Boyd Gaming Corp (BYD) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Q1 2010 Boyd Gaming earnings release conference call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference call. (Operator Instructions). I would now like to turn the call over to Mr. Josh Hirsberg, Senior Vice President and Chief Financial Officer. Please proceed, sir.

Thank you, Antwan and good morning, everyone, and welcome to our first quarter earnings conference call. Joining me on the call this morning are Keith Smith, 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 of 1995. All forward-looking statements in our comments are as of today's date. We undertake no obligation to update or revise 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, included but not limited to, those noted in our earnings release, our periodic reports, and our 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, 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 at boydgaming and streetevents.com. Now I would 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 first quarter of 2010. During the quarter, we continued to see improving trends in our business, a comment that we noted on our last call. While we were especially encouraged by the Las Vegas locals region, which recorded the best year-over-year comparison in nearly two years, we are also seeing improving results beyond Las Vegas. Both of these trends we expect to return to year-over-year growth in the second half of 2010. Our optimism about the future is derived from two fundamental sources. The first is the economic recovery that is taking hold nationally and is leading to positive signs in Las Vegas.

As with any industry that depends on discretionary consumer spending, recovering the gaming sector will lag the national recovery, but a number of indicators give us reason to be confident. (Inaudible) economy grew at 3.2% in the first three months of 2010. This is the third consecutive quarter of economic growth. The first quarter increase in consumer spending was the strongest in three years, and March was the sixth consecutive month that consumer spending rose. These increases in the first quarter were broad based, with gains in restaurant sales, durable goods, and other big ticket items. We have also seen strong numbers in housing, with new home sales in March rising 27% nationally.

Along with consumer spending, the consumer confidence index is also improving, and in April reached its highest level since 2008. This bodes well, since consumer confidence is an important leading indicator for our industry. In Las Vegas, we are encouraged by signals of strength in tourism and are hopeful it support a lasting recovery in the local economy. Visitor volume has risen for five of the last six months, and attendance has been strong at some of our largest conventions. CES, Magic and the NAB conventions all saw improvements in attendance over 2009. We anticipate overall convention attendance to experience year-over-year growth in the second half of 2010 and 2011.

We're also encouraged that traditional seasonal patterns are returning to the Las Vegas locals business. Normalization in this market is an encouraging sign, and we anticipate seeing year-over-year growth later this year. So beyond our optimism regarding the early signs of an economic recovery, we we are optimistic about the future of our Company. Today, our Company is ideally situated for profitable growth, whether that growth comes in the form of organic growth or new acquisitions. As we have navigated the challenges of recent years, we engineered our business model, positioning us to take maximum advantage of the recovery. We have diligently reduced costs in the business, even as we raise customer satisfaction scores. We are a much leaner, more efficient Company that we were two years ago, and we are now able to generate substantial increases in EBITDA, even with moderate increases in revenue.

In addition, we will continue to actively seek out and pursue acquisitions that meet our criteria of being a good strategic fit and improving shareholder value. As we find these opportunities, we will aggressively pursue them. Next, I'd like to spend a few minutes on two other important topics, the Borgata and our interest in Station Casinos. With respect to Borgata, as many of you are aware, on March 24th, MGM Mirage officially transferred their ownership interest into a divestiture trust. Their agreement with the New Jersey Division of Gaming Enforcement provides them with 18 months to divest their ownership, after which a trustee would be appointed to do so on their behalf. Our partnership agreement with MGM Mirage gives us the right of first refusal on a sale of their interest, and we will monitor the situation and act in the best interest of our Company.

Most importantly, it remains business as usual at Borgata, and we continue to work hard to maintain our leadership position in that market. Regarding our interest in acquiring Stations Casinos' assets, as you know, we have made serious and substantial offers in the past with these (inaudible), and we continue to be interested in acquiring them. A hearing in Reno today (inaudible) several issues with respect to the bankruptcy and will have a bearing on our future actions. Strategically, we seek out acquisitions that fit well with our existing business and enhance shareholder value.

So consistent with that comment, we welcome the opportunity to compete for Station assets so long as the process is competitive, open and fair, and the assets themselves have not been devalued to a point where it no longer makes financial sense. A few final thoughts before turning the call over to Paul for more details on our financial results. First, Boyd Gaming will continue to focus on operating our business as efficiently as possible to maximize profitability. Through the (inaudible) experience and effectiveness of our management team, we have been able to drive tremendous costs out of our business without sacrificing the quality of our guests' experience.

As the recovery takes hold, we will remain vigilant and disciplined, and will not allow unnecessary costs to creep back into the business. Second, our financial footing remains strong and puts us in a good position to grow the business. That growth could come from improving our results in markets where we currently do business, entering new markets, completing acquisitions or from new gaming ventures. We continue to have great confidence in the future of our industry and the ability of our brands to compete successfully in our various markets. Thank you again for joining us this morning. Now I'd like to turn the call over to Paul. Paul?

Thanks, Keith. Hello, everybody. Overall, this was a quarter that met our expectations. For the first time in almost two years, the Las Vegas locals region is trending positively and predictably. Results improved on a sequential quarter over quarter basis in both Q4 of 2009 and Q1 of 2010. This mirrors the basic seasonality pattern we traditionally experienced before the economic downturn began in 2007. We reduced the year-over-year EBITDA gap to 10% in the first quarter and expect a similar gap in the second quarter before returning to year-over-year growth in the second half of the year.

A positive trend we're noting as we look forward is that the Las Vegas locals promotional environment has moderated. Many of our competitors have returned to more national marketing strategies. As you know, we have not resorted to the extreme marketing campaigns that our competitors did during the depths of the recession. Our brand has proven resilient, offering local customers exceptional value through a period of economic difficulty and inflated promotional activity.

We offer one of the best and most consistent entertainment experiences in the valley, and we believe it will provide a vehicle through which we can gain market share as economic recovery and a normalized promotional environment take hold in Las Vegas. We are confident we have the right business model in place in the Las Vegas locals market and are comfortable in our ability to manage the business through the remainder of this economic cycle. In the downtown region, there were several factors affecting the results. First, as we noted in the fourth quarter, a combination of lower ticket prices and higher fuel costs at our charter service impacted the region, causing about one-third of this region's decline in EBITDA. Second, visitor traffic declined in the downtown area during the quarter. This led to reduced walk-in traffic.

Finally, we saw a decline in business from our Hawaiian customers who travel to Las Vegas on commercial airlines, which we believe can be attributed to the economic difficulties catching up with the Hawaiian economy. The Hawaiian government mandated furloughs have negatively impacted discretionary spending and visitation for many of our customers. On the positive side, we are beginning to see improvement in the Hawaiian economy in both the retail and tourism segments. We expect the state government employee furlough program to be temporary as well, which will help visitation once it is lifted. We are pleased that we continue to grow our share of gaming revenue in the downtown market, increasing 140 basis points over the last 12 months. In the Midwest and South, the business patterns we reported in the fourth quarter continued during the first quarter.

We reported bottom line growth in both Illinois and Indiana during the quarter, primarily driven by five consecutive quarters of margin improvement at Paradise, as well as refinement in our cost structure at Blue Chip following the opening of our expansion project in January of last year. These solid results were offset by continuing softness in business at our three Louisiana properties. As we've said before, the level of growth we reported in Louisiana during 2008 and 2009 was not sustainable, and was partially driven by one-time factors. Our Louisiana properties are returning to more normalized levels of business, a trend we expect to continue through the third quarter of this year. We are encouraged that all three of our Louisiana properties continue to maintain their market share. Finally, I'd like to touch base on Borgata and Atlantic City.

As we indicated on our previous call, severe winter weather took a heavy toll on Borgata's first quarter results. Absent the poor weather, we believe Borgata's results would have been similar to the prior year. It is no secret that Atlantic City continues to face a challenging business environment and growing competition. However, we cannot state strongly enough just how well Borgata is positioned to deal with such adversity. For the 12 months ended March 31, 2010, Borgata led the competition in both table game and slot revenue. On a total gaming revenue basis, there was nearly a $200 million gap between Borgata and the next largest property. When you look at amenities over the same period, the gap was even more pronounced. Borgata's cash food and beverage revenues were larger than the next three combined. The Borgata's dominance is not just a question of absolute size, but also relative performance.

Borgata's year-over-year quarterly gaming revenue growth rate has outperformed the balance of the Atlantic City market for 19 of the 23 quarters since its inception, including the 13 most recent quarters. There is simply no other property on the East Coast that offers an experience comparable to one at The Borgata. We're encouraged by signs of improvement in the economy, and we look forward to the busy summer season. In summary, the first quarter showed a return to predictability as our business performed as expected across the country. We're confident in our ability to successfully manage our business through the coming months as the recovery builds, and believe we'll return to growth in the second half of the year. With that, I'd like to turn the call over to Josh for a review of our financials.

Thanks, Paul. First, I would like to touch on some information regarding the accounting for Borgata. On our fourth quarter conference call, we indicated that the transfer of MGM's interest in Borgata into a divestiture trust would trigger consolidation of Borgata's results. Under our accounting pronouncement, the amendment to the operating agreement between Boyd and MGM resulted in a controlling interest to Boyd, and thus the requirement to consolidate.

The transfer occurred on March 24th. Therefore, our GAAP income statement in this earnings release, as well as the financial information that will be presented in our first quarter 10-Q, reflects eight days of Borgata's results, consolidated 100% into our results. The 50% of these results not attributable to ownership of Borgata are removed through the noncontrolling interest line item on the income statement. In our earnings release, we also provide non-GAAP financial statements that reflect the EBITDA performance of our business segments. This quarter, we have presented those non-GAAP results as if the consolidation had not occurred so as to be comparable with the prior year. That is, the first quarter non-GAAP results of Borgata are reported under the equity method presentation of the prior year. We have provided a table in our earnings release that reconciles the GAAP results to the non-GAAP financial statements.

When we report our second quarter results, we will present Borgata consolidated for the entire period, GAAP to non-GAAP presentations. As a result, the revenue and expense line items, as well as EBITDA, will reflect 100% of Borgata. So in addition to revenues and EBITDA being larger, below the line items, including depreciation, interest expense, and taxes will reflect 100% of Borgata's expenses. Prior year results, however, are not impacted by the required consolidation and will continue to be presented under the equity method. So we will provide pro forma schedules to reconcile prior year results to present Borgata as if it were consolidated last year. We filed a separate 8-K this morning with this reconciliation as well. Our balance sheet is also impacted by the required consolidation.

Borgata's balance sheet will be combined line for line -- sorry, let me say that again -- will be combined line for line with Boyd. As a result, each asset and liability category, including debt, will be impacted. So to summarize, results going forward will show increased revenues and EBITDA due to the consolidation. However, our earnings per share will remain unchanged (inaudible) for the noncontrolling interest. Now to unpack the quarter for you a bit further. Excluding Borgata, our debt balance was just below the $2.6 billion. At the end of the quarter, we were in compliance with our covenant, and going forward expect to remain in compliance. Our leverage calculated in accordance with our credit facility was 6.5 times versus a covenant of 6.75 times. Our covenant steps up in the second quarter to 7 times. We currently have approximately $1 billion in untapped capacity. That leaves us with ample dry powder to fund the growth opportunities we are considering.

Other items from the quarter that I want to point out, along with guidance for some of the non-operating items, include the following. Corporate expense, excluding share based compensation for the quarter, was approximately $10 million, and that should be a good quarterly run rate for the remainder of the year. Depreciation is estimated at $150 million for 2010. Borgata will add about $50 million in total for the final three quarters of the year. Interest expense was approximately $28 million during the quarter and is expected to be approximately $125 million in total for the year. In addition, due to the consolidation, we will include Borgata's interest expense of approximately $5 million to $6 million per quarter.

Given the maturity of the existing Borgata credit facility in January of next year, the run rate of interest expense at Borgata will be impacted by any refinancing of that debt. Opening expense recorded in the quarter was related to Echelon. We expect $8 million to $10 million for this item for the full year. (Inaudible) based compensation is estimated to be approximately $10 million to $11 million for the year, and the tax rate was 32% in the quarter. From a capital expenditure perspective, at Boyd, our forecasted capital needs are primarily maintenance related and run about $50 million to $55 million for the year. And just as an FYI, Borgata's forecasted maintenance capital runs about $15 million to $20 million.

Finally, at Borgata, due to the stable performance of that property, as well as its limited forecasted capital spending, the property continues to generate significant free cash flow. Borgata's leverage ratio at the end of the first quarter (inaudible) balance of $630 million was 2.85 times. So with that, Antwan, we're now ready for some questions.

Thank you. (Operator Instructions). Your first question comes from the line of Larry Klatzkin. Please proceed.

Hey, guys. Couple of quick questions. One, could you guys quantify what the weather might have affected you guys Company-wide?

I think in the first quarter, I mean, the weather impact in fairness is probably on the East Coast at Borgata specifically. And I think that impact was kind of, call it $6 million to $7 million figure.

Okay. Okay. That makes sense. Now that it's been resolved in Florida what the rules are and the tax rate and everything is, are you guys still looking at that property and do something with it, or are you still kind of holding off on that?

Larry, it's Keith. There were a couple of issues in Florida that, I guess, kept us on the sideline. One was certainly the tax rate, but we knew that going in. I think the other was just how the market developed overall and the levels (inaudible) we were seeing in that market. Now that the tax rate has been lowered, it certainly takes away one barrier, and we are evaluating where we're at and how we view that market. We're anxious to see how the market does rebound or if it does rebound going forward. But we're taking another look at it.

Okay, okay. That makes sense. And as far as the Station assets go, would you be interested in part of but not all of them, and would you partner up with somebody maybe to make the bid even more powerful?

Well, as we've said for a while, we're interested in acquiring both [Ofco] or [Profc]o or some combination, and we had an offer out there for the Ofco assets. I think at this point we're going to wait and see what happens in a hearing today or tomorrow and what the judge's rulings are before we determine what kind of actions we're going to take going forward. So give us the next 48 hours; we're having to wait and see that -- wait and see position.

That makes good sense. All right, guys, thanks a lot. I appreciate it.

Your next question comes from the like of Joe Greff with JPMorgan. Please proceed.

Good morning, guys. I have a question on the Borgata. Are you guys actively considering selling your interest side by side with MGM, or is that something that's completely off the table?

John, this is Keith. What I think we've said a couple of times, for us, we're going to sit back and wait and see how the process plays out. The ball is in MGM's court to see what they are going to do. We will see what the offers look like, and we'll make whatever decision is in the best interest of the Company. At this time, we don't have interest at this point in selling our half.

I think, Joe, as Keith said in the past and today, I mean, we do have the first right of refusal. So it puts us in a reasonable position to wait and understand where MGM is going with the process.

And do you have any knowledge of where that is in the process in terms of interest levels?

Really don't You'd have to speak to MGM about kind of where they're at and if they've gotten any expressions of interest. At this point, we have no knowledge of that.

Great. Thank you.

Your next question comes from the line of Mark Strong with Morgan Stanley. Please proceed.

Hi, guys. One quick question. In the Las Vegas locals market, you made a comment about business reproaching normal seasonal patterns there. What exactly does that mean? And can you help us think about just recent trends there on visitations, spend per visitor and promotions? Are those trends improving, or are you just saying it's more we'll see a normal seasonal pattern throughout the year?

First on the seasonality comment, the first quarter of the year has historically been, in pre-precession, the best quarter of the year for the Las Vegas locals business. It's really a combination of the calendar, the weather, et cetera, et cetera; and we, for the first time in a couple of years, actually saw the first quarter be -- produce better performance from an EBITDA perspective than the fourth quarter. That was not the case in '08 or '09. The first quarter was down from the fourth quarter. So that's the comment on seasonality, and frankly, predictability of the business overall and consumer trend. As it relates to some of the volume indicators, we're seeing overall spend is obviously still done. You can see that certainly in the year-over-year revenue numbers there. With that said, we are seeing an uptick in visitation, which is the amount of times folks would come into our buildings over the course of the month or the quarter. And that's the first time we've seen an uptick in visitation in over two years.

Okay. Thank you very much.

Your next question comes from the line of Chris Woronka with Deutsche Bank. Please proceed.

Hey, good morning, guys. If we go back to Borgata for a second, what's your kind of intermediate term view on Atlantic City, and how does the situation at Revel potentially impact what you do with your half Borgata, and maybe timing of that?

I guess our view of Atlantic City is that it certainly remains a challenging market as we look forward to continued competition from Philadelphia and table games there. And it's certainly nice to have the market leading asset there, and we work hard to make sure we, maintain that position and we're confident about our ability to compete going forward (inaudible) or other competition that may come. I think Atlantic City has plenty of capacity right now. What Atlantic City needs is more demand and a way to stimulate that demand. It certainly doesn't need additional capacity at this point, more frankly for the next couple of years.

Right. And any sense on whether your promotional activity there -- I know, I understand the weather issues -- any sense of whether your promotional activity is in line with what some of your competitors are doing?

No, I couldn't comment on that right now.

Okay. Thanks.

Your next question comes from the line of Steve Ruggiero CRT Capital. Please proceed.

Thank you, good morning. Two questions, first in the press release, you referred to lower downtown visitor volumes. Could you quantify that, and is that primarily -- are those lower volumes primarily driven by your Hawaiian shortfalls?

No, it's really, I guess, in two phases. The number of folks that came to our properties, as I said, we had commercial airlines, which is still a very large chunk that come to Hawaii on commercial airlines as opposed to our charter, was definitely down year-over-year. In addition to that, we saw visitor traffic on Fremont Street in particular at lower levels than we've seen in the past. That all told, along with obviously spending patterns which are down from a few years ago, had the revenue impact that you saw in the downtown market. With all that said, in recent reports of downtown gaming revenues, et cetera, et cetera, our share of the total went up by almost 1.5%. So we're still getting well more than kind of our share and growing our share. Our fair share now relative to (inaudible) is in some cases approaching 200% of our fair share at our properties relative to the other downtown competitors, so a very significant presence. Just would obviously like to see volumes of people increase.

So Paul, it sounds like it's really the visitors that live outside of Vegas that are creating this shortfall as opposed to locals, visitors who happen to visit downtown.

Absolutely, I would agree with that.

Okay, and the second question regarding Borgata and with the advent of table games this summer in Pennsylvania, how will your marketing change at Borgata, if at all, this summer?

I think maybe you easiest way to answer that is we certainly have known for a while that table games will be coming to that market. We have prepared our marketing campaigns to address that issue and to address our customers that live in that area. But probably it's important to remember that Borgata gets customers not just from the Philadelphia and the surrounding areas, but we get a tremendous amount of customers from New Jersey and New York and other places. So Philadelphia is not the only place that provides customers there. But we're prepared for it and we've addressed it, and we are confident in our ability to compete over the summer going forward with table games in Philadelphia.

Right, which we'd fully expect. I guess the ultimate question is, is there a cost difference, if you will, between this summer and last summer? Or is it business as usual?

I think you should expect it will be more business as usual as opposed to simply an increase in promotional environment, at least at The Borgata. I can't speak to our competitors. But for us, maybe a reallocation of dollars or reallocation of marketing programs in terms of how we compete. It will not simply be -- raise the level of spend. That would create too many inefficiencies for us.

Right. Steve, this is Josh. If you look at how Borgata has executed on a marketing plan around the introduction of slots in Pennsylvania, you'll see that basically they reallocated costs from one segment of the business to another. They saved costs from one area and offset that and used it to the benefit of the property going forward, and that's what has enabled it to partially offset large declines in revenue and still maintain very stable EBITDA going forward. The property has a thoughtful plan about executing on the introduction of table games, and they've already started that plan so that they'll be prepared for the introduction of that competitive issue.

Thank you very much. That's all very helpful. I appreciate it.

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

Hi. Good morning, guys. It may be too early, but have you seen any impact from the fuel spill in the Gulf on your Louisiana operations?

We have not, John.

Okay, and then in the -- I guess on the comment, Keith, in your paragraph about generating year-over-year growth during the second half, I assume that's consolidated? That's not all of your markets you're expecting to see year-over-year growth?

That's correct. On an aggregate for a consolidated basis, we would expect to see growth in the second half of the year. You're correct.

Okay, and then just lastly -- again, another question on Atlantic City. The potential new regulations that were proposed for new properties coming in that would require obviously a smaller investment -- specifically, I guess, the (Inaudible) Hard Rock proposal. Any thoughts or comments on whether you believe that that proposal is likely?

Well, I'm not -- I mean, I don't often predict when it comes to legislative issues or politics. It's kind of dangerous. I only say that we believe that what Atlantic City needs is a way to stimulate demand. It certainly doesn't need to loosen regulations to create more competition or create more capacity right now, that there's plenty of available capacity, and that the advent of smaller casinos -- boutique casinos with fewer rooms -- is not going to stimulate demand for that destination. So it simply it will carve it up, so we're certainly not a fan of that piece of legislation and have no idea of the likelihood of its success.

Okay. And then just one last question on the partnership agreement, if somebody comes in and offers MGM obviously a price that you believe is -- does a partnership agreement allow you to put your interest to that potential buyer?

No. It's a pretty straight forward right of first refusal. When MGM gets an offer, they will bring it to us and we will make a decision as to how we want to proceed.

But you can't force that buyer to also buy you out at that same price, that same value?

We cannot.

Okay, all right. Thank you for the comments.

(Operator Instruction). Your next question comes from the line of [Kevin Coin] with Goldman Sachs. Please proceed.

Hi. Good afternoon, thanks for taking my call. Just to confirm on the commentary on the second half growth, I know that's on a consolidated basis. But can you just confirm that that excludes the consolidation of Borgata, that it is on an apples to apples basis? And I assume you're only talking revenue? Or is that also EBITDA?

You're correct. It is on an apples to apples basis. This is not an accounting trick or accounting (inaudible) where we're going to create growth. So that part is correct. When we talk about growth in the second half of the year, we're actually talking about EBITDA growth. We fully (inaudible) second half of the year to grow EBITDA on a year-over-year basis.

Great, great. Secondly, just on the downtown visitation, is it simply a matter of, let's say, new supply or new attractions potentially on the strip that need to anniversary, and that you could -- after that happens, you could see maybe the fundamentals return to the strip -- or to downtown -- or is there something else you think that is causing it to be fundamentally challenged?

I certainly think that is a big part of it. There's more to see on the strip right now with the opening of City Center in particular. I'd also say that the value tradeoff that downtown has had for years is just not as quite as compelling given room rates on the strip, and so folks are taking maybe that kind of once in a lifetime opportunity to stay at the strip properties. I ultimately believe, for various reasons, including just the fact that some people really enjoy the downtown experience, we'll see that trade back.

Great. Thanks for taking my questions.

You're welcome.

And this concludes the question-and-answer portion of today's conference call. I will now turn the call back over to Mr. Josh Hirsberg.

Thanks, Antwan, and you all for joining the call today. If you have any follow-up questions, feel free to reach out to the Company. Thank you.

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