Boyd Gaming Corp (BYD) 2003 Q3 法說會逐字稿

Thank you for standing by. You're on line for today's Boyd Gaming third quarter 2003 earnings results conference call. We're currently gathering additional participants and should be getting underway momentarily. Thank you for your patience and please remain on line . Please stand by, we're about to begin. Thank you for standing by and welcome to the Boyd Gaming third quarter 2003 earnings results conference call. This call is being recorded. With us today from the company is the President, Donald Snyder and Executive Vice President and Chief Financial Officer Ellis Landau. At this time I would like to turn the conference over to Mr. Landau. Please go ahead.

Thank you, good afternoon and welcome to our third quarter earnings conference call. Before I begin, let me make a few comments. The call today may contain forward-looking statements. The actual results may vary from what is contained in those statements. The variances could be material, and I refer you to our public filings for the risk factors you need to know before you invest. I also want to say we're broadcasting this call on our website at www.boydgaming.com, as well as www.firstcallevents.com. Joining me today on the call are Don Snyder, our President, Keith Smith, our Chief Operating Officer and Bob Bogner, who's the Chief Executive of Borgata, our joint venture in Atlantic City. Don, Bob and I will make remarks and then all four of us will be available to answer any questions that you have. A short while ago we issued our release of our third quarter financial results.

We reported third quarter adjusted earnings were 15 cents per share versus 23 cents in last year's third quarter. That's about in the middle of the range, that is the middle of the range that we provided to you in our announcement just a couple of weeks ago. During the quarter comes in two parts. Borgata, whose initial results we're quite pleased and our [INAUDIBLE] properties with the results with a couple of exceptions we're not particularly pleased with. Let me talk about the [INAUDIBLE] property group first, that group in which we experienced the short fall from expectations. Our revenues in the third anywhere were $311 million, that's up slightly from the $308 million we reported last year. Among the best revenue performers were Blue Chip and Delta Downs, which both turned in excellent quarters. Our property on the third quarter was $60.4 million, which was $12.8 million below the third quarter last year. About $10 1/2 million of that decline came from two properties, Stardust and Par-A-Dice. With me in the group is a whole gaming taxes which were recently raised in Illinois, Indiana, and Nevada. Cost us about $8 million of the $12.8 million decline in the quarter.

Stardust with new property management, we tried some new things to pull up the property and improve the guest performance. In the third quarter, they cost us some money but they didn't bear fruit. As you know, Stardust's real value to us is in the real estate, but until we redevelop the property, we're trying to hone and see if it's steady, at least in the mid teens, about where it's been running the past few years. While this past quarter wasn't good, we're confident and remain confident that despite this hiccup, that's where the property will be in 2004. At Par-A-Dice, higher gaming taxes cost us $4.3 million in the quarter versus last year. The property was down more than that. Principally because we lost revenue year-over-year.

We didn't try to lose revenue, we didn't charge for admissions or parking, but we're losing business to neighboring states due to some disruption on the market. Keith will talk more about that later. Mike hampton, we're confident that we can bounce off of this bottom and get the property to a better run rate as we await the tax relief that may come through the sunset of the particular tax revision that is in place now or the opening of the 10th license in Illinois, which would give us some tax relief. On the positive side, Blue Chip did well in the quarter while EBITDA was down about a million dollars from the prior year. We absorbed over $3 million in higher gaming tax expense. The property's revenues were up 6% and that's with Blue Chip operating dark side in all three months this quarter, but it operated dark side two months in the quarter last year. There wasn't that much of a change in this operations. The revenues were up 6%.

Delta Down had an excellent quarter, slot machines were $251 a day, that is--compares to $230 per machine per day last year in the third quarter, and except for gaming taxes that brought its revenue increase all the way to the bottom line. I'm not going to predict how much above $60 million we'll do in the fourth quarter in our [INAUDIBLE] property group, but October has started out much better. We're confident we will show a better Q4 than we had in Q3. Now, let me get into Borgata for a moment. As I said earlier, we were quite pleased with the opening results of the property. Net revenues were $150 million, which is higher than any property in Atlantic City did in the third quarter last year, and we were open for only 90 of the 92 days in the quarter.

Game revenue was good, we had the second highest reported win in the market.

Now that Bali's and Park Place and [INAUDIBLE] are combined, they will probably always be number one, hard to catch. And if you look at it if they were actually separated, we probably would have been at number one or close to number one in the third quarter, even with the two-day disadvantage. Borgata's EBITDA in the quarter was $30.5 million and the property's EBITDA margin on that revenue was 20.4%. Let me just say some things about the margin. First as we point out in relief, we estimate there were about $13 million in non-recurring opening costs. That accounted for almost nine margin points, which would have brought the margin up to about 29%.

Even that's not the whole story because we didn't start booking reservations until June 1 and because the call center didn't operate at its top efficiency due to high volumes in its early months and because of marketing problems involving room offers were not yet at their normal levels, we ran only 80% occupancy, which is as you know, relatively low in the market in the summer. We had strong revenues but feel we were not at peak performance. On the margin side, there is a -- also to say the point of reference in the summer of 2002, the top net revenue was $147 million and we did $150 with 80% occupancy and two fewer days to operate.

Going over to the margin side in the third quarter 2002, the top four revenue producers operated with an average EBITDA margin of 37%. We did 20% and if you put some of the non-recurring costs back, maybe 29%. So if you look at, that we were clearly not operating at peak efficiency, which is what I think you would expect from a property that just opened. We just want to point out that we have revenue opportunities and clear opportunities to improve margins, which is becoming the real focus of Borgata management, now that we're past our opening phase. I would like to comment on Borgata's contributions to Boyd Gaming earnings and make that clear. All the numbers are referred are in or in the release and can be derived from numbers in the release. Before opening expense, Borgata contributed $6 million to Boyd Gaming, that's before a -- that is where they state -- before I say income tax credit, without the state -- if you take the state tax credit out, Borgata's tax contribution was $3.4 million to Boyd. Before Borgata opened, Boyd was capitalizing interest in investment in the joint venture and we're no longer doing that, adding about $4 million to Boyd's expense each quarter. The Borgata's $3 1/2 million contribution before the state income tax credit and before the preopening, those won't happen again. Nearly covered Boyd's incremental interest expense, which is why we say that at about $30 million of EBITDA, Borgata doesn't have a meaningful effect one way or the other on Boyd's earnings. With operating leverage for every $2 million, the Borgata grows its EBITDA, Boyd's earnings can grow $1 million, because we owe 50% of it or about a penny a share.

In a few moments, Bob Bogner will speak more on Borgata. Let me conclude by saying that so far we're where we want to be, but we know we can do better. We have revenue opportunities and margin opportunities. As the property matures, we continue to believe that Borgata will be in the upper [INAUDIBLE] properties with respect to its EBITDA. One final thing on the financial side, let me just make a couple of points in the third quarter. We continue to reduce our debt. Debt went down by a little over $15 million in the quarter. October 1, we redeemed $122 million of 9 1/4% of notes that matured on that date. We refunded the notes with borrowings on our bank line and that is going to save us $7 million a year in interest expense. With that, I would like to turn it over to our President for more comments and I would like to introduce Don Snyder.

Thank you Ellis and good afternoon. The third quarter as Ellis suggested was decidedly mixed, but we're optimistic as we move toward and into 2004. We opened a truly spectacular property in Atlantic City this quarter. This past quarter and are very encouraged with the initial results and even more importantly, the outlook for 2004, as Bob Bogner and his management team executes the 18-month operating plan that was put in place at the very beginning of this property.

This is a wonderful property with a strong and experienced management team in a market we think is fully capable of supporting the property and growing as the product is available and the market continues to evolve. We are also encouraged with the strong performances at Delta Downs and the Blue Chip, although it dampened what would have been better results at Blue Chip. The tax environment overall hurt us in the quarter to the tune of $8 million, and we still have work to do to mitigate the costs of those increased taxes, and especially in Illinois, to mitigate the competitive advantage that has swung toward competing states. There is no doubt the neighboring operations in Iowa and Missouri have been able to draw some of our outer market business away from our Par-A-Dice operations. It's also clear that results in our other markets were not what we were accustomed to and, quite frankly, to which the financial community has come to expect.

It's fair to say that we stretched the management fabric of the company in the quarter, of the company and its property during the third quarter as we drew managers from throughout the company to assist in the opening of the Borgata. We operate, as all the of you know, in very competitive markets, which demand a lot of our managers and we ask even more of them in helping out at the Borgata. The temporary situation is behind us, and I will tell you we have property management very much focused on their properties today and feel good about what they can accomplish. Most of you are also aware that we have a great deal of new management in place at several of our properties. At Sam's Town in Tunica, at Par-A-Dice, at Treasure Chest and at the Stardust, management can be disrupted and oftentimes needs to be.

Those new GMs and their teams are firmly in place, have moved to strengthen the management teams down into the properties and are doing the things we think are necessary to deal with the specific challenges that each of those properties face in their markets. Several years ago, we shared with you our basic strategies. First was to build an increasingly strong and diverse operating foundation. Second, to create growth opportunities, both strategically and thoughtfully, and third was to enhance and maintain a strong financial structure. We're very proud of what we have accomplished over the years and how that positions our company in the long-term; however, that diversified operating base of properties faced more-than-normal challenges in recent months. Taxes, management, it was both changing as well as being stretched by its help to Borgata, as well as changing competitive dynamics.

Nevertheless, we feel very good about the strategy and in the broader operating foundations that we have felt in the last few years. While still early in the fourth quarter, early results do suggest that the business is positively responding to good management and more intense focus on the businesses. The acquisitions we have made in recent years in the development of the Borgata have grown this company and they have changed the company in a very positive way. These positive changes have also positioned the company for good internal organic growth. Delta Downs as we discussed before with you, begun work on the master plan development of that property, which will enhance the gaming experience but also add rooms to that market and we continue to feel very good about that property's ability to grow and to expand as we add those amenities to that very attractive market. At Blue Chip, we're in the pre-planning phases of a master plan at Blue Chip that we have shared with you before.

We feel very good about the ability to expand that product and take advantage of a more master planned approach to building out that property in a way that maximizes its opportunities in that very strong marketplace where we have achieved very strong results and very strong margins. At the Borgata we feel very good about the direction and the opportunity to expand the contribution from the Borgata, particularly in terms of revenues and margins both, but particularly in terms of margins. Also, while it's still too early to discuss what is next at the Borgata, we do feel there is room for more Borgata-like development, whether it's an expanded Borgata or in the form of a neighboring development right door we think will enhance the overall marketplace that we operate in. At the Stardust, we have said over the last many quarters that it's a long-term strategic asset, but we have also said in more recent quarters it's a long-term strategic asset with the long-term coming much more in focus as Steve Winn continues to develop his property.

We has said and we will continue to say that we will monitor how Steve Winn's development goes and how it opens, but then look at what we do with the Stardust. We feel very good about the neighborhood and the opportunities that that affords us. Finally, financially we have continued our efforts to reduce debt and strengthen our balance sheet wherever possible. We do start debt as Ellis has suggested, another $15 million in the quarter while continuing our share repurchase program and initiating our quarterly dividend payment. With that, I would like to turn the presentation over to Bob Bogner, our CEO of the Borgata.

Thanks, Don. What I would like to share with the group is some things we have not shared previously, and that is to lay out a little what have our strategy was, our operating strategy for the property. What we didn't show was simple. Our competitors, it's a very competitive marketplace in Atlantic City, and we chose to keep much of our operating strategy to ourselves. Our focus in the beginning was very simple: Our focus on top-line revenue, market share, customer trial, customer service and customer intent to return for the first three months of operation.

Thereafter for approximately a six-month period to refine, adjust, and fine-tune the operation. And that's the period that we've entered into now. For the quarter, our non-gaming revenues were a $48 million in the quarter. That's roughly a little over half a million a day, and a very healthy 56% of that was cash revenue. We're also very pleased on a gaming side. Our slot revenues during the quarter did well. On a win-per-unit basis, we were number three in the market, way ahead of Showboat, Harrah's, Bali's, and all of the Trump properties. And on an absolute dollar basis for the quarter, we were number six.

But I would point out that we were about half a million away from being number five and probably two days away from being number four. In any event, competing favorably with properties with many more slot machines than Borgata. We finished the quarter in the number two position in total gaming revenue. Ahead of every other property in the market other than the much larger Bali's. Bali's has 73% more slot machines and 68% more table games than Borgata. I would like to give you some brief highlights that deals with our patrons database and throw out a few statistics in this regard. We have 437,000 rated patrons in our patron database at this point in time.

54% of those are over 50. And I would point that out that part of our strategy was to grow the marketplace and we thought that the only real potential to grow the market was to grow the market with patrons that were less than 60 years old and we have seen significant growth in the area of 25 to 39-year-olds and 39 to 54-year-olds who have spent robustly not only in terms of gaming but also on the non-gaming side. The majority of the 39- to 54-year-old and the 25- to 39-year-old spin has showed itself in table gains. 62% of our patrons in the database live within a hundred miles of Atlantic City, and we think that bodes well for us not only in the short-term but in the long-term. 64% of them are slot customers. We have conducted a considerable amount of research over the last three months in Atlantic City at Borgata.

In fact, we have the results in from the recent telephone survey which concluded just yesterday. We view this information as vital to analyzing and improving our operation. And we're very pleased to report that customers have expressed a very positive opinions toward the critical customer checkpoint at Borgata, more specifically, our parking, checking into our hotel. The hotel accommodations themselves, our dining options, the player rewards we offer to our customers and also the gaming experience. 90% of those surveyed indicated that the Borgata experience met or exceeded their expectations and 90% have indicated that they are likely to return to Borgata and other specifically among slot customers. 90% of our slot customers intend to return on the next trip to Atlantic City, and 87% are likely to recommend Borgata to a friend.

And only 7% of the customers surveyed rated the ticket-in, ticket-out or rapid pay in an unfavorable way. This result is in line with our expectations and acceptance has improved since opening the property as customers not familiar with the technology, not only become more familiar with it but also more comfortable with it. My only objection to the technology is that it causes the slots to be a little quieter than we like, but we're in the process of developing some very specific solutions to this situation. And finally, as we very carefully and diligently execute against our strategy developed over the course of the last year prior to the opening of the property, we're very mindful that the last property to open in Atlantic City had 13 years to refine its strategy and operation. We've had but 13 weeks and we have met virtually every financial target in that same period. I will be available to answer your specific questions during the Q&A session.

Thanks, Bob. With that, we would like to open for the questions. Operator, if you want to.

Very good, today's question-and-answer session will be conducted electronically. If you'd like to ask a question you may do so by pressing the star key followed by the digit 1 on your touch tone telephone. If your utilizing a speaker phone, please make sure your mute function is disengaged so that your signal will be registered. We'll pause just a moment. We'll first go to Larry Klatzkin with Jefferies and Company

Hey, guys.

Hi, Larry.

A couple of questions. One in Atlantic City, what do you see as far as marketing ramp-up? There are some indications of Park Place to a little bit of a ramp-up and some of the other competitors, what are you seeing in the landscape there?

What we're seeing are two things: One is we watch the outdoor boards, which is a very good fast leading indicator with regard to cash-back rewards and we have seen a slight ramp-up there, and we also watch the mail that goes out to the patrons and some of our competitors have chosen to do two-times cash back for extended periods of time or offer free parking to the remainder of the end of the year. These are the types of things, frankly, we anticipated. They tend to be all pricing decisions and from our point of view, that's not really a strategy that we're executing on. We're not focusing solely on price. We're focusing more on value.

Okay, and then, you know, while, you know, Park Place just announcing doing the parking garage, but still not the room tower and had concerns, you know, New Jersey's a tremendous deficit for '04 and there's still threat of a tax increase. Do you guys have a worry at all about a tax increase or does that seem to be a little better now?

We personally don't believe that there will be tax increase in 2004.

Okay. And then, um, I guess, Ellis, one question will be a pinnacle. What do you see the effect of Pinnacle is on the Delta Downs, or because of your location, it shouldn't be a lot of anything.

Larry, I think the lateral part of your question probably prevails. We feel that our location advantage will continue to serve us well. They will clearly bring more people out of Texas into Louisiana to gamble. Every one of those people will ride by our property twice, going to Lake Charles and coming back. I think we have a good shot at them. As we always said, the more gamblers we put on I-10, the better it is for us. We think it will be all right for us, given our superior location.

All right, last thing what, do you think your timing is announcing something on the Stardust on where you might be going with that, or the best thing is to wait until it opens up and then you kinda figure out where the markets going?

That's really the answer. The last part of the question is how we're focused. We feel good about the asset we have and as I said before the improving neighborhood and it goes beyond Steve Winn's property, what happened with the fashion show and just other things that can happen at this end of the strip. But we think it's important to wait, when Las Vegas opened and decide what it is we want to do with our 60 acres.

Thank you, Larry.

Okay, thanks, guys.

We'll next go to a Joe Greff with Fulcrum Global Partners.

Hey guys. Just a quick question on Par-A-Dice. How much of that do you see going forward in terms of the trends you saw in the most recent quarter and what is your outlook in general as you change some things in that market?

I'm going to let Keith Smith, our Chief Operating Officer answer that question.

Obviously, the tax impact [INAUDIBLE] was quite significant. Some of the revenue decline we saw in the quarter as Ellis stated was the direct result of competition we haven't seen before from Iowa, from the new operation that AmeriStar has down in St. Charles. We're in the process of watching in some new marketing campaigns and I believe we'll be able to recapture most of the revenue or most of the decline that we saw in the third quarter and our revenues moving forward should approach prior levels. How much of the tax impact we'll be able to cover, I'm not sure. We made some changes in late August, reduced staff, changed operating hours and we're still working our way through that, but we should be able to recapture the revenues. I'm not sure about mitigate, how much of the tax we'll be able to mitigate at this point.

Okay, then I have another follow-up question relating to the Borgata, and maybe Bob can answer this. What specifically are you changing from a marketing perspective as you have just finished going through this period of focusing on the top-line of market share and revenue gains.

Well, we're really fundamentally not changing a lot of things, other than executing against the strategy really at all, which we think makes sense. In Q3, we were -- recorded about $13 million directly related to signature grand opening events, extensive launch media campaigns and other costs related to the opening in the grand opening. On a go-forward basis, don't see those costs as recurring costs. Having said that we are constantly in the process of evaluating the patrons in our database. No different than any other operator in town; however, when you grow, you go from zero patrons to over 400,000 patrons in a matter of 90 days it makes the challenge a bit more daunting, so we're in the process really, of refinding who receives what offers and determining the yanking or level of each and every one of those customers, so I would really say there is not any fundamental shifts in our strategy at all. We -- we hit virtually every target we set out for ourselves during this quarter, and I think that's a pretty good indication we should stick to our netting and stay focused on that strategy.

What are some of the metrics that we should look at from you guys on future conference calls showing that you guys are growing the market. Is it percentage of patrons in the database that are relatively new to the AC market in is it percentage of non-gaming revenue? Can you help us out here?

I think they're both indicators. I think there are other indicators as well, although we may not report those indicators. Our obligation, of course, was to provide a superior return on invested capital to the owners and that's what we're really focused on. I can tell you anecdotally, however, that we're seeing a tremendous amount of business coming our way that we know is recently going to both Foxwoods and Mohegan Sun. I don't know whether it's enough to register on their very large meters or not, but it's certainly the case anecdotally. In addition to that, the fact that we did half a million dollars a day in non-gaming revenue, um, with roughly 56% of that coming in the form of cash revenue is pretty significant. We have observed that there is a profile customer and it was identified early on when we did our initial research in the marketplace that generally speaking would pay cash for their room and food and beverage, that they would utilize the entertainment and bars at the property and that they would be very good table games players with high margins. We're doing a great job in identifying those customers and attracting those customers. We also said we thought everybody playing quarter slots on Wednesday afternoons was probably already coming to the marketplace, and we focused our efforts on growing the market where we thought we could do so in long-term in the cost-effective way.

Thank you.

Our next question will come from Kent Green, Austin America Asset Management.

Yes, a specific question about Borgata. On building the database and how many people are active players. Have you got any idea of frequency just in the first month of, you know, of these people within a hundred miles and, as well as, you know, whether they're played more table games than they're playing slots or any other information on that that you would like to disclose with us?

I can give you a little bit of information in terms of frequency. We -- let me see if I can't pull it up here very quickly. We are seeing in our database a significant portion of customers who have had more than six visits to the property. Some as high as 15 visits to the property, and that's above 15. We aggregate the totals.

We have also seen roughly a quarter of those people make one visit. Another quarter of those people make two visits and so on. We're seeing very good signs of repeat visitation in the marketplace. Both on the slot side and the table game side, so I hope that's responsive to your question.

And then kind of a follow-up question on both Par-A-Dice, and ITO Indiana. How far are you along in implementing your plans to be revenues closer to, you know, a cost because the cost being on up. Has that been completed now? [INAUDIBLE], I guess, or is there more to go in. .

This is Keith Smith. With respect to the revenue-enhancement programs, the new marketing programs of Par-A-Dice, we're in the process of watching those today or this week I should say and we expect to see good results. October's done as stated earlier, is off to a good start and we're seeing good rebounds in October naturally. The marketing programs will enhance that, and we expect through the end of the year into next year where the future revenues to look like prior years, not to be as soft as in the third quarter.

Then, they all cost implementations have been implemented?

The majority. Refinements to the operation were implemented in late August. There is still one or two small items to make. One is two small adjustments to make to the property, but nothing significant.

And then shifting to Delta Downs, how far are you along on the hotel and the other amenities to the racetrack?

The casino expansion, as we have described previously, is underway. We expect phase I of the expansion to be completed around the first of '04, and phase 2 to be completed around the end of the quarter. The hotel projects has not been started yet. We don't expect to start that project until the spring of next year, and it will take about a year to complete.

And total cost?

We're still devising that right now. We don't have a final cost on the hotel at this point.

The overall project is about $50 million. That hasn't changed.

Very good.

That's everything in the whole project to the hotel.

And is the race season on?

Race season starts November 1 this year, will run through mid-August, we'll run Thoroughbreds and Quarter horses and we actually have a million-dollar race coming up on December 5.

And I understand Louisiana Downs maybe, you know, getting slots. Can you update us on that.

Are you talking about the fairgrounds and --

Yeah. Fair grounds I mean, yeah.

The legislation was passed at the end of last year to allow them to receive slots they recently had a local election that was held and then it passed there. I believe they still may have one or two more hurdles to to get over to get that passed. I'm not intimately familiar with that operation.

Okay, so you know Jack, are they picking up off the racing side, too, getting better races? Better cards?

With the increased prices, we're getting better races and better horses.

Right.

Seeing better simulcast revenue as a result of the better races and the larger purses so, um, although the race side of the operation is certainly not where we make the majority of our profits.

No, but it's striving higher had -- driving higher-end people to the property which will play.

To a small extent, certainly not to any large extent.

Right.

We don't believe there is a tremendous amount of crossover.

Okay, very good. Thank you.

Thank you.

The next question comes from Smedes Rose from J.P. Morgan

Hi, can you hear me? Hello?

Yes, we can. Please go ahead.

Okay. On Borgata, I just want to understand more about the marketing expenses. You booked $184 million of gross revenue and net of $150. So the $34 million of promotional expenses. Would you expect it to be maintained in that kind of 18- to 19% range? And also on the marketing expenses of $13 million in the third quarter, if you're -- it seems you're implying that's all pretty one-time in nature. Should we be looking for a fairly significant bump-up in the fourth quarter and EBITDA from that property adjusting for some seasonal factors that, um, is that a fair way to look at this?

Addressing your second point, I'll let Ellis address the first point. The EBITDA margin generally speaking in the fourth quarter in Atlantic City is not the best quarter, so I think you will see some, as you will in all properties in the marketplace, a seasonal decline in EBITDA, but we would expect in the fourth quarter just to have a, you know, in the 3 to $4 million range of that quote unquote non-recurring cost. In 2004, those will have gone away as all of the events and the extensive launch media campaign and the other costs associated with that. All of those costs will have been incurred. I would like to comment on that more because for many of you who follow the industry, in particular Las Vegas, you're quite accustomed to seeing very extensive media launch campaigns and large grand opening events, many of the costs are reflected in pre-opening costs as opposed to operating costs. Atlantic City's a bit different in that regard because it occurred to us it didn't make a lot of sense to be out there with an extensive reach or frequency in television prior to the opening of the property given the nature, the short nature of the booking window in advance. So we made the judgment that during the first three months of operation principally there was no need to do a tremendous amount of advertising. That proved to be a good strategy because we have pretty significant demand for the product in the absence of a lot of advertising. We also made the judgments to launch an extensive television campaign the night of the Emmy Awards and we made that judgment as far back as January of this year, and we have been running that campaign in our principle feeder market -- New York, Philadelphia, and those metropolitan areas. We believe that that was essential for our long-term strategy of creating a high level of awareness for the Borgata brand, and at the same time, to stimulate growth amongst the rejectors of the Atlantic City experience and we have had good success with that this far.

You're saying in the fourth quarter, though, that we should look for EBITDA to decline from the $30 million in the third quarter for seasonal factors despite a lot of these marketing costs going away?

I'm not sure you'll necessarily see a decline, but what I'm saying is you'll not necessarily see a big increase, particularly or in light of the fact that it seasonally is a softer period. Last year in '02, the overall Atlantic City market, the margin for all the properties together dropped about 8 percentage points from Q3 to Q4. So you're not going see that 8% drop from us and the 20%, obviously. The two things that are working in our favor is we're working hard to become more efficient as Bob said, as we enter our new phase of more -- focused on bottom line, and secondly, we won't have that $13 million of non-recurring costs, opening costs, Bob mentioned they might be down in the $3 million range, so you pick up -- you pick up savings and not having a non-recurring cost and also things will be happening in our property ourselves with our own property. But keep in mind the overall margin tends to drop by about 8 points, so I think you can measure our success in progress by how we compare to the overall trends of Q3 and Q4, which I think will be more favorable than what the general trend, is the more mature properties if you look back to next year. Let me address your other question right. I think you're talking about the $34 million of promotional balances?

Well, yeah, just looking because you talked about the cash revenue and the quarter that reported gaming revenue to the states, $142 million and then you said your net revenues are $150. Just trying to, I guess, understand better gaming revenue versus sort of real non-gaming revenue, not promotional and sort of how that's breaking down.

Farther to the release, we did talk about all the finishers on there. While the reported gaming with of the state was $142 or our gaming revenue because of our [INAUDIBLE] from the cash basis win is $136 million, you will see that we reported $48 million of non-games. Of the $34 1/2 million of promotional allowances you see, about $13 million of those are gaming-relating. They're related to the accruals and expense of the -- of gaming promotions, the slot dollars and comp dollars and so forth. If you then take about $21 1/2 million of promotional allowances that was laid to non-gaming, 21, that percentage, $21 1/2 million or so of 48 is the 44% comp versus the 56% cash we have been talking about. That's why I think you look at the 34 being particularly highest compared to the $48 million of non-gaming revenues because the $34 1/2 million promotional allowances includes gaming related promotional allowances to the tune of $13 million allowances.

Okay. Okay. Thank you.

If you go through the math, you'll see it.

We'll next is Joyce Minor with Lehman Brothers.

Ellis, you don't usually tend to provide guidance but you did last quarter. Any chance you're in the mood to comment about the consensus number for fourth quarter.

I thought you were nicer to me than that.

I used to be until this quarter.

After last quarter, I felt pretty good at the end of July to predict the third quarter. You see what happened. I -- I tend to stay away from it, I think, with the precision we tried last time. As we mentioned, a couple of things. The $60 million was unusually low. Our summer quarter is a low one, and I think we did say we would come back from that. We also gave a lot of information about Borgata, which from that you can make your own expectations and I also mentioned we have an interest savings pick up of close to $2 million a quarter. I want to stay away from particular guidance but given all those elements I think you can draw your own conclusions.

Okay. Maybe, Bob, can you give us a sense what we should look for in the way of hotel occupancy in in the Borgata in the fourth quarter? Should we look to see it in the mid-90s or not yet?

Seasonally, Atlantic City doesn't see generally speaking with the exception of a couple of the competitors in the marketplace who get pretty [INAUDIBLE] in the fourth quarter to the customers. It's difficult for us at this point in time to get a sense of what the entire fourth quarter will be. As I look out over the promotional calendar we have in place, as I look at the actual calendar itself, it appears as though November should shape up to be a pretty descent month. October thus far has been a very good month for us. With regard to occupancy and other factors as well. Then December becomes somewhat of an unknown. As you go through your first year of business, you're really uncertain as to how the different months will treat you. We would expect that Thanksgiving would be a good period of time for us, but that but that the period of time between Thanksgiving and the Christmas holiday should be soft, and then building into some good business toward the end of the month between Christmas and New Year's, so that's probably as good a guidance as I could give at this point in time and then we're in 2004.

And, Joyce, if I may to help out and sort of use the geometric axiom the dollar is equal to the sum of it's price, let me say if the $60 million of the property gets better, our interest expense goes down and Borgata continues to improve. We should see a better number than 15 cents a share.

That's a pretty big ballpark. I appreciate the effort. [ Laughter ]

15 cents and beyond.

One more question for Bob, maybe. Bob, we saw that Tropicana announce their food and beverage offerings and retail for the quarter. Any thoughts from you as to reaction on that and would you expect that to impact your cash non-gaming revenues at all next year?

I don't think so. I think that given the demand of -- you kind of deconstruct the product offering that they're created and delighted that they were able to get a couple of good restaurants over there, from our standpoint we have pretty significant demand for our steakhouse product and we think it will compete favorably against the Palm Steakhouse. The same thing is true for the casual, more casual dining of PF Changs. We don't see as we put together our internal projections for 04, we don't think any of that new product is going to cause any decline in the demand for the product that we have at Borgata.

Okay, thanks, guys.

We'll next go to Jay Cogan with Bank of America.

Good afternoon, everybody. Ellis or Bob, I had a few questions for you, with regards from the early Borgata results. I was wondering, I don't know if you mentioned this before and I missed it, I was wondering what percentage of the database is equal to first-time Atlantic City patrons? Second question, what was the pace at which the database grow in the quarter or where do you expect it to be by the end of the year? So if we're $400,000 and change now where should that go and then as we're thinking about the revenues for the fourth quarter given that you're now focused more on margins per say as you mentioned a number of times, there is obviously a seasonal slowdown effect in Atlantic City, anyway, in 4Q. Should we expect to see Borgata's revenue slow at a faster rate, let's say relative to what we saw on a monthly basis in the third quarter.

I will start with the first one with regard to the first-time trial and database. I don't know the answer to that. That's not something we're tracking. With regard to the pace of growth, we're still growing around 3,000 patrons a day in the database, and that's down from, you know, our peak of 5 and 6. But right now, that seems to be the pace going forward and then you can extrapolate what that means for the rest of the year. With regard to 'Q4 and revenues and EBITDA, our focus hasn't shifted but expanded. We're still focusing on customer trial, grilling the market, customer service, customer intent to return to market share; however, as managers, our job has to grow and we're in the first 90 days our focus was principally on the top line market share revenues and providing a good service to our customers. We have to expand our focus to include a focus on refinding, adjusting and fine-tuning the operation. The majority of that will show up in improved margins, however, there are some areas where that will show up actually in improved revenues, so it's not really a shift of focus, but rather an expansion of our focus.

So it's fair to say, I think, there is kind of a growing consensus to this effect, and I'm not sure if this is your focus in the first place, but it's fair to say based on what you say in the first quarter and given the fact the next few quarters are slow from the seasonal stand point that if Borgata hasn't grown in regards to the market the capacity growth that it's at it may never, at least in the next couple of years, from the top-point stand point.

I'm not sure we would draw the conclusion, one, that we have grown the market, I think we've reversed a decline in table games. Which doesn't get talked about as much but it's a significant contributor to our profitability. Secondly, we have also introduced a tremendous amount of non-gaming revenue in the marketplace, which is also reflective of growth and it's very consistent with what we felt was important to change in a few fundamental ways, the quality of the destination which will ultimately lead towards other growth in revenues. So, from our point of view, we're not in that place at all.

Okay, thanks.

We do have a follow-up from Joe Greff with Fulcrum Global Partners.

Hey, guys. Thanks for the follow-up. You guys received $3.4 million in pretax income from your share in Borgata in the third quarter. With all of these questions trying to angle the seasonality and the margins and the growth, Ellis, do you think the fourth quarter you exceed that? You think you're close to that?

Well, we haven't -- it will all come back to, of course, is EBITDA going to be $30 million more or less. I think you look at depreciation and interest, um, we shouldn't see much change in those, so it's all a question of [INAUDIBLE] we don't want to forecast that. We haven't been through a seasonal changeS and going quarter to quarter yet, so we're not quite sure how it's going to be. We would like to think that we could at least equal the third quarter and the fourth quarter, but we don't want to make any formal projections on that.

Okay. Thank you.

We have a follow-up from Larry Klatzkin with Jefferies and Company

Hey, guys, usually the third quarter is about an 8 point lower margin compared to the third quarter. Ellis, you think you can do a 20% margin in fourth quarter Megata? That's more of a relevant question is can you do the 20%, which would put a thinner difference in the rest of the group.

I think we mentioned that, yeah, the market has typically gone down but we have the two things going for us of not having a non-recurring cost at the level we did and also general improvements, so I -- without going on a limb, I would like to think we could at least equal the third quarter margin in the fourth quarter. And, Larry, I would also chime into the fact that the market is a very experienced marketplace in running their businesses and to just re-emphasize the point, you know, we have had, you know, 13 or 14 weeks to run our business and we know a lot more today than we did 14 weeks ago about the business. And each and every week brings with it a greater level of efficiency and a great understand of the business. So, you factor that in. I guess what I'm saying is that in addition to doing the things we're doing to execute against our strategy, we also know more today about how to operate the business and I also want to credit the over 4,000 people that work with Borgata. They're better at what they're doing today than they were 13 weeks ago. They know the facilities better, the know the customers better, they know the systems and procedures better. As a result of that, their level of efficiency has improved as we would have expected, as we would have hoped, but in reality, that's happened. So, we get more efficient, we continue to execute against our strategy to build the business and that's how we deliver our results.

Larry, using the fourth quarter revenues, this is a benchmark. The reduction of $10 million of non-recurring cost, what we call non-recurring [INAUDIBLE] cost, I mean that's a seven-point margin pickup right there, and that -- that makes up for a lot of what is the market seasonal decline from Q3 to Q4. So, I think to give you comfort that we can get the margins up in Q4.

All right, and one housekeeping , capitalize interest for the third quarter, what it might be in the, I guess it's over for the fourth.

Capitalized interest in the third quarter, because we -- all related to Borgata, and we opened it at the beginning of the quarter, so essentially there was no capitalized interest in the -- in the third quarter. It was just minimal and there won't be any going forward.

Okay, thanks, guys.

You have a follow-up from Smedes Rose from J.P. Morgan.

Hi, sorry if I missed this. Have you talked about your budget for the investment at the Blue Chip and Delta Downs and the timing on that?

We just talked about the Delta Downs. We talked about a $50 million budget there and the timing, I think, Keith mentioned when he said we were working on the first phase now which is expanding the casino facility, the hotel will start in the spring and finish in the spring of '05. So we did mention that. Blue Chip we have not been as specific because we don't have many, um, any numbers on that yet, but we're just in the planning stages at this point. That's a project that will start in '04 and late '03 and into '04 and finish up sometime in the middle of '05.

Okay, but in the Blue Chip, though, you're going to replace the boat, correct? More or less?

That's correct. The plan is to have a new gaming boat. That's correct.

Okay, so -- okay. Okay.

As well as some other improvements, but the significant one is the gaming boat itself.

Okay. Thank you.

We'll next go to Robin Farley with UBS.

Thanks. I had a question. I know the property this, relates to Borgata was originally built, there is a motor coach entrance there. Can you talk about what plans you might have to do any kind of [INAUDIBLE] for marketing strategy?

Well, what we stated publicly about busing is that we intend to start a bus program at Borgata in the fall. We just haven't determined what year. [ Laughter ]

But not this year?

No.

And not expecting to do it this winter, or is that a decision still to be made?

We don't anticipate bringing any buses into the property in 2003. And we'll make that judgment as we understand the business better next year. Right now, our view is that the upside of bringing buses in would be outweighed by the downside associated with that and we're getting tremendous levels of visitation and growing our patron database very nicely and without going through that particular process, so at this point in time we don't see that in the near-term cards, although I would never say never about that. I think that we're just going to stay the course that we have started with and not have buses.

Okay, great. Thank you.

We have a follow-up from Joe Greff, Fulcrum Global Partners.

I swear this will be my last question. [ Laughter ] One final question on Borgata, Bob, or Ellis or anyone, are you thinking about taking any of the slot machines and adding more tables?

We currently have a plan to increase the number of tables by 12 at the property and the reason for that is simple: It's based on demand. On many swing-shift during the week, I'm going to say four nights of the week in swing in the late, late night hours, we have so much demand for tables that you basically have too many tables that are hundred-dollar games. Because there's demand for $100 games. We're pricing out the $25 player and the $15 player. So what we want to do is offer more $25 games and $15 games than we presently have, so we intend to do that. The way that we will, quote, unquote, pay for that in terms of real estate is we're taking off one of the cashier booths off the floor. When we open the property with the ticket-in, ticket-out, what we refer to as rapid pay, we didn't know how much cashering space we would need. We put out four booths in order to facilitate that just in case the system went down and we had to convert to coins. That's not happened in the 14 weeks we have been opened. We have made the judgment to eliminate that booth and do a few other moves to pick up the 12 incremental table games probably in December. Hopefully for the Thanksgiving weekend if we possibly can, otherwise for December in anticipation of the strong New Year's and we would estimate that we would lose about 30 or so slot machines in the process and we will probably take off 30 or so wide area progressive games off the floor at the time we did that. And we don't anticipate that having an adverse impact on our slot revenue.

Thank you.

There are no further questions at this time. I would like to turn the conference back to Ellis Landau for any closing or additional remarks.

Thank you, everyone. We tried to make the release as inclusive as possible for Borgata information. I hope we did it in a clear way. If not or if you have suggestions, please let me, but I -- we -- there's a lot in there both Borgata's financials and as it relates to our share. So I hope it's helpful to you and if you have any questions, please call. Thank you very much for your attention to the call and we'll speak to you next time .