Boyd Gaming Corp (BYD) 2011 Q3 法說會逐字稿

Good morning. And welcome to the Boyd Gaming third quarter 2011 earnings conference call. All participants will be in listen-only mode. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Josh Hirsberg, Senior Vice President and Chief Financial Officer. Please go ahead.

Thanks Amy. Good morning everyone, and welcome to our third 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. Comments today will include statements relating to our estimated future results, including among others, guidance for the fourth quarter, annual 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, and we undertake no obligation to revise or update 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.

In our call today we will make reference to non-GAAP financial measure. 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 Investors section of our website at boydgaming.com. Reconciliation of forward-looking non-GAAP measures due to our inability to project special charges and certain expenses. Finally, we are broadcasting this call on our website at boydgaming.com. I would now like to turn the call over to Keith Smith, our President and CEO. Keith?

Thanks, Josh. Good morning everyone. Thank you for joining us for our third quarter earnings call. On our last two calls we discussed the EBITDA growth we were seeing in our wholly-owned business. I am pleased to report that the positive momentum we experienced in the first two quarters of this year continued during the third quarter. Our third quarter represented the third consecutive quarter we posted EBITDA growth in our wholly-owned operations.

For the quarter, EBITDA grew more than 17% and was the second consecutive quarter that all three regions reported year-over-year EBITDA gains. More important than three consecutive quarters of EBITDA growth was the performance of the Las Vegas locals region. This region led the Company with an 18% EBITDA gain for the quarter, and it is the second straight quarter of improved EBITDA in this region. The locals business is moving in the right direction.

From an economic standpoint, the recovery of the Las Vegas tourism industry is continuing. We looked at 18 straight months of increased visitation, 18 straight months of increased room rates, increase in convention business and sales tax numbers, stable employment numbers, it is clear we are headed in the right direction. Our Midwest and South region continues the strong performance for the fourth straight quarter of EBITDA expansion. This is clear proof that the economic recovery has taken a firm hold in the region. In previous quarters strength in the region was widespread, particularly in our properties in southern Louisiana.

And our downtown region continues to show revenue and EBITDA growth as well, with our focus on the Hawaiian market we are have a strong increase in [employee] visitation. In Atlanta City, the Borgata has been our most challenging segment this year, but there are reasons to be optimistic. First, Borgata achieved gaming revenue market share of nearly 20% for the third quarter an all-time record. Second, as to the effects of per [cana read] we believe Borgata would have reports year-over-year growth in both revenue and EBITDA during the quarter.

Overall, our third quarter results clearly show our strategy of providing an exceptional customer experience and a tight rein on costs is paying off on the bottom line, positioning the Company for further growth as the economy improves. During the more recent developments, the most significant event for the Company occurred on October 4, when we completed our acquisition of the IP Biloxi. This is a leading property in one of the country's largest gaming markets,a valuable addition to our nationwide portfolio. We believe we can generate significant new visitation by integrating the IP with our B Connected loyalty program and cross-marketing the IP with our other properties.

As of September 30, the IP generated about $36 million in LTM EBITDA. This is below the levels we discussed in May, when we announced the transaction, and this is mainly to a lost Labor Day weekend due to Tropical Storm Lee, and lower gaming volumes during the quarter in both the IP and the market in general. We remain confident about prospects for this property, and its ability to not only contribute to our future success, but also to provide a meaningful return on our investment.

Along those lines we continue to project we will be able to realize a minimum of $5 million additional EBITDA from the IP. This is a result of operating efficiencies made possible by being part of a large nationwide gaming company. We are optimistic our savings will ultimately be in excess of that amount. In addition to these savings we expect to see the benefits from the cross property marketing efforts, which will only further improve the performance of the property.

In Florida, the sale of Dania Jai-Alai has been extended to no later than November 28th, Dania Jai-Alai has exercised their option to extend the closing in exchange for a non-refundable $2 million payment, along with the initial $5 million payment, the buyers made a total of $7 million in payments on this transaction to date. We are actively working towards the closing of this transaction and is currently focused on securing the financing.

I would like to offer a few comments on our strategy moving forward. As we look ahead we remain confident that we will be positioned well for future growth in our core business. We will remain focused on delivering great customer service, controlling costs, and driving visitation through B Connected, our industry-leading customer loyalty program. We will also continue to focus on strengthening our financial profile, to actively managing our balance sheet and deleveraging and diversifying our asset base of sources of cash flow. Our strategy of diversifying our revenue stream has helped support our business over the past several years, and we continue to look for opportunities to grow through strategic acquisitions like IP. But purchasing existing operations is not the only avenue for generating growth for us.

There are also compelling opportunities to grow our business through development agreements and management contracts, in markets that complement our core business, lines of business such as online gaming. As the conversation about the legalization of online poker continues to gain momentum, we are working aggressively to position the Company to take advantage of opportunities that may arise should Congress enact legislation related to the online gaming environment.

As we noted previously, we cannot control the national economy or the recovery of consumer spending. But as you can see from our third quarter results, we can ensure that Boyd Gaming is managed sufficiently for growth. Thank you again for joining us this morning. Now I would like to turn the call over to Paul to talk about more specifics about results in each of our regions. Paul.

Thank you Keith. Hello everybody. We are pleased with our results from the third quarter. Every region in our wholly-owned business generated EBITDA growth as margins improved by 270 basis points. First, let's look at our Las Vegas Locals business. This was an exceptional quarter from an operating perspective. The region's 18% EBITDA growth led the Company, and margins rose by an impressive 320 basis points. This performance was the result of our continued focus on ensuring we maximize returns on our marketing dollars, as well as greater efficiencies throughout the business.

We saw growth at three of our four major local properties led once again by The Orleans. EBITDA rose 28% at the Orleans during the quarter, make its fourth straight quarter of growth as revenue increased as well. The Orleans provided a powerful example of how a refined cost structure will allow us to flow through a significant amount of future revenue growth to the bottom line.

The elevated promotional environment is continuing as well. Our largest competitor has been the most active in this respect, launching its second major marketing initiative in less than a year. At the high end they are now matching what we have been offering our best customers for quite some time. We take a targeted approach that we believe is more strategic, disciplined and profitable. We do not compete through mass advertising campaigns. Rather, we focus on developing a personal relationship with our best customers, giving them a consistently entertaining experience, and communicating with them through various direct marketing channels. As a result our customers continue to choose our brand in spite of the heightened promotional environment in the locals market. To date we have seen no impact on business volumes due to our competitors campaigns. Looking to the fourth quarter we anticipate that EBITDA growth will continue in the region.

Moving to downtown Las Vegas, we saw continued strength as EBITDA rose nearly 6% on higher revenues. Important to note that the EBITDA growth came despite an $850,000 year-over-year increase in fuel costs at our Hawaiian charter service, a trend we expect to continue in the fourth quarter. At the property operating level EBITDA rose about 11% as all three properties reported year-over-year growth. This performance is being driven by growing strength in our Hawaiian customer segment, visitation and play among geographic Hawaiians was up significantly during the third quarter. There are several factors playing in our favor in Hawaii.

First and foremost, Hawaii's economy has been strong, providing our customers greater confidence and more discretionary income. Second, we continue to be successful in marketing to our Hawaiian customers, which helped drive growth in this market segment. Importantly, we are better positioned to take advantage of growing demand from Hawaii, after putting a Boeing 767 into service on our Hawaiian charter route earlier this month. This aircraft gives us 12% increase in available seats allowing us to fly in more than 6,000 additional customers per year, based on our current five flight per week rotation, while improving the customer experience.

In the Midwest and South we reported our fourth straight quarter of EBITDA growth. Four of our six properties posted year-over-year EBITDA improvement. Treasure Chest led the region with a 21% EBITDA increase, followed by a 16% gain at Delta Downs. We are particularly encouraged by record monthly EBITDA results at Delta Downs during both July and September. The Midwest and South region and southern Louisiana, in particular has shown relative resilience over the last several years.

That trend continued during the quarter and demonstrates why geographic diversification is such an important strategy for our Company. Our success in this region is about much more than simply going along with the economic tide. Our marketing initiative has been very effective in driving business to our properties. We have kept a tight control and costs as well, further improving our margins during the third quarter.

In Atlantic City, we are encouraged by results at Borgata. We believe the property would have reported increases in both revenue and EBITDA during the third quarter, had it not been the forced closure in late August due to Hurricane Irene. We estimate that the impact of the hurricane including the closure of the property for three days, cost Borgata more than $6 million in EBITDA, and over $10 million in revenue. If you factor out this closure we believe Borgata would have reported increases in both revenue and EBITDA, which would have been its first year-over-year EBITDA increase in two years.

In September, for example, the property reported an 11% year-over-year increase in gross gaming revenue. We finished the quarter with a 24% share of Table game drop in Atlantic City, which is an all-time record. As we saw during the second quarter, Table hold was stable at 13%, in line with our expectations. The property's nongaming business continues to perform well as cash ADRs were up throughout the quarter. Looking forward we see reasons to be cautiously optimistic over the next several quarters.

Finally, I wanted to discuss some of the successes we have seen with B Connected, our nationwide customer loyalty program. Since we launched B Connected in 2007 it has become our Company's unifying brand, giving our customers an incentive to visit Boyd Gaming casinos across the country. It has been and it will continue to be a key driver of growth for our Company. We believe this program will be further strengthened when we add the IP to B Connected by the end of the first quarter of 2012.

Over the last several years we have worked to strengthen B Connected with a robust online and mobile presence. Since its launch in 2009 according to Compete.com, B Connected Online has become the most visited website of its kind in the gaming industry. Starting last year we further expanded the power of B Connected with the launch of dedicated mobile applications for the iPhone, iPad, and Androids, making B Connected Mobile the first app of its kind available on multiple platforms.

B Connected Online and B Connected Mobile give our guests highly personalized and constantly update information and offers, that generate better customer experiences and greater loyalty to our brands. These tools help customers get the greatest value out of their B Connected membership, and ensure that our marketing is as effective as possible. Earlier this month the American Gaming Association recognized B Connected Online and B Connected Mobile as the best website and best mobile app in the industry.

To recap, the third quarter saw continued improvement in our operations, as each of our three wholly-owned regions continued to generate year-over-year EBITDA growth. In the months ahead, we will remain disciplined and focused in providing customers with outstanding experience and consistent value. Thanks for your time today. And now over to Josh.

Thank you, Paul. Let me start with a few items from the quarter. Starting with the balance sheet, excluding Borgata, Boyd's debt balance at end of the third quarter was approximately $2.4 billion, which $1.4 billion wasoutstanding under our $2 billion credit facility.

Borgata's debt balance was $806 million, of which $15 million was outstanding under their $150 million credit facility. Immediately following the quarter we consummated the acquisition of IP Biloxi for a purchase price of $288 million. The purchase was financed with cash on hand, and a borrowing under our credit facility of approximately $200 million. Pro forma for the acquisition, Boyd has approximately $2.6 billion outstanding, with approximately $415 million outstanding on our credit facility which matures in May of 2012. And $215 million of availability under our credit facility that matures in December of 2015. We stated in the original announcement of the IP acquisition, the Company expects to raise approximately $300 million between now and the end of the first quarter next year. We are moving along several paths to complete this financing, and are very comfortable with where we stand in that process.

Moving to the income statement. Depreciation expense in the quarter was $46 million, with approximately $6.4 million from the prior year. Boyd's depreciation expense represented approximately $31 million of that number, compared to $36 million in the third quarter of last year. The decrease in depreciation expense is due to our reduced capital expenditure program. Borgata's depreciation expense of $15.2 million was approximately $1 million below the third quarter of last year.

Prior to adjustments related to acquisition accounting, we expect depreciation expense in the fourth quarter to include $4 million to $5 million related to the IP acquisition. Preopening expense was $4.4 million in the quarter, excluding the effects of the consolidation of Las Vegas energy. Again excluding the impacts of consolidating Las Vegas energy, interest expense for the quarter was $55.1 million.

Interest expense at Boyd $34 million for the quarter, an increase of approximately $5.5 million over the prior year, reflecting the impact of our financing activity in the second half of last year, offset by approximately $6 million, due to the expiration of outstanding swap contracts. Interest expense at Borgata was $21 million for the quarter, and $7 million over prior year, again due to financing activity that occurred in the later portion of 2010. Other income during the quarter of $1 million was related to payments from the disposition of Dania not contributed toward the purchase price. The tax provision in the third quarter was 23.75%.

Now let's turn our attention to guidance for the fourth quarter. As we did for the third quarter we will provide quarterly EBITDA and EPS guidance. Because we consolidated Borgata financial results, we will provide separate EBITDA guidance for Borgata, and provide guidance for adjusted EPS for the consolidated business including both the wholly-owned segments of Boyd and Borgata.

We expect wholly-owned EBITDA which includes corporate expense to be in the range of $73 million to $78 million exclusive of IP's results. Absent hurricanes and earthquakes we expect Borgata to generate EBITDA of $34 million to $37 million, compared to $34 million last year in the fourth quarter. With this range of EBITDA guidance including the IP's results, adjusted EPS for the fourth quarter is expected to range from income of $1.10 per share to a loss of $0.04 per share.

Operator, that concludes our remarks. We are now ready for questions from any participants on the call.

Thank you. (Operator Instructions). Our first question comes from Felicia Hendrix at Barclays Capital.

Hi, good morning guys.

Good morning.

My first question is on the Las Vegas locals market. I was wondering if one of you could just give us some color on how the rate of growth trended in the quarter?I know it ended up flat, but I was wondering if it looked better at the beginning of the quarter, if you saw any change?And then also wondering what you are seeing now, you do face tougher comps in the fourth quarter. Keith, you did allude to continued growth. I am just wondering if you could give us some more color on what you are seeing in the fourth quarter so far?

Yes, Felicia, it is Paul. I think as far as the impact of growth within the quarter overall, the summer is obviously typically the slower part of the business for the Las Vegas locals segment overall. The business overall has continued to improve. And if you go back a number of quarters, the rate of decline obviously continued to lessen, and we said it was a chance for us finally to post year-over-year revenue increase for the segment overall. I think the locals, the truly locals business is obviously the most challenged, as Las Vegas is going through its continued recovery, and the long road ahead.

Not surprisingly as I said, the Orleans led the performance overall. And I think that has a lot to do with the destination business that accounts for roughly 60% of Orleans overall business, and to some extent mirrors what you have been hearing from strip operators as well. From just a nuts and bolt perspective on the gaming side, overall relatively stable trends when you adjust for the practicality of the summer itself. Sports overall certainly had some impact as our customers played very lucky in August and September. And so that in its own right would have had a more negative impact on the quarter to the back end.

Thank you. And then just looking forward a little bit, I am just wondering as you think to next year, can you see continued growth, can your nongaming amenities still continue to grow, or do you need gaming growth in 2012 to actually keep that trajectory of improving rate of growth continuing?

Well, I think I mean our expectation in the Las Vegas locals business is we will see it on both sides. We have seen some pretty good improvement on the nongaming side, particularly in the hotel cash ADR aspects of the business. That is a positive and obviously has very significant flow through in its own right, since it is off an existing cost structure that doesn't really change. Overall on the gaming side of the business we continue to see modest but certainly positive improvements throughout the locals business.

And then just my final question, switching gears over to the IP. I know you all said you were confident in the growth. As we think about the rest of the fourth quarter and into the beginning of 2012, I am wondering should we use the EBITDA, the rate of EBITDA that you mentioned on the call as a benchmark, or should we revert back to prior expectations?

I think from our perspective our expectations are for the property to do what we stated when we made the announcement. I think there were some kind of extenuating circumstances that make the LTM EBITDA off of September 30, not the number that we are building from. And I think that obviously there is typically some disruption that goes on around transitions, and other factors that affect kind of what happened in the last quarter, but I think we are very confident that the property has a lot of upside from where it is today. We have talked about the $5 million of synergies, and we alluded to that we think they are more than that. We just need to get in there and get comfortable with what is going on. Great property, great set of employees. Very good market from our perspective. But we also see a lot of opportunity for that asset being part of Boyd overall.

Great. Thanks guys for the color.

The next question comes from Joel Simkins,Credit Suisse.

Yes, I guess the first question I had for you guys was Massachusetts, how much time are you spending there, we haven't really heard your name in the mix?Is this something that you are focusing on at this point?

Joel, this is Keith. I can affirmatively state that we are not focusing on Massachusetts at all, so if there is a rumor out there that we are associated with somebody, it is just that, it is a rumor.

Okay. And it does seem like Dan Lee and Mohito Pointe are getting a little bit closer to getting capital. Clearly they affiliated with MGM last week. Obviously Delta Downs is an important regional property for you. I know it is a couple of years away. How are you thinking about incremental competition at Lake Charles, and how are you preparing for it?

I think that Delta has been performing well over the last year, and has an important part of the Midwest and South region since we purchased it. We said over the years that more traffic along I-10 is good for us at Delta Downs, because we are the first stop as you cross over the border from Texas and Louisiana, we continue to feel that way. That if you put more traffic along the highway we will get our fair share of it. The reality is that we run pretty full at capacity on weekends on Fridays and Saturdays, so it is really the midweek opportunity if they put more people on the highway midweek to go into Lake Charles, we will get our fair share. It is a few years away, we will continue to run a great operation, we will continue to offer our guests a great experience and make sure they remain loyal to our property, by putting more people on the road and moving past us is a positive in our opinion.

And Keith, you spoke earlier about online gaming. Clearly you guys are very active on a national and local level on this topic. Can you give us a sense of sort of the timeline for the rest of the year, what we can expect in terms of online, and if nothing happens this year, do you think it is sort of a moot topic as we head into election season federally next year?

The conversation about online gaming is interesting, obviously. It is something that is regulated. Regulated in tax and many countries around the world, it just doesn't happen to be here in the US given our policies here. There are tens of thousands of jobs, and billions of dollars of tax revenues at stake. It is clearly something that we are supporting and looking to finally get passed.

While we are in the gambling business this is a topic I don't think I would be willing to venture a guess as to how it plays out over the next several months. There are actively working it, I think that there are a lot of dialogues going on in Congress right now to try to move this forward. If it doesn't happen in this session, I don't think the conversation is over. I think it will continue to be a relevant conversation. If not only as a way to protect consumers today who participate in this activity, there are millions of Americans a year that participate in this activity. So we will continue to work on it. I am predicting a timeline is very difficult.

Thank you.

The next question comes from Joe Greff at JPMorgan.

Good morning, guys. Paul, looking back at the locals market in the third quarter, were your gaming revenues up year-over-year, or is it more of a function that the contra revenues were down?

The contra revenues meaning promotional expense, Joe?

Yes, correct.

I mean we obviously don't break out that level of detail overall. I think we can kind of stick with what we said. Overall we continue to see improvement in all kind of aspects of the business, gaming and nongaming. Promotional expenses are driven a lot by slot dollars that are actively used to reward customers for coming in, and they tend to kind of honestly ebb and flow with the volumes overall.

Josh, what is the tax rate you are incorporating in the fourth quarter?

I am using the same tax rate that we had in Q3, because that is the best information I have right now. Our tax rate is pretty volatile given the level of income we are generating, versus kind of some of the permanent tax adjustments that are always there, and make the tax rate move around. It is truly more tied to just on the order of magnitude of the income. But for the estimates that I have used I have used the rate from Q3.

Great, thank you.

Our next question comes from Dennis Forst at KeyBanc.

I have a couple. Paul, how do you look at your market share in the locals market? Do you take it as a share of some standard number which is a combination of the Boulder Strip and the North Las Vegas, most of us do it that way including the balance of the County, and we add up the gaming revenue and then try and look at a market share on that?What do you look at for your market share?

Well, it really depends on the property, Dennis. It is a relates to Sam's Town which is obviously on the Boulder Strip, and on the east side of town we look at it relative to the Boulder Strip region. In fairness the Boulder Strip region for various reasons includes the M and Green Valley Ranch, which really are not on the Boulder Strip, and are obviously significant properties in their own right. That grouping gets clouded by the impact of properties that really aren't in the kind of mix, concentric mix geographically being part of that region. You just have to account for it the best you can. There is no really better information.

As it relates to the Orleans, the Gold Coast and Suncoast, we look at them relative to balance of County. Though in fairness the Gold Coast is included in the Strip numbers as reported by the Gaming Control Board, and so we obviously have to do our own work to factor it out, and then move it into the balance of County. Again, a very large segment overall in very different geographic locations within the city. But it is kind of the best mix you possibly can use to compare them.

Thanks for that answer. Has your market share the way you calculate it gone up year-to-date and in the third quarter?

Market share overall for us has been relatively flat. And that is, frankly, where I would just assume have it be. It is pretty easy to move market share from a gaming revenue perspective, by just simply enhancing the types of offers. Those are all gross revenue type calculations. So if we were solely here to grow market share we could do it frankly very quickly and in a very unprofitable way. But again, the focus clearly continues to be on EBITDA as opposed to gross gaming revenue.

Good. Then Josh, I had a couple of questions on write-downs. I think you had a $2.3 million write-down charge in the quarter. What was that?

That was a combination of two items. Acquisition related costs and then the other item in that line item was expenses related to the Tunica flooding actually.

Okay. Are the acquisitions costs now completed in the third quarter or will there be any slopover in the fourth?

Might be a few but nothing material.

And then you explained the other income of $1 million coming from a Dania payment. There was also an other expense of exactly $1 million that I thought was somewhat coincidental. What is that?

That is Dania, because the SEC does not allow us to include that in any of our operating segments. So that is separated out in other expense. So that is still operating expense associated with Dania.

The thing of it is EBITDA from Dania being a negative $1 million on the quarter.

Okay. Got you. Alright. Thank you very much.

Next question comes from Shaun Kelley at Bank of America Merrill Lynch.

Hey, good morning, guys. So Josh, did you get the cash balance? I apologize I was writing quickly but the cash balance for both the Company and Borgata at the end of the quarter, if I missed it?

I didn't and I don't know that I have that number readily available. Let me try to see, yes, I don't have that number, . I can get it for you,

And can we just like the sources and uses for the deal here, so you drew down $2 million, the rest came from cash. I guess the question that we have is really, if you are planning on raising $300 million kind of what tools do you guys have at your disposal to do so? I believe there is a basket that is available to you guys under your, in an accordion feature for your bank facility, but I wanted to get a better sense of kind of the cost of funds there, and what different paths you guys might be looking at to bridge that gap?

I think the Company's best positioning is to just let that play out. We have a lot of options from kind of moving up and down the capital structure to execute our financing, and I think we will just kind of leave it at that. I think folks have conjectured about doing different types of financing, and I would say those are all available to us. I don't think that people are just thinking about the Company issuing new high yield notes, but are kind of thinking of us in terms of what our options are.

To be a little bit more broad, would equity be on the table there?

I think that for the right kind of acquisition and strategic acquisition, and something that is transformative in nature, the Company would consider equity as long as it creates a good value for shareholders. IP is a good acquisition for us, but it is a plug-in type of acquisition, it is not a transformative type of acquisition. The preference at this point is non-equity.

Okay. That is helpful. And then I guess on Dania, you guys had implied back when you announced the IP that you were going to use the proceeds from Dania to help finance the deal. But now things seem like they are getting extended out. I don't know if you can give us any more color on the buyers here, but do the buyers have financing to close this deal, and is your operating assumption that they close or don't close at this point in terms of the financing that you would be raising, the $300 million?

What I would tell you is that we never have counted on Dania closing in order to finance our transactions. I mean that would be too tight, I think folks should recognize that when we announced IP we did it with our eyes wide open in terms of the period of time we had just come through, in terms of 2008 through 2010 so we didn't do it expecting that kind of hoping for Dania to close, or hoping for the high yield market to be there. We did it understanding here is our range of possibilities and making sure we have the flexibility and the alternatives available to us, so that if certain things don't happen, we kind of go to our play book and pull out the play, and start executing on one of those alternatives. That is basically what we are doing now.

We have a lot of different alternatives. We are moving forward on all of those, and when one of them seems better than the others we will execute on it. Dania was not part of the financing solution. It was certainly a way to have more cash, and reduces the need but we always said we are going to raise $300 million. If we don't get Dania, we are still going to raise $300 million.

That is helpful. My last question would be on just the pricing behind the IP deal. From the time you guys announced it to the obvious closing in October, the capital markets changed quite a bit. You also saw the fundamentals of the property start to change. I guess I think you called out a tropical storm or something that had a bit of an impact there, and we did see that the Gulf Coast numbers were fairly light in August and September. I mean with the numbers down 10% to 12% there, and then the capital markets with the cost of capital becoming higher, why not consider changing your underwriting for that, or at least postponing until there is a little more clarity? Why the need to close that deal so quickly?

Well, I think, again if you think about it from our earlier comments and other of my associates can chime in, from our perspective we had thought about circumstances, such as what are playing out here today. Maybe not exactly the same ones, but we said look, what happens if X happens or Y happens. We didn't go into the IP going well, we sure hope that the world is exactly like it is today and everything is okay. We were prepared for things to not play out the way they were when we entered the IP transaction, when we made that announcement, and we just continue to evaluate it.

I think what people should recognize is that our view of IP has several components associated with it, in terms of making it a good value for the Company, and market growth is one of those but it is not the only one. I would say it is pretty far down the list. My perspective is that the opportunities for us at IP come from, again plugging it into Boyd and getting the benefits of being part of a bigger company, and that means not only synergies below the line, but also revenue related synergies from being able to plug it into our systems, and benefit from being part of a big loyalty based card program. And when we see that working both ways for both the IP customers and Boyd related customers.

This is Keith. The other thing you have to keep in mind is we did sign a contract that had the property or acquisition closing once certain closing conditions were met. Once they were met we had an obligation to close the property. I think the softness we saw over the summer, while we are focused on it is not our primary concern. The more we learn about this business the more opportunities we see.

I think as Josh indicated earlier, we are every bit as confident today about the numbers we talked about when we announced the transaction. We are as confident today as we were then. We believe the synergies are greater. One of the things that might happen at the property over the quarter, when the revenues dropped they probably didn't manage the business aggressively as a larger company like ours may have managed it. We think there is once again, an opportunity there to run this business to a much higher level than the property has seen in the past. So we remain very confident about the prospects for that property.

Okay, thanks Keith, thanks Josh, I appreciate it.

The next question from Carlo Santarelli at Deutsche Bank.

Thank you. Josh, if you wouldn't mind, could you outline a little bit some of your uses of free cash flow as it relates to CapEx, both at Borgata and at the rest of your properties? And then also if you guys could talk through your expectations as we have seen revenues change here to the positive on a year-over-year comparison in the locals market?As we move into 2012 how you guys think about flow through on incremental revenue growth? Thanks.

Carlo, I think I understand your first question. If I don't answer it, please just let me know. I think from our perspective, our free cash flow is going to be used to continue to maintain our properties at a level that we think is necessary to be competitive, and we think we have a competitive advantage today versus our competition, in terms of both the product and the condition of our property. So that affects how we think about what we spend going forward. We get beyond kind of regular maintenance capital, I think the free cash flow is going to be going to deleverage the business. We do generate a lot of free cash flow as part of the ongoing business, and that will be as a result of the IP acquisition we believe over time.

Our maintenance capital runs about probably this year about $70 million, maybe a little bit less than that. About $15 million in the quarter. And at Borgata they have underway a room refurb which will be done kind of first quarter next year. That total refinished project is about $50 million or so. It was originally evenly weighed between the two years of fourth quarter of this year and first quarter next year. I will as usual some of the spend will drag out into, or some of the payments will drag out into more of the first quarter next year, but that is generally kind of how we are thinking about that. And we spent about $8 million in the third quarter related to the Borgata's maintenance. Going forward Borgata's maintenance is probably in the $15 million to $20 million range, and Boyd's is probably $75 million to $80 million.

With respect to your comment on the flow-through in terms of what we provided in the comments, we will see if Paul has anything to add, I think we have worked very hard over the last several years and continue to work hard to make sure this business runs as efficiently as possible, and every day we wake up and find little additional tweaks we can implement to make sure it does that.

A couple of flow throughs that we would expect going forward is north of 60%. I can tell you that we are seeing well north of that today as we get incremental revenue, we are seeing a high degree of flow through. We are very pleased by that. Once again, you see it in the margins, and you see it in the profitability. As we look at next year for every additional dollar of revenue we are able to grow, to focus on profitable revenue that you can expect 60% or more will flow to the bottom line. Paul?

I don't think I can really add anything to that. The amount of flow through obviously varies region by region, state by state, depending on gaming taxes. So my earlier point in some cases nongaming revenue flow through is actually if it is on the hotel side on the cash ADR side, much higher than even the gaming revenue flow through.

Great, guys. That is very helpful.

The next question comes from David Katz at Jefferies.

Hi. Good day all.

Hello.

I wanted to ask, did you if I missed it I apologize. Did you give out what both maintenance and any other CapEx was for the quarter? And did you comment on what we can expect CapEx-wise going forward, and what that would be for? Is there anything going into IP?

Well, I just answered that question but I will try again.

I apologize.

So Boyd was about $15 million in the third quarter related to maintenance. Our run rate probably for this year is about $70 million. We will probably come in a little bit less than that I would expect. For next year, Boyd without kind of IP is probably $75 million to $80 million. And Borgata is about $8 million of maintenance for the third quarter, and they will end up spending probably on top of that this year, probably about $20 million in capital related to their room refinishment project. Their normal maintenance would be $15 million to $20 million, and then about $20 million for the room refinish.

Next year they will probably have a similar amount of maintenance capital related to both the room refinishment and the Borgata maintenance. So again, $15 million to $20 million of maintenance and probably a little bit more for the refinishment project related to just because of the spend so maybe they end up spending about $25 million to $30 million for that project. IP should be about $44 million of maintenance that we mentioned when we acquired that asset. And that will be largely spent in the first half to three quarters of next year, although there will be a little bit of spend in the fourth quarter of this year, probably $5 million or so.

Okay. Thanks and sorry for the repeat, and give you a chance to make fun of me next time you see me.

The next question comes from Kevin Coyne at Goldman Sachs.

Hi, good afternoon. Thanks for taking the question. If I could just return turn to IP real quickly, as it relates to the synergies. Can you just confirm those are all basically all expense synergies, and can you give us a sense of how, will it take 12 months to eventually get to the full run rate, or how long do you think it will take?

Kevin, this is Keith. Some of them are immediate. We talk about $5 million, and we also talk about our confidence in that number growing, frankly quite a bit over the course of time, and every day that we spend there we learn more about the areas that we can make more efficient. There are some areas that will have an immediate impact, and there are some areas that are contractual and will make take more time to bring then in as part of Boyd Gaming's larger national purchasing power, or their efforts, insurance contracts run their course, contracts run their course. I think you should look at it as north of $5 million in the first year. It will take a year to get to that run rate. It won't happen on day one, it won't happen in the first quarter, it will take a year.

Sure. And then if I could just ask a question on, I guess the cross-marketing opportunities. I guess as you think about it, obviously you are going to mine the B Connected database in the region, but what would be your ideal increase in visitation to IP, as you bring new people to the property who maybe haven't been there before?

Well, I mean as you would expect there is and I think I explained on the last call there is quite a bit of US traffic that runs through the Biloxi market, and with properties to the west at both Delta and Treasure Chest, and the fact that Treasure Chest is truly a locals casino, frankly very similar to the Suncoast here in Las Suncoast here in Las Vegas. No hotel rooms at Treasure Chest. Most of our customers come within a five-ish mile radius, given what we have to offer with very, very high frequency, and those same folks frequent the Biloxi as well. It is about a 90-minute getaway from where they are located. The amount of folks in the database is significant obviously now that we own the place, we can compare the two databases together, and make offers as appropriate to Boyd customers that haven't been to IP, and then also take the IP customer base who is from a larger geographic area, and offer many more amenities at all of our properties throughout the region.

Okay. And then just one housekeeping. I saw a minor I guess gain on retirement of debt I believe at the Borgata. Can you just give us some color on what that was? And related to that did you buy back any debt subsequent to the quarter?

You are very perceptive. We bought back some bonds in the third quarter related to Borgata. It was $8.5 million worth of bonds.

Thanks.

The next question comes from Mark Strawn at Morgan Stanley.

Hi. Quick question on the IP. Could you give us a sense of what peak EBITDA was, and kind of maybe the 2006-2007 timeframe?

We are really not able to disclose that number. As you would expect it is per our contracts with them. But as you would expect it happened in the year following Katrina when they were the first to open in the market so it was quite some time ago.

Any sense of the kind of sustainable margins in that business at that time, or is that also something you can't disclose?

The market was just so different following Katrina, and you saw in our numbers at Treasure Chest as well back in that time. But it was just an anomaly that will probably hopefully never repeat itself again in all honesty, because the circumstances were just so odd.

Okay, thanks.

The next question comes from Joe Greff at JPMorgan.

Hi guys. A follow-up, and I apologize if you mentioned this, I didn't catch it. LTM for IP you gave us EBITDA. Did you give us what EBITDA margins were?

We did not.

Can you give that to us, or is that also in the category of we can't give it out?

Actually we would give it out but we don't have it at our finger tips so it is nothing we were prepared to discuss so.

Okay, thanks, guys.

We believe that LTM EBITDA is reflective of how we are looking at the business going forward.

The next question comes from John Maxwell at Jefferies.

Hey, just a follow-up, Josh. On the $8.5 million of Borgata bonds that was repurchased during the September quarter, or subsequent to the end of the quarter?

The third quarter.

I'm sorry?

It was purchased during the third quarter.

Okay. Did you purchase any after or do we have to wait for the fourth quarter to see that?

Probably have to wait. Sorry.

Okay. And then just, I guess Paul or Keith, just with the opening of Aqueduct, do you expect anything or not really going to be as much of a competitive threat to you as much as some of the other guys at Atlantic City?

Based on the intelligence we have it sounds like Aqueduct will probably open the end of this month or the first part of next month. Probably will have some small impact on Atlantic City. We don't expect it to have any real impact on the Borgata operation, as we look at our database of where our customers are from, and we look at our business we don't expect it to have any effect from the opening of that.

Great. That is all I had. Thanks, guys.

Our next question comes from Lawrence Klatzkin, Klatzkin Advisors. Going back to Atlantic City. Rebel is going to eventually open. Do you think that will grow the market and actually benefit you, and are you doing anything to prepare yourself to reface that opening as far as marketing goes and such?

This is Keith. Clearly we are watching what is going on at Rebel, and anticipating the opening of that property. We are not quite sure exactly what will open, in terms of the layout and the amenities that will be offered to the customers. We certainly hope that it goes to market. We expect that as a new product there will be some initial customers that will enter the market, and we certainly like our ability to get a shot at those customers, and have them visit the Borgata.

We are not so naive as to not understand that our customers will probably go and take a look there also. We do expect a little bit of visitation. We are preparing the property and going through a room to room remodel project. Opened a couple of additional amenities recently, in terms a couple of additional bars and new retail outlets to position the property, and make sure it is competitive. We are the number one property in the market today, and we look forward to remaining the number one even after Rebel opens. So we will be prudent but aggressive in maintaining our position. They do have to drive you to get to their property. Do you see it actually growing the market? I mean your opinion with then convention and everything that they are offering, that it might actually see Atlantic City go up for the first time in a while?

Yes, we do anticipate and certainly look forward to it growing the market. To what extent I wouldn't put a number on it, but I do expect it will grow the overall market, Larry. Thanks guys.

We have time for one more question. That is from Dennis Farrell at Wells Fargo.

Hi everyone. I was just wondering if you had the total amount of second lien capacity the Company currently has, either at quarter end or pro forma, for the IP?

Second Lien capacity? I don't think we would be limited in that regard.

Thank you.

Sure.

This concludes our question and answer session. I would like to turn the conference back over to Mr. Hirsberg for any closing remarks.

Thanks, Amy. And thanks for everyone participating. A lot of good questions today including David Katz', and we appreciate them all. Call if you have any other questions. We are available today. Thanks.

This does conclude today's conference. Thank you for attending. You may now disconnect.