Boyd Gaming Corp (BYD) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2009 Boyd Gaming earnings conference call. My name is Fab and I'll 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 conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Josh Hirsberg, Chief Financial Officer. Please proceed.

Good morning everyone, and welcome to our first quarter earnings conference call. On the call this morning are Keith Smith, our President and Chief Executive Officer; and Paul Chakmak, our Executive Vice President and Chief Operating Officer. Our comments today will include statements relating to our future results, including the financial outlook and expectations for the coming year and the second quarter of 2009; 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 statement 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.

During our call today, we will make reference to non-GAAP financial measures. For a complete reconciliation of historical non-GAAP to GAAP financial measures, please refer to our earnings press release and our Form 8-K 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.

I'd now like to turn the call over to Keith Smith, our CEO. Keith?

Thanks, Josh, and good morning everyone. Thank you for joining us this morning.

Our results for the first quarter of 2009 clearly reflect the ongoing recessionary environment in the country today. Rising unemployment, declining home values and historic lows for consumer confidence continue to plague our economy and make it an extremely challenging operating environment for the casino industry. However, amidst all the bad news and negative comparisons, there is some good news in the first quarter results, some bright spots that show the early signs of stabilization in our business -- signs such as margin improvement reflecting our year-long efforts to refine our marketing programs, take excess costs out of the business and improve our overall operating efficiencies. Or signs such as the rate of decline in gaming revenue and other key metrics flattening out during the quarter. Or the fact that we posted year-over-year EBITDA gains in the first quarter in our downtown Las Vegas region and our Midwest and South region, including posting all-time record results in our Delta Downs property. These gains from our downtown and Midwest and South regions helped to offset difficult operating environments in the Las Vegas locals and Atlantic City markets, proving once again the value of geographic diversification.

Overall, while we did not report year-over-year growth in the first quarter, we are pleased with the improving trends we experienced during the quarter and the signs of stabilizing business environment. Paul will provide more details on the trends we are experiencing in each of our markets in a few minutes. But before I turn it over to Paul, let me touch on our Echelon development and our Station Casinos proposal.

First Echelon. We really have nothing new to report on this call. Having a significant presence on the Las Vegas Strip continues to be an important element of our long-term strategy, and we view our 87 acres on the Las Vegas Strip as a major long-term strategic asset. We are continuing the process of analyzing our options for this project and expect this effort to take the remainder of 2009. We will update you further when we have a more definitive strategy on how and when we will move forward on this development.

With respect to Station Casinos, we remain interested in pursuing a transaction to acquire some or all of the assets of Station and we continue to have ongoing conversations with numerous parties within the capital structure of that company and while Station has not provided any information that would allow us to update or otherwise modify our proposal, we remain enthusiastic about the potential of this proposed transaction. The Station properties will integrate well with our existing operations and expand our presence into new neighborhoods throughout Las Vegas. Despite the market's current struggles, we continue to have great confidence in the long-term growth potential of the Las Vegas locals market. The proposed structure as currently contemplated can be accomplished under our existing credit agreement, and we have sufficient liquidity to finance the cash transaction.

As we said on our last call, we are not interested in merely surviving these difficult times. Boyd Gaming is a strong company with a solid financial footing and we intend to use this strength to find ways to thoughtfully, carefully, and prudently grow the company by pursuing opportunities that will both grow the company and provide greater shareholder value.

Thank you for your time this morning and now I'd like to turn the call over to Paul.

Thanks, Keith. Hello, everybody. Overall, the first quarter met our expectations. As we mentioned in the last call, we've responded aggressively to the current downturn by removing about $125 million in annual costs from the business. So while revenues fell, expense reductions helped to reduce the impact on our bottom line. We will continue to actively manage the business and look for additional opportunities to operate as efficiently as possible during these challenging times.

So let's look at the business region by region. While we're cautiously optimistic about the first quarter and how it compares to the fourth quarter, we want to emphasize the Las Vegas economy remains severely challenged. Unemployment continues to rise, reaching 10.4% in March, and home prices continue to be weak as foreclosures dominate the market. These factors are contributing to decreased consumer spending across the valley. These trends are being made even worse by increased supply as well as significant weakness in room rates and occupancy in the market.

Room rates continue to slide during the quarter. Declines in cash ADR reduced EBITDA by $7 million in the first quarter compared to a $5 million reduction in the fourth quarter of 2008. We expect softness in room rates to continue to worsen especially during the historically slower summer season.

Overall our Las Vegas locals business declined significantly year-over-year. However, gaming revenues were relatively flat between the first quarter of 2009 and the fourth quarter of 2008, a signal of possible stabilization. We were also able to improve our margins in this region compared to the fourth quarter, demonstrating the effectiveness of our cost control measures.

Downtown Las Vegas is a much brighter picture. Like our Las Vegas locals business, increased efficiency has been a top priority in downtown Las Vegas. We made strong improvements to our cost structure during the first quarter in the downtown region, and that contributed to improved results. We continued to benefit from declines in the cost of fuel, which improved margins from our Hawaii charter operations.

Moving to the Midwest and South region, we were especially pleased with our performance. Let's start with Blue Chip. This property has struggled in the face of new competition, but with the opening of our new expansion, we were able to position Blue Chip as a true regional destination. It's early, but we're encouraged by increased business levels at the property during our opening phase. Since our expansion opened, Blue Chip reported a 6% increase in gaming revenues or about $2 million for the two month period. By comparison, in the latter half of 2008, gaming revenues fell more than 18% or an average of $3.2 million per month.

The news was even better in Louisiana. Without question, our Louisiana properties were the stars of the quarter. We touched on this a bit during our last call and how the strength in our operations there was helping to offset weakness elsewhere in the region. That trend helped the Midwest and South region post a 5% year-over-year increase in quarterly EBITDA. Our most encouraging results came from Delta Downs. During the first quarter, Delta posted an all-time quarterly record in net revenue and adjusted EBITDA as we continued to increase our share in the southwest Louisiana market. Delta has certainly been a bright spot for our company during these challenging times. As in the other regions, increased efficiency helped strengthen our results. During the quarter, we improved this region's EBITDA margin by nearly 1 full percentage point compared to the prior year. Increased efficiency certainly helps during this downturn, but it also will position us for better results once the economy begins to rebound.

In Atlantic City, an extremely competitive landscape and poor economic conditions continue to adversely impact the market. That's likely to be made a little worse when the new casino in Northeast Pennsylvania opens in a couple of weeks. We expect this opening will impact our results slightly in the short term as the new casino benefits from trial business new entrants typically receive. Over the long haul, we expect Borgata to retain the vast majority of its market share. During the quarter, we began closing The Water Club during midweek period due to decreased demand. We still believe strongly in the long-term potential of this investment and we're looking forward to resuming a seven day schedule at The Water Club during the traditionally busy summer season. Despite the economic and competitive challenges, Borgata was able to outperform the market, growing slot win by approximately 2% over the prior year, while the market without Borgata declined nearly 20%.

The first quarter provided our first glimpse of good news in some time and we look forward to building on that. At this point, I'd like to turn the call over to Josh to update you on our financials.

Thanks, Paul. With respect to the balance sheet, our debt balance at the end of the first quarter was $2.7 billion, of which approximately $2 billion was outstanding under our $4 billion revolving credit facility. At the end of the first quarter, we were in compliance with our covenants and expect to remain in compliance. Our leverage calculated in accordance with our credit facility was just under six times versus a covenant of 6.5 times. Our covenant remains at 6.5 times for the rest of this year before increasing further in 2010.

During the first quarter, we purchased approximately $10 million of our subordinated debt at a substantial discount. We will consider additional purchases if market conditions create favorable opportunities. Also during the first quarter, we repurchased 1.6 million shares of common stock at a total investment of approximately $7 million or an average price per share of $4.54. These purchases were made under the $100 million share repurchase authorization received from our Board of Directors in July of last year, and represents the first purchases made under this program.

Other items that I want to point out from the quarter. Preopening expense recorded in the quarter related to the opening of the hotel and related amenities at Blue Chip as well as Echelon related expenses. Interest expense was $36.4 million in the quarter, excluding $8.9 million in prior period interest expense related to Dania. We removed the prior period interest expense amount from our reported adjusted earnings per share number.

Capitalized interest was $400,000 in the quarter related to Blue Chip. Since the end of last year, we are no longer capitalizing interest associated with the Echelon project. We received a tax distribution in the quarter from Borgata of $9.7 million related to 2008. We expect to receive distributions approximating $19 million in total for this year and of course that includes the $9.7 million I just mentioned. Our tax rate in the first quarter was 31.5%. Based on what we know today, we expect the tax rate to be approximately 40% to 45% for each of the remaining quarters.

So with that, operator, we're ready for questions.

Thank you. (Operator Instructions). And your first question will come from the line of Steve Kent from Goldman Sachs. Please proceed.

Hi. Maybe -- I'm not sure that you did, but could you give us a little bit of an update update as to how things are going since the end of Q1, how April and the first week of May is working out? And besides the interest in Station, what other kinds of assets are you interested in? And then finally, I know this is a difficult one. But could you just talk about the path that you're looking for to see some recovery in the locals Las Vegas market -- what kind of signposts should we be looking for?

Let me see if I can work my way through the various questions. I think the trends that we are seeing in the first five weeks of Q2 are similar to what we saw in March and in February. So not much has changed. Things are not getting better than what we saw in March and February, but things are certainly not getting much worse. And as we said in our comments earlier, we think we're seeing things stabilize. So much of the same in the first five weeks of the quarter.

With respect to other acquisitions that we may be interested in, as you look back on the history of the company, we've grown the company quite successfully by buying assets strategically in markets where we thought we could do a good job and buying the right assets. And we'll continue to do that. Station is one example of that where I think it fits strategically into a segment we have, the Las Vegas locals market. There could be regional markets that would be of interest to us and we'll continue to keep our eyes open for good values or good opportunities. We are not necessarily excluding anything, but we will be careful and we will be prudent. It needs to fit within the overall strategy of the company in terms of where we feel like where we should grow.

In terms of the locals market, in terms of the path, one of the two big issues we have here in the locals market are both unemployment, which is at record high numbers at 10.5%, as well as housing, which is generally in the West but here in Nevada has been truly hit. And tremendous decline in housing prices and tremendously high unemployment create a very difficult environment. I think the other thing that is happening in the locals market is competition from the Strip. Where we normally have some limited competition on the Strip, they're doing or they're getting much more involved in marketing to the locals. So Paul, I don't know if you have anything you would like to add to that.

I think there's one other thing, Steve, that I would add to Keith's list, which I fully agree with and we spend a lot of time looking at those indicators and analyzing them and understanding directionally where they're going. That is room rates on the Strip as we talked about have a key impact on the company overall. The last couple of calls I've highlighted the negative impact of room rates ADR on the business overall. I said it was $5 million negative in the fourth quarter and $7 million in the first quarter this year. And as we see firmness in occupancy and rate on the Strip, so we will see that same trend flow through to our business, which as I remind everybody includes 5,000 hotel rooms in Las Vegas. So another important thing, I think some of our competitors have talked about it in their calls and seeing some stabilization in those areas and that's certainly a good thing for Boyd Gaming as well.

Can you just -- I would note that you didn't mention that you were interested in a Vegas Strip location for acquisition. Is that -- was that just an omission or is that something that you're saying look, we have Echelon, we have no interest in buying an existing asset with existing cash flows on the Vegas Strip? Finally on the locals regional -- locals market, all the surveys you've done and Station used to do and even our own surveys all say that convenience is the biggest factor. So I guess I'm surprised that you're suggesting the Strip properties are able to impact you so severely. Since they're not convenient and they're harder for your customers to get to, they must be really cutting prices for that to be a factor.

Regarding your comment on a potential Strip acquisition, maybe it's best summarized as we're not ruling anything in particular out or ruling anything in particular in on the Strip. We do have the Echelon site and that 87 acres, and long-term it's a very important asset for us. Once again, we wouldn't rule out looking at something on the Strip if the right asset became available at the right price. Today we don't have our eye on anything. We're not interested in anything in particular, but we will stay tuned to the market and see what becomes available.

I think, Steve, on the question about the impact of the Strip properties on the local business, I think you've got to break that down into really two different segments. One is our true Las Vegas locals clientele, which is certainly alive and well. They focus on certainly things like convenience, being close to home and where they choose to play and eat and stay.

And then compare that to a couple of things that's happening on the Strip. I think the analyst community has done a good job in keeping track of where room rates are, and obviously that customer base isn't our local clientele. It is folks that are typically driving in, some flying in, but typically driving in to Las Vegas who are able to stay on the Strip at a cost they typically would have in prior years been able to stay at one of our properties. Folks are trying new things as price points have come down rather dramatically for very nice product on the Strip, and that has that impact on the cash ADR that I talked about overall.

I would also say that as you've seen over the course of the last few months, the Strip properties are very actively and aggressively marketing to the locals clientele with restaurants and shows and what have you. I think the jury's out on the impact of that, but it certainly gives the local customer another alternative, another value oriented alternative to address some of their consumable dollars that they're looking to spend.

Okay. Thanks very much.

Your next question will come from the line of Joe Greff from JPMorgan. Joe, your line is open. Please proceed. (Operator Instructions). Your next question will come from the line of Felicia Hendrix from Barclays Capital.

Hi, good morning, guys.

Good morning.

Wondering what your plans are to pay down debt at Borgata? You've paid down some. I'm wondering that and also how much are you allowed to distribute?

In terms of, Felicia, debt paydown, basically the property has very limited CapEx at this point, and while the market is under a lot of pressure, our property continues to perform fairly well relative to the competition and is generating free cash flow as a result of the limited CapEx. So we're paying down debt in the order of $70 million to $80 million a year in terms of -- from that free cash flow. Distributions are limited at this point due to -- are limited just to tax distributions due to where the leverage ratio is, but it's coming down pretty quickly. I wouldn't expect distributions beyond what we've provided guidance to this year, however.

Okay. Moving on to your operations, I was wondering if you could quantify how much the decrease in the price of fuel has helped your downtown business?

I think when you look at the impact of fuel, which has been a factor the last couple of quarters -- if you remember, last year oil prices were as high as really we've ever seen them -- the impact there is roughly about half of the positive variance you see in the number for the quarter. And the other is to the point of obviously improved margins related to the business overall. So it definitely was not a story of just lower fuel prices. That business clearly outperformed the prior year.

Great. Great. And then in Louisiana, obviously you guys are doing really well. I'm wondering if you're seeing the similar trends or similar strength into the second quarter?

I think as Keith said, I think we've seen stabilization in the business overall. Certainly individual markets kind of move and bounce around up and down month to month and you'll see that pretty transparently as Louisiana and other states report those numbers. As far as the Midwest and South, I think the property to really look at on a going forward basis and what will be an important contributor will be Blue Chip. As we move through this opening phase, and spend an awful lot of time and effort refining that business, it's a fabulous product that is really reached out to a broad base of existing and new clientele. And we look forward to having Blue Chip from a margin standpoint be able to post some much better numbers than it has in just its first few months since the expansion opened.

Perfect. That was actually my next and final question was on Blue Chip, because you've always been excited about the property -- but also cautiously optimistic because there has been trial visitation, and you all have said as that tapers off, maybe some of the top line results you're seeing might slow. I'm wondering if you have a different stance on that now?

I think as I alluded to, there is certainly plenty of focus by management on getting Blue Chip to where it needs to be from a profitability standpoint. The group has done a great job from a revenue standpoint and it's just all about refining that. I would note that Blue Chip was the only property in the region that had any negative trending from an EBITDA margin standpoint and that shouldn't be surprising to anybody, given it was the opening phase. All the rest of the region was flat to up.

Great. Thank you.

Your next question will come from the line of Dennis Forst from KeyBanc.

Good morning. I wanted to get a little clarification, Josh, on Borgata. I think you said there's a fair amount of free cash flow, but you're going to pay out a $19 million distribution. That's to yourself this year?

That's our share.

Okay. So another $19 million to MGM?

Right, but of the $19 million already we've --

Half of that's already been paid out the first quarter?

Right. Because that was related to 2008.

An even with that distribution of, what is that, $19 million to the two partners, you reduced debt by $50 million in the quarter, or $40 million?

No, the actual debt reduction anticipated in 2000 (sic) -- on a run rate basis is $70 million to $80 million.

But I'm saying, but it was down $40 million December to March?

Correct. Expect another $40 million sometime throughout this year, based on the free cash flow that's generated from the property, after distributions to the partners.

Okay. So I'm just calculating these numbers. So that's about $80 million of debt paydown and about $40 million of distribution. That's close to $120 million coming out of Borgata?

That's about right.

Okay. Good. That clarifies that. Next on Dania. You took a write-down. You had the one-time charge of interest. What is the status at Dania in terms of your book investment and what are the plans for Dania?

Basically, all that remains on the books now related to Dania is about $35 million to $40 million. And that would be related primarily to the valuation associated with the land at Dania. Everything else has been written off.

Okay. So there's unlikely to be any other impairment charges, one-time write-offs, et cetera, related to that?

Right. Well, we do have -- I'm sorry, Dennis for interrupting. We do have other payments related to the amendment. And so folks aren't confused, we will make those payments. But they, again, have been factored in if you will in terms of the accounting and the write-off that we've already taken. So they don't influence the potential for future write-offs.

So they won't appear in the income statement, but will be cash payments?

Correct.

And then on Echelon, is there much in the way of ongoing costs other than the security costs quarter-to-quarter?

Well, as we mentioned at our year end call, we expect ongoing run rate cost of this year to be approximately $15 million. That's warehousing, office, rent, security, et cetera. And then depending on how we evaluate the project, because as you know we're going through this phase of looking at different phasing scopes and different alternatives for the project itself, depending on what is the outcome of that analysis, obviously would affect costs going forward.

Where is that $15 million in the income statement? G&A?

It would show up in preopening expense.

So that will be the only component of preopening going forward?

Yes. This quarter we had Blue Chip and Echelon. After this, assuming no other significant capital, which we don't have any planned, it will be largely Echelon.

Okay. And then lastly, for Paul maybe, Delta Downs did have a wonderful quarter, market share up, et cetera. Can you give us a primer on what Delta Downs is doing so well?

Don't want to give all my secrets, Dennis.

Just give us a couple.

The property is obviously operating full out. It is certainly maybe benefiting from some different factors in the market relative to how competitors have positioned their properties and the amount of investment that competitors have put into their properties. So I mean, Delta has just become a go to place for the slot player, obviously does not have table games. And I think the team has really done a fantastic job from a marketing standpoint in reaching out and creating that loyalty amongst the customer base that sees Delta as its home. So it has clearly gained share at the cost of others in a market that is one of the few markets that's actually shown some positive signs overall from a revenue standpoint.

Okay. Thanks a lot for the answers.

Thank you, Dennis.

Your next question will come from the line of Joe Greff from JPMorgan. Joe, your line is open. Please proceed with your question.

Must be having technical difficulty.

Your next question will come from the line of David Katz from Oppenheimer.

Hi, good morning. So just one quick detail and just going back to some of the questions Dennis was asking Josh about, what -- if we're modeling out the cash flows on Borgata, what maintenance CapEx do you use or should we -- would you recommend we use going forward?

It's relatively minor. It's probably $15 million to $20 million a year, as I recall. I don't have the model in front of me, but that's probably the round number.

Okay. Good enough. Just following up on some of the previous questions about the Midwest and South, and particularly Lake Charles, you're talking about market share gains. And we've heard from I guess one other major operator -- we've heard from Pinnacle so far and we presume that they're gaining some share. I mean, who are we taking the share from exactly? Right? I mean, is there -- and I guess if we could talk about that throughout the rest of that Midwest portfolio. As you know, one of the things we've been focusing on is those that have and those that have not, and share shifts in that context. Is there that sort of a dynamic going on? And whatever help you can give us with that would be great.

Sure, David. I mean, I would have you just go to the monthly reported numbers from the state of Louisiana and look at the Lake Charles market. There's obviously one market participant there, Coushatta Native American tribe, that is not in those numbers. So you have to make your own assumptions there relative to its share of the overall market participation. I think Pinnacle has done certainly a good job in continuing to improve and strengthen their position. And as a result of all that, the third participant has reported, Isle of Capri, I think their numbers are off a bit. And so that's where you've seen share shift.

Okay. And then one last question. There's been a lot of discussion about the prospect of buying some Station assets and finishing off Echelon on some program. Is there any prospect that you would sell anything? I mean, we've seen some loosening in the credit markets. Are you perceiving any better grounding for the prospect that you might want to cut loose an asset?

No, that's really not a focus right now, David. We're focused on maximizing cash flows and running our existing operations as efficiently as possible. And on growing the business, finding some good acquisitions, whether they be Station or other assets. We're really not focused on selling any assets at this point, especially given the prices that are out there.

I would add to that, David. Clearly, we don't have the liquidity needs that maybe some other companies are having to be faced with. So really doesn't get to our radar screen from that perspective as something that's a reasonable alternative. As we've said, we're obviously cautiously bullish on where the market is going. We've seen pretty dramatic multiple contraction overall, obviously reflected in all of the stock prices. And I think as we get to a more normal, whatever that is, market, we'll benefit from obviously both improved EBITDA and expansion of multiples back to what I would call more realistic levels. We want to take advantage of that.

Okay. Thank you very much.

There are no further questions in the queue. I would like to turn the call back over to Josh for closing comments.

Thank you, everyone, for joining the call today. If you have questions, please feel free to reach out to the company. Thank you.

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