Boyd Gaming Corp (BYD) 2006 Q2 法說會逐字稿

Good day, ladies and gentleman, and welcome to your Boyd Gaming Second Quarter Conference Call. My name is Jeanne. I’ll be your conference coordinator today. At this time, all lines are in a listen-only mode, and towards the end of the conference call, we’ll be taking questions. [Operator Instructions] At this time, we’ll turn the call over to your host, Mr. Keith Smith, President and Chief Operating Officer of Boyd Gaming. Sir, please proceed.

Thank you, operator, and good afternoon, everyone. Welcome to our second quarter conference call. Joining me on this call is Paul Chakmak, our Chief Financial Officer. Before we begin, I need to remind you that our comments today will include statements relating to our future results, including the financial outlook and expectations for our third quarter, the pending sale of South Coast, and other market business and property transit of forward-looking statements within the Security and Exchange Act of 1934. The company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events, or otherwise. Actual results may differ materially from those projected in any forward-looking statements as a result of certain risks and uncertainties, including without limit those noted in our earnings release and Form 10K for fiscal year 2005 and other filings with the SEC.

I would also like to remind everyone that during our call today we’ll be making reference to non-GAAP financial measures, and for a complete reconciliation of non-GAAP to GAAP financial measures, please refer to our earnings press release and our Form 8K furnished to the SEC today. Copies of both documents are available in the Investors’ Section of our Website at BoydGaming.com.

Also as a reminder, we’re broadcasting this call on our Website at BoydGaming.com and StreetEvents.com.

We released our second quarter results a few minutes after the market closed today, and as you may have noticed, we’re reporting in a slightly different format. We believe this format will provide a better understanding of our how our business is performing and the relevant events related to that performance.

The second quarter was a transition period for the company. We continue to introduce our new Blue Chip product and brand in the northern Indiana market, focusing on generating trial and repeat visitation. In Atlantic City we wrapped up construction the Borgata’s public space expansion and successfully opened that expansion to the public on June 30. And we continue to adjust operationally to the significant capacity addition in the Las Vegas locals market. Well, these events impacted three of our top-performing businesses during the second quarter. We’re excited about our future potential in each of these markets.

Also in the quarter, we added to our strong growth pipeline, making it even stronger with solid near-term development opportunity in Florida. In conjunction with our quarterly results, we also announced the sale of the South Coast to Michael Gaughan. There’s no question the Coast Casinos acquisition was an important event for the company. It firmly positioned Boyd Gaming as a leader in the Las Vegas locals market, and that significantly exceeded our expectations from the beginning. While we have made significant progress in integrating the Coast operation, today’s announcement marks another phase in the integration of that business into our company.

As we said in the announcement, on a prospective basis, we believe the transaction to be immediately accreted to earnings, and we also believe that further integration will provide additional benefits, importantly, to retain the well established Coast brand for future development. Also noteworthy is the fact that the South Coast property cannot be sold for a term of five years, and the company has the right of first refusal for an additional three-year period. Lastly, and as importantly, David Ross, the Chief Operating Officer of our Coast division, will continue to lead that business.

On the development front, we have a number of both short-term and long-term opportunities providing the company with a strong growth pipeline for the future. On June 1, we announced an agreement to purchase Dania Jai Alai, located in close proximity to the major population centers of south Florida. As you know, the Dania facility is one of four facilities approved to operate 1,500 Las Vegas-style slot machines. We’re planning to close the transaction in the fourth quarter, and started working on the design and predevelopment of the construction phase beginning around the end of the year. At the Borgata, the public space expansion opened to rave reviews, and we believe this further positions the Borgata as a leader in the Atlantic City market.

To give you a sense of just how well things have been going, the Borgata’s new 85-table poker room has been virtually at capacity since its opening on June 30, and all of our restaurants, including our three new signature venues, have been extremely busy during this initial period. As for our other expansion project at the Borgata, we’re well in the construction phase of the property’s second hotel, the Water Club, which will have a unique personality all of its own. We first announced the project cost about a year ago, and a lot has changed during that time, both in terms of our plans and the overall construction market. As a result, we’ve increased the budget to $400 million to reflect higher costs for construction materials, vendor consolidation, and demand for contractors in the Atlantic City region, ensuring a tradeoff of proposition to our popular Borgata brand. When it’s completed in the fourth quarter next year, the Water Club will provide an upscale boutique hotel experience, far from the ______ proposition to our already popular Borgata brand.

Here in Las Vegas on the Las Vegas strip, we continue to make headway on our design plans for Echelon. We currently anticipate beginning construction in the second quarter of 2007 and look for a mid-2010 opening. In preparation for our development, you may have heard that we’re no longer taking reservations beyond November 1 at the Stardust. This is not the official close date. We simply did this so that when we determine the exact closing date of the property, we can minimize the challenges associated with the closing.

And in North Las Vegas, we are forging ahead on plans and drawings on this opportunity for a new Las Vegas locals property and will update you as progress warrants. We expect to begin construction in the second quarter of 2007.

As I said initially, the second quarter was a transition period for us. While we ended our streak of eight consecutive reporting periods of quarter-over-quarter earnings increases dating back to 2004, we believe this quarter marks a new baseline for continued growth in the future. Now I’d like to turn the call over to Paul Chakmak, our Chief Financial Officer, to talk to you about some of the operating dynamics we’re seeing in our various businesses.

Thank, Keith. Hello, everybody. As Keith said, the second quarter was clearly a transition period, as many of the dynamics that impacted the quarter just happened to be in three of our key business units--Indiana, Las Vegas, and Atlantic City. The good news is that relative to our performance over the long haul, we feel good about our position within each of those markets and remain very confident in the future.

As Keith also mentioned when he was talking about the sale of South Coast, we are pleased about what it means for our company going forward. I want to add a few points in that regard. First, we expect to sell South Coast significantly above comparable trading multiples. Secondly, when we first acquired Coast, we talked a lot about focusing on business as usual, that Michael Gaughan would continue to run the business as he had previously. With today’s announcement, we can integrate the business more completely. The transaction also allows us to repurchase stock subject to the limitations within our public bond indentures. With the additional funds, we plan to reduce the outstanding balance on our revolving credit facility, allowing us to use the additional capital for our ongoing development initiatives, which Keith outlined a moment ago.

It’s no secret that the business at South Coast has been soft since opening. To give you some specific color on the property’s performance so far, South Coast generated approximately $16 million in adjusted EBITDA for the first six months of this year.

Two last points I want to make relative to our Coast business. When we first announced the Coast acquisition two and a half years ago, we estimated the transaction multiple to be 7.4 times full year 2004 adjusted EBITDA. As you may know, that turned out to be about a full multiple turn lower on the $1.3 billion we paid for that business, and the South Coast was already under construction at that time.

In the Las Vegas locals market, capacity increased substantially for the first time in six years. We believe the continually strong population growth in the Las Vegas Valley will provide an opportunity for significant up side in this segment, and that absorption has already begun. Besides, significant new capacity in the locals market isn’t scheduled to come on line for another three years, really not until 2009.

As we said in our release, our locals business was principally impacted by additional competition. Suncoast was really where we expected it to be during the opening phase of a new competitor in that area. Adjusted EBITDA was down just over 20% on net revenues that declined about half as much. We’re working on narrowing that gap given the new competitive environment and building the business accordingly.

Furthermore, population growth has been unprecedented in Las Vegas, and as a result, we believe we can absorb the additional capacity over time. Looking at the Las Vegas economy at a glance, just in May of this year, the DMV reported some 7,000 out-of-state drivers licenses surrendered in Clark County alone, a run rate that we’ve seen for a number of years. And bringing the new movers total for southern Nevada to more than 33,000 for the year.

Let’s not forget, over the next four years, there’s approximately $20 billion in construction projects planned on the Las Vegas Strip. And that kind of activity has always been an important contributing factor to the success of the Las Vegas locals market. With more jobs comes more population growth. That’s the part of the conversation that people tend to forget when talking about a possible slowdown in the Las Vegas economy. All of these data points together support the expectation that we can absorb the additional capacity, but it just takes a little time.

Near the Orleans, there was significant roadway construction during the quarter that created some access challenges. Likewise, the new competition in the market had more of an impact on our Orleans customer base than we originally thought. The rest of our locals business was less impacted quarter over comparable quarter, with Sam’s Town and Gold Coast both reporting just slight declines in adjusted EBITDA.

Downtown Las Vegas had its second best June quarter ever. Unfortunately, it compares to the best second quarter in its history, which is Q2 2005. In the central region, Treasure Chest is out with its impressive adjusted EBITDA increase of 192%.

In Illinois, the retroactive gaming tax assessment of $6.7 million made a big difference in year-over-year comps for the quarter, for both the company as well as the property. Without that charge, Par-a-Dice was essentially flat quarter over quarter. As you know from our first quarter, the new Blue Chip got off to a fast start, with our expansion at that property opening January 31. And in the second quarter, business continued to ramp up. The opening phase was especially important because we had to completely reposition the brand. And if you’ve been there recently, you can see what I’m talking about. The new Blue Chip is a completely different experience. So with that in mind, its performance in the quarter was impacted by higher than normal marketing and promotional expenses, which have begun to subside as we shift from the opening phase to more normal operations.

In Atlantic City, you all know we completed our public space expansion, and it’s off to a great start. Thankfully, we were able to pick up where we left off following the New Jersey government shutdown, which happened just a few days after we opened our new expansion. We are estimating the adjusted EBITDA loss for Borgata during the three-day period to be approximately $4 million.

I also wanted to give you the estimated revenue impact of that shutdown, so when the state reports the July revenue numbers in the next few weeks, you’ll have some reference as to how the month could have been. Considering the first few days of operations with our expansion and assuming a slight adjustment for the additional marketing aspects of the opening, we believe the three-day shutdown resulted in a loss of at least $7 million in gaming revenue.

Now for guidance. For the third quarter, we’re estimating adjusted earnings per share from continuing operations to range between $0.50 and $0.55 per share, and comparable adjusted EBITDA to be between $165 million and $175 million.

With that, operator, I think we can open up the floor for questions.

[Operator instructions]

I’ll take a question from Mr. Larry Klatzkin of Jefferies and Company.

Hey, guys. How long do you think the Blue Chips returns to, margins return to former margins? Is that third quarter, or is it going to take the fourth quarter to get back to normal?

Larry, this is Keith. We’re not necessarily focused on margins as much as we’re focused on improving the bottom line EBITDA out of the property. We’d expect the EBITDA continued ramp up to Q3 and Q4 to get to a more normal level with the expanded property, so with that, you’ll see some margin improvement also, but that’s clearly not our focus right now.

Okay. As far as South Coast goes, what multiple are you selling it at?

Well, Larry, I think you can, we gave you the number for the first six months, which was $16 million. You can interpolate that into a what a full year estimate would be and then apply that against the 15.8 million shares that are going to be taken back in cash and stock from Michael Gaughan.

So did you have an independent appraisal or evaluation of this transaction?

We used a major investment bank to issue a fairness opinion for a special committee of our Board of Directors that made a recommendation of the overall transaction.

And are you going to do a road show for the issue of the shares, or is it just going to be the investment bank doing a quick issue?

Really, really, to be determined. I think either way is certainly very viable, and we’ll be taking a look at that here over the very near term.

And then, as far as timing of what, you were going to estimate when those shares were due so when the money comes in?

Well, as we said in the release, the share transaction can contractually take place over the next 60 days. We have, our guidance assumed it happens at the end of that period, though there’s no reason to believe it won’t happen much earlier than that.

All right, all right. And then, does Michael, Michael’s compensation will go away, too. What was he getting compensated? Can you add that money back into income? To corporate?

I don’t know that off the top of my head, but you can certainly pick it up in the proxy, Larry, as well as in the—they’re still at really, a Coast corporate office that will be integrated, so there’s certainly significant cost savings and synergies associated with the transaction that we have not highlighted at this point.

All right, so corporate expenses over thirteenth of the quarter. What should we expect it two quarters up?

Well, I think there is, in fairness, probably at least certainly a few million dollars in corporate expenses that will come right off the top.

Okay. Florida timing?

Larry, this is Keith. We’re currently in the design, in the predevelopment process for Florida, and we’d expect, as we said in our comments, to probably break ground around the end of the year, around the first of the year, because we haven’t built in Florida before and because our plans aren’t finalized, we don’t know exactly how long the construction time frame would be. It would be at least a year, in my presumption.

All right. And then the last question is, is the Borgata expansion done, just the results out the door, you’re very pleased with what you’ve seen, is it still ramping up?

Yeah, we’re very pleased. The additional slots and gaming capacity were quickly absorbed, food coverage, the additional food seats have been quickly absorbed, with very little if any deterioration or impact to the original food seats. So we’re very, very pleased with the first, I would say, 23 days, but we were closed for three of them, so for the first 20 days of activity of that expansion.

All right. Thank you, guys.

I will take our next question from Celeste Brown, Morgan Stanley.

Hey, guys. First, what’s the minimum purchase price for South Coast?

The special committee arrived at a minimum price, Celeste, but at this point we’re not disclosing that amount.

Okay. And then, I thought in the release you said South Coast was discontinued so I guess what you were referring to in terms of the impact to your guidance is just the reduction to the shares?

No. In the third quarter, even though the sale will not have been completed by the end of the third quarter, we will show South Coast as discontinued operations below the EBITDA line, really below the net income line before coming up with net income from all operations. We, our guidance was based on the continuing operations, so really, net income before the impact of South Coast.

Right. But the share count doesn’t, is it the higher share count, not including the 4.4% reduction?

That is correct, since we don’t know exactly what the timing of that is.

Okay. And then, I’m just trying to understand. You’re selling South Coast, but then you’re building the property in North Las Vegas. Is it just the area that you didn’t like with South Coast? I’m sort of trying to understand why you’d be selling one and building another?

Celeste, this is Keith. I think they’re actually separate and unrelated events. We purchased a piece of land in North Las Vegas earlier this year and feel that that’s ultimately a good market for a locals casino. The locals, the fundamentals of the locals market is as good as it’s ever been with the growth in population and the continued construction that’s going on in town, the number of projects that are on line for the future, so the market is still strong. The South Coast transaction and the sale of that property is just something that’s a different issue.

So there’s no change in strategy here?

No, not at all. Not at all. We’re still very focused on the locals market. We’re still very focused on the market and continue to look for additional sites.

Okay. And then, just in terms of what you’re looking at now for South Coast. Do you think you’ll take a write-down on that?

There’s certainly the potential for either a loss or gain, really, depending on where the stock is sold, Celeste. The book value of the South Coast, we estimate to be about $575 million at the time the transaction will be closed. So over and above that number will result in a non-cash charge or a non-cash gain.

Okay, thanks.

We will take our next question from Jeremy Cogan of Banc of America Securities.

Right. I’ve got a few, maybe with respect to South Coast. I guess you don’t anticipate to be getting more proceeds for it if you actually waited, for example, for the property to further ramp, for the access to the property to get better, as you guys have been talking about, et cetera. It still is a little bit confusing as to why you would give up so early in the process if it was really that simple.

Well, Jay, it’s really impossible to determine, obviously, what a valuation would be, comparing the valuation today of South Coast versus what it might be three, four, five years from now. I think, as Keith had mentioned, there’s certainly some protections built in relative to the dynamics of the overall transaction on flipping the property, if you will, et cetera, which adds further protection from that standpoint. With that said, it’s been interesting, obviously, given the current share price, focus by many folks on the buy side and sell side event on stock repurchase. And we see this as an excellent mechanism to buy back some 3.8 million shares while still de-leveraging the company.

Do you expect the Olympia project and/or the Mornell project to get built and/or potentially stationed to build the Cactus project? Is that now also part of the thought process?

Well, we know that those projects have been announced and been talked about. We presume that they will get built at some point in time. We don’t sit in the boardroom, so frankly, I’m not sure we have any better information than you do. So we assume they will all get built at some point.

Okay. Speaking of better information, maybe I can switch tracks for a second and talk about Echelon Place. I was wondering if you can tell us at this juncture who the executive architect or series of architects are going to be, who the general contractor is, or if you’re actually going to have one. I know Tishman’s been working with you from a master level, but have you actually made a decision or are about to make a decision on GC levels, where you are with the subcontractors, and where the project is from a go standpoint, in regards to your thought process now and what it might ultimately be relative to January when you announced it?

With respect to the overall scope of the project, we continue to broaden design and continue to refine the overall project. We don’t have anything else to announce today other than what we announced earlier in the year. But we continue to work diligently at it, and the drawings are getting more detailed, and we’ll just continue to refine them. So we hope to have something in the near term to share with everybody, but we don’t have anything for today. I’ll ask Paul to address the question re the architects.

Well, Jay, I think we’ve been through some of that in the past. The executive architect is BLT, the same architect that did the work for us at the Borgata. The construction manager is Tishman, the same firm that we’ve used at the Borgata and is certainly involved in other projects with us, including Florida. We like our development at Borgata and do not anticipate using a general contractor, but we use Tishman as the construction manager and a host of subcontractors in the major trades to support those pieces of business. That’s really unchanged from the discussions we’ve had over the last six months.

Is the subcontractors and labor in general going to be coming from within Vegas, or outside?

I think that’s probably early to tell. We would assume that a lot of the construction trades are here, and whether they’re coming off other jobs that they’d be finishing up, or--we don’t know at this point. We haven’t started the contracting phase, so—that’s not the best question to answer.

Okay, thank you.

Next question, please, operator?

I will take our next question from Joseph Greff of Bear, Stearns.

I have another question on South Coast. Did you actually give a reason or talk about why you are selling South Coast and were there any other bidders, or has anybody else approached you with regard to buying South Coast?

No. We had talked about the fact that Michael, the Coast acquisition, frankly, back a couple of years ago, was a very important acquisition for the company, very strategic acquisition, and it’s been a very profitable and very valuable acquisition for us. I think Michael came to us, and after a couple of years working in the public company environment, he wasn’t enjoying himself anymore, and was looking to go back and do something he enjoyed better, running the operations of a day-to-day property, and we struck a deal.

I think, Joe, from a strategic standpoint, we look at this transaction like any transaction that we might look at relative to where we see value. Obviously, from the standpoint of the run rate value that’s probably implied in the existing stock price, I’m certain, probably well below the current cost basis of the property, we saw this as an excellent transaction for the reasons we identified before.

And the capital investment in the property, is it at $575 million?

Correct.

Okay. And then a less, sort of a media question. D&A guidance for the third quarter?

It’s really unchanged from the beginning of the year, where I think we gave an overall number of about $225 million. You’d have to take South Coast out of that number, so I would say the number for the third quarter will be about $50 million in total.

Thank you.

I will take our next question from Adam Steinberg, Morgan Joseph.

Hi. Pardon me if you’ve already answered this, but there’s a color around what’s the price paid for South Coast. Have you or are you disclosing what that’s going to be?

There is, Adam, there is no top-end cap. All proceeds come back to Boyd Gaming. Michael Gaughan does not receive any cash from the transaction. As far as a floor is concerned, I said that the special committee recommended and the Board approved a floor which we’re not disclosing at this point in time.

Adam Steinberg. Okay. But will there be some sort of SEC filing at some point in time for the transaction that will have it?

The purchase agreement will be filed as an exhibit to our third quarter 10Q.

What, for the quarter, the additional Capex of $3.9 million. Can you kind of give a little indication as to where that went and what it was for? Was some of that kind of predevelopment for Echelon or Borgata, the hotel tower?

Yes. It was a couple of little projects. It’s not, it’s not really much in the way of predevelopment. I’ll have to get back to you on that, Adam.

All right. That’s fine. And what shall we expect for Capex for the rest of the year?

Well, I think for the rest of the year, it’s relatively light. We’ll obviously be finishing up some of the construction payables on South Coast, which have already been run through as capital expenditures, you see them as construction payable for the most part now on our balance sheet. Beyond that, and the Water Club at Borgata, which is obviously not running through our cash flow directly, we’re really focused on the next project, which is Florida. And there will be minimal capital spending for the balance of the year on Florida.

Okay. And what you were saying earlier, it looks like you’re going to break ground on something on that towards the end of the year?

Yes, we said around the end of the year. It could be the very end of this year, very beginning of next year.

All right. And twelve-month construction. Shall we anticipate, then, not putting anything in there until construction, or would you do something temporary?

No, there’s no intention, no intention to do anything on a temporary basis. I think for modeling purposes, it’s safe to put it in January 1, 2008, to make it easy.

Okay, thank you.

I’ll take our next question from David Katz, CIBC World Markets.

Hi. Most of mine have been asked already, but can you add any color with respect to Florida and, I guess, order of magnitude in terms of your buildout?

Well, we’re still at, once again, designing the property right now because we don’t have it completely drawn. We have a program laid out, but not having built in Florida, once again, and not understanding what some of the cost structures are down there, we don’t have a number that we’re comfortable kind of throwing out there. We are paying $152 million to acquire the property, which will close in the fourth quarter, and when we get close to a number we’ll share it with everybody, but we don’t have anything now.

Do you have a target date in mind? I apologize if I missed it, but do you have a target date in mind as to when this would become operational?

You should be thinking the first of ’08.

Very good. Thanks very much.

You’re welcome.

I’ll take our next question from [Jan Skiller], Bank of America.

Hi, guys. How are you doing? I think back at the analysts’ day, you had kind of laid out over the sort of, the current development cycle, you thought that peak leverage, you could see peak leverage kind of in the mid-fives, you lead up to things you could within those parameters. Does this transaction, selling South Coast, does that change that, or is that still something that we should, is that still good guidance to look at?

Well, look. It changes it from the standpoint of your harvesting a relatively significant amount of capital, I mean the South Coast transaction, once completed, is immediately de-leveraging, because on just the cash component of the overall transaction, it’s at a relatively high multiple, well above ten times, probably, your forecasted ’06 EBITDA number. So as a result of that, leverage goes down after South Coast. I think as far as, then, moving that out over the course of the next few years, contemplating Florida, North Las Vegas, and Echelon within those numbers, it certainly gives us more cushion relative to those projects as well as others that may come up for us. And the marginal change relative to that guidance would be relatively small, frankly, a few tenths of a point to the better.

Okay. That’s helpful. Thank you.

I’ll take our next question from Steven Ruggiero of CRT Capital.

Steven Ruggiero. In your adjusted EPS of $0.55 for this coming quarter, what’s your share count that you’re assuming?

Steve, we’re assuming, really, the current full unit share count, which is just over 91 million shares.

Okay. And you said that basically, 3.8 million shares that you’re buying back from Michael Gaughan, or he’s contributing back to you, is the maximum that is permitted at this point, so we shouldn’t expect any possibility of future share buyback in the near term?

Well, as it relates to this particular transaction, I’ll refer you, since I know you know the indentures well, to the asset sale provisions in all four of our subordinated bond indentures, which require the company to receive at least 75% of the proceeds in cash. So as a result of that as it relates to this transaction on share buyback, the max would be 25%. It certainly doesn’t relate to any other share buyback the company may or may not entertain in the future.

And therefore you are still open to share buyback?

Well, sure, absolutely. We’re open to it. You haven’t seen it execute on them at this point in time. I think, as you’re aware, we have just under a million shares from an ’02 authorization available to us, and at this point we are going to obviously move forward on the South Coast transaction and buy back somewhere close to 3.8 million shares from it, most likely.

Thank you.

I will take our next question from Harry Curtis, JP Morgan.

Hi. A question on how you plan to get back to prior EBITDA levels. What is your strategy at Suncoast and at Orleans?

Well, speaking of the Orleans, I think there’s a couple of factors at the Orleans. First of all, the quarter experienced some disruption, as Paul mentioned, as a result of some road construction, and we think, obviously, that’s temporary, that will bounce back. During the quarter, the trend of business at the Orleans actually started to return as you work your way through the quarter, so we think some of that is coming back naturally. The business in the locals market will be somewhat lumpy over the next six months, as you look at the additional capacity getting absorbed into the market. And whether it be through marketing programs or just through customers finding their way back to their home properties, after visiting so many properties, I think you’ll begin to see those numbers return to normal.

And how about Suncoast?

Suncoast, as Paul indicated, that after the first three months of operation of Redrock, we’re about where we thought we’d be. We don’t expect ultimately to be at this level of performance at the Suncoast, we expect it to trend back to a more normal level, but for now, we’re at where we thought we’d be, so—

Have you built in more aggressive marketing programs to recoup some of that business?

Yes, specifically at Suncoast. Not necessarily at the Orleans, but at Suncoast we’ve been a little more aggressive, nothing that is going to create marketing wars, I don’t think you’ll see any unusual marketing going on out there. You see the double marketing that you typically see when new properties open. But we’ve been a little more aggressive at Suncoast to try and retain some of that business.

And Paul, given the importance of this minimum guaranteed price, could you give us a sense of the reasons for why it’s not being disclosed at this point?

Well, we really think, and have been advised by various investment banks, that disclosing the minimum price could have a material negative impact on the company’s ongoing share price.

Sort of bidding against yourself?

Well, to some extent, Harry

Yeah, okay. Very good, thanks.

I will take our next question from [Henry Stroh], [inaudible]..

I hate to harp on this, but I’m still trying to understand, if the locals market is still strong, it’s still unclear why you would sell South Coast so early in the process, because whether or not you look at it on investment capital or replacement costs, it seems like it just doesn’t make a lot of sense. I’m just kind of following up on some of these other questions, I just—because if you had to build that now, how much would it cost?

Well, the total cost of the South Coast was just under $600 million. As I said, the book value of the South Coast is $575 million. I think relative to the location of the South Coast and the near-term impact associated with that location, both from a density standpoint and an access standpoint, clearly, the best days of South Coast are so many years in the future. In addition to that, as one of the callers recognized, there is potential new competition in that area that is under development that certainly didn’t exist at the time the project was underway. And I’ll also note for my comments that the South Coast was underway before Boyd Gaming bought Coast Casinos.

So with all those items, I mean clearly, maybe you have a different view, the South Coast is not in our stock price at cost some 18 times multiple of this year’s EBITDA. The company has a desire to buy back stock in a prudent manner, and we believe, as I said, there’s some significant synergies and cost savings that tend to both reduce expenses at Coast Corporate, as well as further integrate the overall business. So with that, I think there’s a number of items that I highlight that lead us to view this as a very favorable transaction for us.

One other question. Can you just explain the decision process you went through in terms of not auctioning off the property and instead selling it to an insider?

Well, the process, as Keith mentioned, was related to Michael Gaughan approaching the company. The terms of the transaction are such with, basically with no sale provisions, first rights of refusal, very limited representations and warranties on our part, that it would, frankly, be highly unlikely that a transaction could be done with a third party on similar terms. And so a special committee was formed, an adviser was named by that special committee to provide a fairness opinion, and the transaction was reviewed and approved on that basis.

Okay, thanks.

I’ll take our next question from Larry Klatzkin of Jefferies and Company.

Hey, guys. A couple more things. I mean, ultimately, if you spent $600 million on South Coast, you would be hoping to do an EBITDA closer to $100 million or $80 to $100 million, which means a multiple going out a year or so is not as attractive as you’re looking at when you’re saying $16 million for six months.

I think our call, Larry, was that we, at this point in time, did not see South Coast being able to achieve those types of targets for many, many years into the future. It was not a matter of the next year or two or a ramp-up.

All right, all right. Did you guys bid on running the Hard Rock, by the way, since you were partners already with that company?

No, Larry, we didn’t. We didn’t believe, at the end of the day there was enough money in it for us to spend the time and effort and energy to gear up a team and do everything we had to do to manage that. It’s as difficult in our business to manage small properties as it is to manage larger properties, so we just passed on the opportunity.

All right. And then, when you give the EBITDA guidance, is that before or after option expense?

That is after option expense.

And how much have you brought on option expense going forward?

It’s about $0.05 a quarter. Oh, sorry. $5 million.

Okay. So you’re saying, okay, okay. And then the last question, Par-a-Dice. If you add back that one-time tax payment, was EBITDA up or down on that property?

It was about flat.

Okay. So, actually, it performed normally if it wasn’t for the tax. Okay.

That’s correct.

Okay. All right. Thanks, guys.

I will take our next question from Joseph Greff of Bear, Stearns.

Hey, guys. Paul, the one time marketing worth, I don’t know if you look at them as one time, but the marketing and the promotional expenses related to Blue Chip? How much of those do you think come out? Order of magnitude, relative to what you expended in the second quarter?

This is Keith. There were a couple of million dollars in the second quarter that will be non-recurring going forward.

Okay. And I’ve kind of beat the horse on the topic of South Coast, but if you guys in theory got enough dollars per acre on the start-up site, would you be willing to part with it, much in the same way that you seemingly are parting with South Coast?

Well, given our current efforts, our focus on developing the plan that creates long-term value for the company on those 63 acres that we own there, and that’s our current focus and we’ll continue with that, and we think it’s a wonderful site and there’s wonderful opportunities, greater long-term shareholder value on that site, and it’s very meaningful for us as we move forward. So that’s just where we’re at right now.

Good enough. Thank you.

I will take our next question from David Anders in Merrill Lynch.

Great. Thank you very much. Just, Paul just so I have it straight, so South Coast did continue to opt third quarter, but the share count adjustment doesn’t happen until the fourth quarter. Is that correct?

Well, the share count adjustment will happen when the share transaction occurs. And so, since we don’t know that point in time, we haven’t adjusted for that. It could happen, honestly, any time between now and the end of September, unless it’s ended by both parties.

Okay. And then, just if somebody could comment a little bit on the one property we haven’t talked about, which is Treasure Chest. Give us a little color on how that property is faring as competition slowly comes on line in that kind of Gulf Coast.

Well, today Treasure Chest continues to perform at very high levels, and we’re not seeing any deterioration of the business there. Everything seems to be holding up fine. In late August, I believe, when the Beau Rivage reopens, and some other competition comes on in the Gulf Coast area, we’ll see what happens. We don’t expect there to be much deterioration going forward. There’s still tremendous construction activity and recovery activity, going on in the New Orleans market, so we’re pleased with the business today, and we expect it to continue in the future.

Okay. Thank you.

I will take our next question from Grant Garson, Georgia Bank.

It’s actually Bill Lerner, guys. So we can gauge how successful North Coast, or other developments for that matter, may be, you could give us a little bit of color behind when you arrived at the decision to sell South Coast? In other words, did you disagree with the scope initially, as you were in the process of buying Coast? Or did it look promising and then was shocking for some reason?

Well, I don’t think it was either of those, Bill. I think Paul kind of described the transaction as a series of events, as we look at--and you can repeat it, but I think it has been described, I think as you look at North Las Vegas, I think it’s a separate issue, and it’s a new opportunity for us and a new market that we don’t have representation in right now. You look three years into the future and the number of rooftops we believe that will be built out there three years from now, by the time we get that property developed and designed and built and opened, we have a lot of confidence in what will occur in North Las Vegas. But the South Coast transaction was just a transaction that came up, and the business judgment was made.

I hear you. I’m just trying to get to when, it became sort of decision that made more sense to get rid of the property and do something strategic. So initially, were you kind of against the scope, that’s really what I was after?

No, I don’t think that initially when the merger occurred, back a couple of years ago, and we inherited the project along with Coast, we knew what the scope of the project was, we approved an additional hotel tower, and we’ve been part of it all the way along. It’s a confluence of events, where Michael came to us, and we took a look at the proposition on the table, and the value associated with it, and what its short-term implications were, and the longer-term implications, and thought it was the right transaction at the right time for the company.

Yeah, I mean, Bill, from the standpoint of South Coast, I mean clearly, none of us can say that it met our expectations out of the box. I mean, time will just be able to tell what ultimately that property can do, but I, from the standpoint of our decision to move forward with this transaction, obviously, is a commentary on where we see it over the course of the next few years.

Okay, what happens with the customer database? How does that work going forward with Michael?

The customer database that is relevant to South Coast will be split off and will be left at South Coast. The rest of the Coast database remains as part of the company, as well as all the intellectual property associated with the original Coast transition. So we retain all the rights and title of interest of all those things we acquired as part of the merger.

Okay, thank you.

Sure.

I’ll take our next question from Larry Klatzkin of Jefferies and Company.

Just a—sorry guys.

Hey, Larry, you only get to call in three times. This is it.

No, actually, the question I was asking was the Treasure Chest trends, and my esteemed colleague kind of beat me to it.

Fair enough. Next question, operator.

We have a question from Jeremy Cogan at Banc of America Securities.

Just a quick follow-up just on Echelon. Paul, if I heard correctly, we could get another update at some point in terms of where everything stands, design, et cetera. Would that happen, possibly by the analyst day, let’s say, that you’re hosting at Borgata later in August, and will it happen before the transaction related to South Coast that we’re talking about?

Well, it will certainly happen before the closing of the transaction related to South Coast, which isn’t expected to be before the end of the year. Whether or not it is before the stock sale portion of the South Coast transaction, I just don’t know. Clearly, we could be in a position to sell those shares or some microshares very quickly, and so clearly we wouldn’t be in a position to have more detail around Echelon at that point in time. You know, relative to the Borgata event, we’ve always tried to be very transparent with everybody on the street, and if we’re in a position where we can give more color, we absolutely will.

Okay.

And I’m showing no questions at this time. I’ll turn the call over to Mr. Keith Smith for closing remarks.

All right, I want to thank everybody for their participation and your questions, and enjoy the rest of your day. Thank you.

[Operator instructions]