Boyd Gaming Corporation (BYD) Q3 2013 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Boyd Gaming Third Quarter 2013 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Josh Hirsberg. Please go ahead.

Thank you, Amy, and good morning, everyone, and welcome to our third quarter earnings conference call. Joining me on the call this morning are Keith Smith, our President and Chief Executive Officer; and Paul Chakmak, our Executive Vice President and Chief Operating Officer. 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'll 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 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 Chief Executive Officer. Keith?

Thanks, Josh, and good morning, everyone. Thank you for joining us today. As you saw from our earnings release earlier today, our third quarter performance fell below our expectations. While we generated solid results across our operations in the months of July and August, this performance was offset by a significant weakness in September, mainly in our Midwest and South region. However, our year-over-year results in October have shown improvements in most of our markets. Despite this difficult operating environment, we continue to make significant progress as a company in the third quarter. Starting with the balance sheet, we refinanced the Boyd Gaming credit facility during the quarter, reducing interest expense and moving our earliest maturity from 2015 to 2018. We also refinanced the Borgata bank credit facility during the quarter. In August, we completed an equity offering, generating nearly $217 million in proceeds, which were used to reduce debt, further strengthening our balance sheet. Since January of this year, we have repaid more than $500 million in debt through a combination of asset sales, free cash flow and our equity offering. And since the beginning of the year, we have improved our free cash flow by more than $70 million annually. We will save more than $50 million a year in interest expense as a result of debt reductions and our refinancing efforts, and we have eliminated an additional $20 million in annual operating expenses from the sale of non-core assets. We are unquestionably in a stronger financial position today than when the year began. And going forward, we will continue our focus on strengthening our balance sheet. On the operating side of the business, we continue to make progress refining and improving the business. Our Las Vegas Locals business grew EBITDA for the third consecutive quarter as modest…

Thanks, Keith. Hello everybody. Our operations got off to a good start in July and August before slowing rather significantly in September, especially in our Midwest and South markets. But as Keith noted, in October, most of our operations are showing improvement over last month. I'll get into more detail shortly, but first let's talk about our Las Vegas Locals business. We generated our third consecutive quarter of EBITDA gains in the Locals region. Our efficient operations and effective marketing continue to pay dividends for our company. We improved operating margins by 130 basis points during the third quarter, increasing revenue even while we reduced our overall marketing spend by nearly $1 million. One of the more significant drivers of growth for our business is our Penny Lane initiative, which we launched in December of last year. Starting next week, we plan to take this successful concept to the next level when we launch an enhanced Penny Lane at all 7 of our major Las Vegas properties. At the same time, we'll also begin a phased rollout of Penny Lane in the Midwest and South. Our goal is to create a more engaging and compelling experience for slot players, and we'll be doing that by giving players what they've told us they want, more bonuses, more often. These additional bonuses will be delivered through a number of unique game features and player benefits incorporated into many of our Penny titles, and to get the word out about the all-new Penny Lane, we'll be launching a creative new marketing and advertising campaign that should generate quite a bit of attention in the coming weeks. As we've said in the past, Penny Lane isn't just another promotion, it's a strategic initiative designed to enhance and improve our gaming product in a meaningful…

Thanks, Paul. During the quarter, we completed several significant financing transactions. We issued equity and refinanced the credit facilities at Boyd and Borgata, resulting in reduced interest expense and an extension of maturities. Since the beginning of the year, debt has been reduced by nearly $0.5 billion at Boyd, $30 million at Peninsula and $45 million at Borgata. And annual interest expense savings for all 3 companies is over $50 million. Let me provide you a few details from the quarter on the balance sheet and income statement and then provide fourth quarter guidance. Our debt balance at the end of the quarter was approximately $3.6 billion, which includes $1.2 billion at Peninsula. Incremental availability was approximately $295 million at Boyd and $30 million at Peninsula, under their respective credit facilities. Our cash balance at the end of the quarter was $102 million at Boyd and $28 million at Peninsula. From a financial covenant perspective, secured leverage was 4.2x compared to a covenants of 5x and total leverage were 6.6x versus a covenant of 8.5x. Borgata's debt balance was $768 million at quarter's end, including $16 million outstanding under their $60 million credit facility. Their cash balance at the end of the quarter was $35 million. Moving to the income statement. Corporate expense, excluding share-based compensation, was $10.4 million in the quarter. Depreciation expense in the quarter was $69 million, an increase of about $19 million over last year, due to the inclusion of Peninsula. In the quarter, Peninsula's depreciation expense was approximately $22 million and Borgata's depreciation expense was about $14 million. Our interest expense in the quarter was $83 million, which includes $20 million for Peninsula and $20 million for Borgata. Boyd's interest expense was $43 million, a decrease of $7 million from last year. Our capital expenditures…

[Operator Instructions] Our first question comes from Joel Simkins at Crédit Suisse. Joel H. Simkins - Crédit Suisse AG, Research Division: In terms of Delta Downs, you spoke pretty highly about that property, obviously continues to be a nice performer for you. How are you thinking about how that asset's positioned in 2014, with eventually the Golden Nugget coming into that market?

Well, I think, from a market positioning standpoint, as we've said all along, we geographically love our location. We are about 30 to 40 minutes closer to Texas than any of our competition in Lake Charles, which is where, obviously, the Golden Nugget project will be. In any situation where new competition comes in, obviously we have the challenges of the capacity that comes along with that. But it's really a slot-only operation, which Delta Downs is, because it's a horse race track. In Louisiana only slots are available. We can do, really, an outstanding job for our slot customers and make them the kings and queens of the property. So we continue to expect good things out of Delta Downs. Joel H. Simkins - Crédit Suisse AG, Research Division: And I know you don't give guidance too far out, obviously, but as Vegas clearly seems to be getting better. We're hearing a lot of positive commentary on the book of business for convention next year. We obviously see the Case-Shiller data getting better. How should we be thinking about sort of the top-line growth next year? Because clearly, you're getting some good margin expansion, even on fairly low top-line growth.

I think as we look at 2014 in the Locals market in Las Vegas, I think we continue to expect very modest revenue growth. I think there are a lot of metrics that are pointing in the right direction. We haven't seen them fully translate into our business, so we just expect modest growth through 2014. Joel H. Simkins - Crédit Suisse AG, Research Division: And one final, then I'll give up the floor here. In terms of New Jersey online, can you just give us sort of a high level kind of overview on how you expect to sort of attack the market share opportunity and overall sort of customer acquisition in the early days?

Well, without going into too much detail, providing a roadmap for our competitors, I think that the Borgata brand, which we have worked very hard to position over the last 10 years, is a leading brand in the market. We think that will provide us a great opportunity to gain a significant amount of market share. Once again, Borgata land-based poker, currently, I think occupies more than 50% of the market in Atlantic City. That's a great starting point. We are working on the product to make sure, as we said, that it is as attractive as the land-based brand is, and then we just think we're going to launch a very, very strong product. We have dollars budgeted, and we're prepared to be aggressive in terms of attacking the market to acquire players. Those plans are in place and we're ready to go, but I don't think I'm going to go beyond those comments.

The next question comes from Thomas Allen of Morgan Stanley.

Two clarifications from your prepared remarks. The first one, on the Borgata you said EBITDA was reduced by $2.1 million in the quarter because of property taxes. Is that versus your guidance or is that versus year-over-year? And then the second one was you said that there has been some impact from the U.S. government shutdown. Was that factored in your 4Q guidance?

First, on the Borgata question, the $2.1 million was a year-over-year number. So that was certainly known when we put out guidance for the third quarter on our last call. Just a reminder, when you compare it to the prior year. As far as the government shutdown, I mean, obviously, there were aspects of it. I mean, what happened with the uncertainties in September, relative to the budget, government funding, those sorts of things obviously were complete unknowns. And I think, really, what you have seen is, as you sort of monitor the monthly revenue reports from a lot of markets, is there was a consumer pullback. And I think you've heard this from not only companies in the gaming industry, but also companies in other areas that touch the consumer. I mean, people were concerned, and we know that the reaction of the consumer can be relatively sharp and swift. The recovery that we've seen in October, I think, speaks to the point that the government pulled it together and is going to kick the can down the road here, and everyone has regained a level of comfort.

And I think, just to add one kind of aspect to Paul's comments, where we've seen most of the impact has been in that lower-end segment, which is obviously the most economically sensitive. And that has been one characteristic of that segment that has been very consistent, really, throughout this kind of start and stop economic recovery that we've seen.

Okay, and then second question. So would you say that your guidance is somewhat conservative? I mean, is it using kind of what you've seen -- I mean, how much was September factored in there? And then just my last question. So operating efficiencies have offset any kind of revenue weakness over the past few quarters. It did less so this quarter. Was that an impact of kind of the sudden change in trends, so you didn't really have time to adjust or do you think that is more -- or do you think there's less of an opportunity for kind of cost controls going forward?

Well, I would say the guidance that we're providing is reflective of what we saw in the third quarter as well as part of October. And so we're trying to be realistic in everything that we communicate publicly and that's the basis for the guidance and all of our other comments as well. We're communicating on what we are seeing real-time and reflecting that in our communication to you. I'm not sure I fully understand the second question, but I'll take a shot at kind of what I think it is, and then you can kind of ask another one if it doesn't completely answer your question. But I think when you had such a dramatic change and it came about pretty quickly, in terms of the impact of that lower consumer segment on our business overall, it's very difficult to adjust on a real-time basis to cost. You can certainly do it over time, and that's what you saw us do really in, well, throughout 2012, as we saw weakness in the Locals business. We worked throughout the year to take costs out of that business and react to the trends we're seeing, and we'll do the same thing here to the extent it continues. But we're always looking for opportunities to take cost out. And I think you kind of have to be careful in terms of doing it to make sure that you don't affect your overall operations. So we're very careful in terms of how we approach kind of the behavior that we're seeing to make sure that we want to react appropriately to it.

Yes, let me add on to that and just give you some sort of real examples of what's going on within the consumer base. In September, we saw the lower end of our database -- we refer to them as rubies, that's the tier that they’re in, in our database -- still come in to our properties with the similar amount of trips, generally speaking, that they've had in the past but they're spending less. And we've seen this before, in all honesty. It is a reaction to more macroeconomic issues that we have just talked about. And that group, we believe, will recover. But they have to feel better about kind of where the world is for them. As we said, on a month-over-month basis, October to September, we have seen recovery of most of our properties in that tier of the database. Not necessarily to prior-year levels in all cases, but certainly sequentially from September to October improvements. And again, I think that is simply what's on the news and what the government is doing and how people feel and its overall impact on consumer behavior.

Our next question comes from Carlo Santarelli of Deutsche Bank.

I was just hoping if you guys could provide some color on -- I'm a little bit confused with kind of the guidance relative to the October commentary. Is the October commentary more October has picked up from September, October looks like a little bit better year-over-year or October is better than the tenor of the entire 3Q? I'm trying to understand that a little bit better.

Yes, I think all we're trying to say, Carlo, is if September was down x, October year-over-year is not down as much. And we, generally, are looking at the trends of the business and comparing October year-over-year to September year-over-year.

Okay, that's understood. And then just one quick one. Just in terms of, obviously, a new property -- or not necessarily new, but an asset opened recently in the downtown market. Do you guys have any lingering belief that, that will have any impact on maybe your share in that market or do you think this quarter was more of a blip just given some of the construction?

Well, I think relative to share, our share actually improved again this quarter. With the numbers from Nevada that actually just came out earlier this morning, our share was up about 30 basis points year-over-year for the third quarter. I mean, as far as new capacity that comes downtown, obviously from a gaming revenue standpoint, things will get carved up a bit. We typically, over the past number of years, have not seen gaming revenue increases for a market be equal to a new entrant. With that said, we have some pretty compelling brands downtown. And we think, overall, the dilution that occurs from a new property opening is offset by the fact that they're adding so many hotel rooms, a very large number of hotel rooms to the downtown market. And we know when people stay downtown, they walk around downtown and we'll take our fair shot, obviously, at those folks, because we think they'll enjoy our product as well. So, generally speaking, sort of a mixed bag. At the same time, we think it's a good thing for downtown and will continue the revitalization that downtown has been undergoing for the last, really, couple of years now.

And then just really quickly on Borgata. If you can remind us last year, obviously with Sandy -- did you guys -- I don't recall you ever stating an EBITDA impact. But as you think about this year relative to last, could you talk a little bit about the mindset that goes into your guidance relative to kind of how to handicap that event?

Yes, I think generally, we thought of the Sandy impact of around 11 -- I don't have the exact number, but it was around $11 million to $12 million in EBITDA. And so that's how we think about the performance when we compare year-over-year with and without Sandy.

Our next question comes from Shaun Kelley of Bank of America.

Josh, just maybe first start off with Borgata. Just curious on the property tax discussion there. Going forward, did those numbers -- if you guys were to win this or win this on appeal, would that be as simple as basically adding whatever the number is, $15 million to $20 million a year to EBITDA, because that will be a reduction in pure property tax or does it not affect the forward and it's just a settlement of like prior taxes paid?

It does affect going forward. And you can't use the exact same number because you have to -- it's a different year that you're applying the rate to and it applies to whatever is going on in terms of the operations at that point and the valuation that is applied for that particular year. But that's basically in a very simplistic way to think about it. It will be a reduction in expenses going forward, to the extent that the ruling of the current tax court is affirmed and applies going forward.

Sean, this is Keith. Maybe just add to that. So to be clear, if you were to take the kind of current assessment that the judge ruled on and apply it to today's value -- or today's assessment levels or mileages. You'd see a reduction in property taxes of about $30 million a year, which would obviously just be incremental to EBITDA of that property. That's in addition to whatever the settlement is for the years that are under appeal right now. So we would have a benefit going forward from a reduction, as well as the years under appeal. Two different issues, two different benefits to the Borgata.

And not to beat a dead horse, but it is an expense, an operating expense that would be -- being reduced. It would reduce EBITDA as a result of that.

Sure, got it. That's very helpful, guys. And then, second thing, just to go back to the online gaming discussion. I think I'm still trying to get my arms around whether or not, at launch will there be the -- I guess, is it your understanding or your belief that you will launch, with the Borgata, under the Borgata license, only one website or will there be -- I guess we have 2 websites between Borgata.com and likely a party gaming .com or a party gaming offering?

I think that we would expect that when we launch that business, that there will be multiple websites, multiple brands being launched. There will be a Borgata brand. We'd expect a bwin brand to launch at about the same time we launch, and there could be others that we choose to launch at the same time. So I would expect that there'll be multiple.

Great. And is it your understanding, Keith, just to be clear -- our latest understanding, at least, is that you can get up to I think 5, I guess, websites underneath each gaming license. Is that your interpretation as well?

That's our current understanding of what the DG [ph] Has ruled on.

Our next question comes from Felicia Hendrix at Barclays.

Can we talk about your Penny Lane rollout to the rest of the Locals properties into Midwest and South? And I'm just wondering what kind of -- maybe you can help us quantify it a bit. What kind of lift did you get from the properties where it's been at so far? It's just helpful because as we think about next, particularly in the regions, we're estimating much of the same just given the macro environment. So it sounds like we should think about layering on some benefits from this promotion. So maybe you could help us quantify that a bit.

Sure. Well, first, the Penny Lane that launched last December, it was December 1 of 2012, was really a marketing campaign centered around, obviously, penny-denominated slot machines. The focus of that campaign was in the Las Vegas Locals business, and we think it contributed to the lift we saw in the first, second and third quarters. We all know that penny-denominated machines are some of the most popular, and frankly from a manufacturing standpoint, where they are investing most of their capital in the development of new brands and new games. We're taking that to another level by using a product that Bally's has. And Bally's is the backbone for most all of our slot systems around the country. That is proven and it's out there, called their electronic bonusing suite. But we're going beyond what just the hardware and software does and tying it into what will be a very innovative marketing campaign, as I mentioned. And that will launch in Las Vegas, as well as in a couple of the southern properties next week. And then we'll continue to roll in properties over the course of November and then ultimately get to the new Peninsula properties sometime next year.

Okay, that's helpful. And then just bigger picture, as we think about next year, and most importantly, the first quarter and the anniversary-ing of some of the tax-related headwinds that consumers suffered last year. Do you think you might see a pickup in the first quarter from easier comps or do you think that the economy just, generally, is weighing on the consumer such that the easier comps might not have much of an impact?

I think it's hard for us to answer that question right now, given we don't give guidance and direction of business that far out. And I also think, just given kind of where we are in terms of how the consumer has reacted more in September, we need to see more of kind of what we can base our trends on. I think September was, on reflection, something that we could've expected, had we known maybe what was going to happen with the government and some of the other things. But we don't know kind of if there's going to be a residual impact that continues to affect the consumer or not into the fourth quarter and beyond. And so I think it's hard for us, at this point, to suggest what our business is going to look like in the first quarter at this point.

And if I could just quickly go back to Paul for just the Penny Lane for one second. When you think about the impact it had last year, starting from last year on Las Vegas, is there any way to quantify? If you removed that, would you have still seen growth x that promotion?

Well, I mean, hard to say. I mean, we were very pleased with the results we've had throughout this year in the Locals business, relative to obviously the numbers that we can all see from Nevada and others. We think we've made a meaningful impact to where we stand from a market share, where our brands and how our brands are recognized, and have been able to take it to another level, just like everybody else fights to find that way to really pick up market share in a market that is showing very, very modest revenue growth.

And, Felicia, this is Keith. I think it's also important to recognize that Penny Lane wasn't the only marketing initiative. It wasn't the only change in the business that was implemented over the course of the last 3 or 4 quarters. There have been a number of changes. Obviously, we call out Penny Lane, because it was probably our most significant one. But we're continually refining the business, continually adjusting marketing programs, continuing to find ways to attract people into our buildings. And so I think it's hard to start to parse out it is this program is this much and another program is a different amount. But I think it's important to note, Penny Lane wasn't the only initiative that was ongoing through the course of the year.

Our next question comes from Kevin Coyne of Goldman Sachs.

Just a question on online gaming in New Jersey. If we assume everything goes smoothly and the rollout happens on the 26th, just to get a sense, if I'm a New Jersey resident, do I have to, let's say, go down to the property and visit it first to get registered or can I sign up right away to gamble that day or that night?

I think the anticipation is you'll be able to sign up online. You mentioned New Jersey resident. You don't have to be a New Jersey resident to be able to do this. You have to be within the boundaries of the state of New Jersey to be able to play. So this is not limited to New Jersey residents.

But you won't have to go to the property first?

No.

Okay, great. I don't think you mentioned much about the Borgata business interruption insurance. Can you give us an update on that?

Yes, we didn't mention anything about that. And I think the reason is that I think we balanced the claim versus understanding the relationships that we have with those carriers and understanding the implications of pursuing a claim and the legal challenges of doing such. So I think it's something that I would suggest that people shouldn't count on as some sort of benefit as a result of that event. But we continue to kind of evaluate where we stand.

Okay. And, Josh, maybe one more follow-up on your Borgata guidance. I think what you said is there would be no benefit from the online business, which I would understand to be a positive. But in the number you gave on the brick-and-mortar business, does that include any cannibalization of lost traffic at the property?

Well, let me just -- our view is that, to the extent that there is online gaming opportunities, they will more than offset any kind of impact on our existing bricks and mortar. We actually think that, overall, our business would obviously improve as a result of pursuing this opportunity or, commonsensically, we probably wouldn't be doing it. So, in terms of the guidance, it's strictly based on the business as is continuing and we would view, as you stated, Kevin, that online gaming would strictly be a benefit to it. In terms of the mix and how that plays out, that's not reflected in the guidance, to the extent that there's a marginal impact on the bricks and mortar, that's not reflected in this guidance. So does that help you?

Yes, I think that helps.

We have time for one more question which will come from Steven Kent at Goldman Sachs.

I know Carlo asked this question. I'm going to try and ask it again, which is the idea that October is better, and better than September I think. But is it better than June, July and August? I guess I'm trying to figure out what was the sudden re-acceleration more recently? And then, just separately, how is the promotional environment in reaction to some of the weakness we're seeing, broadly, within the regional gaming industry? What's the promotional environment like? Are you starting to see some of your competitors press some of the deals?

Let me take a shot at it this time. As far as your last question and the competitive environment, it is really very much a market-to-market situation. I mean, so in our case we'd have to talk through 12 or 13 different markets to really answer that. I would say, overall, the more casual gamer, the lower end of the database, in September, as I said, was spending less. So they're coming in, they're redeeming their offers, but effectively, you have a higher level of investment in those folks. Because they're redeeming the offers that they've earned based on their past levels of play, but are playing at a lower level, we believe, because of, frankly, the psychology of that consumer relative to more macro events. Relative to the comments about October, everyone sees, obviously in all these markets, revenue reports come out. Revenue reports for September sort of one after the other, were not very good. So, to that extent -- though I know our numbers relative to the Midwest and the South were a surprise this morning -- really they shouldn't have been as much given the revenue reports that everybody had seen. What we're saying is, in October, given we believe that the government has kind of pulled it together obviously at the end of September, early October, that the consumer behavior is starting to improve. So we would not expect revenue declines in October to be anywhere near the levels that we saw in September. That help?

Yes.

All right. I don't believe there are any other questions. And so, with that, to the extent that you have any follow-ups, feel free to contact the company and we'll be available to answer those, and we appreciate you taking the time to dial in today and have a safe Halloween.

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