Boyd Gaming Corp (BYD) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the fourth quarter 2007 Boyd Gaming earnings conference call. My name is Cerita, and I'll be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Keith Smith, President and Chief Executive Officer. You may proceed.

Thank you, operator. And good morning, everyone. Welcome to our fourth quarter conference call. Joining me on the call is this morning is Paul Chakmak, our Executive Vice President and Chief Operating Officer, and our new Senior Vice President, and Chief Financial Officer, Josh Hirsberg.

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 the first quarter 2008, 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 in 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 other filings with the SEC. I would also like to remind everyone that during our call today, we will make reference to non-GAAP financial measures. For complete reconciliation of historical non-GAAP to GAAP financial measures, please refer to our earnings press release and our Form 8K furnished to the SEC today, both of which are available in the investor's section at 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.

Earlier this morning we released our fourth quarter results. These results were in line with consensus estimates as well as our guidance. We were especially encouraged by the resiliency demonstrated in our Las Vegas locals business as it posted its third straight quarter of adjusted EBITDA growth. And we are were similarly pleased that four of our six Midwest and South properties recorded fourth quarter increases of adjusted EBITDA. As we pointed out in our press release, our Midwest and South region was materially impacted by Blue Chip's performance. Blue Chip experienced continued pressure from an increasingly competitive market, construction disruption that is expected to subside by the end of the summer and to a lesser extent adverse weather during the quarter. Paul will provide some color on our results in a few moments. While we were able to meet expectation for the fourth quarter, we began to experience some softness or weakness in the business that began in late November and continued into January. Fortunately we're seeing some positive trends in February and remain cautiously optimistic that the recent trends will continue through the remainder of the first quarter.

Now I'd like to spend a few minutes updating you on the progress we're making on our development projects. In Atlantic City, Borgata is in the final stages of the construction of The Water Club. We're installing furniture up through the 30th floor, while we complete the finishing work on the higher levels. The Water Club, which will feature five swimming pools and a spa in the sky, was conceived as an exclusive extension to the sophisticated and international style that already defines Borgata. This signature hotel will offer a serenely cosmopolitan setting blending high design and modern amenities within an intimate and highly personalized guest experience that will be unrivaled by any other property in the Atlantic City marketplace. We're excited to unveil this magnificent property and we remain on track for a June opening, just in time to catch the busy summer season. Our $130 million expansion of Blue Chip in Michigan City remains on schedule for an opening this December.

As most of you already know, this development project will add a dramatic 22 story hotel tower that will include 300 new upscale guest rooms, a spa and fitness center, additional meeting and event space, new dining and night life experiences and a new porte cochere. Our biggest challenge during the fourth quarter was the business disruption caused by the rerouting of the main entrance as we began to construct this new porte cochere. We expect this disruption to continue through September of this year the new porte cochere will be completed. We are excited about our expansion projects to Blue Chip and we believe the new additions will help us to compete more effectively.

With respect to Dania Jai Alai in South Florida, we've decided to postpone that redevelopment of the property at this time. There are a number of considerations that factored into our decision. First, the continued poor performance of Broward County casinos producing win per unit numbers well below our expectations. Second, the introduction of class three slot machines and the addition of table games at the nearby Native American casino. Third, the pending introduction of gaming in Miami Dade county which will add unneeded capacity to an already competitive environment. And lastly, the introduction of legislation that will allow for VLTs at all pari mutuel facilities in the state of Florida, and all of this is compounded by a prohibitively high tax rate for the pari mutuel slot operators.

We're not closing the door on the development at Dania, we still believe south Florida could be an attractive market under the right circumstances. If and when these conditions change, we'll take a second look at redevelopment Dania, but it simply does not make good business sense to move forward with the project at this time. In the meantime, it's business as usual at Dania and we'll continue to operate our Jai Alai facility there.

Moving to the Las Vegas strip. Construction on our Echelon development continues to advance as foundation work is nearly complete on our wholly owned hotels, which include Hotel Echelon, The Enclave and Shangri-La Las Vegas. We expect to begin erecting steel in April. Work on the Delano and Mondrian is scheduled to begin in the second quarter. We remain on budget and on schedule for a third quarter of 2010 opening.

As I said in my opening comments, there is no question these are challenging times. And as we move forward in 2008 we will remain focused on our three main goals: improving our operating performance, continuing to execute on our current growth opportunities, and rolling out our branding initiatives. Now I'd like to turn the call over to Paul Chakmak, our Chief Operating Officer. Paul.

Thanks, Keith, and hello, everybody. Before I review our quarterly performance I would like to begin with an update on the branding initiative. We successfully launched the first phase of our nationwide consolidated players club program on January 14. Our goal is to build and reward customer loyalty, drive cross-property visitation and offer the ability to seamlessly earn and redeem rewards at our properties across the country. In this phase, which was effective last month, our four primary Las Vegas local casinos, Sam's Town, Suncoast, The Orleans and Gold Coast, were unified under our new Club Coast Players card program.

For the first time, our Club Coast members are rewarded for their play based on a tiered card system. Guests qualify for one of three tiers, each offering an increasingly attractive series of services and benefits. The program also allows guests the opportunity to earn and redeem points at any Club Coast property with a single card, enhancing reward options for our players.

The introduction of our new players program in Las Vegas is the first stage of the nationwide rollout. We plan to connect the Club Coast card to our Player's Gold program at our downtown Las Vegas properties and our new Be Connected rewards program in our Midwest and South region. Once the rollout is complete, players will be able to use their cards at Boyd Gaming properties in Nevada, Illinois, Indiana, Louisiana and Mississippi. The next phase will roll out in our Midwest and South region and is expected to be completed in the second quarter of 2008.

In reviewing the fourth quarter it's important to separate the results from the trends. As Keith stated earlier, there were some positives for the quarter but by and large weakness that developed in the second half of the fourth quarter has carried into January, and to a lesser extent, February.

Now let's discuss results from each of our operating segments. In spite of a 2% decline in revenue, we were able to achieve our third consecutive quarter of year-over-year EBITDA growth in the Las Vegas locals market. The EBITDA growth was once again attributable to the management initiatives we implemented earlier in the year, which yielded a year-over-year margin improvement in excess of 150 basis points for the fourth quarter. Given the current operating environment we did not expect growth in EBITDA and EBITDA margin to continue at this pace for the first quarter.

Moving to downtown Las Vegas. Fourth quarter adjusted EBITDA was down $2.4 million or 13.8% from prior year results. The decline was due to a combination of decreased gaming revenues as well as increased losses at our Hawaiian charter business. The decline in the Midwest and South's EBITDA was almost entirely attributable to Blue Chip. The combination of aggressive competition and promotions as well as construction disruption and inclement weather drove Blue Chip's EBITDA down 55% or $13 million from prior year results. This was in line with what we estimated on our last call. We expect the same dynamics at work last quarter to continue in the current quarter. We aren't sitting idle. Quite to the contrary, as we're refining and adjusting our operations to meet the current challenges head on.

With our new expansion slated to open in December we believe Blue Chip will become a true regional destination. In light of the decline at Blue Chip it's clear to see how well our other Midwest and South properties are performing as collectively the group increased adjusted EBITDA nearly $7 million for the quarter. It's during times like this that the value of our geographic diversity becomes clear. The effects of competition and economy were also evident during the fourth quarter in Atlantic City, where, excluding Borgata, gaming revenue for the market experienced a shortfall of 10.6% from prior year results. These declines were mainly attributable to new competition in Pennsylvania.

Despite the decline for the total market, Borgata grew gaming revenue by 3.7% and increased market share from 14.1% to 16% over the prior year. Borgata maintained its top spot in the Atlantic City market for the 2007 fourth quarter, leading in virtually all gaming related areas. Its operating income and operating margins matched prior year levels. The property remains positioned as the premier gaming resort on the East Coast and will continue to assert its dominance with the opening of The Water Club in June. Although we cannot control the macroeconomic outlook for the future, we can focus on what we do best, running our properties efficiently and, most importantly, providing our customers the high levels of customer service and outstanding entertainment experiences they associate with our brands.

As this is the first call for 2008 we typically provide broader direction on various items in our annual forecast. As we stated on our previous call we're spending a significant amount of capital on the implementation of our One Card and branding initiatives this year. As such, we expect corporate expenses to run $8 million to $10 million in excess of 2007 levels with all of the increased spend occurring in the first half of 2008. Maintenance capital expenditures are expected to be approximately $120 million for 2008. Furthermore, we expect to spend $85 million to finish the hotel at Blue Chip and approximately $850 million on construction at Echelon.

Now let's take a look at the larger below the line items. We expect 2008 depreciation expense to be approximately $175 million. We're projecting cash interest expense at $170 million for the year, of which $50 million will be capitalized.

Nonoperating expense for the Borgata deserves particular attention for the 2008 forecast. First, please note that as The Water Club comes on line at Borgata we will no longer be capitalizing interest on the $400 million we used to construct the project, therefore half of the interest expense associated with the $400 million will flow through our financials under Borgata's nonoperating expense. In addition, as we have now used up the job tax credits we were granted for bringing Borgata into the Atlantic City marketplace, state taxes at the property will shift from a tax benefit to a tax expense. As a result of both of these changes our share of nonoperating expense will increase by approximately $15 million in 2008.

Our share-based compensation for 2008 is projected to mirror our 2007 expense. As you are aware, share-based compensation expense is excluded from our adjusted EBITDA, but is included in our adjusted EPS.

Finally, we're projecting the 2008 tax rate to be 36.5%. With those factors in mind, for the first quarter 2008, we're estimated adjusting EPS from continuing operations to range between $0.30 and $0.35, and that includes an estimated impact at Blue Chip of approximately $0.10 compared to the prior year. We're expecting adjusted EBITDA to range between $127 million and $137 million.

Operator, at this time we'd be happy to take some questions.

(OPERATOR INSTRUCTIONS) Questions will be taken in the order received. (OPERATOR INSTRUCTIONS) And your first question comes from the line of Felicia Hendrix of Lehman Brothers. You may proceed.

Hi, guys. First of all, Keith, you gave us a little bit of a teaser there at the beginning, saying that your starting to see positive trends in February, and I was sitting on the edge of my seat through your whole call trying to hope that you would give us some details on that, so I'm wondering if you can now.

I don't think that we're prepared probably to go into a lot of detail on that. January, as I indicated, continued the softness that we saw in -- that began in November and December and continued into January, and just we're seeing some stronger volumes. We just are seeing some more customers through the door in early February. Don't know if that's going to continue. The first three weeks of February are looking good and as I said we're cautiously optimistic, but we're not prepared to go property by property or give anything further.

Okay. So you would not even talk about region? Because I think Harrah's said on their call this morning that they might be seeing some stabilization in Atlantic City, so I was wondering it if it was coming from AC or the centrals region or the locals market.

No; frankly, Felicia, it's fairly broad-based. We're seeing a little bit of rebound across the board, whether it be in Atlantic City where we had a good fourth quarter and we continue to perform well there, or whether it be in the Midwest and South or here in the Las Vegas locals market, so it's not restricted to any one region. It's actually across the board.

Okay. And then yesterday, Pinnacle talked a lot about potentially delaying some projects, given the current credit environment. And at this point it looks like you have plenty of room on your bank line to continue Echelon, but I'm wondering if you have any concerns about continuing to fund that project?

No. I mean, Felicia -- it's Paul. As you know, the total bank line is $4 billion. We gave the details on outstandings at the end of the year, so we've got plenty of capacity under the bank line to support the wholly-owned development we have under way.

Great. And I was just wondering, there is still a piece that you're doing some third party financing for or you're out trying to get financing, I was wondering if you could update us on that.

Sure. And that piece is, in particular, the Morgan's joint venture for the Delano and Mondrian that are part of the overall Echelon development. And we've ramped up our efforts on the capital raising for that project in conjunction with Morgan's Hotel Group, and over the course of the next couple of months we look forward to pulling that together. I mean, as we all know, the markets are much more challenging today than certainly they were six or nine months ago. But with that said, we benefit from a fabulous group of relationship banks that have supported Boyd for the long term. Those banks were part of a very successful syndication of the $4 billion credit facility and are at their anticipated hold levels prior to the market declines, and so as a result of that, we can certainly draw on a lot of resources and firepower that we have.

Great. And then just finally one quick housekeeping. Are you expecting to have any kind of write-off coming from your decision to not go forward in Dania?

We'll certainly be looking at that in the first quarter. We do not have that analysis, which is relatively complicated, fully completed. There is always a possibility of a potential write-down when you change course and enter into a delay like this. The total investment at Dania is just over $80 million. Obviously, there is 47 acres of land that still have significant value as well as really the option associated with the pari mutuel license to have slot gaming at the location. I think the bigger issue comes up to the extent we're required to make the second $75 million payment some time between now and 2010.

Okay. Great. Thanks a lot.

Thank you.

And your next question comes from the line of Larry Klatzkin of Jefferies & Company. You may proceed.

Hey, guys. A couple of questions here. First, on the course of Dania, so at this point in time, you are -- this is something you're continuing doing. You may even spend more money on analysis and everything on that? The way this number is coming in, in Florida I think hit new record highs in the month of February so far.

Yes, Larry, this is Keith. I think we'll continue to monitor it, I don't think we're going to continue to spend a lot more money. I think we've done a fairly thorough analysis of the market. I think the numbers are improving, but still well below what we had modeled out early on and I think well below what anybody expected early in the process. And then when you look at the all of the other factors that have crept up, whether it's once again the enhanced competition from the Native American casino by getting class three slots and table games, or whether you look at the additional capacity that potentially is added in the surrounding counties, the environment isn't right to go forward with the project. There is not a reasonable return on investment you can get on your money at this point.

Yes, Larry, as we've gotten into the high season, you're right, the win per unit numbers have escalated. I think that was to be as expected. I'm sure part of this as well is gaming is now becoming more of a mainstream item in south Florida. With that said, you can't make a business decision based off of a one or two month trend, and frankly, obviously the numbers relative to all of our expectations are still substantially below where our expectations were when everybody went into that market, and frankly do not support a tax rate over 50% based on the capital investment that's required.

Okay. That's fair. As far as could you maybe quantify the cost of weather and construction disruption to you guys? Did you do that kind of analysis, maybe enlighten us?

Well I mean, you always attempt to do the type of analysis around weather and construction. It is much more of an art than a science. What we do know in January in particular, in the Midwest properties, you had significant snowfall on Fridays and Saturdays, which obviously are the biggest days of the week. As opposed to what was a tough winter in -- for the December month as well, albeit the timing was maybe a little bit better than what we expected, but we certainly do not have any specific numbers or details to share with you at this point in time.

All right. That's cool. As far as AC, your January market share number was -- congratulations. What do you see -- are you expecting to keep that kind of share in the market and I assume that -- yes, is that share reasonable to continue?

Well, I think Borgata since its opening has been the premier in the market. And it just goes to show that quality does well in strong economies as well as weaker economies And we continue to do well, the market continues to be very aggressive in spending marketing dollars. We continue to try and stay out of that fray. But we have a very good property there, and we'll continue to operate it the best we can.

All right. Last question. Echelon budget, how much of the -- how much do you have as fixed price at this point, and as far as advanced orders and some materials, how are you?

I don't have those numbers off the top of my head. But it is, as I said on my -- in my comments, progressing on schedule and on budget and we do not have any concerns about that at this point.

All right. Thank you, guys.

Thanks.

And your next question comes from the line of Joe Greff of Bear, Stearns. You may proceed.

Hey, guys. My question relates to the Las Vegas locals market. In the fourth quarter you did a great job on the expense side in growing EBITDA despite the revenue decline, and, Paul, you'd mentioned that pace won't continue in the first quarter here. I was hoping you could give us a sense. maybe factoring in competition throughout 2008, to keep EBITDA margins flat, what sort of revenue, year-over-year revenue change break point, would there be in order for you to keep margins flat? So I guess in other words, if revenues were down say 3% year-over-year, is that a level in which you think margins can stay flat in 2008 relative to 2007?

Joe, that's a tough one. I don't think I have the numbers in front of me to give you any sort of firm correlation on a break-even. I guess I would make the comment and directionally where I was going with the comment about the first quarter was that in fact we are starting to anniversary the efficiencies that we put into the business at some of the properties initially last first quarter and maybe even the very end of 2006, but really fully effectively the first quarter of 2007. So as we anniversary those, we've already seen those efficiencies in the previous year's numbers. As a result we do not have the exponential effect across the board, though there is still some modest benefit at some of the properties we got to later in the program.

And you're right, Joe, I mean given the operating leverage in the business as we all understand it, it is difficult to maintain those margins with declining revenues, so we'll continue to be focused on it as one of our goals this year is to focus on our operating margins, but we do not have the data here to give you a complete answer.

Okay. Another question, an easier one to answer. The construction in progress balance at the end of the quarter?

About -- hold on, Joe. Joe, it's still not a very easy question to answer off the top of my head. $[176] million.

$176 million?

$276 million.

That's it. Thanks, guys.

And your next question comes from the lines of Jane Pedreira of Lehman Brothers. You may proceed.

Hi, good morning, everyone. Just had a couple of questions, on the downtown results, are you seeing difficulty there because of raising -- rising fuel costs, or are you experiencing lower load factors in the jets that you send over to Hawaii?

This is Keith. I think it's a combination of factors. Clearly, fuel continues to be a challenge for us as fuel prices rise, and so that was a challenge for us in most of '07 and continues to be a challenge in early '08. Yields is another issue. The load factors are up, yields are -- there is more competition in the market so we're seeing some issues in yield. But generally speaking, the Hawaiian market remains a strong market for us. I think as big of an impact downtown is weakness on what we call the street or the downtown traffic in general. While we do not get a lot of business off the street, the business we do get is very profitable business for us, kind of walks in the door, and as that business softens up it has a bigger impact on us. So --

Yes, Jane, I think a little more detail we're seeing in Hawaii, since we have people on the ground in Hawaii with our travel agency, and many of our downtown executives spend a significant amount of time in Hawaii with customers and travel agents, is that the Hawaiian economy is benefiting from foreign travel into Hawaii as a result of the lower dollar. That's something we've certainly seen before. So whatever weaknesses occurs in the U.S., going west, is picked up by traffic -- I mean by traffic coming east out of Asia in particular. And so to that point, from a consumer standpoint, we feel good about what's going on with kind of the rank and file, if you will, customers that we have in Hawaii.

Okay. That's good. And then I had just one more question on the One card system that you're developing, are you expensing the cost of that, or is that something you can capitalize, and also are you doing something to add points to the customers' cards as they get the new cards?

Well there is a -- on the point side there is a transition plan, obviously from the old card to the new card, that's already occurred. We already have accruals on the books relative to the different properties that we operate and the different programs that we currently have in place. So that will be -- there'll be no sort of change from a numbers standpoint relative to the expensing of points. And obviously from a development standpoint, we have expensed the appropriate amount of the development of that program. The big part you're seeing in corporate expense as I mentioned in my comments is really the launch cost associated with the programs, not just the basic stuff like printing new cards and putting new brochures, but really getting out there and talking about what is a rather significant change to the reward program that is very consumer oriented, that -- to get the message out as to why Boyd Gaming is different than what it was relative to the programs and why we're different than our competitors.

Okay. And in a way, I would assume that this would enable to increase your market share. Are you seeing any -- I don't want to use the word retaliation, but any sort of counter moves from other competitors out in the Las Vegas locals market?

Well, I mean I think in the Las Vegas locals market, stations have certainly introduced a new program. That's something that we saw after the roll out of our program. With that said, it's probably too early to tell, given it's only been six weeks, as to the impact of our program based on our history.

And certainly the roll out of Station's new program I don't think was in response to what we did. I'm sure it was under development for quite some time. These decisions are quite a while in the making. So I think it was more coincidence than anything else.

Okay. Thank you very much. Appreciate it.

(OPERATOR INSTRUCTIONS) And your next question comes from the line of Dennis Forst of KeyBanc. You may proceed.

Good morning. I just wanted to continue to focus on the locals business. Paul, can you tell us what the market share number was for you in the locals and what it did fourth quarter versus fourth quarter of '06? Do you have a ballpark number for that?

I don't have the market share number here, Dennis, no.

Okay. Just gut feel, did it go up in the quarter? Do you think you got a little bigger share of the market?

I think our feeling is we're making real good progress in the locals business. I think part of it is the refinement of the business overall under one cohesive management team, that's something we've talked about in the past, and I think we've got some very good momentum, albeit in a very, very competitive market with great, great product offerings that our competitors have.

And then the reward program, once it's fully instituted, is that going to -- it will drive market share, hopefully, and more top line, but it will add costs, you will be taking on a little bit more promotional expenses; is that not fair?

I think that as we looked at and designed the new club, it was designed as part of the overall investment process in our customers. And so while the club has changed, it's part of an overall plan. And so it's really not about is the club less or more expensive, it's about the overall investment in the customer and how you look at that. So certainly the club is different today than it was before.

But the perception shouldn't be that when you look at promotional expense and marketing expense and you put them all together, this is not about spending more dollars and flooding the market with more dollars. This is about directing the dollars more efficiently.

Okay. And then next part on the locals, the nongaming component, we've all heard about the Las Vegas housing market and just consumer confidence level in general, I'm wondering whether there was a bigger impact on nongaming revenues than on gaming revenues during the fourth quarter in the Las Vegas locals market.

Yes. It's an interesting question. As we looked through the data, you are seeing a little bit more of an impact. It appears that the consumer is allocating the dollars that he's spending and appears to be allocating more of those to the gaming side than the either hotel or food and beverage side or the entertainment side. So we did begin to see some of those trends. Once again it's early, but that's the early take on it. We're seeing some of that, some declines in nongaming.

I would have thought that. And last question, Paul, can you give us an estimate for preopening for '08?

Preopening is always a bit of a wild guess, but preopenings should be in the $25 million area.

Okay. And I assume that preopening is excluded from your first quarter guidance of $0.30, $0.35, that excludes preopening.

We adjust preopening out, historically, yes.

Right. Thanks a lot. Good luck in the second quarter.

Thanks.

And your next question comes from the line of Kent Green of Boston American Asset Management. You may proceed.

Yes, I guess my question pertains to the non-blue chip markets where you had an EBITDA [but] gained. Most people are talking about some of these regional markets being sloppier. Are you gaining market share in those markets, or doing special promotions or anything going on there that -- to reverse this trend that we're hearing from a lot of other operators?

Well, Ken, it's Paul. I think in the markets that we operate in, in Louisiana, Mississippi and Illinois, we have spent an awful lot of time focusing market efforts, not ramping up market efforts relative to dollars, but focusing on what works right. We've also spent a significant amount of time trying to position these properties as number one or two in their markets, and frankly I think, based on the trends and the numbers you see in many cases, we are gaining share.

And then finally one last question, is the downtown market just on a continuous type of cost escalation or slide? There's been other properties which have not done well downtown, Binion's comes to mind with -under new management. Or is the cash flow verses the capital expenditure at the cost down there still very attractive to you?

Well, Kent, this is Keith. We've had a very, very stable operation downtown for years. We have a very strong management team that has operated those properties on a very consistent basis for years. We have a very strong foothold in the Hawaiian market and they've been great customers for years. I think we have a very consistent level of capital reinvestment in those properties to keep them clean and modern and fresh and make sure our customers continue to come back and enjoy their experiences there, and over the years our EBITDA has grown year after year there. So we saw a dip in the fourth quarter. Don't know what that means for the future. We think once again we're seeing a little bit of rebound in the first quarter but we have -- we enjoy very strong business downtown.

From a straight return on capital standpoint, Kent, the downtown business is really almost off the charts to the positive. I mean it's relatively small to the overall business, but it is a fabulous returner.

Thank you.

And your next question comes from the line of David Katz of Oppenheimer. You may proceed.

Hi. Good morning.

Good morning.

Most of my issues are addressed, but one of the things I'm trying to get my head around is the card rollout. And what your spending and how we should sort of measure that over the next one to four quarters. How should that -- what kind of sort of revenue pop or what kind of return on that spend should we be thinking about as we sort of factor that into our models?

Well, that's something that I think we're just going to have to show to you, David. As I mentioned in the Midwest and South we'll be fully rolled out in the second quarter, so the real impact of the Midwest and South rollout as a whole will really be seen in the back half of the year. With that said, we will do this really property by property, and so some will benefit really for most all of the second quarter, while others will be picked up at the very tail end of the second quarter. And then I believe and although we've done a lot of analysis on this, part of this too is what is the benefit to us in Las Vegas relative to the much easier transportability of customers and their benefits into this market. Because we know they travel here very frequently, but we had not historically made the connectivity between a Boyd property in the Midwest and South and a Boyd property in Las Vegas, and that is exactly what we're doing with this program.

Okay. And can we maybe spend a minute on Blue Chip or another minute. There is quite a few moving parts in it. And with a construction project we can often sort of look at historical levels and say, okay, here is the spend on the project, what kind of return is reasonable for us to expect. When we factor in the addition of Four Winds and some of the other spending that's going on in that market now, help us sort of think about what is the new normal for that project that you might be looking toward down the road margin-wise and all of that.

Well, on the call, obviously here, we gave you much more detail microscopically on Blue Chip than we typically would do to really help with that question, giving you the comparison in specific dollars to the prior year.

Right.

Now, obviously winter isn't the summer and we have to kind of sort through the dynamics of what the impacts have been with construction as well on the fourth quarter number and then ultimately the first quarter number as well. I think the best way to look at it, once you establish a baseline run rate for Blue Chip is that the opening of the hotel, and spa and additional restaurants, is going to be really all incremental to that baseline. And I say that because the Blue Chip hotel today, even with additional competition in that market, continues to run extremely full.

So hotel rooms are not in surplus in northern Indiana or Michigan, the competing Michigan market. And I think really the analysis that needs to be done is based on a substantially improved room product at Blue Chip, which will be focused on a very different customer than would typically stay there today, what the incremental benefit of that customer is, not just relative to its hotel and restaurant spend, but obviously its casino worth, and those how we approach it. So we believe when the new hotel does open, it is really all incremental, because we're not taking business away from ourselves anywhere else, to the success of that property.

Right. Now again, I apologize if I missed it in the commentary or in the release, but in terms of what the cost structure is, or what kind of margins we should be thinking about as the new normal for that property, anything you can share there?

No, I don't think you missed it in the release. We went into a great amount of detail. We certainly didn't go into that detail. The first quarter and continuing into the first quarter are difficult with weather, with the construction disruption. It's the most destructive -- some of the most destructive type of the most disruptive type of construction we can do when you move the front entrance of a building -- has been very significant, and weather, and then it's early in the Four Winds impact. They only opened in August and as these things happen there is a greater impact earlier on than there is later on. We have a very strong product at Blue Chip. We opened our own $170 million brand new facility, brand new boat there, not too long ago. We have a very strong product. Our customers enjoy it. And I think when we cycle through this disruption and we get out of some this bad weather we'll see some better results. But I don't think -- we're not in a position to be providing kind of direction on margins and run rates.

Okay. Thanks. Thanks for the answer. I appreciate it.

And your next question comes from the line of Glen Reid of Bear, Stearns. You may proceed.

Yes, hi. Thanks for taking the question. Back to the locals market for a second, a couple things. One, and this is maybe a different way of rephrasing Joe's question, but can you kind of give us a sense for the percentage of your costs that are fixed, and then your ability, to the extent that we see revenue weakness or more revenue weakness there, the ability to cut costs at those properties beyond sort of what you've already done on that sort of fixed versus variable basis?

And then I guess secondly, we can all kind of look at layoffs on the strip that have been sort of talked about in the press and the housing market. Is that really what you guys look at and what you feel is the biggest sort of factor for your business in the locals market, is that sort of those macro headlines and the trends that you kind of see there? Thanks.

With respect to kind of the margin question, on a more global basis, for years the operating -- we understand the operating leverage is very high in that incremental revenue has a high degree of flow through. We've been aggressively working on margins in the locals business over the last year, have made significant headway as you saw reported in the fourth quarter. We still have some room to go. We have very strong management teams working those. And we'll continue to focus on those. With respect to the local economy here, there is still a tremendous amount of development going on up and down the strip. There is still a tremendous amount of construction activity, and, yes, it has slowed significantly from several years ago, but we still like our Las Vegas locals business.

Okay. Now -- but just as far as any sort of -- I don't know if you could peg it, but what the specific percentage, or maybe even a range in your locals market of fixed costs to variable costs at those properties?

Well, I think we're probably not in a position to go into that. I'm not sure we'd want to give our competition that much information to be able to understand our business. So I do not think we're probably willing to go into that information.

Okay. Fair enough. Thank you.

And your last and follow-up question comes from the line of Jane Pedreira of Lehman Brothers. You may proceed.

Sorry, I forgot to ask one question. Getting back to the card again. Once you fully implement the card, in terms of the way it's intended to operate, is there going to be any real meaningful difference between your card and Harrah's card? And I'm assuming once you have the Echelon open you'll have a Las Vegas property that might entice more play, but in terms of the physical way the program works, is there anything significantly different from Harrah's?

Well, I think the programs have their own structures and their own differences. Given we haven't launched it yet, we're not prepared to make comment on the specific differences because, again, just the competitive pressure associated with changes that we would make and what our competitors may make as a result of that. With that said, I don't think this is just about Echelon. I think it's about the other 5,000 hotel rooms that we own and operate in Las Vegas today that frankly are at price points that are much more in line with many of our Midwest and South customers.

Okay. So in other words you would anticipate maybe someone would stay at The Orleans or one of the other property nears near the strip?

I think The Orleans and the Gold Coast are both very well positioned, being really truly strip adjacent, no different than the Rio is for Harrah's.

Got you. Okay. Thank you so much. I appreciate it.

And at this time, this concludes our question and answer session. And I would now like to turn the presentation back over to Mr. Keith Smith, President and Chief Executive Officer.

Thank you for joining us this morning for our earnings call and we look forward to speaking with you next quarter. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.