Boyd Gaming Corporation (BYD) Q4 2013 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Boyd Gaming Fourth Quarter 2013 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.

Thank you, Amy, good afternoon everyone and welcome to our fourth quarter earnings conference call. Joining me on the call this afternoon 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 estimated future results 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. 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 other filings with the SEC. 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 8-K furnished to the SEC today and both of which are available in the Investors section of our website at 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, as a reminder, today's conference call is also being webcast live on our website at boydgaming.com and will be available for replay on the Investor Relations section of our website shortly after the completion of this call. I'd now like to turn the call over to Keith Smith, our President and CEO. Keith.

Thanks Josh and good afternoon everyone. Thanks for joining us here today. For the fourth quarter of 2013, our wholly owned business performed in line with our expectations. Despite some external challenges in December. But before reviewing our results for the quarter, I would like to begin by summarizing where Boyd Gaming stands today; progress we have made as a company over the last year and where we're going in the year ahead. During 2013, we made great strides excluding on our strategic plan, putting our company in a much stronger operational and financial position from when the year began. From an operational perspective, we diligently focused on refining and adjusting our product our marketing and our amenities, keeping cost under control, while delivering a consolidated and competitive entertainment product to our customers. A good example of this is our Penny Lane initiative. In early November we relaunched Penny Lane at our 4 Las Vegas Locals properties adding significantly more bonus opportunities for players under the tagline more bonuses more often. We then introduced Penny Lane for the first time in our downtown Las Vegas and our Midwest and South operations. Penny Lane is now in place at 12 Boyd Gaming properties across the country and then it’s having a positive impact on play across our business. The adjustments and refinements we’ve made to our business have helped us to return to consistent and sustainable EBITDA growth in Las Vegas. And while the landscape has been more challenging elsewhere, we’re confident that we have right strategy and amenities in place to successfully compete across the country. We’re making good progress in the financial front as well. During 2013, we eliminated more than $0.5 billion in debt and we reduced interest expense by more than $60 million annually. And our earliest…

Thanks Keith. Hello everybody. As noted on our last call, October was a strong month across our operations. This positive trend continued about half way into November before weakening. As we saw in previous quarters, spending and visitation declined among casual players. This trend was exacerbated by severe winter weather in December, which further reduced visitation in many markets outside of Nevada. But there were bright spots as well. Across the country, business among our top tier players is as strong as ever, and the recovery of our Las Vegas business continued. Let’s begin our review with the Las Vegas Locals business. Our 6% EBITDA gain marked the fourth straight quarter of growth in this segment, thanks largely to the operating efficiencies we have built into our business. We reduced marketing spend by nearly $2 million during the quarter and improved operating margins by more than 120 basis points. And we saw benefits throughout the quarter from the launch of an enhanced Penny Lane. Players have responded well to Penny Lane’s mini-bonus features with meaningful gains in both frequency and play among participating customers. Non-gaining business also grew during the quarter, driven largely by strength in our hotel business. As Keith noted, non-gaming has been a promising area of growth throughout our business. And we’re finding these amenities with a strategic priority, both in Las Vegas and across the country. 2013 was an encouraging year of consistent growth for our locals business. EBITDA increased by nearly $9 million for the full year, an increase of almost 7% for 2012. And we expect growth to continue in 2014. The fourth quarter was quite positive for our Downtown business as well, as revenue and EBITDA growth resumed, which is largely the result of successful refinements throughout our business. The changes we made…

Thanks Paul. During the fourth quarter, we continued to take advantage of favorable market conditions to reduce interest expense and extend maturities. In December, we redeemed Borgata’s 9.5% secured notes through 2015 with a $380 million term loan. The term loan matures in 2018 and is priced with a LIBOR spread of 5.75%. At current rate, this refinancing reduces Borgata’s interest expense by over $8 million annually. And given the amount of free cash flow this property is expected to generate, increases the amount of pre-payable debt and the capital structure. This past year was very busy for us in terms of both paying down and refinancing debt. In 2013, we repaid $525 million in debt and refinance existing debt at Peninsula and Borgata. The net cash interest benefits from this activity represented over $60 million in annual interest savings. In addition, 2013 was the first full year of contribution from our Peninsula acquisition. Peninsula has expanded our free cash flow generation by approximately $100 million. Further contributing to our free cash flow is the sizable $1.1 billion [Maxwell’s] carry forward which is valuable to our company for a lead to next decade and our present value bases represents at least a couple of dollars per share. The elimination of our federal tax burn on a cash basis is expected to contribute materially and directly to our free cash flow for years to come. Our year-end debt and cash balances are disclosed in our earnings release. We had incremental availability at year-end under our credit facilities of $268 million at [Boyd], $27 million at Peninsula and $17 million at Borgata. From a financial covenant perspective, Boyd secured leverage was approximately 4.2 times compared to a covenant of 5 times and total leverage was approximately 6.5 times versus a covenant of…

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

Hi, good afternoon. And Josh thanks for all the color. The question for you on the just the Las Vegas Locals in the quarter, you posted flat revenue growth there, the market was up I am wondering is the driver of your actual revenue performance was due to the changes in your marketing program. In other words since your revenues declined mainly due to perhaps the decline in the less profitable players or is it something else?

No I think as it relates to the market being up I think Felicia you have taken that from the Gaming Control Board abstracts that have come out, is that your source?

Yes. I notice there was not a correlation, so I understand that.

And I think that’s really probably the key driver because the January numbers as you know just came out very recently and it sort of showed that correction, it was probably a bit of a false positive we believe in the December number which was up given where New Year’s eve fell, what was reported by certain companies in maybe December versus January that probably led to that. I am not sure there is a material change in sort of the direction or the slope of the curve for the Las Vegas Locals market. You probably have to look at kind of January and December sort of together to get a better feel for that.

Okay, helpful. Thank you. And have you guys seen any benefit -- the first quarter on the [strip] has been good because of increased convention activity. Have you seen any benefit trickle through to the Locals market?

Well, we see it in particular -- my comments and Keith alluded to as well on a non-gaming side, our hotel business we benefit from 5,000 rooms in Las Vegas just like any of the other major players on the strip and that’s certainly a positive. It will further be benefited in March as (inaudible) March a very good convention calendar that's been written about. And so we expect that sort of trend to continue for the entire quarter.

Great thanks. Final housekeeping, in your EBITDA guidance are you including online gaming in there?

No, we are not, Felicia. We are assuming basically no contribution positive or negative from online gaming for the full year.

Okay. I’m sorry you have said that already, I understand. Thank you.

It’s okay.

The next question comes from Thomas Allen at Morgan Stanley.

Hi guys. Thanks for providing the full year guidance and the color around it. Just digging a little further, as you think about kind of your regional Midwest, Peninsula and properties, what are you factoring in terms of same-store sales if you kind of take out properties that are getting cannibalized? Thanks.

Well, I think as far as cannibalization is concerned, Thomas we will be lapping the opening of new competitor in the [Shreveport] market in the June timeframe. Beyond that there really won’t be any other cannibalization as a result of new property openings until we get really very deep into the year in the Lake Charles market. So really what our comments are as far as the Midwest and South are concerned tied to what has been a lot of disruption for weather and Josh gave you a sense of what that process in the first quarter as he went through the guidance numbers. And then just very sort of marginal improvement over what was relatively tough year in 2013.

Okay, thanks. And then just in terms of New Jersey and online gaming, you’ve been operating for three months now, what really surprise you the most since moving on? Thanks.

Yes, Tom. We are not sure there’s been that many surprises, the new business is performing right now in line with our expectations. It’s ramping up slowly but it continues to ramp up nicely. The technology continues to improve. So from our perspective, we are kind of right on track and it is performing as we would have expecting to three months into the process.

It seems and kind of the progress normally the (inaudible) has fallen a bit in February, and maybe picked up a little bit in March, are you, I mean is there anything that drove that?

No we will provide some commentary next week when the numbers for February come out, but until then we won’t be providing any commentary on those numbers.

Okay, thank you.

Our next question comes from Carlo Santarelli, Deutsche Bank.

Hey, thanks guys. Josh, if we could just, you went through the guidance on a segment level that was helpful. I just wanted to clarify a few things. Did you say in the 2014, 600 to 630 weather was an $8 million to $10 million EBITDA impact?

Yes, that’s what we felt to-date so far in the first quarter and to clarify Carlo, it’s really not just weather, it’s weather impact over normal weather that we would have seen last year. So it’s not -- it’s all weather it’s the excessive kind of bad weather increment if you will.

Understood, so first quarter there will be basically $8 million to $10 million spread between Borgata, Peninsula and Midwest in South, I would assume?

That’s right.

Okay. And then, sorry go ahead.

Just in the first quarter. Yes.

Okay. And then if we look at the rest and you kind of extrapolate your comments on the Locals market it looks like 6% to 7% EBITDA growth. At downtown you mentioned being flat. And then when you look at kind of the Midwest and South the first half down and then we're obviously looking at that $9 million non-recurring in the fourth quarter. But on an apples-to-apples basis of the kind of the one, I guess 70 number. Do you guys think for the full year you can get close to that?

Yes. I think I'm not sure what you're doing with the $9 million. But if you take the $9 million out, I think we have the opportunity to be close to that.

The $9 million was 180 less than 9, that's where I get the 171 from.

Okay, alright. That makes sense. Thank you very much.

You're welcome.

(Operator Instructions). Our next question comes from Shree Vijay at UBS.

Hey guys, how are you? That's Shree Hari from UBS. Josh I was kind of curious you gave us comment about looking at the Japan. Maybe you can elaborate a little more on what you guys are looking to do there. And how you plan to finance that?

Sure. I think I should let Japan expert, Keith answer those questions. And then we'll go from there. And I think it's a little early try to figure out how we would finance it, just given where we're on the process. But Keith can give you kind of a bigger picture view of how we're thinking about Japan industry.

Sure. If we continue to look for ways to grow the business and clearly that growth during the states is somewhat limited and growth in the Asian markets has been quite dramatic. And as Japan is talking about it, they are in the early stages, basically what I have learned here to multi-step process, now I am looking to it to pass, maybe the first part of that middle of this year. And so we’re investigating the opportunities trying to understand, is it a good fit for us trying to meet people and beside whether that is an opportunity that we should take a serious look at. So as Josh says very early of a process, we’re in the exploratory phase introducing our company to Japanese companies and learning more about the process, but as we’re probably pretty far way from worrying about how to finance it and what the structure or deal may look like and where that deal maybe whether it would be Tokyo or Osaka or one of the regional markets, if they get approved and when they get approved. It’s pretty far up into the future but we started the process of looking in any case.

Fair enough. And you noted there are limited opportunities in regional basis, their couple of assets out there, anything interesting from an acquisition perspective?

Yes. I would say that, we continue to have opportunities for acquisition. I think they are fewer and harder to kind of understand strategically how they make sense for us. But we’re always looking and I think that they are all opportunity to just have kind of gotten to the point where they make sense for us just yet. But we’ll look for ways to grow the company and improve the shareholder value whether that’s acquiring assets, potentially selling some assets as well to the extent that it makes sense for our company.

(Inaudible) we have been a fairly aggressive acquirer of assets over the last several years. It has to fit into a very specific strategic plan and it’s got to be right markets at the right price and we have got to do it for a reason. So we pay close attention to what’s out there and what’s available, if the right opportunity comes along you will see us execute on it. But it’s got to fit into the plan.

Fair enough. And one last one on Atlantic City with one of the competitors shutting down and possibly another casino being bought out, your thoughts on that market and where you see that stabilize in 2014?

Well the closing of the Atlanta Club really had no impact on the Borgata, those are not our customers those were kind of never customers of the Borgata. I think it probably helps some of the other properties to square those customers there. So really has no impact there and therefore doesn’t impact the overall market, the market has gotten somewhat competitive as Paul alluded to in the first quarter as I think people are competing for those Atlantic Club customers. And I certainly hope that the market is kind of stabilizing in terms of where it’s at, maybe we see a little bit of growth in the year ahead and that we have kind of seen the worst of the decline.

And assuming Philadelphia second license doesn’t come up at some point. Thanks for taking my questions.

Sure.

Our next question comes from Thomas Allen at Morgan Stanley.

Hey guys, just one follow-up. So you talked just now and earlier about the potential of doing further acquisitions. But do you have any interest in selling properties and obviously while your peers convert into an [opco propco] structure. Any appetite for you to selling real estate to them or even potentially topping them during (inaudible)? Thanks.

Yes. I think in terms of selling assets, it just depends on the specifics of a transaction and so it’s hard to kind of comment generally, but we’re certainly open to that as it makes strategic sense for us. I think in terms of your question around would we copy 10, that’s more of a strategic initiative that we’re not going to comment on specifically, but I can just say generically that we’re always, as I mentioned actually earlier that we’re always interested in growing the company and looking for an initiatives to create shareholder value. And so it’s not appropriate really for us to comment on specific strategic initiatives that we may or may not take. But just broadly, we’re interested in acquiring assets, we’ve done that historically very successfully in a strategic fashion and created value with those acquisitions. And to the extent somebody comes along and offers just a multiple that we think exceeds what our trading values are for that asset and I think we have to consider for the best interest of our shareholders.

The next question comes from Justin Sebastiano with Brean Capital.

Thanks guys. Hey Josh, you mentioned there is, you think there is fewer opportunities that make sense on the M&A front; is that due to a multiple of that, perhaps as sellers are looking for or is it a market situation that maybe the markets that you guys are more particularly looking at just there is nothing really coming to bear there, could you may be give us some thoughts on that?

May be let me provide a little color on that and will see if Josh has comments. But part of it, I think as we’ve grown in size as a company and we have expanded into additional markets that we’re in now, it makes it -- the opportunities for us are somewhat more limited. Size and scale is important also because it’s just as difficult to run a small property as it is a large property. So, we look at the size of properties, performance of properties, we like to buy assets that are more market leading assets, not assets that are kind of in the bottom tier of the market, and (inaudible) got to fit into overall strategic plan that we have in place in terms of the quality of the asset, the market and the price. So we add all those things together, it just I think limits the pool. We’ve proven we’re very prudent acquirer of assets. When we do acquire an asset, we are able to do good things with it. But we have our eyes open and we will continue to look for things, but they do have to fit a profile. So Josh, you may want to…

No, I think you covered it Keith.

Okay. So since acquiring Peninsula Gaming, would the IP, would that have been something that you probably would have maybe past on today given your comments about size and scope of potential M&A activity?

I think we are looking at the IP, we acquired the IP, was in the low $30 million EBITDA range, and we’ve driven it up significantly higher. That is an asset that we will look at today, something that produces $30 plus million EBITDA is clearly an asset that is clearly number two in Block C market. If by some standards not tied for number one, so it clearly is something we would look at today, and we would look at in the future.

Okay. So is $30 million kind of that threshold or is that just kind of where the IP should go?

I wouldn’t take that as a threshold that just is a specific comment with respect to the IP.

Okay. All right, thanks.

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

Thanks, Amy. And we appreciate you guys joining the call today. And if you have any follow up questions, please feel free to reach out to the company, and we will try to help you out. Thanks.

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