Boyd Gaming Corp (BYD) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2009 Boyd Gaming earnings conference call. I will be your coordinator for today's call. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session following the presentation. I would now like to turn the presentation over to Mr. Josh Hirsberg, Senior Vice President and Chief Financial Officer. Please proceed, sir.

Thank you, Ann, and good morning everyone and welcome to our third quarter earnings conference call. Joining me on this morning's call 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 among others the financial outlook for the company, our expansion and development projects, and other market business and property trends that are forward-looking statements within the Private Securities Litigation Reform Act. All forward-looking statements in our comments are as of today's date and we undertake 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 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, and both of which are available in the Investor section of our website at boydgaming.com. Finally ,as a reminder we are broadcasting this call at our website at boydgaming.com and streetevents.com. I'd now like to turn the call over to Keith Smith, our CEO.

Thanks, Josh. And good morning everyone, thank you for joining us this morning. Earlier this morning we released our results for the third quarter. During the quarter, we continued to deal with the weak economy and a very cautious consumer. While visitation has remained relatively flat at most of our properties during the quarter, we continue to experience significant year over year declines in spend per visitor. Overall, I'm pleased by the way our management team has responded to these challenging times and by the reference to reengineer our cost structure and develop a more cost efficient business model. Our third quarter results reflect the benefits of that more cost efficient business model as we posted year over year improvement in overall operating margins and three of our four business units showed year over year growth in EBITDA and operating margins.

Las Vegas locals region was the one exception to this trend. Las Vegas has has been one of the hardest hit metro areas in the country. The unemployment rate rose to nearly 14% in September, home prices remained more than 50% below their peak, foreclosure rates on a per household basis continue to be among the highest in the country. However, the challenges we face in the Las Vegas locals market today will not last forever. We continue to have tremendous confidence in the long-term viability of Las Vegas and believe that conditions in this market will improve over time. When conditions do improve and revenue growth returns, our more cost efficient business model will enable us to see significant bottom line improvements. Paul will provide more details on our property operations in a few minutes.

Now I'd like to provide a brief update on where we stand with respect to Echelon and Station casinos. First, as we stated in our press release, development of the Echelon project remains suspended. We do not know when construction will resume, but our present expectations is that Echelon will not resume development for three to five years. So what's different today versus 12 months ago that has gotten us to this conclusion? First, when Echelon Resorts first halted development in August 2008, neither us nor anyone else anticipated the recession would continue for as long as it has or have as deep an effect on the economy as it has. Second, consumer spending patterns have changed significantly over the last 18 months, a trend that has been felt on the Las Vegas strip in lower occupancy, declining room rates, and reduced spend per visit. It will take time to fully understand the longer term implications of these changes in consumer behavior. Third, there's a significant amount of new supply coming online. It is anticipated that the openings at City Center as well as other projects will add more than 10,000 hotel rooms to the Las Vegas market. This new supply has been anticipated for some time, but the recession has significantly depressed demand levels. As a result, it will take longer than originally anticipated for this new supply to be fully absorbed. And finally, financing for this type of development simply is not available in the current marketplace. I want to emphasize that we have not changed our long-term strategy with respect to Las Vegas. We have tremendous confidence in the future of Las Vegas and we continue to view our site on the Strip an an important strategic asset for the company.

Next I'd like to update you on our ongoing efforts to acquire some or all of the assets of Station Casinos. As we have said in the past, bankruptcy is a very distracting and expensive process. The Las Vegas community is in the midst of some challenging times and it would not appear to be in anyone's best interest for this situation to drag on. We continue to believe Boyd Gaming is best positioned to offer a timely solution to these proceedings when we are permitted to do so. Also, Station has been trying to restructure itself for nearly a year, and yet to date no agreement has been reached on a reorganization plan. Creditor objections have been filed with the bankruptcy court and Station's creditors, customers, and employees may question the impact this drawn out process is having on the Station franchise. However, Station still is operating in its exclusivity period -- that is, the timeframe during which it has the exclusive right to submit a reorganization plan. Nonetheless we stand ready to discuss our proposal and begin due diligence as soon as bankruptcy proceedings allow.

Station has previously suggested our proposal is not serious. Let me be clear -- we cannot be more serious. We are very interested in acquiring some or all of the Station assets to the extent permitted under the bankruptcy process. We are not in this to create controversy. We have the financial capability and stability needed to execute a transaction and believe the outcome would be in the best interest of customers and employees as well as the broader Las Vegas community. Combining Station with our current portfolio is consistent with our strategy of growing our presence in Las Vegas market. It would allow us to significantly expand the advantages of our nationwide player loyalty program. Given this compelling strategic fit and our ability to leverage our 35 years of operating experience in this market, we believe we could, if permitted, deliver substantially more value to Station's creditors than any reorganization plan we expect Station could put forward. We also believe we can present an offer that is not only fair to Station's creditors, but more importantly, one that makes sense for our shareholders.

Lastly, before I turn the call over to Paul, I'd like to leave you with a few thoughts. Boyd Gaming continues to be focused on operating its core business as efficiently as possible to maximize profitability during these difficult economic times. Our management team has been and will remain focused on improving performance without compromising our high standards, growing profitable revenues, improving our operating margins, and importantly we will remain in compliance with our financial covenants. Boyd Gaming is also a company with a strong financial footing, with the financial resources to grow our company even during these difficult times by pursuing strategic acquisitions that will be accretive to earnings. While we remain seriously interested in moving forward with the Station opportunity, we will only do so as long as it makes financial sense to Boyd Gaming. Lastly, we will remain open to other growth opportunities that may come our way as the country begins to emerge from this recession.

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

Thanks Keith, hello everyone. The third quarter had encouraging results, with three of our four business units posting year over year improvements in EBITDA. The exception was the Las Vegas locals region, which is where I'll start our regional review.

The third quarter was one of the toughest quarters in the Las Vegas local region's history. High unemployment and depressed housing prices have greatly impacted consumer discretionary spending in the Las Vegas valley. That translates into lower spend per visit at our Las Vegas locals casinos. These factors, combined with traditional summer seasonality, contributed to an incredibly soft August performance. In fact, August was responsible for over half of our $14 million year over year decrease in EBITDA during the quarter. Aggressive and in some cases elevated promotional activity has continued in the locals market. As usual, we remained on the fringe of these promotional wars, sticking with our time tested strategy. This strategy not only helps keep our expenses in line, but offers a much more consistent product to our customers and helps reinforce the value oriented reputation of our Coast Casinos brand.

Another trend that continued during the third quarter was softness in room rates as operators citywide continued to cut rates to fill hotel rooms. We estimate that declines in cash ADR reduced regional EBITDA by about $3 million compared to the same quarter last year. Despite the decline in EBITDA during the third quarter, we remain confident that the rate has begun to decelerate, as September saw a quick moderation of business volumes. Looking ahead, we remain confident in the long-term prospects of our Las Vegas locals business.

Things are much brighter in downtown Las Vegas as EBITDA rose year over year for the third consecutive quarter. We're seeing strong visitor volume from our Hawaiian customer base. We also benefited from aggressive cost containment measures which allowed us to post a 26% increase in EBITDA even while revenues declined slightly. I want to note that the financial impact of our Hawaiian Charter operation were consistent year over year, meaning that our growth was entirely due to strong operating performance.

The news from our Midwest and South region was also encouraging as we posted EBITDA growth of more than 6% year over year. The biggest shift during the quarter occurred at Blue Chip, where despite two months of new competition, EBITDA grew by more than 20% and the property experienced year over year revenue and EBITDA growth every month during the quarter. The strong performance is reflective of both the revenues that our expansion contributed over the peak summer months as well as our aggressive efforts to control costs following the opening of this expansion in January.

Delta Downs continues its remarkable run, posting quarterly EBITDA records in each of the last four quarters as well as a third quarter record for EBITDA margin in slot coin in. We have been able to create a unique customer experience that continues to allow us to grow market share even while boosting operating margins. Despite this exceptional performance, we do not expect similar growth in future quarters, as Delta Downs will experience tough year over year comparisons starting in the fourth quarter.

Our success notwithstanding, southwest Louisiana is generally reporting slow growth. It's clear to us this market lacks the incremental demand needed to absorb future additional gaming supply.

Moving to Atlantic City, we were quite pleased with Borgata's performance. Despite Atlantic City's well publicized struggles, Borgata posted increases in EBITDA, operating income, and market share. EBITDA increased 13% during the third quarter, the first full quarter since we reached the one year anniversary of the Water Club opening. This increase was the result of a continued focus on margin improvement as well as pursuing more profitable revenues.

We also continued to increase our share of the market. In the third quarter, Borgata grew its casino win market share by 1.1 percentage points from 16.6% in 2008 to 17.7% in 2009. In addition, the property set an all time market share record of 18.9% in September 2009. We believe these results reflect the customers' continued satisfaction with our Borgata brand of hospitality. Atlantic City's clearly enduring the most difficult period since gaming was introduced more than 30 years ago. We believe that Borgata's market leading product, strong free cash flow, and reputation for exceptional customer service places us in a unique position to weather these difficult times.

To summarize, the stabilization trend we mentioned on earlier calls continued during the third quarter. Our more efficient business model performed well during the quarter, allowing us to maximize EBITDA in an environment of severely reduced consumer spending. We are not predicting that discretionary spending will return to previous levels any time soon. But our new operating efficiencies will allow us to record improved profitability on significantly lower volumes. At this point, I'd like to turn the call over to Josh to update you on our financials.

Thanks, Paul. I have a few comments to make with respect to the finances of the company and then we will open the call for questions. In terms of the balance sheet, our debt balance at the end of the third quarter decreased by more than $50 million from the second quarter to approximately $2.6 billion, of which approximately $2 billion was outstanding under our $4 billion revolving credit facility, providing us ample capacity. At the end of the quarter, we were in compliance with our covenants and expect to remain in compliance. Our leverage calculated in accordance with our credit facility was below 6 times versus a covenant of 6.5 times. Going forward, our covenant remains at 6.5 times for the fourth quarter before increasing further in each quarter of 2010.

Other items that I want to point out from the quarter -- preopening expense recorded in the quarter was related to Echelon. Interest expense was approximately $32 million in the quarter. Last year we had approximately $11 million of capitalized interest. We recorded no capitalized interest in the current quarter.

We recorded two significant items during the quarter that are not reflected in our adjusted earnings per share. The first is our share of the cash gain related to the settlement of an insurance claim associated with the September 2007 Water Club fire at Borgata. Our share of the cash gain is approximately $14.4 million and is not included in adjusted earnings per share. In addition, a noncash pretax charge of approximately $13.5 million related to the Morgans joint venture was also excluded from adjusted earnings per share. This is a noncash charge necessitated purely by accounting rules. We have not made any formal decision regarding the future of this joint venture. As an aside, we have also reached a mutual agreement with Shangri-La Hotels and Resorts to terminate their management and technical services agreement at Echelon. This termination had no impact on our financial results.

We received a tax distribution of $3.2 million from Borgata in the third quarter. Borgata's leverage ratio at the end of the third quarter is estimated to be 2.6 times. Borgata's covenant calculation benefited from the previously mentioned one time cash gain associated with the Water Club fire. The terms of the Borgata credit agreement allow Borgata to make distributions to its partners in excess of tax related amounts to the extent that leverage remains below 3 times. For this reason, we expect Borgata to pay a larger distribution to its partners in the fourth quarter. Our tax rate in the third quarter was 42.5%, and based on what we know today, we expect the tax rate in the fourth quarter to be similar to that in the third quarter.

That concludes our formal remarks. So operator, we are now ready for any questions.

(Operator Instructions). The first question comes from the line of Joe Greff with JPM, please proceed.

Good morning, everyone.

Hi Joe.

Maybe Keith this is a question for you. Perhaps you can tell us, this is a question on Borgata, let's presume Pennsylvania gets table games, Philadelphia [race] has tables, Aqueduct opens -- what is the strategy for Borgata specifically? That might be a question more broad for the market there, how the market [attacks] that, but how do you prepare for what looks to be like inevitable competition?

Well, Joe, this is Keith. I think that certainly the Borgata certainly is the market leader there and we continue to like our position. I think as the surrounding states get gaming, whether it be table games in Pennsylvania or sports betting on table games in Delaware, or something happening in New York, we need to continue to execute on our business model, to continue to have the best product in the market, and offer something that I don't think you can get in some of those markets. A lot of what you're talking about in Philadelphia and other markets are more convenience gaming. They don't have the type of assets and amenities we have at the Borgata, and we will have to continue to market to those assets and emphasize those amenities and what we have for the customers. Having said that, it clearly is incremental competition. In a weak consumer environment, in the weak economy we have today, there will be competition, there's no question.

Thank you.

And the next question comes from the line of Larry Klatzkin with Chapdelaine. Please proceed.

Hey guys. A couple questions here. One, do you see any further Echelon costs, charges here, is that done? Or you probably have some lingering things every quarter going forward?

Larry, as we said on previous calls, really the only costs we should have now are normal recurring costs of about $15 million probably for this year and then they will go down in the following years. And we have very limited amount of CapEx going forward with respect to Echelon. I think we continue to spread it out where we can. We will probably have about $20 million in 2010, but that's about it.

All right, all right. Then the AC smoking ban, which I think -- guys are trying to shoot themselves in the foot again, any comment on that?

No, we're just anxiously awaiting the City Council to have a hearing on it. We certainly hope they come to the same conclusion they did last year, which is to continue to allow us to have 25% of the floor smoking so we can remain competitive. But we will wait and see the outcome, Larry.

Okay, that's fair. I just hope they're not as dumb as they look I guess, I don't understand it. As far as October locals, have you seen -- you commented how September was a little better, has October been even a little better yet?

I think we're just playing out the fourth quarter Larry, overall. There's certainly upside and downs within a specific quarter. With only four weeks there, we will see where it plays out as we get deeper into the period. As you know it tends to get slower as we pass Thanksgiving and get preholiday season. And so we will just withhold comments on the fourth quarter for now.

Okay, okay, good. And then I guess the last thing you guys have definitely some availability of funds if you're looking at Station assets. Anything else look attractive to you guys?

Well, we're looking at a lot of different things. I think we have opportunities come up every week, Larry, nothing we're willing to talk about now. All right, thanks guys.

I appreciate it.

Thanks, Larry.

And the next question comes from the line of Susan Berliner with JPMorgan, please proceed.

This is actually Richard [Dayton] in for Susan. I just had a quick question. I noticed you guys had a $3.6 million gain from debt repurchases. Can you guys elaborate at all how much of which notes were actually bought?

Sure. We acquired about $30 million worth of bonds throughout the third quarter and it was evenly split between each of the three issues. Approximately.

Okay, great, thank you.

Sure.

And the next question comes from the line of Cann Hoe with KeyBanc. Please proceed.

Hi, good morning. This question is a follow up on what Larry was asking. For the Echelon structure over the next three to five years, is the structure going to be, is the skin going to be put on it or will the elements corrode the steel on the building? Does any work have to be done to protect the structure?

Peter, this is Keith. Given the exceedingly dry climate we have here in Las Vegas, there's not much if anything that has to be done to the steel or the concrete or exposed structure at this point. We will obviously continue to monitor it, and take whatever precautionary steps we need to, but there's nothing significant that will need to be done to the structure.

I see. So in approximately five years when you guys restart the project, there's very little chance you will need to start the structure from the ground up again?

That's correct. We anticipate using or incorporating the structure that's already in place into the new project.

Okay. Sounds good, thanks a lot.

You're welcome.

And the next question comes from the line of David Katz with Oppenheimer, please proceed.

Hi, afternoon. Or morning. I just wanted to go back to the issue of weighing the prospective Station asset acquisition with other opportunities that are out there without obviously speaking about specific ones. But we certainly see other states that are talking about gaming expansion. There certainly are other distressed opportunities that are outside of your current markets of exposure that might be opportune. Could you just walk us through maybe your methodology or your analytical approach to those and show us how you -- Station weighs out better?

Sure, David, this is Keith. As I mentioned earlier, we look at a number of opportunities that come up every week in our business, whether they be distressed assets or ground up development or other acquisitions, and take a look at how they fit into our existing portfolio of properties, take a look at whether they are in markets that are growing or markets that are not growing or whether they are new markets and weigh all of that. The Station opportunity continues to interest us greatly as we have a lot of confidence in the Las Vegas markets and over the long term believe that will be a very good fit and very good acquisition for us. Certainly in the short term we understand the challenges associated with the locals market. Our focus on Station does not preclude us from looking at other assets, and we are looking at many of the states that are out there talking about gaming right now. We have looked at a number of distressed assets, and either the prices haven't come down or aren't at the right levels, or we are not a fan of the market that they are in or the asset themselves. But we have looked at a number of things over the last year while we have been looking at Station's assets.

David, this is Paul. I'd add that given the economic environment we're in there are clearly some compelling acquisition targets to the extent the valuations can come in line with where market conditions are. There can be significant equity value created through some acquisitions, whether that's Station or others that Keith generally touched on. We believe we're in a market right now where, broadly speaking, acquisitions are more attractive than development, but it doesn't necessarily preclude us from having blinders on relative to new states that may legalize.

Okay, okay, thank you very much.

And the next question comes from the line of John Maxwell with Jefferies, please proceed.

Hi, guys. Keith and Paul, I think you touched on it, but also would you also be open to other local properties in Las Vegas as opposed to just focusing on the Station ones?

Sure. I mean our focus on Station is the result of an opportunity and some of the assets they have we think would be a great addition to our portfolio. But if there were other assets we thought were equally as attractive that were additive to our portfolio and that could help expand our brand and our presence, we absolutely would be taking a look at them. There may be something that becomes available and we will take a look. We are not looking not just at Station, but at all opportunities that come our way, as we have over the years. We have always taken a look at any number of opportunities that come available to us.

Okay. And Paul, is there any color you could share in terms of Blue Chip, in terms of how that property is performing following the completion of the expansion? And just wondering how that market is faring for you.

Well, I gave a little bit of details in my prepared comments. But the summer season is obviously the peak season for us in the northern part of the Midwest. And Blue Chip performed exceptionally well, as I had said, up 20% in EBITDA even in the face of a new competitor in the market, which opened around the beginning of August. So we had two basically full months of a new Native American competitor in Michigan.

And certainly those numbers that Blue Chip posted we were very happy with, and I think a lot of it had to do with some hard work by the broader team relative to making Blue Chip more efficient in light of the fact it is still a much larger facility. And we expect to be able to maintain levels, albeit they will be on reduced revenues as we get into the colder winter months. But continue to show some growth out of Blue Chip in what is really a beautiful, beautiful facility that, as that part of the world recovers, economically becomes truly that regional destination for meetings and what have you that we have talked about from the beginning. Just a very tough time to open a new property.

Okay. Lastly any comments on your Florida property, any plans with that versus -- based on what you've discussed in the past? I would imagine probably not, but I just figured I'd see what your thoughts are with that.

Sure John, this is Keith. Right now we're just continuing to monitor the market. A lot has been written with respect to the Seminoles and the state and the compact issues that they're dealing with. The tax rate doesn't decline to the 35% until such time as that compact is signed by the state and is approved. So that hasn't happened yet. So we just continue to monitor and wait for the right time to make further investment there. We own the asset and we're waiting for the right time.

Great, thanks, I appreciate it.

Ladies and gentlemen, there being no further questions, this concludes the question and answer session. I would now like to turn it back to Josh Hirsberg for closing remarks.

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

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a good day.