our estimate.
    • Food & beverage and other revenues grew a staggering 18% YoY.  While the comp is easy (2Q09 F&B and Other revenues were down 36%), this is still impressive and is likely a reflection of the mix shift to better rated corporate business and a pickup in banquet business.
    • As a result of the strength in non-room revenues, RevPOR increased 5.9% YoY, compared to .7% YoY growth in 1Q2010.
    • Even more impressive was that CostPAR only increased 70bps, which lead to margin improvement of 4% YoY to 20.6%.  We would note that 2Q09 was the easiest margin comp as margins decreased 10.2% YoY that quarter compared to a 6.9% decrease for 2009.
  • Fee revenues of $177MM came in $1MM above our estimate.  Management & Franchise fee growth of 17.5% was better than HOT’s guidance of 11-13% and our estimate of 14.4% growth.
    • Base Management fees of $69MM were spot in line with our estimate, while incentive and franchise fees were each $2MM higher.
    • This was somewhat offset by lower “low quality” other “stuff” which was $2MM light of our estimate.
    • Amortization of deferred gains was still $20MM/Q.
  • Total VOI and Residential Sales and Service revenue of $137MM was $5MM better than our estimate, due to stronger residential sales.  Timeshare results of $34MM were 12% higher than our $30MM estimate.
    • Originated sales revenue of $177MM was lower than our estimate due to lower contract sales and lower YoY pricing, which was somewhat offset by a lower percentage of sales revenue getting deferred.  35% margins on originated sales was inline with our estimate.
    • Residential sales were $5MM higher and there were no associated expenses – which is a bit odd and is why the overall results in this segment was better than our estimate.
    • Other Sales and Services Revenue of $62MM was $1MM higher than we expected but margins 7.6% lower (i.e. expenses were $5MM higher)
  • Other Stuff:
    • SG&A was $12MM higher than our estimate – company claims it's due to timing of incentive-based accruals. However, they raised FY guidance for SG&A growth to 6-8% growth from 3-5%.  Anyway, higher pay for better results is no surprise given the crummy years that the sector has had.
    • D&A was $4MM lower than our estimate.
    • Net interest expense was $2MM below our estimate and $2MM light of company guidance.

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INITIAL JOBLESS CLAIMS RISE 37K, MORE THAN OFFSETTING THE PRIOR WEEK'S IMPROVEMENT

Initial claims rose by 37k last week (39k net of the revision), the largest jump since May of 2009.  This comes on the heels of the prior week’s decline of 29k, which was the largest improvement since February of this year and the lowest weekly number since mid-08.  At 464k, the number reported today is right back in line with the 450-470k range the series has occupied for all of 2010.  On a rolling basis, the deterioration was more modest, rising 1.25k to bring the rolling total to 456k. We note that there seems to be significant seasonal volatility at work, as similar gyrations appeared this week in 2008 and 2007 (see the second chart below).  Ultimately, initial claims need to be in the 375-400k range before unemployment meaningfully improves. 

 

INITIAL JOBLESS CLAIMS RISE 37K, MORE THAN OFFSETTING THE PRIOR WEEK'S IMPROVEMENT - rolling

 

INITIAL JOBLESS CLAIMS RISE 37K, MORE THAN OFFSETTING THE PRIOR WEEK'S IMPROVEMENT - raw

 

Below, we chart US equity correlations with Initial Claims, the Dollar Index, and US 10Y Treasury yields on a weekly basis going back 3 months, 1 year, and 3 years.Not surprisingly, Consumer Discretionary has the largest inverse correlation to Initial Claims (r-squared = 0.68) on a 1-year basis. On the flip side, it is a surprise to see that the Financials have the second lowest inverse correlation to Initial Claims (r-squared = 0.20) on a 1-year basis.

 

INITIAL JOBLESS CLAIMS RISE 37K, MORE THAN OFFSETTING THE PRIOR WEEK'S IMPROVEMENT - 1

 

As a reminder, May was the peak month of Census hiring, and it will remain a headwind through the September data as the Census continues to wind down.

 

INITIAL JOBLESS CLAIMS RISE 37K, MORE THAN OFFSETTING THE PRIOR WEEK'S IMPROVEMENT - census chart

 

 

Joshua Steiner, CFA

 

Allison Kaptur


INITIAL JOBLESS CLAIMS RISE 37K, MORE THAN OFFSETTING THE PRIOR WEEK'S IMPROVEMENT

Initial claims rose by 37k last week (39k net of the revision), the largest jump since May of 2009.  This comes on the heels of the prior week’s decline of 29k, which was the largest improvement since February of this year and the lowest weekly number since mid-08.  At 464k, the number reported today is right back in line with the 450-470k range the series has occupied for all of 2010.  On a rolling basis, the deterioration was more modest, rising 1.25k to bring the rolling total to 456k. We note that there seems to be significant seasonal volatility at work, as similar gyrations appeared this week in 2008 and 2007 (see the second chart below).  Ultimately, initial claims need to be in the 375-400k range before unemployment meaningfully improves. 

 

INITIAL JOBLESS CLAIMS RISE 37K, MORE THAN OFFSETTING THE PRIOR WEEK'S IMPROVEMENT - rolling

 

INITIAL JOBLESS CLAIMS RISE 37K, MORE THAN OFFSETTING THE PRIOR WEEK'S IMPROVEMENT - reported

 

Below the jobless claims charts, we show the correlations between initial claims and each of the 30 Financial Subsectors. To reiterate, Credit Card and Payment Processing companies show the strongest correlations to initial claims, with R-squared values of .62 and .72 over the last year, respectively.  Surprisingly, some subsectors show a positive correlation coefficient to initial claims - i.e. Financials that go up as unemployment claims go up.  These names are concentrated in the Pacific Northwest Banks and Construction Banks, though these correlations are usually not very high.  

 

In the table below, we found the correlation and R-squared of each company with initial claims, then took the average for each subsector.  For composition of the subsectors, see Chart 5 below.

 

INITIAL JOBLESS CLAIMS RISE 37K, MORE THAN OFFSETTING THE PRIOR WEEK'S IMPROVEMENT - init. claims subsector correlation analysis

 

The following table shows the most highly correlated stocks (both positively and negatively correlated) with initial claims. Note that the top 15 negatively correlated stocks have a much stronger correlation on average than the top 15 positively correlated stocks - as you would expect, given that most of the Financial space is pro-cyclical. 

 

INITIAL JOBLESS CLAIMS RISE 37K, MORE THAN OFFSETTING THE PRIOR WEEK'S IMPROVEMENT - init. claims company correlation analysis

 

Astute investors will note that in some cases the R-squared doesn't seem to reconcile with the square of the correlation coefficient. This is a result of finding the correlation and then averaging. For example, Pacific Northwest Banks have an average correlation coefficient of .32 and an average R-squared of .52 (with CACB, CTBK, FTBK, and STSA strongly positively correlated and UMPQ strongly negatively correlated). The different directions have the effect of canceling out each other out when finding the average correlation coefficient, but do not cancel out when finding the average R-squared. 

 

The table below shows the stock performance of each subsector over four durations. 

 

INITIAL JOBLESS CLAIMS RISE 37K, MORE THAN OFFSETTING THE PRIOR WEEK'S IMPROVEMENT - price perf

 

As a reminder, May was the peak month of Census hiring, and it will remain a headwind through the September data as the Census continues to wind down.

 

INITIAL JOBLESS CLAIMS RISE 37K, MORE THAN OFFSETTING THE PRIOR WEEK'S IMPROVEMENT - census chart

 

Joshua Steiner, CFA

 

Allison Kaptur


US STRATEGY – UNUSUALLY UNCERTAIN

TODAY’S SET UP

 

As we look at today’s set up for the S&P 500, the range is 23 points or 1.1% (1,058) downside and 1.1% (1,081) upside.  Equity futures are trading above fair value following Wednesday's declines in the wake of Fed Chairman Bernanke's "unusually uncertain" economic outlook.

 

SBUX, QCOM, and EBAY posted solid results after the close. Today, Bernanke's testimony will be less a factor, as the focus is on corporate earnings, the weekly jobless figures and June home sales. 

 

TODAY’S BULLISH EUROPEAN HEADLINES 

  • Eurozone May Industrial New Orders +3.8% m/m vs. consensus +0.0% and prior revised 0.6%
  • UK June retail sales inc. fuel +0.7% m/m vs. consensus +0.5%
  • UK June retail sales inc. fuel +1.3% y/y vs. consensus +1.0%
  • Eurozone July Services PMI 56.0 vs. consensus 55.0 and year ago 55.5
  • Eurozone Jul Manufacturing PMI 56.5 vs. consensus 55.2 and prior 55.6
  • Germany Jul Services PMI 57.3 vs. consensus 54.5 and prior 54.8
  • Germany Jul Manufacturing PMI 61.2 vs. consensus 58.0 and prior 58.4
  • France Jul Services PMI 61.3 vs. consensus 60 and prior 60.8
  • France Jul Manufacturing PMI 53.7 vs. consensus 54.1 vs. prior 54.8
  • France Jul Consumer Confidence (39) vs. consensus (40) vs. prior (39)

THE HEDGEYE GLOBAL MACRO LOOK:

 

China closed up another 1.1% last night, bringing the four day rally to 5.6%.  Copper is up 7.2% over the last four days.       

 

Following yesterday’s 1.3% decline in the S&P 500, we only have Materials (XLB), Utilities (XLU) and Consumer Staples (XLP) positive on TRADE with XLU the only sector positive on TREND.  Every sector declined yesterday. 

 

China closed up another 1.1% last night, bringing the four day rally to 5.6%.  Copper is up 7.2% over the last four days and materials (XLB) is positive on trade – it’s all related!

 

Treasuries were stronger today on the recovery concerns and expectations for a prolonged period of low interest, according to Fed Chairman Bernanke. 

 

The Consumer Discretionary (XLY) was the worst performing sector yesterday.  The decline was broad-based - the home builders took it on the chin ahead of what we think will be a bearish housing data point this morning.  Notable decliners included MTH (3.3%), HOV (3%), SPF (2.6%) and TOL (2.6%).

 

On a relative basis, the Industrials (XLI) was the best performing sector yesterday.  TXT was one of the bright spots as both top and bottom-line results for 2Q10 came in ahead of expectations; the company also raised full-year guidance above the Street. Analysts were positive on the strength in manufacturing. 

 

THE HEDGEYE MACRO TRADE RANGES:

 

US STRATEGY – UNUSUALLY UNCERTAIN - levels and trends 721

 

US STRATEGY – UNUSUALLY UNCERTAIN - S P

 

US STRATEGY – UNUSUALLY UNCERTAIN - DOLLAR

 

US STRATEGY – UNUSUALLY UNCERTAIN - VIX

 

US STRATEGY – UNUSUALLY UNCERTAIN - OIL

 

US STRATEGY – UNUSUALLY UNCERTAIN - GOLD

 

US STRATEGY – UNUSUALLY UNCERTAIN - COPPER


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