Boyd Gaming Corp (BYD) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2009 Boyd Gaming earnings conference call. My name is Janeeta and I will be your operator for today. (Operator Instructions) I would now like to turn the conference over to your host for today, Mr. Josh Hirsberg, Senior Vice President, and Chief Financial Officer. Please proceed.

Thank you, Janeeta. Good morning everyone, and welcome to our fourth quarter earnings conference call. Joining me 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 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 statements as a result of certain risks and uncertainties, including, but not limited to, those noted in our earnings release, our periodic reports, and our other filings with the SEC. 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 in 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 on our website, BoydGaming.com, and streetevents.com.

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

Thanks, Josh. Good morning, everyone, and thank you for joining us. Earlier this morning, we released our results for the fourth quarter and full year 2009.

Before I turn this over to Paul to review the results for the fourth quarter, I would like to make some general observations about our results. During the fourth quarter, the economy continued to be weak, unemployment remained high, consumers continued to be cautious with their discretionary spending. Looking forward, however, we are seeing early signs that a recovery is underway, despite the fact the national economic forecast remains uncertain. The national unemployment rate dropped in January. The nation's GDP grew nearly 6% in the fourth quarter, the biggest quarterly increase since 2003. And as the national economy improves and consumer confidence returns, we are confident we will see the benefits in our industry. The question remains not if, but when. The good news from Las Vegas is that signs of this recovery are beginning to show here.

Las Vegas monthly visitation has grown for four consecutive months, showing that this city remains an extremely popular tourist destination. Las Vegas continues to have the unique appeal to visitors from around the world and our customers remain loyal, even through the recession. In addition, many of our colleagues in the gaming industry have expressed cautious optimism about the prospects for recovery on the Las Vegas strip in 2010. Las Vegas Boulevard is the heart of our economy and the recovery in business along the Las Vegas strip is crucial to us, as a significant portion of our customer base is tied either directly or indirectly to the economic vitality of the strip. Business on the strip regains its footing. The Las Vegas locals market will recover as well. Most importantly to us, the Las Vegas locals EBITDA was up by more than 10% from the third quarter. This marks the first sequential quarter over quarter improvement in the locals region in 18 months. This growth pattern is continuing in the first quarter. While we reported declines in our other business units, we believe these declines were primarily the result of short-term factors, not a broad-based shift in customer behavior.

As we look at our business trends nationwide, we are optimistic about our long-term prospects. Although spend per visit remains down, the visitor counts are stable across the country. Our guests may be more cautious, but they continue to enjoy our brand of casino entertainment. As we reported previously, we have taken a number of steps to put us in an optimal position to capitalize on the recovery. We've built a more efficient business model over the last several years, taking significant costs out of the business, without sacrificing the quality of the customer experience. These efforts will result in substantial bottom line growth, as revenues begin to recover. And we're not simply waiting the recession out. Our Company has significant liquidity and ample access to credit, including $1 billion in untapped capacity on our revolving credit facility. We continue to look for opportunities that provide attractive long-term growth opportunities for our shareholders.

One of these potential opportunities that we've been working on for over a year is acquiring the assets of Station's Casinos. As you know, in December we submitted a bid to acquire all of Station's assets. This offer stands and we are still actively pursuing these assets. Many of you no doubt have read that Station has asserted it may have an agreement in principle with key lenders related only four of their 18 properties. If that proves to be the case, it would leave a considerable number of assets in play and we continue to work diligently to bring a transaction to fruition when permitted. Station's assets will be a great fit for our business -- it would align with our strategy of expanding the Las Vegas local segment -- the market where we have demonstrated an ability to compete effectively and profitably. We believe in the Las Vegas Valley's long-term potential. Acquiring additional local assets would be an attractive opportunity, one we believe would be immediately accretive to Boyd Gaming. Additionally, we continue to believe we can offer the greatest possible value to the majority of Station's creditors. Since no one is in a better position to manage those assets profitably from day one. Finally, we believe a smooth transition of Station's business to Boyd would be in the best interest of this community.

Regarding another important development, MGM Mirage reported in their recent 10-K that they are preparing to divest 50% their equity stake in Borgata. We hold the right of first refusal on any sale of MGM's Borgata interest and we will monitor the divesture process closely and act in the best interest of our Company. We are pleased with our 50% ownership position in Atlantic City's premier gaming asset and for us, it will continue to be business as usual at Borgata. A few final comments before I turn the call over to Paul. First, I want to recognize the job our leadership team has done in managing the business through these difficult times. They are a group of truly talented leaders and executives and I am confident they will continue to successfully meet the challenges of the upcoming year. Second -- you've heard me say this before -- the periods of great difficulty often lead to great opportunities. Boyd Gaming has the resources, the vision, the strategy and the experience needed to seize the opportunities that lie ahead. Our commitment to generating long-term growth remains as strong as ever. We are uniquely positioned for growth and intend to pursue it aggressively. And we will continue to be proactive in creating and pursuing opportunities that can provide an attractive long-term return for our shareholders.

Thank you for your time this morning. Now I would like to turn the call over to Paul. Paul?

Thanks, Keith. Hello, everybody. Overall we continue to see signs of stabilization in our business, although a number of unique challenges impacted EBITDA in each of our regions.

Let's start with the Las Vegas locals region. When we spoke last, we noted that a stabilizing trend was developing in Las Vegas and that we believed we had reached the low point of the business cycle. Our fourth quarter results reinforced that belief. The 20% decrease in EBITDA is the smallest year-over-year decline in the Las Vegas locals region in the second quarter of 2008. When compared to the third quarter of 2009, the picture becomes more encouraging. Gaming revenue, room revenue, EBITDA and EBITDA margins all improved from the third quarter to the fourth quarter. As these trends continue into the first quarter, the gap in year-over-year results is narrowing. As other operators have reported in recent weeks, business trends are finally improving on the Las Vegas strip. We've never been through a recession of this severity, so it's difficult to predict when positive trends on the strip will begin to impact the locals business, but we can be certain that it will. Many of our local customers are beneficiaries of improved business volumes on the strip. As the financial situation of our local customers improves and their confidence returns, so will their appetite for a normalized entertainment budget. We were encouraged to see a moderation of the promotional environment in the locals market during the fourth quarter, a trend that is continuing into the first quarter. As we've noted before, we believe broad-based promotional campaigns are often ineffective and inefficient, which is why we have traditionally declined to match our competitors' more irrational offers. It appears our competitors have begun to come to the same conclusion as they become more targeted in their promotional spending.

Moving to the downtown region, although revenues at our three downtown Las Vegas properties decreased during the fourth quarter, property EBITDA rose to increased efficiencies. But lowered ticket prices and higher fuel costs associated with our Vacations-Hawaii charter service resulted in lower regional results. As many customer packages are purchased months in advance, prices on those packages don't necessarily reflect the actual fuel costs we incur when a charter flight occurs. In times of rising fuel costs, as we experienced in the fourth quarter, this creates a shortfall on ticket yield and negatively impacts EBITDA. From an operating perspective, we are encouraged by our results. Visitation at our downtown properties remains stable during the fourth quarter and our share of the entire downtown Las Vegas market has risen to one-third. The Midwest and South recorded a 23% decline in EBITDA during the quarter. This drop, however, is almost entirely due to our two southern Louisiana properties. During our last call, we noted that growth in the Southwest Louisiana market was slowing down and that the market lacked the incremental demand needed to absorb future additional gaming supply. The fourth quarter results for Delta Downs and its competitors have proven that prediction.

Several factors are in play in Louisiana. First, we believe the Lake Charles market was benefiting from economic stimulus that typically follows a major hurricane. As was the case with Hurricane Ike in September of 2008. As we have seen in the past, those benefits rarely extend beyond the one-year mark. The second factor was the sluggish national economy, which finally began to impact the region. Though Louisiana and Texas job markets have softened, prompting consumers in those states to cut back on discretionary spending. That impacted results at Delta Downs and Treasure Chest.

Moving north, the news from the region was more encouraging. Blue Chip posted solid increases in revenue, EBITDA, and EBITDA margin during the fourth quarter. The goal of our recent expansion of Blue Chip was to create a regional entertainment destination that could draw more business from the Chicago metropolitan area, as well as other key feeder markets. We are meeting that goal, as more customers than ever are drawn to the wide range of unique amenities we have to offer at Blue Chip. Summing up the fourth quarter in the Midwest and South, while Blue Chip posted solid growth, Delta Downs and Treasure Chest combined to produce an $8.8 million year-over-year EBITDA decline in the fourth quarter. We are expecting first quarter results in the Midwest and South region to have similar year-over-year comparisons.

Finally, I would like to touch base on Borgata and Atlantic City. In Atlantic City, Borgata is clearly in a class by itself. We continue to build on our leading market share and have built substantial efficiencies into the business that are helping Borgata maintain adjusted EBITDA near prior year levels, even while revenues are down. In fact, Borgata would almost certainly have posted solid growth in the fourth quarter if it weren't for the bad weather. The snowstorm that hit the region in mid-December was one of the worst on record, and we estimated it reduced Borgata's EBITDA by more than $5 million during the fourth quarter, as customers found it extremely difficult to travel for a two-week period. As many of you have experienced personally, the East Coast continues to be impacted by some of the worst winter weather we've seen in our life times. Borgata has already lost three weekends to bad weather so far in the first quarter and we expect to see an impact on first quarter EBITDA in excess of the $5 million we saw in the fourth quarter.

Looking further into 2010, we are confident about our position in Atlantic City. Despite the well-publicized challenges that Atlantic City faces, it's important to note that in 2009, Borgata led the market in gross gaming revenue in all categories and achieved a 17.6% market share, which represents a nearly 40% market share premium. In fact, Borgata's gross gaming revenue was approximately $210 million greater than the second place Atlantic City operation. Even as other jurisdictions in the region introduce or expand gaming, Borgata offers an all-encompassing entertainment experience unlike anything else in neighboring states. As the economic recovery takes hold, we believe Borgata will capitalize on growth and consumer spending.

To summarize, the stabilizing trends we have discussed on previous calls continued during the fourth quarter and the first part of the current quarter. We have seen growing stability in our business across the country, and expect year-over-year gaps in our results to continue narrowing, as 2010 progresses. At this point, I would like to turn the call over to Josh to update you on the financials.

Thank you, Paul. Starting with the balance sheet, our debt balance was $2.6 billion, unchanged from the balance at the end of the third quarter. At year end, we were in compliance with our covenants, and going forward, expect to remain in compliance. Our leverage calculated in accordance with our credit facility, was 6.2 times, versus a covenant of 6.5 times. Our covenant steps up in the first quarter of this year to 6.75 times and continues to increase for each of the next two quarters.

We completed an amendment to our bank credit facility in December. Under the terms of the amendment, we received additional flexibility under our covenants in the four quarters of 2011. In exchange, we agreed to reduce the available borrowing capacity under the credit facility from $4 billion to $3 billion. We currently have approximately $1 billion in untapped capacity. That leaves us with plenty of capacity to fund the initiatives we are considering. As a result of the amendment, there was a $1.8 million non-cash charge from unamortized debt fees associated with retiring the $1 billion of capacity. This charge is recorded as interest expense and was excluded from adjusted earnings per share.

Changing topics for a minute to Borgata, MGM recently released information regarding the divestiture of their 50% equity stake in Borgata. Once the New Jersey casino control commission approves the transfer of MGM's ownership into a trust, accounting rules will require us to consolidate Borgata's results. Upon receiving the commission's approval, we will file an 8-K that will include financial information to assist you in modeling this change. Until then, we will continue to report Borgata as we do today, under the equity method of accounting, reporting 50% of their operating income in our results. The consolidation of Borgata will not have any impact on our covenants.

Other items I want to point out from the quarter, preopening expense was entirely related to Echelon. Interest expense was approximately $33 million during the quarter. In the fourth quarter of 2008, we had approximately $12 million of capitalized interest. We recorded no capitalized interest this quarter. Due to the stabilizing performance of Borgata in a very challenging environment, as well as the property's limited capital needs, Borgata continues to generate significant free cash flow. As a result, Borgata distributed $89 million in the quarter as a dividend to its partners. Borgata's leverage ratio was just below three times at the end of the quarter. As a result, Borgata will continue to pay dividends to the extent leverage remains below this level.

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

(Operator Instructions) And your first question comes from the line of Larry Klatzkin with Chapdelaine. Please proceed.

Hi, Josh. Couple things. One, Florida, looks like they talked to you about a tax cut in rates. Do you have any feeling -- if it gets to 35% or less, would you consider going forward down there?

Larry, this is Keith. We've been monitoring obviously Florida for a number of years since we purchased a Jai Alai down there. This conversion's been on the table for a while, so we're just continuing to monitor it. If indeed they do reduce it, we will take a look and see where that project fits, along with everything else we're looking at today.

Okay. As far as the Echelon costs, I assume this is the ceiling up at the site -- are there going to be more of these costs going forward?

Larry, there will be ongoing roofing costs, there is site security and some minimal site maintenance, so there will be some ongoing minimal costs.

All right, and then the weather was not just isolated to Atlantic City. Do you see any other properties taking some weather hits in the first quarter? Could we be seeing more than just the $5 million plus just from Atlantic City?

Larry, it's Paul. I think the weather for the most part in the first quarter moved up the eastern seaboard, so, as odd as it may seem, the Midwest has had a -- maybe pretty normal weather, other than a lot of snow. But haven't had the same impact that it had in the northeast.

All right, cool. Then the last question would be, any chance the recap of the Borgata, given how low the leverage is, and stability of the earnings?

Josh, do you want to address that, please?

Sure. I think given the low leverage, I think it's certainly something that we'll consider, combined with the fact that the credit facility that's existing now matures in early 2011. So it's certainly something we're looking at.

All right. Thanks, guys.

And your next question comes from the line of [Steven Ruvo] with CRT Capital. Please proceed.

Hi, it's Steve Ruggiero Just one quick question. Are the stabilizing trends you are seeing in the Las Vegas locals market the same on the Boulder strip as they are for your gross properties west of the strip?

I think, Steve -- it's Paul. We've -- obviously we've now just started to anniversary a new competitor that came onto the Boulder strip about a year ago, so it's generally across the board.

Okay, and actually one follow-up question to Larry on the Echelon and the preopening expense. In fact, we did see a decline in the fourth quarter, in your preopening expense. Do you expect we could see any further declines, or is this a run rate we should plan for in 2010?

Yes, I'll take that one, Keith. It will continue to come down. The -- we're continuing to have expenses to wind down some of the capital costs that were really left over from 2008. Some of that cost is obviously capitalized and goes on the balance sheet. And some of that goes into preopening expense.

But I would say beyond Q1, Q2 timeframe of this year, we would get to a point where we probably are on the run rate that you could expect. And at that point, it truly reflects the maintenance level spending that needs to be retained with that property, meaning insurance, taxes, storage, security, et cetera. So that should be a good indication once we get beyond first quarter, second quarter timeframe.

Okay, thank you.

Your next question comes from the line of Felicia Hendrix with Barclays Capital. Please proceed.

(inaudible) in for Felicia. Several questions. One in Louisiana, are you seeing more competition from I guess the Biloxi casinos in Mississippi marketing towards your New Orleans customers and has that continued into the first quarter?

I think the Biloxi casinos, as they search for some additional revenues, have always targeted markets to the west with New Orleans being a major population center. Treasure Chest -- only property we have in the Midwest and South that does not offer any hotel amenities -- so it is very purely a locals casino. And certainly folks enjoy taking a night or two and going somewhere from a regional perspective and Biloxi has always been and will continue to be target for those consumers.

And just one question on the tax rate in the quarter. Seeing that you guys had a pretty big benefit there, was that anything unusual?

Yes, the fourth quarter is somewhat of a nuance every year, only because it -- you true up to the annual rate at that point. In addition, we have a lot of permanent adjustments that have to be factored in and it skews things when the pretax income numbers are fairly low. So it, it reflects all of those things coming together. I think for 2010, we would expect our run rate tax rate to be around 38%.

Okay, thanks.

Your next question comes from the line of Carlo Santarelli with JPMorgan. Please proceed.

Hi, guys. I just had a quick question on margins, maybe in your Midwest and South region. Obviously some of your properties in Louisiana were able to brave this economic storm over the last few years, but now that things have softened pretty significantly in relatively short order there, do you guys have quite a bit of wood left to chop on margins, or are we pretty bare bones at present? Thanks.

I think when it comes to margins, obviously there was a decline in EBITDA margins in the Midwest and the South. Revenues were certainly down well in excess of the EBITDA impact, which was showing the variable to manage that process a bit. I think, one of the key areas that you have to focus on obviously in declining revenues is marketing expense. Though as I said, we saw the slowdown in Louisiana coming when we were on our last conference call, I've got to say it probably wasn't to the extent necessarily that the impact did hit in the October/November timeframe.

As a result, a number of our competitors were spending significant dollars in Southwest Louisiana. I think one in particular even commented on their conference call about that. And that correction, which takes a couple of months to occur, will be a benefit, if you will, as we get here toward the end of the first quarter and into the second quarter, easing back on marketing spend.

Thanks, guys.

Your next question comes from the line of [Dennis Rowe] with Wells Fargo Securities. Please proceed.

Good morning, guys. Couple questions. Could you -- Josh, could you share with us the revolver balance, as well as an update on any repurchases for the quarter? And I guess in regards to the revolver balance, how much availability under the covenants do you -- how much liquidity do you have in that facility right now?

Yes, I think from the revolver balance perspective, we have just under $2 billion, so it's about $1.9 billion outstanding. In terms of incremental capacity, we have enough to do exactly what we want to do with respect to -- I guess you're talking with respect to the levels of covenants -- and so, that's really not an issue with us -- or for us. In terms of the bond repurchases, we purchased about $30 million in the fourth quarter last year, primarily related to 6.75, and as we've always said, we'll just continue to be opportunistic to the extent that it makes sense for us to do so. So we don't update the market until after the quarter's over.

Okay, and then in regards to CapEx and corporate expenses for 2010, what are your thoughts there?

Well, we don't usually give too much guidance in those -- in that regard, but I would say that CapEx -- sorry, corporate expense -- shouldn't be much different than what you would expect to have seen from 2009 levels. And I think for CapEx perspective, we have a little bit left on Echelon that I alluded to earlier. We've actually already spent that money. That's about $25 million to $30 million. And then absent that, all we have is maintenance capital, which we're saying will be similar to levels that we saw in 2009, given our outlook for the business in 2010. So, that would be probably $50 million to $55 million of maintenance CapEx.

Okay, great. And then lastly, with just over $2 billion of debt maturing in 2012, what are your thoughts about refinancing, paying down the debt, or potentially issuing equity or a convert?

Yes, I would say that we're well beyond the need to start to have those conversations with respect to the credit facility at this point. The maturity is May 2012, so it goes current in the second quarter of 2011, so we're a good two years -- over two years away from that maturity. We've had conversations with our relationship bank starting almost a year ago, to start to develop our own strategy of how we were going to address that. And in our own mind, we have the plan in place -- the sketches of an outline of how to deal with that -- and it's just too early in the process to do something.

We can also, as capital market conditions warrant, term out some of that facility and we certainly will plan to do that over time, when it makes sense for us. Equity is not something that we're talking about right now. I don't think we're in the situation where we need to talk about it.

Thank you.

Your next question comes from the line of John Maxwell with Jefferies & Company. Please proceed.

Hi, good morning. Paul, I was just wondering if you can comment. I guess there's a little bit of noise coming out of New Jersey with BLTs at the Meadowlands. Any comments on that? And then also, any thoughts on how Borgata, addresses or how you look at the table games coming on in Pennsylvania?

John, this is Keith. With respect to the BLT issue in New Jersey, once again, it's another one of those issues that has been out there for a number of years, that the industry has been fighting. We have a new governor in office who has made comments both pro and con on the BLT issue. So, we'll continue to monitor it and continue to fight it and we certainly do not wanting to see that happen. We do not need additional compensation in the Atlantic City marketplace.

With respect to table games in Pennsylvania and Philadelphia in particular, it's something we've been planning for for a little bit now. We've known it's been a possibility and we watched that legislation as it went through and we will simply have marketing programs and reach out to our customers and make sure that we -- that they remain loyal customers in Borgata. We have the premier assets. The Atlantic City is a little bit more of a destination market than some of the local casinos in Philadelphia. So having the premier asset in that market is actually -- we are comfortable or confident in our position even with advent of table games in the Philadelphia area.

I think it goes without saying John that the amenity package in the Borgata is really unsurpassed. I'm not sure if really anybody in Pennsylvania -- given tax rates and return on that type of amenity package if they so chose to build it. So really the difference in tax rates between the two markets becomes a bit of a buffer relative to the distance trade-off that occurs between Philly and Atlantic City.

This is Josh. I don't mean to pile on with what everyone else is saying, but the reality is, the management team at Borgata has done a great job over the last two years. There's not many properties you can look at where they have had such a dramatic decline in revenues and EBITDA has basically remained flat when you exclude the impact of more recent weather effects. So, we've got a good management team there and they have got a business plan put in place that has contemplated really all the events that are unfolding there.

Okay. Is it -- just reading a couple of different things, is it your view that the BLT is -- some of the politicians say they could shoot it down. Is it a legislative issue, or is it a vote issue that if it was to come to that?

John, this is Keith. I believe it's a legislative issue that has to pass the bill to approve that. I am not familiar with whether or not it would have to go to a vote of the people.

Okay, and then just lastly, I gather you probably don't have any update on Station, but Josh, just wondering is there any costs going on in your corporate that would -- legal costs, or is that just negligible for -- with that situation?

Yes, given that the debtor has a period of exclusivity that obviously we have to respect, there's not a lot of costs that we're spending at this point. So it's in the rounding, to be honest.

Okay, great. Thanks for the comments, guys.

Thanks.

(Operator Instructions) With no further questions in the queue, I would like to hand the call back over to Mr. Josh Hirsberg. Please proceed.

Thanks, Janeeta. Thanks, everyone, for joining the call today. Should you have additional questions, feel free to reach out to the Company and we'll provide you the answers as quickly as we can. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect, and have a wonderful day.