Boyd Gaming Corp (BYD) 2016 Q3 法說會逐字稿

Welcome to the Boyd Gaming third-quarter 2016 conference call.

(Operator Instructions)

Please note this conference is being recorded.

I would now like to turn the conference over to Josh Hirsberg. Mr. Hirsberg, please go ahead.

Thank you, Gary. Good afternoon everyone and welcome to our third-quarter earnings conference call. Joining me on the call this afternoon is Keith Smith, our President and Chief Executive Officer.

Our comments today will include statements that are forward-looking statements within the Private Securities Litigation Reform Act. All forward-looking statements and our comments are as our of today's date and we undertake no obligation to update or revise the forward-looking statements. Actual results may differ materially from those reflected in any forward-looking statement. There are certain risks and uncertainties, including but not limited to, those disclosed in our earnings release, our periodic reports and our other filings with the SEC that may impact our results.

During our call today, we will make reference to non-GAAP financial measures. For complete reconciliation of historical non-GAAP to GAAP financial measures, please refer to our earnings press release and our form 8K furnished to the SEC today and both of which are available in the investor section of our website boydgaming.com. We do not provide a reconciliation of forward-looking Non-GAAP financial measures due to our inability to project special charges and certain expenses.

Finally, today's call is also being webcast live at boydgaming.com and will be available for replay in the investor section of our website shortly after the completion of this call.

I would now like to turn the call over to Keith Smith.

Thanks, Josh, and good afternoon, everyone. Thanks for joining us today.

In the third quarter, we continue to make significant progress executing our long-term growth strategy. On September 27, we completed the acquisition of Aliante, further expanding our presence in the Las Vegas Valley, the fastest growing part of our business. We also completed a major refinancing of our Company's debt simplifying our capital structure and significantly reducing our interest expense.

These are important strategic achievements for our Company. Together, they position us to further expand our free cash flow and create significant value for our shareholders. But before I go into more detail on what these transactions will mean for our Company in the future, let's begin with a review of our operations in the third quarter.

I will start with our strongest performer, our Las Vegas locals business, which grew EBITDA by 12% in the third quarter. This marked the sixth consecutive quarter of EBITDA growth in margin improvement, and it is the fifth quarter out of the last six that EBITDA grew at a double-digit pace.

We increased operating margins by 250 basis points year-over-year. As every property in the Las Vegas locals segment delivered year-over-year EBITDA growth and margin improvement. This performance is the result of our ongoing focus on identifying new efficiencies throughout our business as we continue to make significant and profitable refinement store operations and marketing programs.

These refinements have eliminated less profitable sources of revenue and resulted in meaningful year over year EBITDA growth. However, even with these refinements, our properties have maintained or grown market share.

We've also benefited from a local economy that continues to strengthen. Visitation's to the Las Vegas market continues to grow over last year's record levels, including an impressive 12% increase in convention business. Citywide room occupancy is running at 90%, up 170 basis points over last year.

Taxable sales are at record levels. The local economy has added more than 26,000 jobs over the last 12 months at a growth rate of 3%. Total employment is at an all-time high. Average weekly wages are up.

And more than $10 billion in construction activity is now in the pipeline across the Las Vegas Valley, including a 600,000 square foot expansion at the Las Vegas Convention Center. And much of this construction is already underway.

The southern Nevada economy is strong and the future outlook is bright. We remain optimistic about the long-term direction of our Las Vegas locals business, and believe the EBITDA growth trends we've seen over the last six quarters will continue.

Growth trends are also continuing throughout the downtown Las Vegas market as visitation remains strong. Our downtown operations are well positioned to benefit from these trends, and delivered solid results in the third quarter despite construction disruption at the [California] related to various renovation projects at the property. These projects included a renovation of our hotel rooms that reduced our room count by 14% in September. This project will be completed by the end of the year.

Adjusted EBITDA for the region was in line with prior year results and was just shy of the record third-quarter achieved in 2007 just prior to the recession. We believe EBITDA growth will resume in this segment once our renovation work is complete in the first quarter.

Outside of Las Vegas, with a couple of exceptions, our midwest and south properties generally performed in line with our expectations. And we are focused upon improving our performance in the two markets where we continue to deal with the impact of added competition.

In Mississippi the IP has been contending with the added gaming capacity from a nearby competitor that opened last December. While the IP team is working hard to identify opportunities to mitigate the impact of this new competition, our progress to date has been below our expectations. But the IP is a market leading asset, with first in class amenities, and we're confident we will turn the corner with this property in the coming quarters.

Increased capacity also continues to have an impact on the Par-A-Dice in central Illinois. There are now more than 4,200 video gaming machines in operation across Par-A-Dice's feeder market, up more than 16% year-over-year. Despite this considerable challenge, the Par-A-Dice team continues to do a good job managing the properties' cost structure and successfully improved operating margins for the second straight quarter.

In Louisiana, Evangeline Downs contended with significant flooding throughout its region in August, But the property successfully overcame this challenge delivering solid EBITDA growth in the third quarter. To the west results at Delta Downs were impacted by the final stages of construction of our new 167 room hotel tower at the property. That construction work is now complete, setting the stage for future growth at Delta Downs.

We opened the first rooms in the new hotel tower on October 21, allowing us to begin work on the renovation of the existing 200 hotel rooms in the properties original hotel tower. Once this project is a complete in December, Delta Downs will feature 370 new or completely renovated hotel rooms, a new steak house and an expansive outdoor pool and entertainment venue. These new amenities will take the Delta Downs entertainment experience to a new level and position the property continuous long-term growth trajectory in 2017.

So setting aside challenges at a few properties in our midwest and south segment, we remain confident at the overall direction of our operations. Particularly our Las Vegas locals business. And we are expanding our presence even further in the southern Nevada market with our recent acquisition of Aliante and our pending acquisition of the Cannery properties.

We completed the Aliante acquisition on September 27, giving us our first asset in the northern part of the Las Vegas Valley. Aliante is an exceptional property, one that puts us in a great position to capitalize on long term growth trends across the area. This part of the valley is emerging as an industrial hub with millions of square feet of industrial and warehouse space now under construction throughout the area.

This will inevitably drive further population growth expanding the potential customer base for Aliante. Over the last two quarters, Aliante has been producing financial results that exceed the original projections we reviewed when we first agreed to acquire this asset. We remain comfortable with our prior estimates of $8 million in annual run rate synergies at Aliante, and our projection of $30 million in EBITDA during our first full year of ownership in 2017.

Separately, our purchase of the Cannery casinos in north Las Vegas and east Las Vegas is pending regulatory approval. We continue to work with the Federal Trade Commission and still expect to close the transactions by the end of the year. Beyond these transactions we continue to invest in our non-gaming initiative which is driving non-gaming revenue growth throughout the portfolio.

This part of this initiative, we expect to open several new restaurant concepts in the fourth quarter and early next year. But our growth opportunities are certainly not limited to these initiatives. We also see opportunities to generate incremental revenue and EBITDA growth as well as margin improvement for through the implementation of new technologies.

Earlier this year we commenced a major initiative to modernize our technology and marketing systems. Once the rollout has been completed, this upgraded ITM marketing infrastructure will provide improved insights into our customers and their behavior, driving both incremental revenue and more profitable revenue throughout our operations.

As you saw at our Las Vegas locals region in the third quarter, this new approach has the potential to generate improved flow through to EBITDA in targeted areas. And as I noted last quarter, we are reviewing opportunities to more effectively leverage our nationwide size and scale, particularly with respect to our back of the house operations. These will be targeted opportunities to take redundant costs out of the business without compromising the customer experience in any way.

Finally, I want to know the solid progress we made in the third quarter is strengthening our balance sheet with the completion of our debt refinancing. This refinancing allowed us to simplify our balance sheet by consolidating the Peninsula debt into our capital structure.

Going forward, it will also significantly reduce the Company's annual interest expense, further enhancing our free cash flow. Our balance sheet continues to strengthen. Based on our progress to date, and are growing free cash flow, we remain confident in our ability to reach our long term leverage target of 4 to 5 times EBITDA within the next 12 to 14 months.

So, in conclusion, we continue to make good progress executing our long-term growth strategy. Our Las Vegas locals business is delivering strong EBITDA growth and we are preparing to expand further in this growing market. Excluding challenges in a few markets, our midwest and south properties are generally performing in line with our expectations. We're confident we will be able to improve the performance of the few properties that are not.

Through the implementation of new technologies and new efficiencies, we're laying the groundwork for future growth in EBITDA and margin's across our operations. And we continue to strengthen our balance sheet and free cash flow, giving us a strong foundation for growth as we look to 2017 and beyond.

Thank you for your time today. I will now turn the call over to Josh.

Thanks Keith. During the quarter we completed a refinancing of a significant portion of our balance sheet. That resulted in the retirement of all of Peninsula's debt as well as our 9% senior notes due 2020. We also refinanced our existing credit facility that matured in 2018. This financing extended our maturity while significantly reducing interest expense.

To provide context for these savings, our guidance for full year 2016 interest expense is $210 million. And we should be pretty close to that number when we finish out this year. As a result of this financing, assuming similar levels of debt outstanding, we estimate interest expense for next year will be approximately $165 million.

Our quarter-end debt and cash balances were provided to you in our earnings release. We're on track to achieve our leverage target of 4 to 5 times EBITDA and expect to be below 5 times by the end of 2017.

During the quarter we invested $45 million in our properties, including maintenance capital, non-gaming investments, and the Delta Downs Hotel project. By the end of this year the hotel and amenities expansion at Delta Downs will be completed, and our investment in non-gaming amenities will be finished in the first half of 2017.

As you will recall, in August we completed the disposition of our equity interest in Borgata. As a result of this transaction, Borgata has reported as discontinued operations.

We retain the opportunity to receive our share of property tax refunds owed Borgata. Borgata is currently offsetting the amount it is owed against property taxes as they become due. Our 50% share of the tax refunds received to date has been almost $16 million. Borgata continues to have positive settlement discussions with both the city and the state regarding the remaining tax refunds.

Now turning to our 2016 EBITDA guidance. We expect full year EBITDA to be in the range of $530 million to $538 million. This guidance incorporates a revised outlook based on third-quarter trends. For the midwest and south segments, we expect EBITDA trends in the fourth quarter to be similar to those of Q2 and Q3, below the prior year by about 6% or so.

Our guidance also incorporates a fourth quarter EBITDA contribution from Aliante of approximately $5 million. Including the contribution from Aliante, for the full year our Las Vegas locals segment should grow EBITDA by about 11% to 12%.

Finally, given the uncertainty of timing surrounding the Cannery acquisition, we have not included any EBITDA contribution from the Cannery acquisition in our guidance.

In conclusion, our Nevada business continues to perform at a high level. Outside of Nevada, we have a few isolated markets where we need to do a better job. We will focus on improving our performance in these markets and are confident we will make progress in the coming quarters.

We are very pleased with the Aliante acquisition. We remain confident not only in our ability to deliver the synergies we have previously outlined, but also the long term growth opportunity this acquisition represents for our Company.

And finally, our ability to generate free cash flow is improving. Over the last two years, our operations have significantly improved. And our outlook for business remains positive.

The recent refinancing set the stage for further reductions in interest expense. And our capital expenditure programs are slowing with the foreseeable completion of our investments in Delta Downs and our non-gaming amenities initiative.

As we consider how best to deploy our enhanced free cash flow, we will take a balanced approach. Balancing our focus on deleveraging, growing opportunistically, and returning value to shareholders. As always, we approach capital allocation with the objective of maximizing long-term value for all shareholders.

With that, operator, that concludes our remarks and we are now ready to take any questions.

(Operator Instructions)

Carlo Santarelli, Deutsche Bank.

Hey, Josh and Keith. And Josh thanks for the color on the guidance. Just to better understand, if you bridge the gap between the midpoint of your old guidance and the midpoint of your new guidance, I believe it's about $11 million. Is it fair to assume that Cannery is roughly $5 million of that or ballpark?

Yes, Carlo, we had originally said that Cannery and Aliante together would contribute, I don't know $10 million to $12 million. So, wherever you would have assumed in that range, about half of it would come from Cannery and about half would come from Aliante.

Great. And then if you look out and obviously with locals growth in the quarter on the top line being sub 1%-ish, you guys were able to grow EBITDA obviously fairly nicely. As you look forward and we look out to 2017, how much more room is there, not just in locals but maybe even more specifically in the Midwest and South region is there to curb costs?

And then on top of that could you maybe quantify what the impact in the Midwest and South was from the flooding and construction which maybe helps us get a little bit of a better sense of what 3Q would've looked like from a cost perspective ex those things?

Carlo, this is Keith. So, when you're looking out at the Las Vegas locals region, I think whether you look at nine months or 12 months, you have seen a growth rate in the 3% range, and you have seen our market share and our growth, gaming revenue growth in that same range. And so, it was a little less in Q3, but when you look over the last nine or 12 months, it's closer to 3% than the sub 1%.

I think we still feel good about the growth in the locals market. Given the last five or six quarters and given the dynamics in the locals market, once again what you're looking at taxable sales or population or job growth, employment, all the statistics remain as strong as they have ever been. And so I think we still feel very good, absent maybe a little bit of a slowdown this quarter. I think our growth this quarter, if you look at the last three months, was closer to 2%. And so, once again were feeling good about the market.

I think when you look at the Midwest and South market overall, I don't think you can paint a brush or take one view of all those markets they're all acting somewhat differently. We see good growth in some of our markets and actually some shrinkage in some of our markets, and so I don't think it's consistent. I couldn't apply one number out there.

Okay. Great.

Did you have a final question?

If you guys could maybe try and put some parameters around the flood impact as well as the construction impact to EBITDA in the 3Q, any sense of what that could have been?

I think we estimated the flood and maybe the construction disruption together. When we look at those two properties, in terms of how they were impacted, we would say they're probably $1.5 million to $2 million.

In total between the two?

Yes exactly.

Great thanks a lot guys.

The only other thing I want to emphasize about the Las Vegas revenue growth, a lot of that had to do with decisions that we made in terms of how we were going to market and who we were going to market to. I don't think it is necessarily representative of the overall growth in the marketplace. So I think you -- I wouldn't take our revenue growth and extrapolate it to something that's going on in the market. We made a conscious decision to change strategy in how we were running the business for the third quarter.

For sure. Understood. Thank you Josh.

Felicia Hendrix, Barclays.

Hi. Thanks. Josh, can we just stay on that point for a second -- and Keith also. If we just step back, you guys listed out a lot of really positive things that are going on in the Las Vegas locals market and how you're positively positioned. It sounds like you made some marketing decisions in the third quarter that didn't pan out the way that you expected. Is that the full reason for perhaps the slower than expected revenue results in the quarter?

A couple of comments, Felicia. First of all, the marketing changes we made actually paned out exactly like we expected. And the direction of those programs was to not invest in some less profitable customers and, therefore, just take a different direction. And it actually worked out just the way we thought it would which is that it muted our overall revenue growth.

In the quarter our revenue growth was still close to 1.5% or 2%, which exceeded the market overall for the quarter. And so we did a very good job even though once again we implemented a strategy to not invest in some less profitable customers. So, it's actually working. And it's part of a strategy we've been working on all year. It's not exactly new for the third quarter.

Okay, so it sounds like just by getting more profitable customers in that benefits your EBITDA you are not paying for -- throwing good money at bad on the top line. One thing I just wanted to understand was when you were saying that the top revenue in the Las Vegas locals markets was up about 1% or 2%, but based on the numbers that you reported, it looks flat. So, I'm just wondering if we're looking at something different.

One's gaming revenue versus reported (multiple speakers).

Oh, you're just talking about gaming revenue. Okay, got you. Okay, so let's move on from that. And just looking very big picture, Keith again, just taking all your prepared remarks, right? Las Vegas locals market growth to continue downtown and we had some construction disruption, midwest/south. We should be anniversarying the competition soon. You had some flooding, that's over. Delta Downs you are going to complete the hotel.

Maybe some of that is offset by continued competition from the VLTs in Illinois. But if you wrap that all up and then you look at 2017 and then you also think about Aliante and Cannery, it seems like 2017 should be better for the Company than the past several quarters would imply. Is that fair?

First of all, thank you for that good summary.

That's the Cliff Notes version, we will have to publish that.

Next time I will call ahead and you can give that to me and then we'll keep the call shorter. Thank you for that. I think they would expect 2017 to continue the trends. We feel good about the locals business, as I said in my prepared remarks, we expect those trends to continue.

With the addition of the Delta Hotel and anniversarying the competition at IP specifically, we expect better results there. The VLTs or VTTs tease in Illinois are just going to continue. I don't know when we will find a bottom to that particular problem.

Hopefully they're, knock on wood, won't be continued flooding or more flooding in Louisiana next year, although that's always hard to predict. So, overall do we expect a year in 2017 as we look out that would be better than 2016, sure.

I would add one little concept to that, Felicia, and that is, when we look across the business where you there you are looking at Las Vegas locals or the markets outside of Las Vegas, there is nothing fundamentally wrong with the business. It is -- we're dealing with isolated issues, whether it be competition or the expansion of VTTs or construction disruption, you can all put your hands around it. And I think that's what we feel generally comfortable about when we look across the portfolio.

Thank you because the reason why I'm asking this is, I'm just wondering if you can reconcile that with the perception that the consumer may be weakening particularly in the regional gaming markets. Because that is what keeps showing up in the numbers.

I would say that's not the way we feel about our business, and that's why we went to the extreme of trying to explain where we are seeing issues and the primary issues, which are the competition down at IP, the VTTs in Illinois, the flooding and the construction disruption in southern Louisiana. Those things shall come to pass, and when they do, we wouldn't expect the customer or the performance to be any different than the way it was before in reality.

Felicia, one of the ways I think we measure part of that is the level of unrated play that we see in our business. We all know that that was the first business that went away in the beginning of the recession. It's the most sensitive business to us. And we've seen good growth there over the last several quarters across the portfolio whether it's here in Las Vegas or whether it's across the Midwest. We continue to see growth in Q3 in unrated play and so that gives us confidence that the business is solid. And as Josh said, the economics or the environment and the markets we operate in, are solid. There aren't any significant

We're just not seeing any change in --

Significant change in those markets.

In how the consumer's performing.

Okay.

I wouldn't say the consumer is getting stronger. I am not saying consumer is getting stronger by any means, I'm just saying we're not seeing a significant falloff and we just don't see the event that's going to cause that right now. It doesn't mean it can't happen.

All right, thanks for that.

Sure.

Joseph Greff, JPMorgan.

Hello, everybody. Just to ask one final question on the Las Vegas locals market. I think we all understand what you are saying about the marketing changes in the 3Q relative to the year ago third quarter, in terms of eliminating no margin, low margin revenue growth.

And just for us, I guess to better understand on a go forward basis how to think about your reported net revenues to EBITDA, is there a way to quantify your changes in marketing and what that revenue impact, in terms of what you are doing now and what you did a year ago, what that impact was in the third quarter? Recognizing that we are valuing on EBITDA and from an EBITDA line perspective it's great. But if you could help us understand that I think that would be helpful.

Joe, this is Keith. There is really no easy way to start to parse that out and what is the natural rate of growth in the business versus what the decline is from changing reinvestments or altering marketing programs. Joe, this is a very dynamic business as I think you understand and everybody understands; you're making changes daily and weekly and monthly. So, it is difficult to parse it all out. So, I don't think we will be able to provide you any sort of insight into that.

Okay, and then in the third quarter I'm presuming the contribution from Aliante from an EBITDA perspective was something very small like less than $0.5 million and from a revenue perspective. If you could help quantify that.

Yes, it was -- we would've called it out if it was anywhere near those numbers. It was really small in the third quarter.

Great. And then, Josh, $45 million of CapEx in the quarter with a little bit below what we were projecting. Can you give us what you are anticipating in the 4Q? And what your CapEx would be for next year if anything has been pushed out from 2016 into 2017, if you could help clarify that?

Sure. So when we started the year off we talked about maintenance running around $115 million and then we talked about the Delta Downs project being about $45 million and non-gaming amenities being about $45 million, so around $200 million. I think where we sit today, we generally know that about $20 million to $30 million of that spend is going to flow over into 2017, and so that puts you around probably $170 million for this year. And I think that would imply something around another $40 million to $50 million in Q4 if we are able to hit that pace.

Typically we don't spend at the levels that we have generally budgeted, but I would say, for now, that's the best we could give you. I think we haven't set any new budgets for 2017. That's the process we're going through now. So, I can't give you an idea what the CapEx program looks like for 2017 beyond just knowing about $20 million or $30 million will roll from 2016 into 2017.

Got it. All right so, you're looking at something around $140 million plus maybe a little bit of CapEx for Cannery or for Aliante. There's nothing really at Cannery.

Yes. I think I'd say for 2016 the number is more like $170 million or so. So, that's -- we're at about $120 million year to date and we will spend $40 million to $50 million in Q4, most likely, if we're able to meet that, if not it would be a little bit less. And then I think what we have identified as general run rate maintenance capital is $125 million plus or minus a little bit here or there. So, you can use that as a base for 2017 if you want until we get through our budgeting process.

Good enough. Thanks.

Joe, just a follow up to your question on revenues, and I think one of the things you don't see when you look at Las Vegas locals revenue for the quarter, there was a decline in non-gaming revenue in our business, and that was a function of two things. One it was the outsourcing of a restaurant to a third party, so we no longer record the revenue of that outlet, but it was also the timing or the rotation of a significant piece of convention business at the Orleans that we had last year that we didn't have this year and it will be coming back in the future.

And so those two events actually caused a decline to non-gaming revenues which is impacting the overall revenue number when you look at the chart in the table. So, keep that in mind as you are looking at what looks like flattish revenue growth in the LBL.

Thank you.

Shaun Kelley, Bank of America.

Hey, guys. Promise no questions on LV locals revenue. But just a couple of -- you guys of covered most of the ground here, so just a couple of specific things. So first of all, Josh, on the Cannery thing, you mentioned an FTC approval there. Is there anything beyond procedural and just take a little longer than you would expect or is there a possibility that there is actually a challenge here?

We don't know. We are working with the FTC. They provided us -- asked for a second request for information. I guess the term (inaudible) there was the second request, we provided them that documentation. We've continued to provide them documentation and work with them, to answer their questions, and at this point we're just continuing to work through the process. And as I said in my prepared remarks, we still expect to close at the end of the year. If there was an issue I couldn't tell you what it is.

Okay. That's great. And does it relate to a specific sub-market or is it just -- all you know is the acquisition?

Yes, that's all we're really aware of and once again we've provided a tremendous amount of data to them and we're just waiting for them to work through their process.

Perfect. Thanks for that, Keith. And then my other question would just be, Josh, you referred to the tax benefits that you are starting to see that are the residual from the Borgata transaction. Can you just remind us of, in light of what's been received so far, how much remains out there that you could potentially collect if you were able to -- if the whole thing were able to be settled or materialize in your favor?

So, Shawn, I think the city put out a plan that had a number of about $100 million or so in it, and I think that's probably a general starting place for us. Our estimate is obviously higher than that, and that's about all I know at this point. I know we received about $16 million to date. And very little color beyond that at this point.

And Josh, the $100 million is the total for the property, so you'd get half or is the $100 million just --?

That's for the total property. We would get half, and that's what the city has proposed as part of their plan.

The actual amount owed, Shaun, is greater than that. I think the actual amount owed on face value is, today, after netting out the payments is -- Josh, about $150 million? It's about $150 million is what is actually owed. How much we actually collect, we're still in negotiations. We are still in conversation, I should say.

Sure. Just kind of seeing what comes through. Okay. It is helpful to think about as a possible opportunity. And then last question for me was just on NOLs. Josh, there's a deferred tax asset change which I assume is something you guys can use to offset taxes in the future. Can you just remind us of, just generally speaking, your NOL balance at this point?

The NOL balance is actually not related to that. It's approximately $500 million to $600 million. I haven't checked on it recently. It went down pretty substantially as a result of the Borgata sale. But we still have probably five or six years worth of NOL protection before we would become a taxpayer -- a cash taxpayer.

Okay. Great. So the deferred tax thing was unrelated?

Yes. The deferred tax thing have to do with the fact that, for a while, we had negative pretax income and so it was unlikely that we're going to be able to utilize the benefit of those of our tax position, and that obviously has started to change with our performance and some of the other things we've been doing.

Okay. Understood. Thank you very much.

David Katz, Telsey Group.

Hi, good afternoon. I am not going to necessarily fulfill Shaun's promise to not ask about Las Vegas locals revenue (laughter), but I do want to ask it a different way and just go back to some of Keith's commentary about the marketing programs. It sounds as though these are programs that are ongoing that were really pursued differently in the quarter. I am not sure I am clear on what the change was or what the surprise was in the quarter, or if it did actually lead to a surprise in the quarter for the locals business.

I don't think there was a surprise to us. This was part of a well-prepared, well thought out, marketing strategy as we go through the planning process and we look at our business on a continual basis. Just taking another look figuring out how to drive incremental EBITDA, we decided to take a look at a certain -- how we reinvest in certain customers and decide to focus more on high-value customers and maybe a little less on less profitable customers.

It was a very premeditated strategy if you will. And it works. So, there really wasn't a surprise. I think the reason to even talk about it was to help explain what looks like flattish revenue in the locals market, where we actually, once again, saw some growth in the market and it's just hidden or muted by the implementation of this marketing strategy.

The other thing I would add, David is, I think, and we have difficulty quantifying this, but our expectation would be had the market not been growing, and strong as we currently believe it is we think revenues would've actually been down as a result of the changes in marketing that we did. And I would say that probably our expectation for the next couple of quarters, at least, is that we will continue to have more muted revenue growth as we continue to execute on this aspect of our business. At some point we will get to the level where we're comfortable that it now starts to grow again.

Right. That's really helpful to not get carried away the next few quarters. But I did want to also just follow that up. You made a comment about a piece of business with Orleans that was significant in the quarter. Are there any other rotational or comp issues we should be considering as we model the next few quarters out in the locals market?

Not that I can think of sitting here today. That one was significant, and there's nothing that I have on my list today that I could answer.

Okay. Thanks very much. Appreciate it.

Steven Wieczynski, Stifel.

Good afternoon, guys. Keith, I think you talked about in your prepared remarks, Aliante, I know you've only owned it at this point for about a month or so, but it's actually surprised to the upside. Can you maybe help us think about what has driven that upside? Is that more on the gaming side of things? Or more on the non-gaming side of things? And then also, I would assume at this point B Connected has not been linked up there yet and maybe when do you guys expect to have that in?

Right. So, starting with that -- starting with B Connected, it is not linked up yet. It is an important part of our, not just our marketing strategy, but in terms of how we will grow the business. We see a lot of cross market or cross property play and we would expect first half of next year that we would expect that to be up.

In terms of the property itself, and it's recent performance, even leading up to our actual purchase of it in late September, they had seen improving results and it's a function of growing markets, it's a function of a quality asset we're seeing out of both the gaming and the non-gaming side of the business,. But it's just the market out there is growing. The population is growing, and it's one of the reasons we were extremely interested in the asset. And one of the reasons we were willing to pay what we paid for it is because we think there's great growth potential and it's panning out exactly the way we thought it would at this point.

Okay, got you. And the second question going to Biloxi real quick. We've actually heard from other competitors as well just say how brutal that market really is from a -- not only from a competitive perspective but also a promotional perspective. I just wanted to get a sense of, have you guys been pretty promotional or have you been sitting back at this point and letting your competitors go down that road? And then maybe also help us think about what are some of your options that you can do to offset some of the weakness that you're seeing down there?

Sure. I think it has been a tough market. When you read the headline numbers that come out and it says Gulf Coast revenues are up, when you actually look at the data and strip out the Scarlet Pearl, the new competitor, you actually see a decline in the overall market. The overall market is shrinking and so we are all fighting for a piece of a smaller pie.

I think the market is very promotional, but it's always been very promotional. So I'm not sure that it is more elevated today or significantly more elevated today than it has been. But it is a very promotional market, and I think, have we had an elevated spend level? No, I think our spend level has probably been about where it's been over the last year. We did increase it shortly after the opening of Scarlet Pearl and then have pulled back subsequent to that. So, if you look at Q3 I would not say it was terribly elevated.

In terms of how we refine the business. I think it will be across the board. I think there are opportunities to pull back maybe on some marketing dollars, there's some opportunities to refine the payroll side of the business, and just look across the entire business for ways to save money. It's in process. We continue to make progress, just not enough to overcome what's a tough market.

Okay great, thanks, guys. Appreciate the color.

John DeCree, Union Gaming.

Good afternoon, guys. Thanks for the question. Just wanted to shift gears maybe to the rest of the US, outside of Las Vegas. There's obviously been a lot of strides made in Las Vegas in getting operating leverage, a lot of EBITDA growth with little revenue growth. And I'm wondering when we look at 2017 and some of these one time or quarantined events in regional markets start to stabilize, all the initiatives you guys have mentioned on technology and back of house across the portfolio.

How do you feel about picking up operating leverage in the regional markets, the Midwest and South? Is that a large opportunity or do we really need to see some revenue growth to get that operating leverage? Any comments you have on there, any color would be helpful.

Sure. So, as we look at the properties, the regional properties in the Midwest and South, part of our portfolio, everything outside Nevada, we do believe there is continued room for margin growth. We don't look at it quarter to quarter, we look at it on a longer-term basis. I think we've made great progress in the last couple of years, probably improving margins couple of hundred basis points.

And I think as we look over the next couple of years, that we would be comfortable saying we can continue to improve margins to the tune of another 200 basis points or better in those properties. And it isn't tomorrow, it isn't next quarter, it isn't the first quarter of 2017, but it is over the next couple of years with sustained focus and effort. And we can do that with flattish revenues, limited revenue growth, we don't need to see tremendous revenue growth to do that. I think if we see revenue growth in higher than low-single digits we will see much higher margins. But without that, I still think we can look at another 200 basis points in the next couple of years.

Great, thanks for that. And just to build off the last question taking that from Biloxi to the rest of the US on a promotional bar, does everything still feel relatively rational to you guys or has there been any change in the promotional environment more broadly speaking?

No. As I always say, I look from week to week or month-to-month, it always ebbs and flows, but when you sit back and you look at it as a whole, I would not say that any one of our markets has gotten overly promotional or to a point of where it's irrational what the operators are doing. So, I think it's -- generally it's fine (inaudible).

Great, thanks for all the color guys.

Harry Curtis, Nomura.

Hi, guys. I only had one question. Which is, if you could discuss the overall revenue trends in the local market, it has been decelerating somewhat from this first to the second to the third quarter overall and July and September were both down. What are your thoughts behind that?

As we look at the locals market, as we add it up, if you look back over the last 12 months, over the last year, the market was growing in the 2.5% range and actually accelerated after that because if you look at nine months, it's closer to a 3% growth rate. Now clearly, over the last three months as we look at the local markets, it's about a 1%, a little less than 1%, growth rate, so it did slow in the last quarter, the summer quarter.

We are a bigger fan of looking at it over a longer period of time because of the way the numbers get reported over a two or three month period the numbers can be a little suspect. It also could be because of the summer time which is the slowest quarter here in Las Vegas, just given the way the business runs. So, it has slowed during the last three months. I don't attribute it to anything in particular except the summer is always slow.

I guess what I'm trying to get my arms around is you've got a record employment base, the construction in the pipeline is, isn't what it was 12 years ago, but it's still pretty decent. Visitation growth is good. And it seems to all be lining up for growth that is better than that. Have you seen this in the past where you have seen these dips, but with the strength in the overall economy ticking up like it has, that it's just a matter of time before we begin to see better top line growth for the locals revenues overall?

Once again, we look at it at a little longer-term basis and looking back nine months and seeing a 3% growth in the overall market, which takes some of the fluctuations out based on the way numbers are reported, that feels about right. And I'm not overreacting to a sub-1% or 1 percentage revenue growth in the last three months. But we will wait and see what the next quarter or so brings. That could flip in October simply because the month of September ended on a Friday and the way the accounting is done it could -- October could be as reported by the Nevada gaming regulators, as a much larger number.

So we just -- we'll wait and see. I am not overly panicked by the 1% revenue growth in the last three months. I am encouraged by the 3% revenue growth in the last nine months, or the 2.5% over the last 12 months, and that feels right to me. And I would expect that to continue.

I was just going to add, Harry, I think the 2.5% to 3% growth that we've seen over the last 9 to 12 months, as Keith was alluding to, feels more like the run rate of the market and what we're seeing in our underlying trends of our business in terms of how consumers are participating in our -- and what we offer in our casinos. So, we don't see something that suggests that this is a slowdown or change in trajectory in reality.

Okay. That's what I thought. I guess time will tell. I appreciate it thank you.

Sure.

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

Thanks, Gary, and thanks for everybody participating today. If you have any other questions, feel free to reach out to the Company and we'll try to be as helpful as we can. Thank you very much.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.