Boyd Gaming Corp (BYD) 2005 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to this first quarter 2005 Boyd Gaming earnings conference call. My name is Nia (ph) and I will be your coordinator for today. At this time all participants are in listen only mode. We will be facilitating a question and answer session towards the end of the conference. [Operator Instructions] I will now turn the presentation over to your host for today's call, Mr. Ellis Landau, Executive Vice President and Chief Financial Officer. Please proceed.

Thank you Nia, and good afternoon, and welcome to our first quarter conference call. First let me say that today's presentation may contain some forward-looking statements. Actual results may vary from what's contained in those statements. The variances could be material and we refer you to our public filings for the risk factors you need to know before you invest. I also want to tell you that today's call is being webcast on our website boydgaming.com and at streetevents.com.

Joining me today are Keith Smith, our President of Boyd Gaming, Bob Boughner, who's the Chief Executive of Borgata. They will each make remarks and following that we will all be available to respond to your questions. A short while ago we issued a release of our first quarter financial results. We announced that the Board of Directors has declared a significant increase in our dividends, raising the payout 47% over the previous quarterly rate were now at an annualized rate of $0.50 a share versus the previous rate of $0.34 a share. What better way to signal our investors their confidence that we are on the right track with the great collection of business units, top-notch management and an excellent growth pipeline to keep our solid earnings and cash flows going and growing.

Looking at the first quarter I think back to that great Jackie Gleason expression, "How sweet it is." The quarter beat estimates yours and ours, and we. We broke records for revenue, EBITDA and earnings per share. It was the third quarter in a row that we more than doubled earnings, of earnings per share and EBITDA. In basketball, I call that a triple double. I suppose there is an old adage somewhere that says if you do something three times in a row it can't be a fluke, it's for real. And we hope we have one more double left in us before we cycled through the anniversary of the Coast merger.

Our two major earnings drivers, Las Vegas locals and Borgata again had very strong quarters. But not to be over shadowed, our other three units, the central region riverboat business, the Stardust on Las Vegas trip and downtown Las Vegas all contribute very nicely to our earnings growth. Now let's run through some of our results. For the first quarter our adjusted earnings were $0.64 per share. By far a record for any quarter in the company's history. The previous record was $0.51 per shares that just last quarter. That $0.64 was a 121% increase over the $0.29 reported in the first quarter of 2004 and that big increase came with over 23 million more shares, and that is 35% more shares outstanding from the first quarter last year.

The one sizable adjustment of EPS we have in the quarter was a bellow the line non-cash charge that was necessitated by an accounting rule change. We will explain it in our release and footnotes (inaudible). But the short version is that relates to evaluation methodology and the annual test for the intangible assets that we booked when we bought properties in the central region. It is really is about a shift in values between two intangibles, licensed rights and goodwill, but we are only allowed to write down the value of a licensed right. We are not allowed to reclassify and write up the value of goodwill as an offset. So, however logical that sounds, we took the right down. It is important to note that this does not effect fixed asset values and or infer anything about property performance.

And now let us talk about EBITDA results, for the first quarter we've reported record EBITDA of $170 million. That is 111% increase from the $81 million in the comparable quarter last year. Much of that increase came from our added properties Coast Casinos and Sam's Town Shreveport. The same store EBITDA was also quite strong, up 17% over last year. And the gains were widespread, all six reporting units posted strong gains in EBITDA and in EBITDA margins. You have heard us talk over the years about how pleased we are with the diversification of our assets and many different markets. That diversity is supposed to smooth results, but when you're diversified and they all go up now that's when you know you really have something special going on.

Once again our local Las Vegas business is producing very strong results for the company. Economy here in Las Vegas remains strong, as you can see in such measures as the results of gaming operators and construction activity. Through our reporting units Boulder Strip properties and Coast Casino properties operate principally in that segment which also includes visitors who want to stay with the locals play and get the values of the local debt. In the quarter, these properties saw a 12.4%increase in revenue and a 26% increase in EBITDA over the first quarter last year. Those are powerful growth numbers. Helping the results was the addition of hotel rooms at the Orleans. Those additional 461 rooms drove strong increases in both rooms and slot revenue at that property.

The power of unit growth and a high-demand market makes the coming addition of South Coast that much more anticipated. With a high residential density in an area that is just waiting for a full-service casino property to serve them, South Coast should be a big contributor to EBITDA growth in 2006 and have lots of expansion capabilities beyond 2006. Borgata was again a great story for us. You saw the impressive results on the release. Revenue was up 18% EBITDA 42% and EBITDA margin up 5.5 percentage points all versus the first quarter last year. It dominated the Atlantic City market with the size and consistency of these numbers and it does not appear that any other property can touch it. Combining the most recent four quarters, Borgata's EBITDA was $232 million. It has a public space expansion opening in 2006 and a room's expansion opening in 2007. So we expect it will be nice upside from these levels. Our other Las Vegas segments did well in the quarter. Stardust reported impressive gains, doing its best numbers in several years. Downtown Las Vegas, benefiting from both its solid core Hawaiian business and from increased visitation to the free (inaudible) experience saw nice revenue in EBITDA growth in the quarter.

Our central region, are Riverboat and One Racino group also did well. Couple of points to make about this group, first Sam's Town Shreveport is gaining traction as we're coming out of the adjustment period after our acquisition of the property last May. And Delta Downs completed its expansion with its new hotel and public space. It is being very well received by customers. We've finished the project in mid March. Here's one impressive statistic: so far in April, its slot machines are winning about $300 a day each. That is the best number we've seen since our first few weeks of operation when we opened in early 2002.

Looking ahead, the second quarter is off to a good start. As you know, our second quarter is almost never at first quarter earnings levels. So unfortunately we cannot predict another $0.64 quarter. However given current trends we expect second quarter EBITDA to be in 155 million to $165 million range and adjusted EPS to be in the mid '50s. Let's bracket that at $0.53 to $0.55 per share. That's well above current second quarter estimates for us. As you can tell we're having a great time here at Boyd Gaming. A lot of things are going right and we have great opportunities ahead of us. Now I would like to turn the call over to Bob Boughner who will tell us more about what's happening at Borgata.

Thanks Ellis and good afternoon everyone. Q1 one was really a terrific one for us at Borgata. Our EBITDA was up 42% despite the fact that there was one day less in the quarter, we did receive some competition from the expansion at Tropicana and it was also a fair amount of inclement weather. We give our total gaming market share 170 basis points over the first quarter last year. Our slot market share grew a strong 200 basis points. The 6% increase in non-gaming revenues was also very powerful for us.

Hotel occupancy was up to 93%, up a 11 percentage points on the prior-year, while our average daily rate was essentially flat. Our restaurants and bars continue to be very popular despite recent competitive supply additions. Fully 58% of our food and beverage revenues were cash sales. This is the strong showing in the Atlantic City Marketplace. Our gaming tables have won $4,574 per day during the quarter. That's 68% premium to the remainder of the market. And our slots won $324 per day during the same period, up 47% market share premium. And our extraordinary Poker room also outperformed the market than the 64% premium. We also note that we market Borgata aggressively, and have since the day we opened and we will continue to do so in the future. But I would like to point out that our promotional allowances in the quarter were down 3% from the prior year, yet we grew total revenues by 13%. This property is doing what we built it to do, expanding the overall market and taking meaningful share from our competitors.

We have shown that the addition non-gaming amenities, when executed well and in conjunction with the gaming amenities grows the market and captured the attention and wallets of the customer. In that context, we believe that the competitive landscape that shapes up over the next couple of years will be interesting. Atlantic City will see significant incremental investment in our view. New owners will bring new ideas, new capital, new customers, and a new sense of purpose and optimism. We already share that optimism. Construction on our $200 million public area expansion continues on schedule and on budget. The site work is nearly complete, the steel election had begun and we still plan a second quarter 2006 opening.

The design of our second hotel, which features 800 rooms and suites as well as other amenities including some very needed meeting space, retail operations, is well underway. As previously stated, we expect to start construction on a hotel in Q4 of this year with the planned opening in Q4 of 2007. To summarize, we continue to grow both revenues and profits and we are now rationally growing the building to meet the demands of the Atlantic City marketplace. We're still having fun, we're still being aggressive, and at the same time we still seen continuous improvement. With that I will turn the conference over to our president and Chief Operating Officer, Keith Smith.

Thank you Bob, and good afternoon, everyone. As both Ellis and Bob indicated, we're very proud of the results we achieved in the first quarter. Not only did we produce record EBITDA again but same story EBITDA was up significantly in all six operating units reported increases in revenue EBITDA and EBITDA margins. Results we achieved are reflective of the fact that the company has a very strong broad and diversified operating foundation. One the we have built carefully over the years, and one that will serve as an excellent platform for us to continue to grow and expand this company. Growth for us in the future will be focused in four areas. First and foremost will be growth more existing operations.

We have been successful over the last several years in achieving revenue and EBITDA growth from our existing properties. We hope to continue this growth with the stronger focus on the use of technology in our business and enhancements to our marketing capabilities. This should allow us to continue to grow profitable revenue and enhance our operating margins. The second are of growth will also come from our existing properties in the form of expansions of our best performing properties. The recently completed rooms addition at The Orleans and the hotel addition in Casino expansion at Delta Downs, the major enhancements at Blue Chip, which are currently underway including a new state of the art riverboat with all gaming activity on one floor and the significant expansions at the Borgata, that Bob Boughner just spoke about, are all examples of taking very productive and profitable properties and expand it on their success.

A third area of growth, and maybe most exciting area, is developing new properties. As we have said many times, we believe we have some of the most valuable acreage on the Las Vegas strip here at the Stardust. We started the research and conceptual process with the redevelopment of this sites several months ago. And we will take much of the remainder of 2005 to determine the proper development for the site. Also on the Las Vegas Strip, we have the Barbary Coast site. While there are no immediate plans for this site, it is a wonderful development opportunity to have for the future. In the Las Vegas locals market, we're making great progress on the South Coast, the newest addition of our portfolio was Las Vegas locals properties. This property, which will open with approximately 660 rooms is master plan for more than 2000 rooms and is located in one of the fastest growing areas of Las Vegas.

We expect to complete this project around the first of the year. While that sounds like a lot to have on our plate, there is going to fourth area of growth. We will continue to look at new jurisdictions and strategic new acquisitions to complement our existing portfolio. With our strong operating foundation and a solid capital structure, we are well- positioned to take advantage of these opportunities as they arise. We have a proven track record of successful acquisitions. In closing, we are extremely proud of the performance of our existing properties and the prospects for continued growth and success of these properties.

However we are more excited about the future and the growth opportunities we control and the sites we control and strong markets with stable regulatory environments. The beauty of our future is that we control our growth. We're not relying upon new acquisitions or new restrictions for our growth. But if these opportunities present themselves we're well positioned to take advantage of them. Thank you and with that I will turn the call back over to Ellis.

Operator maybe you want to call for questions.

[Operator Instructions] Your first question comes from Larry Klatzkin of Jefferies and Company, please proceed.

Hey guys, congratulations on great earnings. Couple of questions, one, could you talk about what's going on with the Indian casino in Michigan and also I guess your property will be extremely comparative with anything they do?

With the (inaudible) in southern Michigan, we always knew that eventually that they would get the project on and it looks like they have crossed their last hurdle and we know what you know and that's what you read in the paper. We are confident that our new property will not only enhance our existing operations but will be very competitive with whatever they build so.

Okay, Atlantic City for Bob. Some of your competitors shows definitely an increase level of competition and you negatively affected most of them, which obviously you guys didn't see, what do you see the tent of market right now, now that you're another month alone?

I would say Larry essentially what it has been, some of the competition it would appear uses discounting as almost their default strategy and that's really not been the strategy that we've taken so I think that if your operating in marketing strategy defaults to discounts immediately rather than other methodologies then you going to see some increasing in costs, but that's not to say that things would not change in the future, but that is pretty much my assessment right now.

Okay, just as housekeeping depreciation CapEx initial expenses rest of the year?

The expense depreciation tend to be fairly straight throughout the year. We will increase our debt as we expand our capital expenditure program but that's going to be capitalized interest as we borrow for the new projects. So I absent -- we'll but look at interest rates, but other than that the interest levels should be fairly steady, depreciation levels fairly steady. CapEx we're going to be finishing up two projects in the company and that is the South Coast project, probably run at little higher levels than it ran this past quarter and Blue Chip has another three quarters to go, and again probably a little higher in this level.

And then the last question, the Shreveport market is suffering from the (inaudible) casino, how is that market feeling right now?

As you seen numbers, it has been a tough market for us. We continue to make progress of our property as we've had it for a little over three quarters now. We feel good about the future, we've seen increased earning over the last 3 quarters and the revenues are relatively flat for us if not down but we still feel good about the acquisition.

Thanks guys, you got a great price on it, too. Congratulation thanks guys, thanks.

Your next question comes from Joe Greff of Bear Stearns. Please proceed.

Good afternoon guys, question for you, Ellis, on the Coast Casinos performance in the first quarter. I do not know if you consider -- break it out this way -- but how much of the year-over-year revenue growth rate of 14% you think relates to additional runs at the Orleans. Are you guys doing anything differently there than you did a year ago either marketing or promotions wise and then if you just comment on, how you're seeing things in Las Vegas, locals market, the first 24 days of the second quarter? Are you seeing any slow from that first quarter growth rate?

The percentage increase that came from the rooms, I don't have a particular number, but I think it was a few million dollars increase in rooms revenue or that could come from other parts of the operation but principally from the new rooms, but that was -- and you can just configure out based on the number rooms we have added. We haven't done anything differently there. It's being run consistently with the way it had been run. It's a very successful property, it just needed more rooms. The rooms are added and they've become immediately productive. I can see their levels -- they're stayed up despite the addition of rooms. There was no decline because of incremental supply. So that was immediately accretive and valuable addition, not just in room revenue but from gaming and improved revenue of the property also. And the second quarter is starting out fine. We haven't disclosed any particular percentages over the last few weeks but as you can see in our guidance that we gave, we mentioned that the second quarter trends are starting out good, and included in that of course is a strong locals market that's continuing.

Okay great, and then just one final question with respect to the Borgata. The distribution that you received during the quarter, how do we think about that going forward. Should we be expecting this going forward? Is there a trigger for future distributions that you can remind us of?

We plan to continue this as a consistent policy of taking a percentage of their earnings as a distribution to both of the two owners. The 35% of pretax profits that we took is clearly representative of a federal tax rate. We don't pay federal taxes at the Borgata level; we pay it at the parent level. So both companies essentially are taking the tax payment due out of Borgata so it can pay the taxes at the parent level. That will be a consistent policy going forward.

Okay, and then property level debt at Borgata at quarter end?

Just under $400 million was the debt at the quarter end.

Thank you.

Your next question comes from Celeste Brown of Morgan Stanley. Please proceed.

Good afternoon. Two questions for you guys, one on coast overall. Have you changed the way you are operating those businesses now that they are part of Boyd and that's why we're seeing so much margin improvement? It is purely the gross in the market? And then two, do you expect to see a change in the discounting of the Atlantic City market when the ownership changes later this year?

Hi Celeste, this is Keith. With respect to the coast properties, we really have not changed in any material way the way those properties are operated. And so the growth you're seeing at those properties comes from normal operations and growth in the market. They were very well run when we acquired them and continued to be very well run.

All of the margin improvement is coming from the revenue growth?

Yes.

With regard to the competitive environment in Atlantic City, this is Bob Boughner, you know I think time will tell. Certainly the change in ownership as I indicated, I think will bring fresh capital, fresh ideas and fresh perspective, so I think there's really no way to answer that question other than to wait and see what happens, and I would I personally believe that there will be some significant capital that's invested in the marketplace over the next couple of years.

Great, thank you.

Your next question comes from James Newton (ph) of Wachovia. Please proceed. Mr. Newton, you may proceed with your question.

Congratulations again on the great earnings. My question is, when you go down to the Borgata, I understand there's going to be an expansion in the poker room. You will always have a constant weight when you go down there, could you go into more depth on that expansion, because poker is blooming all across the country?

Mr. Newton, the poker operations in the Borgata will expand from 34 poker tables to 85 poker tables. It will be relocated into the expansion part of the building, adjacent to some incremental restaurant supply including some casual restaurants and quick service restaurants, which we believe will assist us in handling the feeding issues associated with the crowds we now enjoy in that area. And we believe that that growth rate that we have seen in the marketplace will continue, and probably grow beyond that. Poker actually in terms of growth rate is the fastest growing game in the Atlantic City market place in terms of total revenues, even ahead of the more traditional table games. So we think that we will be uniquely positioned in that market to do extremely well.

Fantastic, thank you.

Your next question comes from Dennis Forst of Keybanc.

Good afternoon. I have a couple of questions for you. In the commentary, you mentioned that Tunica was the only property that had a decline in EBITDA. Can you give us an idea of what the revenue at Tunica did in the quarter? Or the gaming win, was that down very much?

Let me give you an idea of the revenue here in just a second. EBITDA was not down that much. It was not that big of an earner for us. Revenue was down maybe about 10% it deals more with the change of strategy, maybe Keith you could talk about how the strategy year-over-year changed. The revenue decline was programmed that way.

In the first quarter of 2004, we were running a fairly significant junket program, which drove the tremendous amount of top line revenue did not produce much in a way of profit, and that program ceased to exist in the third quarter of 2004. So for about the first quarter and second quarter of this year, you will most likely see declines in revenue in Tunica year-over-year because that program has been eliminated. But it did not produce much in the way of profit.

Okay, so the cash flow decline was significantly less than a 10%?

Right, the 10% revenue decline amounted to a few million dollars and there was a very small cash flow decline, so we did save -- we did pick up and save a considerable amount of expense by not running those programs.

So the margin actually improved?

The margin was fairly flat. It is not a significant number, but the margin was fairly flat.

Got you, and then I had a question about Borgata. You give nice detail there. If I can find it-- it had to do with the benefit in income tax, it was actually a $3 million swing between '04 and '05 in the income-tax provision/benefit. Why the big change in that quarter?

If you recall, we put this in our 10-K. It rose when, we are now booking at a tax credit that is available to us in New Jersey based on the job creation that came from --

I thought that was supposed to eliminate two-thirds of the tax benefit not a 100 percent plus?

The credit we get is not limited by income tax, it depends on what the state income tax would be. The actual credit can actually go higher because it goes over to the-- is limited by your property tax not by your state income tax. So the allowable credit could vary as to how much it takes up of an income tax liability.

Depending on taxable income.

It can go beyond taxable income based on the property tax limitation. There is a credit based on how much property tax you pay, not based on how much income tax you pay. In this case, we are going to book that credit all the ways through 2007 when it's available to us. And you just saw, we booked some of that in the fourth quarter last year, --for the fourth quarter going back was a catch-up quarter-- then we are booking it now consistently through the next three years.

Then lastly on the Pokehagens (ph) competing again Blue Chip, when might they start operation?

We don't know. We did see that they had gotten over a hurdle for placing a land and trust, but I'm sure there are some administrative things they have to do and they have to build the property, so you have to refer to their statement as to when they make it going. We'll be in operation with our new facility before the end of the year. And that will give us a large head start over the earliest they can get going. And we think that will stand us in good standing to compete with them effectively when they do open.

Thank you.

Your next question comes from Kent Green (ph) of Boston American Asset Management.

Great quarter fellows. My question pertains to ADRs. It appears that both occupancies are going up on Las Vegas like mad and everybody pushing ADRs, and obviously you guys ADRs level at the Borgata and it appears to be a bargain price in ADRs down here if you're going to run high occupancy particularly several months. Is this a strategy that you're doing in both markets that you want to push to casino floors instead of ADRs?

Bob, you want to answer that concerning the Borgata.

Be happy to. The strategy at Borgata is to focus on achieving the highest all-in revenue and profitability (inaudible) that occupies a guest room. Sometimes the high-paying cash customer pays incremental dollars in also non-gaming amenities. Other times it is simply putting in a casino-- and we do not artificially inflate the internal recognition for the amount of our internal charge for that room. So it is a-- it simply reflects a higher recognition that we have grown our customer database significantly so that it brings more customers as a result of that and why were achieving double-digit increases in gaming revenue and cash flow.

And what about Las Vegas?

We are growing our ADR here, but our properties don't have the high levels of average daily rate that you have seen at the very large Strip resort. We have not made a lot of statements about it, because it is not a significant part of our income. We have as you know relatively small property on the strip, the Stardust, with 1500 rooms and a small property at Barbary Coast. We have seen increases, but they have not been the dramatic-- not the dramatic impact that some of the other properties have had. We have seen our strength come more through the casino side, well there is some in the room side, but particularly casino operations is where we see increased revenue and profitability.

Shifting back to AC, with the new announcement from MGM MIRAGE about the big development of city place or whatever it is in the middle of the strip, does this mean that they will allow Borgata to keep acquiring part of that joint land as you keep expanding beyond the second phase? Is there a third phase, and then you might also equate that to say you had access to the database at least of the players, and I don't know what you have been able to harvest that, how many players were former players that used to go to the Stardust or other Las Vegas properties or how many people went to the betting casinos in Vegas of MGM MIRAGE?

With regards to the patron database, we -- in addition to properly (inaudible) opening of the Borgata by combining the available database of Boyd Gaming/MGM MIRAGE to mail to customers, but after now, approaching two years we have established a unique Borgata customer base. As far as any future development beyond what we have announced, that question would be best be posed to our friends and colleagues at MGM MIRAGE.

Thank you.

Your next question comes from Felicia Hendrix of Lehman Brothers.

Hi guys. Couple of questions, first I am just wondering in Lake Charles, what you're seeing there regarding marketing and promotions if anything as the market gears up for the Pinnacle opening there? The second thing is that-- my second questions is that you reported EBITDA margins on a kind of division level were a lot higher than we were looking for, and then, we think about modeling going forward should we think about these kind of levels, and I also just wondering in general what you have been doing internally to garner these levels? And then finally, on your last conference call, you alluded to perhaps the fact that we've might see a Phase Two of South Coast. I was wondering if you could you touch up on that?

With respect to marketing in the Lake Charles area, we have not seen anything too out of the ordinary recently. Probably, it's been more on the employee's side and marketing for employees because of a very small labor pool out there, but in terms of marketing for the casino patrons, nothing out of the ordinary.

You expect that to gear up? I mean, can you tell the tone of the market yet?

No, I don't have any insight into what Pinnacle -- pre opening or even post opening marketing plans are. We presume that there will be significant and there will be quite a bit of competition for the customer. We certainly like our position being the first in you know cross the Texas border, so we've always said that the more cars on the road better for us. So, we like our position I think the opening of our expanded property and the opening more hotel has kicked off very, very well. As Ellis said, we have seen some record coined-in numbers and having some great win per unit. So, we like what we see so far and we'll deal with the Pinnacle opening when it happens.

With regarding the margins, we have seen very good flow through. We're managing the hotel expenses both marketing payroll expenses fairly consistent levels of prior periods. And we are getting very nice revenue increases, so we're seeing a good flow through of revenues down to the EBITDA line which has helped our margin, so that is just a result of our strong markets, good business, good marketing, and a variety of efficiencies in their operations. So we are pleased that we have been able to do that. It is hard to predict whether those types of business conditions, or those types of things, how they will forecast themselves in the future. We're just pleased that we have been able to achieve these levels, and obviously we hope to keep it up. We did don't not have specific prediction on margins. And that I guess, on phase two of South Coast, Keith you got anything to say on that?

If you're referring to the next phase of rooms and actually it's master plan for three towers, we don't certainly have anything at this point to announce on when the second hotel tower or when the third hotel tower would come online. We certainly would expect you know great opening and you know lot of demand and based on that we will have something to announce after we open.

Great, thanks.

Your next question comes from Harry Curtis of J.P. Morgan.

Real quickly on the Coast assets-- would you give us some sense of how they have performed seasonally, Q1 versus Q2, Q3 and Q4? Just a better clarity on which quarters tend to be the strongest and the weakest, please?

Let me look back into last year and I can give you and idea we what has happened-you know, let me just give you the order for '04 was that the fourth quarter the best solid by the first quarter and then Q2 and 3 were about the same. Now the fourth quarter remember had the addition of hotel rooms at Orleans, so there was an advantage to fourth quarter from a unit addition. That is the way it worked last year. 4, 1, and then next middle quarters were similar performers.

And then the second question is, are you still expecting your tax rate to be somewhere in the mid 36% range?

We think for the years going to come out maybe a touch lower than that. We can't be too precise yet because we're be sure exactly how certain things will fall. But we do expect to be between 36 for the quarter and 36.5 for the full-year.

There are no further questions. Mr. Landau I will now turn the conference back over to you.

Thank you everyone for your interest and attention, and we look forward to doing this again in three months. So thank you and good bye.

This concludes your conference. You may now disconnect.