Boyd Gaming Corporation (BYD) Q4 2009 Earnings Report, Transcript and Summary

Welcome to the fourth quarter 2009 Boyd Gaming earnings conference call. (Operator Instructions) I would now like to turn the presentation over to Mr. Josh Hirsberg, Senior Vice President and Chief Financial Officer. Please proceed, sir.

Thank you. Good morning everyone and welcome to our fourth 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. Finally, as a reminder, we are broadcasting this call on our website at boydgaming.com and streetevents.com. I would now like to turn the call over to Keith Smith, our CEO. Keith?

Thanks, Josh and good morning everyone. Thank you for joining us. Earlier this morning we released our results for the fourth quarter and full-year 2009. Before I turn this over to Paul to review the results for the fourth quarter I would like to make some general observations about our results. During the fourth quarter the economy continued to be weak, unemployment remained high, consumers continued to be cautious with their discretionary spending. Looking forward, however, we are seeing early signs that a recovery is underway despite the fact that the national economic forecast remains uncertain. The national unemployment rate dropped in January and the nation’s GDP grew nearly 6% in the fourth quarter, the biggest quarterly increase since 2003. As the national economy improves and consumer confidence returns we are confident we will see the benefits in our industry. The question remains not if but when. The good news for Las Vegas is that signs of this recovery are beginning to show here. Last Vegas monthly visitation has grown for four consecutive months showing that this city remains an extremely popular tourist destination. Las Vegas continues to have the unique appeal to visitors around the world and our customers have remained loyal even through the recession. In addition, many of our colleagues in the gaming industry have described cautious optimism about the prospects for recovery on the Las Vegas strip in 2010. Las Vegas Boulevard is the heart of our economy and a recovery in business along the Las Vegas strip is crucial to us as a significant portion of our customer base is tied either directly or indirectly to the economic vitality of the strip. As business on the strip regains its footing the Las Vegas locals market will recover as well. Most importantly to us, the Las Vegas locals EBITDA was up more than 10% from the third quarter. This marks the first sequential quarter-over-quarter improvement in the locals region in 18 months. This growth pattern is continuing in the first quarter. While we reported declines in our other business units we believe these declines were primarily the result of short-term factors, not a broad-based shift in customer behavior. As we look at our business trends nationwide we are optimistic about our long-term prospects. Although spend per visit remains down the visitor counts are stable across the country. Our guests may be more cautious but they continue to enjoy our brand of casino entertainment. As we reported previously we have taken a number of steps to put us in an optimal position to capitalize on the recovery. We have built a more efficient business model over the last several years taking significant costs out of the business without sacrificing the quality of the customer experience. These efforts will result in substantial bottom line growth as revenues begin to recover and we are not simply waiting the recession out. Our company has significant liquidity and ample access to credit including $1 billion in untapped capacity on our revolving credit facility. We continue to look for opportunities that provide attractive, long-term growth opportunities for our shareholders. One of these potential opportunities we have been working on for over a year is acquiring the assets of Stations Casinos. As you know, in December we submitted a bid to acquire all of Stations’ assets. This offer stands and we are still actively pursuing these assets. Many of you no doubt have read that Stations has asserted they may have an agreement of principle with key lenders related to only four of their 18 properties. If that proves to be the case it would leave a considerable amount of assets in play and we continue to work diligently to bring the transaction to fruition when permitted. Stations’ assets would be a great fit for our business and would align well with our strategy of expanding the Las Vegas local sector, a market where we have demonstrated an ability to compete effectively and profitably. We believe in the Las Vegas valley’s long-term potential. Acquiring additional local assets would be an attractive opportunity, one we believe would be immediately accretive to earnings. Additionally we continue to believe we can offer the greatest possible value to the majority of Stations’ creditors since no one is in a better position to manage those assets profitably from day one. Finally we believe a smooth transition of Stations business [inaudible] would be in the best interest of this community. Regarding another important development MGM Mirage reported in their recent 10-K that they are preparing to divest their 50% equity stake in Borgata. We hold a right of first refusal on any sale of MGM’s Borgata interest and we will monitor the divestiture process closely and act in the best interest of our company. We are pleased with our 50% ownership position in Atlantic City’s premier gaming asset and for us it will continue to be business as usual at Borgata. A few final comments before I turn the call over to Paul. First, I want to recognize the job our leadership team has done in managing the business through these difficult times. They are a group of truly talented leaders and executives and I am confident they will continue to successfully meet the challenges in the upcoming year. Second, you have heard me say this before but periods of great difficulty often lead to great opportunities. Boyd Gaming has the resources, vision, strategy and the experience needed to seize the opportunities that lay ahead. Our commitment to generating long-term growth remains as strong as ever. We are uniquely positioned for growth and will pursue it aggressively. We will continue to be proactive in creating and pursuing opportunities that can provide an attractive, long-term return to our shareholders. Thank you for your time this morning. Now I would like to turn the call over to Paul. Paul?

Thanks Keith. Hello everybody. Overall we continue to see signs of stabilization in our business although a number of unique challenges impacted EBITDA in each of our regions. Let’s start with the Las Vegas locals region. When we spoke last we noted that a stabilizing trend was developing in Las Vegas and that we believed we had reached a low point in the business cycle. Our fourth quarter results reinforce that belief. The 20% increase in EBITDA is the smallest year-over-year decline in the Las Vegas locals region since the second quarter of 2008. When compared to the third quarter of 2008 the picture becomes more encouraging. Gaming revenue, room revenue, EBITDA and EBITDA margin all improved from the third quarter to the fourth quarter. These trends continue into the first quarter the gap in year-over-year results is narrowing. As other operators have reported in recent weeks, business trends are finally improving on the Las Vegas strip. We have never been through a recession of this severity so it is difficult to predict when positive trends on the strip will begin to impact the locals business but we can be certain that it will. Many of our local customers are beneficiaries of improved business volumes on the strip. As a financial situation of our local customers improves and their confidence returns so will their appetite to a normalized entertainment budget. We were encouraged to see a moderation of the promotional environment in the locals market during the fourth quarter, a trend that is continuing in the first quarter. As we have noted before we believe broad based emotional campaigns are often ineffective and inefficient which is why we have traditionally declined to match our competitor’s more irrational offers. It appears our competitors have begun to come to the same conclusion as they become more targeted in their promotional spending. Moving to the downtown region, although revenues at our three downtown Las Vegas properties decreased during the fourth quarter property EBITDA rose with increased efficiencies. The lower ticket prices and higher fuel costs associated with our Vacations Hawaii Charter Service resulted in lower regional results. As many customer packages are purchased months in advance prices on those packages don’t necessarily reflect the actual fuel costs we incur when the charter flight occurs. In times of rising fuel costs as we experienced in the fourth quarter this creates a shortfall on ticket yield and negatively impacts EBITDA. From an operating perspective we are encouraged by our results. Visitation at our downtown properties remained stable during the fourth quarter and our share of the entire downtown Las Vegas market has risen to 1/3. The Midwest and South reported a 23% decline in EBITDA during the quarter. This drop, however, is almost entirely due to our two southern Louisiana properties. During our last call we noted that growth in the Southwest Louisiana market was slowing down and that the market lacked the incremental demand needed to absorb future additional gaming supply. The fourth quarter results for Delta Downs and its competitors have proven that prediction. Several factors are at play in Louisiana. First, we believe the Lake Charles Market was benefiting from economic stimulus that typically follows a major hurricane as was the case with hurricane Ike in September of 2008. As we have seen in the past those benefits rarely extend beyond the one-year mark. The second factor was the sluggish national economy which finally began to impact the region. Both the Louisiana and Texas job markets have softened prompting consumers in those states to cut back on discretionary spending. That impacted results at Delta Downs and Treasure Chest. Moving north the news from the region was more encouraging. Blue Chip posted solid increases in revenue, EBITDA and EBITDA margin during the fourth quarter. The goal of our recent expansion of Blue Chip was to create a regional entertainment destination that could draw more business from the Chicago metropolitan area as well as other [feeder] markets. We are meeting that goal as more customers than ever are drawn to the wide range of unique amenities we have to offer at Blue Chip. Summing up the fourth quarter in the Midwest and South while Blue Chip posted solid growth Delta Downs and Treasure Chest combined to produce an $8.8 million year-over-year EBITDA decline in the fourth quarter. We are expecting first quarter results in the Midwest and South region to have similar year-over-year comparisons. Finally I would like to touch on Borgata and Atlantic City. In Atlantic City Borgata is clearly in a class by itself. We continue to build on our leading market share and have built substantial efficiencies into the business that are helping Borgata to attain adjusted EBITDA near prior-year levels even while revenues are down. In fact, Borgata would almost certainly have posted solid growth in the fourth quarter if it weren’t for the bad weather. The snow storm that hit the region in mid-December was one of the worst on record and we estimate it reduced Borgata’s EBITDA by more than $5 million during the fourth quarter, as customers found it extremely difficult to travel for a two week period. As many of you have experienced personally the East Coast continues to be impacted by some of the worst winter weather we have seen in our lifetimes. Borgata has already lost three weekends to bad weather so far in the first quarter and we expect to see an impact on first quarter EBITDA in excess of the $5 million we saw in the fourth quarter. Looking forward to 2010 we are confident about our position in Atlantic City. Despite the well publicized challenges that Atlantic City faces it is important to note that in 2009 Borgata led the market in gross gaming revenue in all categories and achieved a 17.6% market share which represents a nearly 40% market share premium. In fact, Borgata’s gross gaming revenue was approximately $210 million greater than the second place Atlantic City operation. Even as other jurisdictions in the region introduce or extend gaming, Borgata offers an all encompassing entertainment experience unlike anything else in neighboring states. As the economic recovery takes hold we believe Borgata will capitalize on the growth in consumer spending. To summarize, the stabilizing trends we have discussed on previous calls continued during the fourth quarter and the first part of the current quarter. We have seen growing stability in our business across the country and expect year-over-year gaps in our results to continue narrowing as 2010 progresses. At this point I would like to turn the call over to Josh to update you on the financials.

Thank you Paul. Starting with the balance sheet, our debt balance was $2.6 billion, unchanged from the balance at the end of the third quarter. At year-end we were in compliance with our covenants and going forward we expect to remain in compliance. Our leverage calculated in accordance with our credit facility was 6.2 times versus a covenant of 6.5 times. Our covenant steps up in the first quarter of this year to 6.75 times and continues to increase for each of the next two quarters. We completed an amendment to our bank credit facility in December. Under the terms of the amendment we received additional flexibility under our covenants in the four quarters of 2011. In exchange we agreed to reduce the available borrowing capacity under the credit facility from $4 billion to $3 billion. We currently have approximately $1 billion of untapped capacity. That leaves us with plenty of capacity to fund the initiatives we are considering. As a result of the amendment there was a $1.8 million non-cash charge from unamortized debt fees associated with retiring the $1 billion of capacity. This charge is reported as interest expense and was excluded from adjusted earnings per share. Changing topics for a minute to Borgata, MGM recently released information regarding the divestiture of their 50% equity stake in Borgata. Once the New Jersey Casino Control Commission approves the transfer of MGM’s ownership into a trust accounting rules will require us to consolidate Borgata’s results. Upon receiving the Commission’s approval we will file an 8-K that will include financial information to assist you in modeling this change. Until then we will continue to report Borgata as we do today, under the equity method of accounting; reporting 50% of their operating income in our results. The consolidation of Borgata will not have any impact on our covenants. Other items I want to point out from the quarter, pre-opening expense was entirely related to Echelon. Interest expense was approximately $33 million during the quarter. In the fourth quarter of 2008 we had approximately $12 million of capitalized interest. We reported no capitalized interest this quarter. Due to the stabilizing performance of Borgata in a very challenging environment as well as the property’s limited capital needs, Borgata continues to generate significant free cash flow. As a result, Borgata distributed $89 million during the quarter as a dividend to its partners. Borgata’s leverage ratio was just below three times at the end of the quarter. As a result, Borgata will continue to pay dividends to the extent leverage remains below this level. With that operator we are now ready for any questions.

(Operator Instructions) The first question comes from the line of Larry Klatzkin – Chapdelaine. Larry Klatzkin – Chapdelaine: Florida it looks like they are talking about a tax cut in rates. Do you have any feeling if it gets to 35% or less would you consider going forward down there?

We have been monitoring obviously Florida for a number of years since we purchased Dania Jai Alai down there and this conversation has been on the table down there for awhile so we are just continuing to monitor it. If indeed they do reduce it we will take a look and see where that project fits along with everything else we are looking at today. Larry Klatzkin – Chapdelaine: As far as the Echelon costs I assume this is the ceiling up at the site. Are there going to be more of these costs going forward?

There will be ongoing costs with site security, some minimal site maintenance and there will be some ongoing minimal costs. Larry Klatzkin – Chapdelaine: The weather was not just isolated to Atlantic City. Do you see any other properties taking some weather hits in the first quarter? Will we be seeing more than the $5 million plus just from Atlantic City?

I think the weather for the most part in the first quarter moved up the eastern seaboard so odd as it may seem the Midwest has had maybe a pretty normal weather. Not to say there hasn’t been a lot of snow but it hasn’t had the same impact that it had in the Northeast. Larry Klatzkin – Chapdelaine: Any chance the recap of the Borgata given how low the leverage is and the [stability] of the earnings?

I think given the low leverage it is certainly something we will consider combined with the fact that the credit facility that is existing now matures in early 2011. So it is certainly something we are looking at.

The next question comes from the line of Steven Ruggiero – CRT Capital. Steven Ruggiero – CRT Capital : On the stabilizing trends you are seeing in the Las Vegas locals market the same on the Boulder strip as they are for your Coast properties west of the strip?

Obviously we have now just started to anniversary a new competitor that came onto the Boulder strip about a year ago. So it is generally across the board. Steven Ruggiero – CRT Capital : On the Echelon and the pre-opening expense, in fact we did see a decline in the fourth quarter in your pre-opening expense. Do you expect we could see any further declines or is this a run rate we should plan for in 2010?

It will continue to come down. We are continuing to have expenses to wind down some of the capital costs that were really left over from 2008. Some of that cost is obviously capitalized and goes on the balance sheet and some of that goes into preopening expense. I would say beyond Q1 and Q2 timeframe of this year we would get to a point where we are probably on the run rate you could expect. At that point it truly reflects kind of the maintenance level spending that needs to be retained with that property meaning insurance, taxes, storage, security, etc. So that should be a good indication once we get beyond kind of first quarter and second quarter timeframe.

The next question comes from the line of Analyst for Felicia Hendrix – Barclays Capital. Analyst for Felicia Hendrix – Barclays Capital : In Louisiana are you seeing more competition from the Biloxi casinos in Mississippi marketing towards your New Orleans customers and has that continued into the first quarter?

I think the Biloxi casinos as they search for some additional revenues have always targeted markets to the west with New Orleans being a major population center. Treasure Chest is the only property we have in the Midwest and South that does not offer any hotel amenities. So it is very purely a local’s casino and certainly folks enjoy taking a night or two and going somewhere from a regional perspective and Biloxi has always been and will continue to be a target for those consumers. Analyst for Felicia Hendrix – Barclays Capital : On the tax rate in the quarter it seemed you got a pretty big benefit there. Was that unusual?

The fourth quarter is somewhat of a nuance every year only because you kind of true up to the annual rate at that point. In addition we have a lot of permanent adjustments that have to be factored in and it skews things when the pre-tax income number is fairly low. So it reflects kind of all of those things coming together. I think for 2010 we would expect our run rate tax rate to be around 38%.

The next question comes from the line of Carlos [Anspirelli] – JP Morgan. Carlos [Anspirelli] – JP Morgan: On margins in your Midwest and South region, obviously some of your properties in Louisiana were able to brave this economic storm over the last few years but now that things have softened pretty significantly in relatively short order there do you still have quite a bit of wood left to chop on margins or are we pretty bare bones at present?

I think when it comes to margins obviously there was a decline in EBITDA margin in the Midwest and South. Revenues were certainly down well in excess of the EBITDA impact which was showing we were able to manage that process a bit. I think one of the key areas you have to focus on obviously in declining revenues is marketing expense and though as I said we saw the slowdown in Louisiana coming when we were on our last conference call I have to say it probably wasn’t to the extent necessarily that the impact did hit in the October/ November timeframe. As a result a number of our competitors were spending significant dollars in Southwest Louisiana. One particularly even commented on their conference call about that. That correction which takes a couple of months to occur will be a benefit, if you will, as we get here towards the end of the first quarter into the second quarter easing back on marketing expense.

The next question comes from the line of Dennis Farrell – Wells Fargo. Dennis Farrell – Wells Fargo: Could you share with us the revolver balance as well as an update on any repurchases for the quarter? In regards to the revolver balance how much availability under the covenants [liquidity] do you have in that facility right now?

I think from a revolver balance perspective we have just under $2 billion. So it is about $1.9 billion outstanding. In terms of incremental capacity, we have enough to do exactly what we want to do with respect to, I guess you are talking with respect to the levels of covenants. So that is really not an issue for us. In terms of the bond repurchases we have purchased about $30 million in the fourth quarter last year primarily related to the 6.75 and as we have always said we will just continue to be opportunistic to the extent it makes sense for us to do so, so we don’t kind of update the market until after the quarter is over. Dennis Farrell – Wells Fargo: In regard to CapEx and corporate expense for 2010 what are your thoughts there?

Well we don’t usually give too much guidance in that regard. I would say corporate expense shouldn’t be much different than what you would have seen in 2009 levels. I think for CapEx perspective we have a little bit left on Echelon I alluded to earlier. We have actually already spent that money. That is about $25-30 million. Then absent that all we have is maintenance capital which we are saying will be similar to levels that we saw in 2009 given our outlook for the business in 2010. So that would be probably $50-55 million of maintenance CapEx. Dennis Farrell – Wells Fargo: With just over $2 billion of debt maturing in 2012 what are your thoughts about refinancing, paying down the debt, potentially issuing equity [or converting]?

I would say we are well beyond the need to start to have those kinds of conversations with respect to the credit facility at this point. The maturity is May of 2012 so it goes current in the second quarter of 2011 so we are a good two years, over two years away from that maturity. We have had conversations with our relationship banks starting almost a year ago to start to develop our own strategy of how we were going to address that and in our own mind we have the plan in place, the sketches of an outline of how to deal with that. It is just too early in the process to do something. We can also as capital market conditions warrant term out some of that facility and we certainly will plan to do that over time when it makes sense for us. Equity is not something we are talking about right now. I don’t think we are in a situation where we need to talk about it.

The next question comes from the line of John Maxwell – Jefferies.

I was wondering if you could comment I guess there is a little bit of noise coming out of New Jersey with VOT at the Meadowlands. Any comments on that? Also any thoughts on how Borgata addresses or how you look at the table games coming on in Pennsylvania?

With respect to the VOT issue in New Jersey once again it is another one of those issues that has been out there for a number of years but the industry has been fighting. We have a new governor in office who has made comments both pro and con on the VOT issue. So we will continue to monitor and continue to fight it and certainly we do not want to see that happen. We do not need the additional competition in the Atlantic City market. With respect to the table games in Pennsylvania and Philadelphia in particular, again it is something we have been fighting for a little bit now. We have known it has been a possibility. We have watched that legislation as it went through. We will simply have marketing programs that reach out to our customers and make sure that they remain loyal customers of Borgata. We have the premiere asset. Atlantic City is a little bit more of a destination market than some of the local casinos there in Philadelphia. So as a premiere asset in that market we actually are comfortable or confident in our position even with the advent of table games in the Philadelphia area.

I think it goes without saying the amenity package at the Borgata is really unsurpassed and I am not sure really anybody in Pennsylvania given the tax rates can get a return on that type of amenity taxes debate so [chose] to build it. So really the difference in tax rates between the two markets becomes a bit of a buffer relative to the distance tradeoff that occurs between Philly and Atlantic City.

I don’t mean to pile on with what everyone else is saying but the reality is the management team at Borgata has done a great job over the last two years. There is not many properties you can look at where they have had such a dramatic decline in revenues and EBITDA has basically remained flat when you kind of exclude the impact of more recent weather effects. We have a good management team there and they have a business plan put in place that has contemplated really all of the events that are unfolding there. John Maxwell – Jefferies: Reading a couple of different things, is it your view the VOT I guess some of the politicians say they could shoot it down, is it a legislative issue or is it a vote issue if it were to come to that?

I believe it is a legislative issue that would have to pass a bill to approve that. I am not familiar with whether or not it would have to go to a vote by the people.

I gather you probably don’t have any update on Station but wondering is there any costs going on in your corporate that would…legal costs or is that just negligible for that situation?

Given the debtor has a period of exclusivity that obviously we have to respect there is not a lot of costs we are spending at this point. So it is [be in] the rounding to be honest.

There are no further questions in the queue. I would like to hand the call back over to Mr. Josh Hirsberg. Please proceed.

Thank you. Thanks everyone for joining the call today. If you have additional questions feel free to reach out to the company and we will provide you any answers as quickly as we can. Thank you.

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a wonderful day.