Boyd Gaming Corp (BYD) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2007 Boyd Gaming earnings conference call. My name is Lauren, and I will be your coordinator for today. At this time all participants are in listen only mode. We will conduct a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this call is being recorded for replay purposes.

I'd now like to turn the presentation over to your host for today's call Mr. Keith Smith, President, Chief Operating Officer.

Thank you operator. Good morning everyone and welcome to our second quarter conference call. Joining me on the call is Paul Chakmak, our Executive Vice President, Chief Financial Officer and Treasurer. Also joining me today is Bill Boyd, our Chairman and Chief Executive 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 2007, our expansion and development projects and other market business and property trends that are forward looking statements within the Private Securities Litigation Reform Act. 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 at any forward looking statements as a result of certain risks and uncertainties, including but not limited, to those noted in our earnings release, our periodic reports and our other filings with the SEC.

I would also like to remind everyone that during our call today we will make reference to nonGAAP financial measures. For complete reconciliation of historical nonGAAP to GAAP financial measures, please refer to our earnings release-- our earnings press release and our Form 8K furnished to the SEC today, both of which are available in the investor section of our website at boydgaming.com. We do not provide a reconciliation of forward looking measures due to our inability to project special charges and certain expenses including preopening expenses. Finally, as a reminder we are broadcasting this call on our website at boydgaming.com and streetevents.com.

Given the nature of our announcement last week, we thought we'd start our call off a little different this quarter. As I mentioned in the opening Paul and I are joined this morning by Bill Boyd, our Chairman and Chief Executive Officer, and effective at the end of this year, our new Executive Chairman. So it is with great honor that I turn this call over to Bill Boyd.

Thank you Keith, good morning everybody. Thank you for joining us this morning. On the heel of our announcement last week regarding on Keith's well deserved promotion and my new role in the Company, I wanted to take just a few moments to provide some background on my decision to transition from Chief Executive Officer to Executive Chairman. Some of you may be familiar with the term Executive Chairman. It is far more than the leader of the Board of Directors. He is an active Senior Executive and leader who remains deeply involved in the operations, the vision and strategy of the Company. Sometimes this type of transition is seen as a prelude to retirement. I want to make it absolutely clear that this is not my intention. I intend to remain actively involved in this Company.

However, I recognize the need to make sure our Company has an established path of leadership succession. That's why on January 1st, 2008, I will transition to the Executive Chairman post, a position that will allow me an opportunity to focus more on our customers and our employees. Our Company culture and success have been built on the close bond we have developed with both of our customers and employees. And in my new role, I will have more time to spend interacting with both. I will remain a member of our Management Committee and obviously will continue to lead our Board of Directors. After 32 years as President or CEO, my decision to turn over the CEO's role is a bittersweet moment for me. But I could not be happier or more excited to turn over this job to Keith Smith.

As many of you know Keith has been with our Company for 17 years and has been involved with the growth and direction of the Company over that period of time from going public in 1993 to last year's announcement of our Echelon project, Keith has played a key role in our success. Over that time he has demonstrated considerable skill and vision as a Senior Executive and leader. Just as importantly, Keith understands and supports the special culture that has defined and differentiated Boyd Gaming over the last 30 plus years, making this Company such a special place to work and play. For these reasons, I have every confidence that he is the right person to take our Company to the next level.

I am also pleased that Paul Chakmak will be succeeding Keith as Chief Operating Officer. Since joining our Company in 2004, Paul has quickly established himself as a valuable member of our Senior Management team. The familiarity with our Company and our industry make him an ideal candidate to follow Keith as our Chief Operating Officer. We have been fortunate to have an extremely talented and stable Senior Management team that has been with us for many years guiding our Company. As we move forward with an exciting new chapter in our Company's history, I have the utmost confidence that under the direction of this Management team, Boyd Gaming will be in good hands for many years to come. Thank you for your time this morning and now I would like to hand the call back over to Keith.

Thanks, Bill. Now, let's get into the second quarter. Earlier this morning we released our second quarter results which were within the boundaries of our guidance for the quarter. We are encouraged to report that the Las Vegas Locals market has begun to fully absorb the significant capacity increases that came on line last year, and we're beginning to see real growth in revenues and EBITDA from our Las Vegas Locals properties. In our Midwest and South region, our properties performed in line with our expectations. And in Atlantic City, Borgata continues to be the market leader in revenue and profitability. In recently opened Philadelphia slot parlors have expanded gaming supply and created a more competitive and challenging environment in the Atlantic City market. However we continue to have tremendous confidence in the Borgata brand and Atlantic City marketplace. We look forward to the opening of the Water Club to further expand Borgata's reach of the destination-- as the destination.

Now I would like to talk a few minutes talking about the progress we're making on each one of our current growth initiatives. In Atlantic City, the Water Club will introduce the unique brand of hospitality in the market and it will elevate the Borgata experience. And we recently topped off the hotel and are well into the final phase of the construction. The project remains on budget and we anticipate opening early next year. The Water Club will be a boutique hotel featuring 800 finely appointed guest rooms and suites, the spectacular spa in the sky, 18,000 square feet of meeting space, five indoor and outdoor pools and six retail shops. We are excited to open this outstanding new facility which will compliment our recent public space expansion. The Water Club will continue Borgata's effort in redefining Atlantic City as a travel destination by introducing a new and unique hotel experience to the market.

At Blue Chip, construction is well underway on our $130 million expansion project that will add 300 new guest rooms, a spa and fitness center, additional meeting and event space, new dining and night life experiences and a new porte cochere. Once our hotel project is complete late next year we will be able to deliver on our vision of providing a more upscale offering to continue to attract customers from more distant markets. New competition will be coming on line in the next few days but we remain confident the expanded Blue Chip will offer the kind of amenities and provide a level of service we need to maintain and grow our business.

In South Florida, we continue to work on our plans for the addition of a casino and other amenities at our Dania operation. Given the early results of the recently opened facilities, we are taking additional time to understand the dynamics of the market place and define what elements are required to deliver the best overall experience for attracting our target customer. We are committed to design a property that can effectively compete with the successful operation in the market today. Once we have finalized our design plans we will announce a more definitive scope and time line. Although this process is taking more time than we originally expected, I want to emphasize that we remain optimistic about the South Florida market.

As for our Echelon development on the Las Vegas strip, many of you know that we recently broke ground on this exciting project. During the quarter we also announced design and development plans for the Mondrian and Delano hotels at Echelon. We see Echelon as a tremendous long term growth opportunity for our Company, a project that will be well positioned to benefit from the continued growth and upscale leisure and business travel to Las Vegas.

Moving on to our branding initiative. We continue to make progress in this area we look forward to beginning the roll out of this program in the fourth quarter. As we have previously discussed, our branding initiative will position our individual properties as part of a larger network creating additional synergies and further leveraging our highly regarded blend of gaming, excitement and personal service. Our goal is to reward and build customer loyalty, drive cross property visitation and offer the ability to seamlessly earn and redeem rewards at any Boyd property. As I mentioned on our last earnings call our focus is on improving our operating performance, rolling out our new branding initiative, executing on our existing growth initiatives and continuing to look for attractive growth opportunities to expand the Company. Our focus hasn't changed and I believe we're-- we've made significant progress in each of these areas.

We've shown improvement in our operating results in a highly competitive Las Vegas Locals market and in the Midwest and South region. In Atlantic City we continue to achieve market leading results and to refine our operations in preparation for the opening of the Water Club. We continue to execute on our existing growth initiatives and make good progress on our major projects. We main focused on completing them on time and on budget. We have made considerable progress on our new branding initiative and I look forward to sharing more details with you when we begin the phase roll out in the fourth quarter. And most important, I believe the successful execution of these strategies will allow us to continue to expand the Company's already strong operating foundation and enable us to drive greater shareholder value. Now I'd like to turn the call over to Paul Chakmak, our Chief Financial Officer. Paul?

Thanks Keith. Hello, everybody. As we reflect on the second quarter, we're pleased to see results that were not only in line with our expectations but also were achieved in a manner where virtually every property pulled its own weight. For the first time since the recent capacity increase in the Las Vegas Locals market, all four of our major Las Vegas Locals properties are performing above their prior year levels. Given the magnitude of development in the Las Vegas metropolitan area over the next five years, we believe these properties will continue to show outstanding growth and return. Our downtown Las Vegas properties have once again exceeded expectations as they delivered results that matched 2006 levels. In addition we have also continued to gain market share year-over-year.

Though our Midwest and South Region was down from last year, it is mainly attributable to the normalization of Treasure Chest. As expected Treasure Chest performed at a level well below the 2006 results with EBITDA falling off by nearly 45%. But to keep this in perspective, the property is still performing over 60% better than it did in the second quarter of 2005 before the effects of Hurricane Katrina. As we have now seen three consecutive quarters of stable EBITDA from Treasure Chest, we believe that the near to mid-term EBITDA will continue to run at its current levels.

Aside from Treasure Chest decline we did see positive results in several of our other Midwest and South properties. In particular, our Tunica and Shreveport operations have shown significant improvement over their respective Q2 2006 results. On a combined basis, these two properties outperformed their prior year EBITDAs by over 40%. These improvements directly resulted from our ability both to identify opportunities and to execute strategies that allow us to capitalize on the current marketplace.

Finally in the Midwest, business remains stable when compared to the prior year. The second quarter saw Borgata continue it's dominance of the Atlantic City market. On a year-over-year basis, Borgata has seen a 3% gain in gaming revenue and 11.5% gain in nongaming revenue and 1.3 percentage point gain in overall market fair. Unfortunately, the combination of increased regional competition and fixed expenses related to the public space expansion are muting the performance of the property. Our share of second quarter operating income from Borgata was 12% less than it was a year ago. Although we are paying considerable amount of attention to the near term results there, we remain long term focused. It's our view that we must continue to operate the property at the highest service levels and maintain competitive promotions for our top tier customers. We are confident that this near term strategy will yield the highest long term results as the promotional environment returns to normal levels and the opening of the Water Club allows us to capitalize on the public space expansion.

On May 24th, we closed on our new $4 billion revolving credit facility. This new financing will not only fund the majority of our growth pipeline but it will also do so at extremely attractive rates. Current pricing out of the new facility is set at LIBOR plus 100 basis points for the balance of the year.

Before we move into the guidance part of the call let me briefly address three key assumptions within our forecast. First, as the Four Wind Casino is coming on line this quarter, we have assumed a reduction in EBITDA from Blue Chip. It has been our experience that the EBITDA impact is greatest during the trial phase of a new competitive entrant into the market. As such we are conservatively forecasting a reduction of $0.04 to $0.05 per share in the third quarter compared to current levels. Second, although we have made substantial refinements to Borgata's operations over the last year, we do not anticipate that those improvements will be enough to offset the current competitive environment in the region. We are therefore forecasting that third quarter results from Borgata will mirror those from the third quarter of 2006.

Finally, as you are all aware, the hold harmless tax provision in Illinois effectively sunset on June 30th of this past year. In the absence of further direction from the Illinois Legislature, we are projecting third quarter EBITDA as if the sunset remains in place. With those factors in mind, for the third quarter 2007, we're estimating adjusted earnings per share from continuing operations to range between $0.40 and $0.45. And the comparable adjusted EBITDA to be between $140 million and $150 million. Operator, at this time, we'd be happy to take some questions.

(OPERATOR INSTRUCTIONS) And your first question comes from the line of Larry Klatzkin with Jefferies.

Hey guys, congratulations Keith and Paul. Couldn't happen to nicer guys.

Thank you Larry.

Couple of questions, one can you just give us a little direction on just depreciation and Corporate expense going forward and maybe CapEx for the rest of this year and next year?

On the Corporate expense side, you saw that we were down a bit in the second quarter over the first quarter Larry, but still about $1 million ahead of last year. If you just kind of look at the seasonality in that particular line item, the second quarter historically is our lowest number that we post. I think a couple of quarters ago, we gave some views on where we saw Corporate expense for the full year and that number, I believe was closer to the $50 million mark at the time. I would say for the third and fourth quarter you should expect it to run about $200 million ahead of last year's levels.

Okay great. And then depreciation?

Depreciation in what you're seeing is going to be basically fairly constant for the balance of the year. So I think what you're seeing currently is a good approximation for the rest of the year quarterly.

Perfect, and then the last thing is CapEx the rest of this year, I know it's a profit number, but just what we might think about for next year with that (inaudible)?

I think we're not ready to come out with the '08 numbers yet as we're still refining kind of where we see the spend '08, '09 and '10 on Echelon. Previous direction on CapEx for Blue Chip in '07 was $50 million, that's still a good number for the full year. Previous guidance on Echelon was $180 million for the full year, that's still a good number and maintenance CapEx was I believe $115 million and that's still a good number.

Okay perfect. As far as I-- the Echelon land originally was with the Harrah's land in the back, you're going to stockpile, and you kind of reconfigured the land. Can you talk about that and what kind of opportunity it might present for you with some free land on the strip?

Well as-- once we acquired that land you're right, we did reposition the buildings associated with Echelon on the overall site. That left us with 22 acres of land that we are not developing in the initial phase of Echelon. There's a 16 acre parcel on the strip just to the north of the development and obviously contiguous to the overall Echelon, and there's another six acres on the back of the site that will be held for the future as well. We haven't made any determination at this point in time exactly what we'll do with either of those parcels. The six acres lends itself very readily to further expansion of the complex. The 16 acres is certainly of enough size to accommodate another hotel casino.

Would be fair to say you have all your profits from Barbary Coast in the 16 acres, is that correct?

I'm sorry, say that again Larry.

Profits for the Barbary Coast is all embedded in the 16 acres?

Well, the Barbary Coast deferred gain, if you will, is really embedded in the entire 24 acres that we acquired of which the 16 represents certainly a portion of that.

So, you probably wouldn't look to sell that out right but would you be adverse to having another gaming company develop that for you or even swap that for someone else's casino elsewhere in the country?

Well Larry, this is Keith. As Paul said, we haven't really developed a strategy for that, for that 16 acres. We look at it as our-- another great development site on the strip and something that we look forward to dealing with in the future. Right now we're simply focused on building out Echelon and completing that project. So we haven't given it any further thought.

All right. Well thank you, guys. I think that is an opportunity for you.

Thanks. Next caller.

Your next question comes from the line of Felicia Hendricks with Lehman Brothers.

Hi, good morning guys. Few questions, you mentioned and we've seen in the numbers, that Las Vegas Locals market is beginning to absorb some of the supply. I'm just wondering do you think and if so, maybe you can give us some timing of when we-- when you might be able to get EBITDA margins back to the levels they were prior to the new supply that came into the market? And then moving-- well lets answer that and I'll ask the next question after.

Sure. We're focused on increasing EBITDA to either match or exceed last year's levels or the prior levels, and we're making good progress on that. We're-- (inaudible) focused on the actual margin and more focused on the absolute dollar amounts in terms of increasing our profitability at those properties. The marketing in the-- in Las Vegas Locals market is a little more enhanced or a little more aggressive than it was, and so that's going to continue to impact margins a little bit. But we are seeing-- beginning to see good growth and profitability in EBITDA.

Okay great. And then in Atlantic City, you've all talked in the past about being able to take advantage of the property's balance sheet and perhaps levering up on that again. Is what's happening in this environment at all changing your strategy there?

No not necessarily Felicia. I mean obviously the debt markets have changed pretty materially over the course of the last month or so. Our assumptions at any sort of recapitalization at Borgata had never assumed the types of leverage levels that some of the buy out activity has been done at. And certainly there is some, as I said, disruption in the market but things don't last forever either, for good or for bad. And we have plenty of flexibility today and we'll just look to take advantage of those things as the opportunities open up. We've always said that we were very focused on completing the Water Club and having it open and being able to fully maximize the cash flow of the property in it's fully expanded phase.

Okay and actually as a segue on from that question. As I just look at your overall corporate balance sheet and the borrowings that you have over the second half of the year which we're not estimating to be that significant, but more into next year. How is the current environment effecting your thoughts there in terms of future financing?

Well we've always been very opportunistic. Having a $4 billion revolving credit facility allows us to be very opportunistic even further, and at pricings it is as aggressive certainly as any of our competitors in this market. And as we look out from a CapEx standpoint, CapEx will continue to build at Echelon '08, greater in '09, greatest in '10. And it gives us a significant capacity really to come to the market when we feel that market is most receptive for us. We have $900 million of subordinated debt as well that all have interest rates below 8% and that again positions us quite well for the future.

All right. Thanks so much.

Your next question comes from the line of Joe Greff with Bear Stearns.

Hi, gentlemen. Paul you'd given us sort of an anticipated impact from the (inaudible) Blue Chip. What does that translate into year-over-year EBITDA the clients for the third quarter?

Well, Joe, as you know, we haven't-- we don't have numbers out quarterly for Blue Chip. But I think from the standpoint of earnings per share per $0.01, as I've said in the past, every $0.01 is about $1.4 million EBITDA.

That's helpful. Thank you.

Your next question comes from the line of James Hardiman with FTN Midwest Securities.

Good afternoon. Couple, couple of brief questions here. First in terms of Echelon place, obviously it's pretty early, I'm assuming that you haven't seen anything in terms of labor or raw material cost that would make you revise any of your overall project cost or timing estimates. But what are you seeing, how are those-- how are those line items trending at this point versus sort of last year, the last few months? Where are those numbers trending?

I think you're right it is too early to comment on that. We're actually quite comfortable with the construction market here and where the labor supply is and where our budgets are in relation to all those items. So it's a little pre-- a little premature to be making any further comment on that. We're comfortable with our budget at this point.

Okay fair enough. Talk a little bit about the promotional environment in Atlantic City. Obviously it's a difficult market, obviously there are a number of other properties coming on line in Pennsylvania. Is there any light at the end of the tunnel in terms of promotions going on in Atlantic City and I guess as it sort relates to that from an EBITDA perspective, obviously Water Club is going-- it's going to draw the top line to some degree. Talk a little bit about what you think the Water Club is going to do to your profitability or your margins as that opens up?

Maybe to start at the end, we're not, we're not in the position to give estimates or forecasts on how the Water Club is going to impact that. So going back to the top of your question, the promotion environment in Atlantic City is aggressive. It is driven a lot by the slot parlors that have opened in Philadelphia that are now generating some $60 million a month in gaming revenue. And those facilities are actually increasing their promotions, they report those on a weekly basis, and promotional allowances in that market have been increasing recently as the competitors there are doing more.

That does impact Atlantic city. And you see many of the competitors in Atlantic City ramping up their promotional efforts. We have tried to stay out of that fight. I think our marketing expenses year-to-year are generally flat for the quarter, we've tried not to get in the middle of that. And frankly there is some good new in the Borgata results, when you cut through all the numbers, you'll see that our table games dropped for the quarter, it's up significantly some 9% and you'll see that table games win is also up while the market is down. We did not hold well this quarter, and I think on a hold adjusted basis, there's some $3 million that would flow to the bottom line. That would frankly make up the difference between this years EBITDA and last years EBITDA. Additionally we are fighting the fixed cost from the recent public space expansion and property taxes and property insurance and utilities alone, there's some $6 million in fixed cost on a quarterly basis. So you have to take that into account when you're looking at Atlantic City's results.

Great. And then one final question, similar question I guess in the Las Vegas Locals market. You touched on the idea that promotions are a little bit more, a little bit more enhanced than they have been. Talk about how you, how you see your role in that market promotionally. Are you leading the pack? Are you trying to match what others are out there maybe leading the pack doing. Or do you just need to be essentially within shouting distance of what some of your competitors are doing?

Well I wouldn't say that we're leading the pack, I think that we're running, running the properties the way we see best to run them and market them. Our properties are different than some of our competitors properties, they have different strengths and weaknesses. Different things to offer, and so our promotions are slightly different. We're not leading the market. Are we reacting to the market? Well we're paying attention to the market and adjusting accordingly. We are focused on running a profitable business, so we're not going to run promotions that don't bring profit to the bottom line. But we are managing the business daily, and paying attention to what's going on in the market place.

Okay, great. Thanks guys.

Your next question comes from the line of Dennis Forst with KeyBanc.

Yes good morning and congratulations you guys. I had a couple of questions. First about the Locals market. I saw that the unemployment rate in Las Vegas in June had ratcheted up to the highest level I've seen in a year or two, it was about 4.7%. Can you maybe comment on that first of all?

Well I think part of unemployment and what factors into those numbers is some level of seasonality as businesses do adjust across the board as it relate to the season. I think you've seen obviously a pretty significant pull back in the home building sector in Las Vegas and certainly other major cities in the west. As a result of current market conditions and I would estimate that that would have certainly a meaningful impact to that overall number.

But so far really, you haven't seen it in your major properties in Vegas, Paul?

No not at all Dennis. And I think finding high quality employees continues to be something that we're focused on every day. And certainly the availability of jobs. Whether they're in the service business or in the construction industry which is obviously primarily on the strip these days here in Las Vegas are important factors to running successful businesses. I think the flip side of this is it has certainly ease any sort of fear that anybody would have on the labor crunch and the construction (inaudible) today.

Okay. And then also on the Local side, you said you picked up a little market share in the second quarter? In the Locals market?

I didn't make any comment about market share in the Locals market. The comment on upside and share was both downtown and in Atlantic City.

Downtown okay. Good. And then secondly on Borgata, the margins have certainly been compressed with the competition and the even the fixed cost related to the nongaming that opened up last year. Are we going to continue to see EBITDA margins around the high, actually mid-to high 20s or can they get back into the 30s once you open Water Tower?

Well, I think as Paul indicated on his guidance, what we're looking from Borgata over the next several quarters are results similar to last year's levels. As we get into the Water Club, the dynamics of that addition an 800 room hotel will change the margin structure of the property structure of that property. And once again, we haven't gotten to the point of giving guidance on where the numbers are. But you're opening 800 rooms without any other food and beverage facilities or any other high, high cost or low margin businesses. So quite naturally you'd expect that to probably drive them up a little bit from where they are today.

And then I wanted to ask what the Company's posture is on share repurchases. Do you have an authorization? What 's the philosophy on doing given what's going on in the market today?

Well, we have an authorization, Dennis, that we've had in place for some time. It's-- there's a million shares left under that authorization. Certainly that could be adjusted with the direction of the Board. We obviously took advantage of the ability to rebuy significant block this time last year when there was a secondary offering by a major shareholder. And we'll continue to look at those types of opportunities based on where we see, where we see value. The flip side is, we have an aggressive growth profile ahead of us and we need to balance out obviously our spending and what ever form it takes.

Okay, good. And then lastly you had mentioned, when you talked about the new $4 billion facility that it's LIBOR plus 100 through the balance of this year. What happens next year?

Well as is typical with revolving credit facilities with banks, it's based off of leverage. The document itself will be filed with our 10Q, so you'll be able to see it. The highest pricing is LIBOR plus 1 5/8.

Okay that 's the worse it could be.

Yes.

Great thanks a lot.

You're welcome.

Your next question comes from the line of Harry Curtis with JPMorgan.

Hi, guys. In addition to recognizing awesome talent, if you could discuss the motives and objectives behind the Management changes?

Well, this is Keith. I think Bill was articulate in his opening comment. He's, I don't want to speak for Bill, he is here on the call. But he's been in the job for 32 years and sees it as a time to turn over the reins but Bill to you want to comment on that?

Sure, we've been-- pardon me since 2000, we've been looking at succession planning in our Company. And it's just a natural point that we've gotten to with my wanting to, after 32 years, to start to do something different on a day-to-day basis and still stay involved with the Company. But, Keith and I had worked closely together in the last seven or eight years, very closely and he's ready to step up to the CEO roll and I'm ready to do something a little different on a day-to-day basis.

Very good, thank you.

Your next question comes from the line of David Katz with CIBC World Markets.

Hi, good morning. Could we spend a couple of minutes on Florida? Just looking at the landscape there, I think it's fair to say most are surprised by what the outcome has been to date. But when we all sit and sort of look at the Seminole facilities and what they are and what their tax basis is relative to what you'll have to work with. Is there really a way to solve this? And is there, is there a point at which the project-- I mean you might sort of decide to go into another direction with the project all together?

Well certainly, the South Florida gaming market has turned out to be a little more complex than most of us or all of us anticipated. You're right, there are examples of some very successful operations down there, in terms of the Seminole operations, they do have a tremendous advantage from a tax perspective which allows them more money in terms of marketing and also the ability maybe to build larger facilities. And the earlier results coming out the [pari-mutual] facilities I think are less than what everybody expected. It's one of the reasons we're taking additional time to make sure that we design and then to build in the right thing.

We still have confidence in the market, we think yes there is a way to solve the problem, that there is a business model that works, that there is a project that you can create in the current tax environment that will produce a return on the investment. And we think we can attract the right gambler to that. It's a little more challenging once again and that's why we're taking additional time. The good news is we are able to study the market at this point, we have the other three competitors who are open and then we have the Seminole Tribe that we can look at to see what's going on down there. So we have the luxury of time right now in terms of studying all this. But we're still confident that we can do up a project that will work and make sense for us.

Okay and just sort of carrying some of those thoughts up to Indiana. Like what are the buttons you can push? I mean, clearly you might be facing some similar issues although perhaps not as extreme., but perhaps they are. I mean what are the buttons that you can push to sort of compete on a, what looks to be an unlevel playing field?

Well, certainly when you add a new competitor to that market, and you add a couple of thousand slot machines in that market. That will be an impact to Blue Chip, I don't think we're going to deny that and it pulls guidance, our guidance at the end of the call indicated that we expect there to be in the short term a hit in any case. We like the fact that it's proximity is close to us. We like the fact that gamblers tend to be superstitious and if they're plain unlucky they'll want to moved to another location, and so we like the fact that it's close.

We like the fact that we've been in the market for quite a long time and we've been able to develop a very loyal following, very loyal customer base. We have established service standards. We provide very good levels of service and our customers like our facility, we have customers that drive past many, many other facilities right now to get to Blue Chip, which gives us the confidence that while many of our customers will go over and visit the new facility that we expect the majority to come back. We know that some will stay, it happens with every opening. It happened here in the Las Vegas Locals market over the last year as some of the competitors opened. And they will visit and they will stay, but we expect a large portion to return to us. So, you're right, they have a competitive advantage in the form of a tax advantage, they could spend a few more dollars on marking. But we can-- we feel like we have a lot of experience in the business operating competitive facilities cross the country and this was nothing different.

Okay. Congratulations, guys.

Thank you.

Your next question comes from the line of Bill Lerner with Deutsche Bank.

Thanks guys. Just on the Locals market. Obviously population migration has got to be a huge driver behind the absorption of that recent supply, but can you guys talk a little bit about same store-- or sorry, not same store but same customer, what's going on there? As it-- were it not for population migration, how would those numbers look? And then I just had a question about Orleans and Gold Coast versus Suncoast and Sam's Town.

Well once again, as the market absorbs the capacity, we're seeing growth in new customers and return of old customers. Once again, we've lost certain customers, specifically at Suncoast who wanted to trade up to a different experience. And we've had many customers return to the Suncoast property after they went and experienced the new competition and then came back and wanted to "come home to the place they were comfortable". We already said the good news was the two facilities were quite dramatically different in they're approach to the customer and the amenities that they offered. And so frankly we're seeing, once again, growth in both areas, both customers returning to us, customers coming back and new customers.

Okay that's fine.Thanks guys.

Your next question comes from the line of Celeste Brown with Morgan Stanley.

Hi guys, good afternoon.

Good afternoon.

Quick question first, Keith on the Borgata, you mentioned that you thought the third quarter and fourth quarter would be similar to last year's number was hit pretty hard for hold in the fourth quarter. So are we talking, I guess last year not adjusted for hold it was $53 million. Is that what you're talking about again for the fourth quarter of this year or would it be the higher number, I think it's closer to 65?

Well, we would expect it to normalized hold. We understand last years third quarter got hit quite significantly by hold and we expect business volumes generally to run in line with last year's business volumes.

Okay. Thank you. And then as you look at interest rates rising, how do you think about them in terms of your own decisions and developing properties? And then how do you think about them in terms of competition in Las Vegas. I know a lot of things are being built with pretty narrow returns. Do you think some of it gets squeezed out as interest rates continue to go up?

Well I mean based on where the debt markets are today, obviously projects that aren't fully financed at this point in time, it probably will have a challenge in getting financing. Though again, I don't expect that rates and markets will continue in their current posture forever. And I think there just take some time for the issues that have kind of been created effectively by the buy side to resolve themselves and in fact the supply demand to balance back out.

Let's keep in mind over the last couple of years we've had an imbalance going the opposite direction and we've very tight credit spreads and we've seen transactions in all sorts of industries be done with structures and including leverage levels and covenant packages as aggressive as we've ever seen ever. And so, there's some practicality to what is happening overall. When we look at returns on our projects we look at them from really a weighted average cost to capital basis, it was obviously we're very focused on our marginal cost to capital being as low as possible. And as in my comments, you can tell Celeste, it is very low today at in the low sixes. And so with that and with a very strong balance sheet, I think we're positioned quite well to take advantage of opportunities that come up.

Great. And then just one final question. I just want to make sure I am understanding clearly on Illinois and how you're thinking about the sunset provision. So you're essentially, what will flow through the numbers is similar to what we've seen in the last two years in terms of way that you're accounting for taxes.

No the-- at Par-A-Dice we were subject to the whole timeless level that was set as revenues actually have come down over the last couple of years at Par-A-Dice given competition in both Iowa and Missouri. And with the sunset of that provision we will just fall to the tiered tax structure that's in place as opposed to the minimum amount. So there was actually a bit of savings for us from a tax stand point at Par-A-dice without that hold harmless provision.

So does that potentially offset some of the higher taxes you're seeing now in Indiana to the property level.

Well sure. I mean it's all fungible obviously. We're just trying to identify particular, that particular item given that Illinois has willing to change it's mind in the past and we're just letting people know that we're not accruing for it at this point in time because the provision doesn't exist.

All right. Okay. I just want to be clear. Thank you so much.

Your next question comes from the line of Adam Steinberg with Morgan Joseph.

Yes hi, guys. Just a couple of real quick questions. Paul, can you break out the $42 million in the growth CapEx between the various projects?

The $42 million in the current quarter?

Yes.

I would say most of it is related to Echelon. Let's say well over half. Blue Chip also accounts for a very meaningful portion of it as we're fully underway with construction there. And then the balance of it, comes back to honestly a number of different projects. We have a pretty substantial upgrade project going on at Sam's Town, Las Vegas right now as well as just some other, I'll call them odds and ends if you will, throughout the Company that are viewed as expansion as opposed to maintenance.

Okay. That's kind of what I was looking at in terms of directionally. Have you guys made a decision on the North Las Vegas site?

No, it's still-- we obviously still own our land out there, we're continuing to monitor that. I think as we said on our last call, we see it as a great way to expand, or continue to expand our Las Vegas Locals franchise. We don't think the market is quite ready for that project. We're waiting for the housing to continue to fill in around the site. So it's obviously still on our radar screen and we think it's just a few years off.

Adam I mean I think from the standpoint of North Las Vegas, we will not get out ahead of the market and out ahead of the population. With that said, it's a high growth area but giving housing development in this city, obviously the timing of building a new property in that area has to be monitored constantly and addressed at the appropriate time.

Okay. And then are you tracking in Dade County polls on how the voters feel about putting slot machines at those [pari-mutuals]?

We track them just like you do.

Does that factor into your eventual decisions on that property?

No, I think given our location which is quite central to Fort Lauderdale, itself, and probably the most-- really the most central of any of the four, our direction and pull was never really focused on markets dramatically further to the south.

Okay but you are--that is also the furthest south though of the four in Broward County?

Ours is not. Ours-- actually Gulf Stream and Mardi Gras are further south of us.

Okay. And then are there certain time lines, is this part of the sales agreement, there's certain time lines or dates that will need to be met with regard to any potential development there?

I'm sorry, with respect to Dania?

Yes.

No, no there's no time constraints.

Okay and then the last question I'll let you go is-- are you hearing anything on South Point and the third tower there?

No, we don't have any, don't have any information that we can share with that, or on that.

Okay. Thank you.

And your last question is a follow up from the line of Larry Klatzkin from Jefferies.

Hey, guys. Let's follow up on Florida. So I was expecting (inaudible) in the fourth quarter of '08 is when you may hope to open Florida. Should we moving that backward?

Yes, clearly the fact that we're still kind of in-- studying the market, making sure that of what it is that we want to build. I think that we would not get in construction until some time the first half of next year. And if you look at a 12 to 18 month construction timeline for any sort of a project, you're into '09, well into '09.

All right so what's (having followed your sight) though is the latter part of '09 really?

Probably.

All right, all right. Thank you very much. That was the only question.

This conclude our Q&A session. I'll now turn the call back to with Mr. Smith for closing remarks.

Well thank you. Thank you for joining us this morning and we look forward to speaking to you again next quarter. Have a good day.

This concludes the presentation. You may now disconnect, and have a great day.