This may be good enough. We believe we were the Street high in Macau and Singapore and they came in pretty close. Low hold at MBS impacted VIP by $15MM so they would have beaten us in Singapore and overall with normal hold in Singapore. Here our are notes from the call.


"We are pleased to report that we delivered record revenues and adjusted property EBITDA during the second quarter of 2010. Strong revenue growth, increases in operational efficiency and robust operating margins at Marina Bay Sands in Singapore all contributed to substantial margin expansion and a record financial performance overall. In Macau, we delivered an all-time quarterly record of $307.0 million of adjusted property EBITDA, with each of our properties, The Venetian Macao, Sands Macao, and Four Seasons Hotel Macao and Plaza Casino, delivering substantial revenue and adjusted property EBITDA growth, as well as adjusted property EBITDA margin expansion. In Las Vegas, increases in gaming volumes and hotel revenues, in concert with the impact of our efficiency programs, allowed us to deliver $66.0 million of adjusted property EBITDA during the quarter."

- Sheldon G. Adelson, chairman and CEO



  • In Las Vegas, results are showing some improvement. Occupancies are strong, and weekend business has improved
  • Construction activity on Sites 5 & 6 is progressing. They are working with Macau authorities to ramp workers on the site
  • 963 rooms opened on April 27th and most of the remaining rooms opened on June 23
  • Have seen continued ramp of daily play at MBS since opening
  • Las Vegas- volumes were healthy but they had low hold.  Occupancy was good but pricing was challenged. Forward bookings continue to improve and have started to see better pricing trends on FIT, especially on weekends.
  • Leadership change in Macau - apparently the board made this decision. For at least the last 6 months, they had planned on beefing up the management team in Macau. 
  • Direct VIP play was Venetian Macau was 24% of total rolling volume.  At FS, direct VIP RC was $2.4BN or 49% of total RC. 
  • Retail sales at Venetian Macau were up 56% in June YoY
  • Remain confident that adding "destinations" to sites 5 & 6 will be additive to drawing customers to their properties
  • Sands Bethlehem had its best quarter since opening - efficiency and marketing efforts helped.  July 18th - they introduced 89 table games.  Table games have already positively influenced slot play, total play and other property revenue.  300 room hotel is scheduled to open Spring 2011
  • Las Vegas results:
    • Gaming volume was healthy but low hold impacted revenues by $30MM
    • Expect to realize more group rooms in 2010 than 2009. 2011 should be even better. 18% of total room nights were group. However, rates are still under pressure in the group segment.
    • Gaming business is healthy, costs are down, but rates are still under pressure
  • Deleveraging strategy: Paid down $420MM of debt (ex. Singapore).  At June 30th - had $3.8BN of cash & equivalents on their balance sheet. Had $3.2BN of R/C availability across their credit facilities in US and Macau.  $750MM of capex and pre-opening expenses in Singapore through YE 2010 - although about $400MM of that should be paid out of their cash flow. 
  • They have sufficient capital to complete Phase 1 of Sites 5 & 6
  • Weighted average interest rate in the Q was 3.7%. 
  • US credit facility leverage: $432MM TTM EBITDA, $4.3BN, cash: $1.9BN, 5.47x compared to 6x max leverage
  • Venetian Macau: TTM EBITDA $1.09BN, gross debt: 2.27BN, leverage was 2.09x compared to max leverage of 4x
  • Expect to execute the sale of non-core assets to assist in the deleveraging
  • Launching an amend and extend for their US facility - they will reduce the term loan in exchange for an extension of the facility and financial flexibility



Singapore specific:

  • Monthly progression of gaming win at MBS?
    • There was a substantial ramp from May to June.
    • RC - started around $300-$400MM range per week initially. By the beginning of June, it got above the $600MM range and is now around $800MM. Rolling volume will hit just over $3BN in July.
    • Slot win: May was $2MM+ range per day, then June was 2.5MM, and in late June/July - $3MM/day
    • Ramp in Mass and slots has continued
    • VIP hold has been lower than expected
    • Mass and slot win has been very consistent though
  • Occupancy is still low at MBS but on 2,500 rooms instead of on 1,200 average rooms. July occupancy is a little higher/similar than what it was this quarter. Selling 1,200-1,300 rooms per night. Have been light on corporate business so far.
  • (MBS) Opened up the electronic Bacc - 90 units.  By September 3rd they will have over 300 positions online.  Early results on Baccarrat were lower than expected but results are still ramping as people figure out that they are there.
  • Commission rates at MBS?
    • Thinks that 1.2% is about right on average for rebates. 1.2-1.3% is a good number to use.
  • Market share in MBS now?
    • Don't know Sentosa's numbers. Think that once they are fully ramped that they will have more than their fair share. Genting is doing a lot better than Sheldon initially thought they would do. Their bussing program is good and claim that they are giving 20 bps more in rebates than MBS.
  • Contribution margins of 50-67% at MBS
  • Radius of their marketing reach at MBS is wider than they thought
  • Slightly more than 1/3 visitors to MBS are from Singapore - trend has been steady from the beginning (35-37%)
  • More then $1BN in EBITDA in 2011 for MBS?
    • Think that they can do $1BN, not necessarily more than that
  • Contribution margins for the hotel and casino at MBS:
    • From the hotel it was minimal
    • Casino margin was about 52-55%
    • Think that their overall margins will be north of 50% when they are fully ramped
  • Retail at MBS - will have 160 stores open on Sept 3rd of the 280 stores.  Expect them to begin contributing to profitability. Their current EBITDA has no contribution from retail this quarter.
  • No update on junket applications - they haven't sponsored any.  They don't think that they need any since the demand on the premium side is very strong. Doesn't think that junket reps will get licensed in 2H2010.
  • Thinks that Genting is likely working with junkets given their higher commissions
  • Singapore hold impact was $25-26MM
  • Direct credit hasn't been an issue so far

All other questions:

  • Steve Jacobs departure? Is there a non compete?
    • No he does not have a non-compete. He didn't have an actual negotiated contract - just a term sheet.
    • "I would opt for him to go to work for a direct competitor" - Sheldon
    • No more departures of management teams. Claims they have people wanting to come back.
  • David Sisk: He has many years of very strong casino experience and some significant Macau experience. Think that his personality and skill set will bring attention to the day to day management of their properties
  • Ed Tracy: Has some casino experience - he build himself up from washing dishes to senior management.  Thinks that he's a good operational guy and will help marketing and sales.
  • Thinks that the government will allow them to have the necessary amount of labor that they need since they are hiring all the locals that they can.
  • Macau: July has been a terrific month so far. Will continue the trends of the last quarter ... "or more".
  • They are comping less in Vegas than last year - they're in the mid 20's for comping but comp less than their competitors.  Across the market there is too much comping but also too many rooms. 
  • Hope that they will get to 20% group business in 2010, and hopefully 30% in 2011 but high 20's is more likely
  • Evaluating pulling back direct play in Macau? Why?
    • Because junket growth has been very strong, so why not participate more in that growth
    • Analyzing whether it's worth keeping all strata of premium play because it's chasing away some junket reps from their property
  • CEO search for Sands China: Will pick a search firm tomorrow. Wants a person with Asian operating experience
  • % of roll and the commission that they pay isn't impacted by hold... hmmm not sure that's true
  • Vegas impact from Opryland shift of business?
    • They did help the summer a bit - there were 25,000 room nights or so for them.
    • It was good for Vegas though, but it wasn't highly rated room business because the rates were very low for a part of it.



As we look at today’s set up for the S&P 500, the range is 31 points or 2.1% (1,090) downside and 0.6% (1,121) upside.  Equity futures are trading below fair value following Tuesday's inconclusive close which saw the S&P 500 snap a three day winning streak after US Steel provided an uncertain outlook statement.

Today sees a slew of earnings while the Fed's Beige Book and Durable Goods Orders will be the main MACRO focus.

  • Advance/Decline Line: -360 (-2235)
  • Volume: NYSE 1115 (+9.5%) - Volume is up DoD with negative breadth and but still below LTM average.
  • Sector Performance: 5 sectors up/4 sectors down (RECOVERY/REFLATION trade underperforming)
  • Market Leading Stocks: Lexmark +8.4%, Du Pont +3.5% and Masco -11.7%, Thermo Fisher -9.4%

Equity Sentiment:

  • VIX: 23.19 (2.0%) - The VIX is broken on TRADE - BULLISH for stocks
  • SPX Put/Call ratio: 1.40 down from 1.70 (low on 07/15/10 of 0.87)
  • ABC Consumer confidence declined to -48 from -45
  • Bullish sentiment increases to 38.2% from 35.6% in the latest Investor's Intelligence poll

Credit/Economic Market Look:

  • TED Spread one-day change: 33.029 to 32.911
  •  3-Month T-Bill Yield is at .15% from .14% yesterday
  • Yield Curve one-day change: 2.406 to 2.413

Commodity/Growth Expectation:

  • CRB: 266.66 +0.02%
  • Oil: 77.50 -1.87%
  • Copper: 320.65 (-0.51%) – trading above its TRADE line - BULLISH for growth expectations
  • Gold: 1,159 (-2.1%) - Gold has decisively broken the Hedgeye intermediate term TREND line of support (1197); the long term TAIL of support -4.2% lower at 1115


  • EURO: 1.30 (-0.1%)  - Trading above the TRADE line
  • DOLLAR: 82.05 (0.1%) - BEARISH formation

Overseas Markets:

  • ASIA - Markets closed sharply higher helped by a string of better than expected corporate earnings including Canon and Nippon Steel.  China A-Shares close up another 2.3% last night (up 7 of last 8 days and +12.8% from July 5 YTD low)
  • China could jolt markets on Aug. 1 with PMI below 50, Westpac & SocGen analysts say (Bloomberg)
  • EUROPE - Major indices have pulled back from opening levels and appear to be waiting for the US open, as the benefit from the Asian markets gives way to some minor profit taking.
  • LATIN AMERICA - Major indices are mixed, with Mexico down 0.8%
  • MIDDLE EAST - Mostly higher with the UAE trading down  another 0.60% 

THE DAILY OUTLOOK - levels and trends

Gold Fishies

“What does a fish know about the water in which it swims all its life?”

-Albert Einstein


Gold got clocked yesterday, and I was getting a lot of questions as to why. Given gold’s multi-factor and multi-duration attributes, there are a lot of ways to consider these questions, so let’s take a little risk management swim starting from the top down. Then we can move from the bottom up.


First, from global macro perspective, here are 3 major reasons why consensus loves gold:

  1. Protection against Fiat Fools who run Fiat Republics.
  2. Protection against a deflating US Dollar.
  3. Protection against inflation.

So let’s take these one at a time. What happens when certain Fiat Fools are forced to get fiscal religion? Austerity measures across Europe have provided a huge intermediate term tailwind for both European equities and currencies. The UK in particular is where we’ve had our bullish currency bias (long FXB) and we get how a marginal investment dollar could be allocated to the British Pound here versus US Dollars or gold.


But what about that US Dollar? What do we Gold Fishies know about the waters of down dollar equating to down gold? That’s definitely new – but that certainly doesn’t mean it can’t make sense. It’s happened before – don’t forget that DOWN DOLLAR = DOWN GOLD in the summer of 2008 – and that, my fellow fishies, wasn’t a precursor to a very friendly hootchy-kootchy kiss.


On the inflation front, our call for Q3 is that reported inflation in the US in particular rolls over sequentially versus headline CPI and PPI readings we witnessed at the cycle-highs of Q2. On the margin, that matters – if you are long gold for inflation protection in the intermediate term that is…


Duration is always critical to contextualize, so let’s swim right back up to the top and consider the setup in the gold price from a top-down quantitative perspective using our multi-duration model (TRADE, TREND, and TAIL):

  1. TRADE (3-weeks or less) = 1217 and that line broke in late June.
  2. TREND (3-months or more) = 1197 and that line broke in the last few weeks.
  3. TAIL (3-years or less) = 1115 and that long term line of support continues to hold.

In other words, irrespective of my long term bullish view of the gold price, if all I did was run a quant shop, I’d be shorting gold on strength (it’s immediate term oversold at 1164 this morning by the way) using an 1197 stop, with an intermediate term plan to cover my short position in the 1115 range and get really long again.


To be crystal clear, I am simplifying my analysis this morning because I only have 40 minutes to write this in 1000 words or less. But that’s not something I need to apologize for – quite often when applying the fundamental principles of chaos theory to macro market moves, there is a deep simplicity to the right answer.


For now, the answer is in the math. Over the long term, the DOLLAR DOWN = UP GOLD bulls have been fed handsomely by recognizing the inverse price relationship between these two asset classes. Like anything that gets bubbly, these bullish waters have been purified by a great story – the end of the Fiat Republic. We get storytelling, but we get math too…


Using our intermediate term TREND duration, there are two new mathematical realities that have re-surfaced in the last 3 weeks (mid-2008 style):

  1. There is currently a POSITIVE correlation between the US Dollar and Gold of +0.84
  2. The r-square between gold and USD has shot back up to +0.70

By any mathematical consideration these are very high correlation and r-square levels for the Gold Fishies to consider as we all swim up and down the proverbial fish bowl of risk management that is this interconnected marketplace.


My immediate term support and resistance levels for the SP500 are now 1090 and 1121, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Gold Fishies - FISH

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The only bright spot in this low quality quarter was free cash flow generation. Lower FQ4 guidance was blamed on software revenue recognition. Wish we had known about that FQ2 Canadian shipment.



While IGT’s $0.21 EPS number technically is in-line with consensus, with the exception of tight cost controls, there was little to get excited about in the release.  North American (NA) unit shipments, NA ASPs, and install base were all disappointing.  FQ2 ship share now appears overstated given a big Canadian shipment which wasn’t previously disclosed, and share appeared to remain low in FQ3. 


Guidance of $0.16 to $0.19 was not good, below consensus estimates of $0.22.  The only bright spots were free cash flow, non-box sales in NA, margins, and lower SG&A.  The S in SG&A has a commission component so it shouldn’t be a surprise that SG&A was low with top-line miss. 


The biggest miss vs. our expectations was on North American box sales which came in $28MM below our estimate, largely driven by lower replacement shipments.  June is usually a seasonally better replacement shipment quarter than March and Konami tends to grab a smaller piece of the pie.  So what went wrong?  Possible explanations:

  • We know that Konami shipped fewer units in the June quarter – about 1,250 less than the March quarter so that’s not it.
  • IGT claims that lower sequential shipments into Canada negatively affected their shipments to North America (they shipped 1,100 units into Canada in the March Q), although conversations with WMS and BYI suggested that there was nothing unusual about the Canadian shipments in March.
  • March industry-wide replacements were simply better than June – We didn’t get the sense that this was the case from speaking to operators throughout the quarter.
  • The introduction of the Dynamix package in the March quarter may have pulled forward some of IGT’s demand.  In the March quarter, IGT sold 4,017 units under the Dynamix package, while selling less than 2,300 units under this promotion in the June quarter.
  • IGT lost even more share – if we back out the 1,100 Canadian units from the March quarter, IGT’s market share would’ve been 22%, instead of 27%.  Had we known about the Canadian shipment in March, we would’ve assumed lower IGT ship share going forward.


Better North American non-box sales helped offset some of product sale weakness and, we suspect, was the major driver of better margins, since it’s not unusual for this mishmash bucket to have margins of 70%.  As followers of BYI know, systems revenue is almost impossible to model given the revenue recognition issues, and IGT gives no quarterly disclosure of the contents of the non-box sale bucket.


Gaming operations revenues came in light of our estimate as did gross margins – although excluding the jackpot funding expense, margins would have been 60.6% - which were only a touch lower than our estimated margins.  The “splendid yield of $51.68” in the quarter, finally showed some stability and even growth – which is encouraging since for at least 5 straight years, yields have declined.  However, given the new exciting games like Sex in the City and Amazing Race, we suspect that most analysts were expecting some stabilization and perhaps even some growth here.  The backlog for mega-jackpots increased by about 200 units sequentially, while the backlog for the “hot” top 4 games decreased by almost 1,000 units sequentially.


While earnings were disappointing, the huge improvement in free cash flow generation by IGT is impressive.  Much of this improvement is due to more efficient capex spend through the reduction and streamlining of platforms, better working capital management, and cost cutting.

UA: Contextualizing Sources for Growth

Following UA’s 2Q call, we see two key incremental opportunities for top-line growth – outlet stores & distribution within existing partners. Below is our analysis sizing each:


One of the two incremental growth opportunities pertains to direct-to-consumer. Sales in this segment are tracking up 60%+ with growth of 17-19 stores on a base of 35 in 2010. Plans call for similar unit growth in 2011. In an effort to size the potential contribution to the top-line consider the following. Taking into account location at premium outlets where productivity is typically $600/sq. ft and an average store size of 5,000 sq. ft. with year-1 productivity at ~75%, we estimate the addition of ~18 stores in each of the next 2-years alone could add $40-$50mm, or 4%-5% annually.


Additionally, growth within existing partners such as Foot Locker also represents meaningful upside over the intermediate-to-long term. For example at Foot Locker, UA can grow through 1) increased door distribution and 2) increased product penetration (i.e. apparel and footwear):


1)  We know that UA is in 700-800 of approximately 2,400 addressable FL stores (excluding ~750 international locations and ~465 Lady Foot Locker concepts – these represent an additional opportunity a few years out). If we assume that each store sells 1 pair of UA shoes/day with a net retail ASP of $70 and retailer margin of 55% (essentially $45 at wholesale), that equates to ~$13mm in footwear revs for UA at FL currently, which we view as conservative. Therefore, the expansion into 1,600 incremental stores represents a ~$26mm opportunity.


2)  The more meaningful opportunity is increasing UA’s market share within FL’s mix. If we take into account the fact that Nike represents 60%+ of FL’s portfolio and no other brand accounts for more than 10%, let’s assume that UA represents only 1%, or ~$50mm of sales at retail. Again, this equates to ~$32mm to UA at wholesale (same retail/wholesale markup assumptions as above). With basketball shoes and gen-2 running shoes imminent, we fully expect UA to become more meaningful to FL’s portfolio. The table below captures just how significant an opportunity this is for UA.  As a reminder, UA is currently a $1Bn business.


It’s clear that we should no longer expect major product launches from the company following its $5mm Super Bowl footwear launch in 2008. There are clearly new products on the near-term horizon in both footwear (basketball and running) and apparel (cotton-based and new fits) that will play a key role in driving double digit top-line growth. Coupled with the aforementioned distribution opportunities, we expect 20% top-line growth over the next 2-years, at least, and remain comfortably above guidance and the Street at $1.19 in 2010 and $1.75 in 2011.


UA: Contextualizing Sources for Growth - UA at FL 7 10







"Our third quarter results reflect meaningful progress at IGT . Despite challenges in the broader marketplace, we continue to manage our business to increasing levels of efficiencies.  Our efforts have resulted in the generation of significant cash flow for reinvestment into the business in areas that create innovative and customer centric products and services."

- CEO Patti Hart. 



  • Gaming operations:
    • 58-61% guidance for 4Q2010 margins
    • $51.68 blended daily yield
    • $10-$15 on lower yielding units and international units to over $100 on mega jackpot units
    • 83% of install base's yields are based on variable fees
  • Reduced material costs and increase of non-machine products contributed to better gross margins for product sales
  • Product sales in NA:
    • Replacements: 3,200
    • Sequential decline was due to lower shipments to Canada partly offset by higher shipments to Washington
    • Non-machine revenue was up due to higher system revenue and the Dynamix package
    • ASP decline was due to the Dynamix package - since the conversion revenue is recognized in non-box revenue
    • 55% of shipments were MLD's
  • International product sales:
    • Benefiting from FX, MBS and higher Mexico sales
    • Higher gross margins due to higher mix of non-box sales and lower material costs
  • 50-52% margin guidance for product sales next quarter
  • Lower SG&A was due to lower professional fees, expect $85-90MM run rate in the 4Q. Bad debt was flat to the prior year quarter
  • R&D in the low $50MM range for 4Q
  • Total D&A was $59MM, decline was due to lower D&A on the domestic Mega Jackpots - expect it to remain flat in 4Q2010
  • The interest expense included a $4MM financing charge
  • Convert added $7MM of non-cash interest in the Q, non-cash interest of $30MM or $0.06 is estimated for FY2010
  • Tax rate excluding discrete items was 39%.  Expect 37-39% tax rate going forward
  • Had $1.2BN of R/C capacity, $270MM O/S balance
  • For debt covenants, their bank leverage ratio was 2.5x at June 30, 2010
  • Their converts and warrants weren't dilutive to their share count this quarter
  • Generated $192MM of FCF YTD
  • $61MM of capex this quarter  and is expected to trend at $60-65MM in the 4th Q
  • Generation of FCF remains their highest priority
  • Focusing more of their engineering efforts on application developments in their SB effort - have 14 properties with SB products
  • Strategic product initiatives
    • Gaming yields increased 1% sequentially
    • Stand alone jackpot yields up 2% sequentially
    • Sex in the City: 1,300 units installed
    • Amazing Race, Top Dollar and Super Nova Blast now have 790, 391, and 362 units deployed, respectively
    • Top 4 games (mentioned above) backlog: 1,202 games
    • 3337 game backlog for mega jackpot
    • Dynamix package - Sold 6,300 units
    • Cosmopolitan agreement: will sell them the majority of their for sales games, SB system
    • They are in various conversions on 10 SB system opportunity customers internationally
  • Ohio Lottery commission is seeking a court judgment affirming the commission's authority to install slots at racetracks
  • Illinois: implementation of the VLT program is proceeding with the awarding of the central monitoring system contract and the adoption of administrative rules. Licensing process has started.  Chicago (could be 15k machines) is still waiting to pass the necessary city council resolution to opt into the program.  Expect first shipments in early 2011.
  • MA:  Should know by July 31
  • Canada:  VLT replacement process moving slowly.  Expect the majority of the games to come online in 2012.  Of the 34,000 games in Canada, estimate 20-25k could be replaced over the next 2-3 years.
  • Italy: expect first approval for their installations in September with their first shipments in early 2011 (March)
  • Brazil:  think that the proposal can resurface next year
  • Greece:  Expect that within 1 month a proposal for VLT legislation will be submitted and final legislation by the end of this year.  Potential operational date in late 2011.  Potential for 50k VLTs & upfront license fee of Euro 10k
  • Guidance: Cautiously optimistic about customer spending levels.  Few factors might impact their 4Q results (replacement demand, interest rates, and revenue recognition accounting) range: $0.82-$0.85 guidance for 2010


  • Sustainability of cost cuts?
    • Most should be sustainable
  • NA non-box sales were very high and driven by:
    • Dynamix free conversions got allocated at fair value to non-box sales vs. ASP on game sales
    • Higher systems sales
  • How does the backlog influence the total install base?
    • 2 for 1? No, that would be aggressive.  Their goal is to replace lower yielding games with new fresh product. Goal is to maintain floor share.
  • What are their customers waiting for to order replacements?
    • A lot of their customers are waiting to see what their competition does
    • Improvement in the general environment
  • Guidance implies a $0.16-$0.19 cent quarter for 4Q? Why so low?
    • Cosmo - unclear when they can recognize that revenue given that they are supplying the system
    • Aria: revenue recognition is dependent on when they deliver some software
    • Interest rate risk for Jackpot expense
    • Harder to predict revenue recognition for non box business and that has been a driver for them
  • How are sales trending now that the Dynamix package has expired?
    • General sense that they have is that there were just less replacements in June vs. March which benefited from a large Canadian order
    • No real comment there on the post Dynamix trends
  • Early 2011 reference for Italy - meant March 2011 Q
  • 50% of the new units shipped came from 3 properties

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