Boyd Gaming Corporation (BYD) Q1 2010 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q1 2010 Boyd Gaming Earnings Release Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Josh Hirsberg, Senior Vice President and Chief Financial Officer. Please proceed, sir.

Thank you, Antoine, and good morning, everyone, and welcome to our First Quarter Earnings Conference Call. Joining me on the call this morning are Keith Smith, our President and Chief Executive Officer and Paul Chakmak, our Executive Vice President and Chief Operating Officer. Our comments today will include statements relating to our future results including, among others, the financial outlook for the company, our expansion and development projects and other market business and property trends that are forward-looking statements within the Private Securities Litigation Reform Act. All forward-looking statements in our comments are as of today's date, and we undertake no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. Actual results may differ materially from those projected in any forward-looking statement, as a result of certain risks and uncertainties, including but not limited to those noted in our earnings release, our periodic reports and our filings with the SEC. During our call today, we will make reference to non-GAAP financial measures. For a complete reconciliation of historical non-GAAP to GAAP financial measures, please refer to our earnings press release and our Form 8-K furnished to the SEC today and both of which are available in the investor section of our website at boydgaming.com. Finally, as a reminder, we are broadcasting this call on our website at boydgaming.com and streetevents.com. Now, I'd like to turn the call over to Keith Smith, our CEO. Keith?

Thanks, Josh. Good morning, everyone and thank you for joining us. Earlier this morning, we released our results for the first quarter of 2010. During the quarter, we continued to see improving trends in our business, a comment that we noted on our last call. While we were especially encouraged by the Las Vegas Locals region, which [indiscernible] the best year-over-year comparison in nearly two years, we are also seeing improving results beyond Las Vegas. Both of these trends we expect to return to year-over-year growth in the second half of 2010. Our optimism about the future is derived from two fundamental sources. The first is the economic recovery that is taking hold nationally and is leading to positive signs in Las Vegas. As with any industry that depends on discretionary consumer spending, the recovering gaming sector will lag the national recovery, but a number of indicators give us reason to be confident. National economy grew at 3.2% in the first three months of 2010. This is the third consecutive quarter of economic growth. First quarter increase in consumer spending was the strongest in three years, and March was the sixth consecutive month that consumer spending rose. These increases in consumer spending in the first quarter were broad-based with gains in restaurant sales, durable goods and other big-ticket items. We've also seen strong numbers in housing, with new home sales in March rising 27% nationally. Along with consumer spending, the consumer confidence index is also improved, and in April, reached its highest level since 2008. This bodes well, as consumer confidence is an important leading indicator for our industry. In Las Vegas, we are encouraged by signals of strength in tourism and are hopeful it will support a lasting recovery in the local economy. Visitor volume has risen for five of the last six months. And attendance has been strong at some of our largest conventions. CES, MAGIC and the NAB conventions all saw improvements in attendance over 2009. We anticipate overall convention attendance to experience year-over-year growth in the second half of 2010 and 2011. We're also encouraged that traditional seasonal patterns are returning to the Las Vegas Locals business. Normalization in this market is an encouraging sign and we anticipate seeing year-over-year growth in Las Vegas later this year. But beyond our optimism regarding the early signs of an economic recovery, we're optimistic about the future of our company. Today, our company is ideally situated for profitable growth, whether that growth comes in the form of organic growth or new acquisitions. As we have navigated the challenges of recent years, we engineered our business model, positioning us to take maximum advantage of the recovery. We have diligently reduced costs in the business even as we raise customer satisfaction scores. We are a much leaner, more efficient company than we were two years ago, and we are now able to generate substantial increases in EBITDA even with moderate increases in revenue. In addition, we will continue to actively seek out and pursue acquisitions and meet our criteria for being a good strategic fit to [ph] shareholder value. When we find these opportunities, we will aggressively pursue them. Next, I'd like to spend a few minutes on two other important topics, the Borgata and our interest in Station Casinos. With respect to Borgata, as many of you are aware, on March 24, MGM MIRAGE officially transferred their ownership interest into a divestiture trust. The agreement with the New Jersey Division of Gaming Enforcement provides them with 18 months to divest their ownership after which a trustee would be appointed to do so on their behalf. Our partnership agreement with MGM MIRAGE gives us the right of first refusal on a sale of their interest and we will monitor this situation and act in the best interest of our company. Most importantly, it remains business as usual at Borgata and we continue to work hard to maintain our leadership position in that market. Regarding our interest in acquiring Stations Casino assets, as you know, we have made serious and substantial offers in the past for these assets, and we continue to be interested in acquiring. At a hearing in Reno today, several issues with respect to the bankruptcy will have a bearing on our future actions. Strategically, we seek out acquisitions that fit well with our existing business and enhance shareholder value. So consistent with that comment, we welcome the opportunity to compete for Station assets, so long as the process is competitive, open and fair and the assets themselves have not been devalued to a point where it no longer makes financial sense for the company. Two final thoughts before turning the call over to Paul for more details on our financial results. First, Boyd Gaming will continue to focus on operating our business as efficiently as possible to maximize profitability. Through the exceptional experience and effectiveness of our management team, we have been able to drive tremendous costs out of our business without sacrificing the quality of our guest experience. As recovery takes hold, we will remain vigilant and disciplined and will not allow unnecessary costs to creep back into the business. Second, our financial footing remains strong. We're focused [ph] in a good position to grow the business. That growth could come from improving our results in markets where we currently do business, entering new markets, completing acquisitions or from new gaming ventures. We continue to have great confidence in the future of our industry and the ability of our brands to compete successfully in our various markets. Thank you again for joining us this morning. Now I'd like to turn the call over to Paul. Paul?

Thanks, Keith. Hello, everybody. Overall, this was a quarter that met our expectations. For the first time in almost two years, the Las Vegas Locals region is trending both positively and predictably. Results improved on a sequential quarter-over-quarter basis in both Q4 of 2009 and Q1 of 2010. This mirrors the basic seasonality pattern we traditionally experienced before the economic downturn began in 2007. We reduced the year-over-year EBITDA gap to 10% in the first quarter and expect a similar gap in the second quarter before returning to year-over-year growth in the second half of the year. Our positive trend we're noting, as we look forward, is that the Las Vegas Locals promotional environment has moderated. Many of our competitors have returned to more rational marketing strategies. As you know, we have not resorted to the extreme marketing campaigns that our competitors did during the depths of the recession. Our brand has proven resilient, offering local customers exceptional value through a period of economic difficulty and inflated promotional activity. We offer one of the best and most consistent entertainment experiences in the valley and we believe it will provide a vehicle through which we can gain market share and economic recovery and a normalized promotional environment take hold. We are confident we have the right business model in place in the Las Vegas Locals market and are comfortable in our ability to manage the business through the remainder of this economic cycle. In the downtown region, there were several factors affecting results. First, as we noted in the fourth quarter, a combination of lower ticket prices and higher fuel costs at our charter service impacted the region, causing about one-third of this region's decline in EBITDA. Second, visitor traffic declined in the downtown area during the quarter; this led to reduced walk-in traffic. Finally, we saw a decline in business from our Hawaiian customers who travel to Las Vegas on commercial airlines, which we believe can be activated to the economic difficulties catching up with the Hawaiian economy. The Hawaiian government-mandated furloughs have negatively impacted discretionary spending and visitation for many of our customers. Positive side, we are beginning to see improvement in the Hawaiian economy in both the retail and tourism segments. We expect the state government employee furlough program to be temporary as well, which would help visitation once it is lifted. We are pleased that we continue to grow our share of gaining revenue in the downtown market, increasing 140 basis points over the last 12 months. In the Midwest and South, the business patterns we reported in the fourth quarter continued during the first quarter. We reported bottom line growth in both Illinois and Indiana during the quarter, primarily driven by five consecutive quarters of margin improvement at Paradise as well as refinement in our cost structure at Blue Chip following the opening of our expansion project in January of last year. These solid results were offset by continuing softness in business at our three Louisiana properties. As we've said before, the level of growth we reported in Louisiana during 2008 and 2009 was not sustainable. It was partially driven by one-time factors. Our Louisiana properties are returning to more normalized levels of business, a trend we expect to continue through the third quarter of this year. We're encouraged that all three of our Louisiana properties continue to maintain their market share. Finally, I'd like to touch base on Borgata and Atlantic City. As we indicated on our previous call, severe winter weather took a heavy toll on Borgata's first quarter results. Absent the poor weather, we believe we Borgata's results would've been similar to the prior year. It is no secret that Atlantic City continues to face a challenging business environment and growing competition. However, we cannot state strongly enough just how well Borgata is positioned to deal with such adversity. For the 12 months ended March 31, 2010, Borgata led the competition in both table games and slot revenue. On a total gaming revenue basis, there was nearly a $200 million gap between Borgata and the next largest property. When you look at amenities over the same period, the gap was even more pronounced. Borgata's cash, food and beverage revenues were larger than the next three competitors combined. But Borgata's dominance is not just a question of absolute size but also relative performance. Borgata's year-over-year quarterly gaming revenue growth rate has outperformed the balance of the Atlantic City market for 19 of the 23 quarters since its inception, including the 13 most recent quarters. There is simply no other property on the East Coast that offers an experience comparable to one at the Borgata. We are encouraged by signs of improvement in the economy and we look forward to the busy summer season. In summary, the first quarter showed a return to predictability as our business performed as expected across the country. We're confident in our ability to successfully manage our business through the coming months as the recovery builds and believe we will return to growth in the second half of the year. With that, I'd like to turn the call over to Josh for a review of our financials.

Thanks, Paul. First, I would like to touch on some information regarding the accounting for Borgata. On our fourth quarter conference call, we indicated that the transfer of MGM's interest in Borgata into a divestiture trust would trigger consolidation of Borgata's results. Under accounting pronouncements the amendment to the operating agreement between Boyd and MGM resulted in a controlling interest to Boyd, thus the requirement to consolidate. The transfer had occurred on March 24. Therefore, our gap income statement in this earnings release which followed the financial information that will be presented in our first quarter 10-Q reflects eight days of Borgata's results, consolidated 100% into our results. The 50% of these results not attributable [indiscernible] ownership of Borgata or removed through the non-controlling interest line items on the income statement. In our earnings release, we also provide non-GAAP financial statements that reflect the EBITDA performance of our business segments. For this quarter, we have presented those non-GAAP results as if the consolidation has not occurred, so as to be comparable to the prior year. That is, the first quarter non-GAAP results of Borgata are reported under the equity method [indiscernible] presentation of the prior year. We have provided a table in our earnings release that reconciles the GAAP results to the non-GAAP financial statements. When we report our second quarter results, we will present Borgata consolidated for the entire period, after the non-GAAP presentations. As a result, the revenue and expense line items, as well as EBITDA, will reflect 100% of Borgata. So in addition to revenues and EBITDA being larger, below the line items including depreciation, interest expense and taxes will reflect 100% of Borgata's expenses. Prior-year results, however, are not impacted by the requirements of consolidation and will continue to be presented under the equity method. So we will provide pro forma schedules to reconcile prior-year results to present Borgata as if it were consolidated last year. We filed a separate 8-K this morning with this reconciliation as well. Our balance sheet was also impacted by the required consolidation. Borgata's balance sheet will be combined line per line with Boyd. As a result, each asset and liability category, including debt, will be impacted. So to summarize, results going forward will show increased revenues and EBITDA due to the consolidation. However, our earnings per share will remain unchanged [indiscernible] for the non-controlling interest. Now to impact [ph] the quarter for you a bit further. Excluding Borgata, our debt balance was just below $2.6 billion. At the end of the quarter, we were in compliance with our covenant and going forward, expect to remain in compliance. Our leverage calculated in accordance with our credit facility was 6.5x versus a covenant of 6.75x. Our covenant steps up in the second quarter to 7x. We currently have approximately $1 billion in untapped capacity. That leaves us with ample dry powder to fund the growth opportunities we are considering. Other items from the quarter that I want to point out, along with guidance for some of the non-operating items include the following: corporate expense, excluding share-based compensation for the quarter was approximately $10 million. That should be a good quarterly run rate for the remainder of the year. Depreciation, estimated at about $150 million for 2010. Borgata will add about $50 million in total for the final three quarters of the year. Interest expense was approximately $28 million during the quarter and is expected to be approximately $125 million in total for the year. In addition, due to the consolidation, we will include Borgata's interest expense [indiscernible] approximately $5 million to $6 million per quarter. Given the maturity of the existing Borgata credit facility in January of next year, the run rate of interest expense at Borgata will be impacted by any refinancing of that debt. Opening expense recorded in the quarter was related to Echelon. We expect $8 million to $10 million for this item for the full year. Share-based compensation is estimated to be approximately $10 million to $11 million for the year and the tax rate was 32% in the quarter. From a capital expenditure perspective, at Boyd, our forecasted capital needs are primarily maintenance-related, could [ph] run about $50 million to $55 million for the year. And just as an FYI, Borgata's forecasted maintenance capital runs about $15 million to $20 million. Finally, at Borgata, due to the stable performance of that property as well as its limited forecasted capital spending, the property continues to generate significant free cash flow. Borgata's leverage ratio at the end of the first quarter [indiscernible] balance of $630 million was 2.85x. With that Antoine, we're now ready for some questions.

[Operator Instructions] Your first question comes from the line of Larry Klatzkin [Chapdelaine Credit Partners]. Lawrence Klatzkin - Jeffries & Co.: Could you guys quantify what the weather might have affected you guys company-wide?

I think the weather impact, in fairness, was probably on the East coast. At Borgata specifically, and I think that impact was in the kind of the about $6 million to $7 million figure. Lawrence Klatzkin - Jeffries & Co.: Now that is it resolved in Florida what the rules are and what the tax rate and everything is, you guys still looking at that property and do something with it or are you still kind of holding off on that?

It's Keith. There were a couple of issues in Florida that I guess kept us on the sideline. One certainly was the tax rate but we knew that going in. I think the other was just how the market developed overall and the levels of win per units we were seeing in that market. And now that the tax rate has been lowered, it certainly takes away one barrier, and we are re-evaluating kind of where we're at, and how we view that market. We're interested to see how the market does rebound or if it does rebound going forward. But we are taking another look at it. Lawrence Klatzkin - Jeffries & Co.: As far as the Station assets go, would you be interested in part of them, not all of them? I mean would you partner up with somebody, maybe, to make the bid even more powerful?

As we've said for a while, we are interested in acquiring both, OpCo or PropCo, or some combination, and we had an offer out there for the OpCo assets. I think at this point, we're going to wait and see what happens in the hearing today or tomorrow and what the judge's rulings are before we determine what kind of actions we're going to take going forward. So given the next 48 hours, kind of in a wait and see position.

Your next question comes from the line of Joe Greff with JPMorgan. Joseph Greff - JP Morgan Chase & Co: I have a question on the Borgata. Are you guys actively considering selling your interest side by side with MGM or is that something that's completely off the table?

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

I think, Joe, as Keith said in the past and today, I mean we do have the first right of refusal. So it puts us in a reasonable position to wait and understand where MGM is going with the process. Joseph Greff - JP Morgan Chase & Co: Do you have any knowledge of where that is in the process, in terms of interest levels?

We really don't, you'd have to speak to MGM about where they're at. If they've gotten any expressions of interest at this point, we have no knowledge of that.

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

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

First off, the seasonality comment. The first quarter of the year has historically been, pre-recession, the best quarter of the year for the Las Vegas Locals business. It's really a combination of the calendar, the weather, et cetera, et cetera. And we, for the first time in a couple of years, actually saw the first quarter be produced better performance from an EBITDA perspective in the fourth quarter. That was not the case in '08 or '09. First quarter was down. [Audio Gap] (23:30) So that's the comment on seasonality and, frankly, predictability of the business overall and consumer trend. As it relates to some of the volume indicators we're seeing, overall, spend is obviously still down. You can see that, certainly, in the year-over-year revenue numbers there. With that said, we are seeing an uptick in visitation, which is the amount of times folks would come into our buildings over the course of the month or the quarter and that's the first time we've seen an uptick in visitation in over two years.

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

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

Our view of Atlantic City certainly remains a challenging market as we look forward to competition or continued competition from Philadelphia, of table games there. And it's certainly nice to have the market-leading asset there. We're certainly going to work hard to make sure we maintain that position. And we're confident about our ability to compete going forward [Audio Gap] (25:08) [indiscernible] or other competition that would come. I think Atlantic City certainly has plenty of capacity right now, and what Atlantic City needs is more demand. And the way to stimulate that demand certainly doesn't need additional capacity at this point, or frankly for the next couple of years.

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

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

Your next question comes from the line of Steven Ruggiero with CRT Capital.

Two questions, first, in the press release, you refer to lower downtown visitor volumes. Could you quantify that and are those lower volumes primarily driven by your Hawaiian customer shortfalls?

It's really in two phases. The number of folks that came to our properties, as I said, via commercial airlines, which is still a very large chunk that comes from Hawaii on commercial airlines as opposed to our charter, was definitely down year-over-year. That in addition to that, we saw visitor traffic on Fremont Street in particular and lower levels than we've seen in the past. That, all told, along with obviously spending patterns which are down from a few years ago, had the revenue impact that you saw in the downtown market. With all that said, recent reports of downtown gaming revenues, et cetera, et cetera, our share of the total went up by almost 1.5%. So we're still getting well more than kind of our share and growing our share. Our fair share now relative [indiscernible] is, in some cases, approaching 200% of our fair share that are properties relative to the other downtown competitors. So very significant presence. We, obviously, I like to see volumes of people increase.

It sounds like it's really visitors that live outside of Vegas that are creating this shortfall as opposed to locals visitors who happen to visit downtown?

That's the way I would view it.

Second question regarding Borgata and with the advent of table games this summer in Pennsylvania. How will your marketing change at Borgata if at all this summer?

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

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

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

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

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

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

Still not, John.

And then on the comment, Keith, in your paragraph about generating year-over-year growth during the second half, I assume that's consolidated, that's not all of your market you're expecting to see year-over-year growth.

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

Again another question on Atlantic City. The potential new regulations that were proposed for new properties coming in that would require obviously a smaller investment, specifically, the as if [ph] Hard Rock proposal. Any thoughts or comments on whether you believe that, that proposal is likely?

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

On the partnership agreement, if somebody comes in and offers MGM, obviously a price that you believe is -- does the partnership agreement allow you to put your interest to that potential buyer?

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

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

We cannot.

[Operator Instructions] Your next question comes from the line of Kevin Coyne with Goldman Sachs.

Just to confirm on the commentary on the second-half growth. I know that's on a consolidated basis but can you just confirm that, that excludes the consolidation of Borgata, that it's on an apples-to-apples basis? And I assume you're only talking revenue or is that also EBITDA?

You're correct, it is on an apples-to-apples basis. This is not an accounting trick or accounting gimmickry where we're going to create growth. So that part is correct. It is our growth -- we talk about growth, in the second half of the year, we're actually talking about EBITDA growth. We fully expect [ph] in the second half of the year to grow EBITDA on a year-over-year basis.

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

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

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

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

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