Boyd Gaming Corporation (BYD) Q1 2014 Earnings Report, Transcript and Summary

Good afternoon, everyone, and welcome to the Boyd Gaming First Quarter 2014 Earnings Conference Call. [Operator Instructions] Please also note that this event is being recorded. At this time, I would like to turn the conference call over to Mr. Josh Hirsberg, Senior Vice President, Chief Financial Officer. Sir, please go ahead.

Thank you, Jamie. Good afternoon, everyone, and welcome to our first 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 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, 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. Thank you for joining us today for our first quarter earnings call. During the quarter, we continue to make steady progress delivering results that were at the high end of our first quarter guidance. Our operations performed well, despite challenges during the quarter. Severe winter weather was the most significant factor, negatively impacting EBITDA by about $10 million to $12 million. Borgata's online operation also recorded a $3.2 million operating loss related to the launch of this business. Overall, we are pleased with the progress we are making as a company and we are confident that we are making the right moves to position ourselves for future growth. First, we've continued to refine the business, maximizing the flow-through potential of our operations. Second, we are successfully expanding beyond our existing operations, establishing ourselves as a clear leader in America's largest, real money online gaming market, and positioning ourselves to pursue new opportunities to grow. Third, we continue to strengthen our balance sheet and pay down debt, further enhancing our financial flexibility in creating shareholder value. Let me walk through each of these areas in a bit more detail, starting with our core operations. Over the last several years, we've built increased efficiency in our operations across the nation, reducing unnecessary expenses without compromising the high-quality customer experience that is the foundation of the Borgata brand. As we have seen in Las Vegas over the last year, we have significantly improved our operating leverage as even limited revenue growth has resulted in consistent and meaningful EBITDA gains. We are confident further EBITDA growth is achievable even in a flat revenue environment, and we expect this growth to accelerate as the economy strengthens. While it's always difficult to predict the future direction of the economy, recent…

Thanks, Keith. Hello, everybody. As noted earlier, unusually severe winter weather had a significant impact on our business outside of Nevada, negatively affecting EBITDA by about $10 million to $12 million. Despite these challenges, our operations performed well. Overall, wholly-owned property operating margins were essentially unchanged year-over-year, thanks to efficiencies in our business. Now let's get started by reviewing our Las Vegas Locals segment, which remains a positive story. Even though year-over-year comparisons are getting tougher, we posted our fifth consecutive quarter of EBITDA growth, led by strength in our destination business and continued efficiencies in our operations. While first quarter gaming revenues showed modest year-over-year declines across the market, we continued to maintain our market share and kept customer reinvestment steady with prior year levels. Our non-gaming amenities performed well during the quarter. This is partially a reflection of a strengthening market citywide. Visitation, room rates and occupancy are all improving, and we're also giving customers new reasons to choose our properties over the competition by actively refining our non-gaming amenities. We recently completed an extensive remodel of hotel rooms at the Gold Coast, as well as 800 rooms at the Orleans. These investments paid dividends during the quarter, as both properties showed solid gains in hotel revenues. As noted previously, we see more opportunities to drive further growth by directing our existing CapEx budget toward our non-gaming amenities. For example, a remodel of all 400 rooms at the Suncoast is scheduled to begin later this year. We will be refurbishing the Gold Coast meeting space this summer. The Orleans Hotel project will resume in 2015, covering the balance of the nearly 1,900 rooms at the property. And we are looking at numerous opportunities to reinvent and reinvigorate our food and beverage offerings. By giving customers new reasons to…

Thanks, Paul. As Keith noted earlier, we continue to make good progress strengthening our balance sheet, reducing debt by another $55 million during the quarter. We have incremental availability under our credit facilities of approximately $300 million at Boyd, $35 million at Peninsula and $20 million at Borgata. We remain in compliance with our financial covenants. Boyd secured leverage was approximately 4.2x compared to a covenant of 5x and total leverage was approximately 6.7x versus a covenant of 8.5x. At Peninsula, total leverage was approximately 6.3x compared to a covenant of 7x, and Borgata's covenant EBITDA was about $114 million. Capital expenditures were $18 million during Q1, including $6 million at Peninsula and $2 million at Borgata. Much of our capital spending is scheduled for later this year. And as a result, we continue to project about $120 million in maintenance capital for the full year between Boyd, Peninsula and Borgata. And an additional $20 million of expansion capital at Peninsula for Kansas Star's Phase 2 development. For the second quarter, we expect our Las Vegas Locals and Downtown segments to perform generally in line with prior year levels. Borgata should slightly exceed prior year results, and our other operations outside of Nevada should see year-over-year declines similar to the first quarter, absent the weather issues we experienced during Q1. Slightly more than half of the negative weather impact we discussed earlier was attributable on a combined basis to our Midwest and South and Peninsula segments during the first quarter. We are more optimistic about the outlook for our business in the second half of the year, as year-over-year comparisons for the third and fourth quarter will grow more favorable in all segments of our business. Starting in the third quarter, we will also anniversary new competition in the Shreveport…

[Operator Instructions] And our first question comes from Thomas Allen from Morgan Stanley.

Two questions on guidance. The first, which segment specifically drove the cut to the high end? And secondly, can you just give us some more color on what drives the high end versus the low end of the range? So you mentioned you expect kind of Midwest, South and Peninsula properties, EBITDA to turn positive in the second half. If that wasn't to play out, do you think you could still hit the low end of guidance?

So with respect to setting guidance to the high end and bringing it down, or bringing the top end down, it really kind of trends across all segments of our business. It's not any one particular segment that causes us to take a look at and adjust that high end of the range. I think if -- I think we generally expect, given kind of the third and fourth quarters of last year, and this is consistent with kind of the comments and the points I was trying to make, is that we expect all of our segments to really do better in the third quarter and fourth quarter. It's not any one particular segment that kind of makes us reach the guidance that we're providing. I think if we had multiple segments not be able to meet kind of our expectations, then we probably would be towards the lower end of that guidance and perhaps, below. But I think just given where we are in terms of our -- the trends of the business even today and given kind of the softness that we saw in those 2 quarters last year, it's hard to imagine that we would be below those levels. But we'll have to see how it plays out over time.

Okay. And then just on online gaming. I think, you said in the past, you expected the impact this year to earnings to be pretty immaterial. Now that you've gotten through the first quarter and have seen this loss, I mean, do you still feel like you can have kind of no impact to earnings? I mean, I think we model you guys losing about $2 million this year. And if you look at precedents from other markets that have opened, companies typically do see losses early on. And then, I guess, another part of this question is just how do you balance investing for kind of long-term market share, which is what it appears you were doing at the beginning with kind of trying to take kind of nearer-term earnings?

Sure. Thomas, with respect to kind of where we see our online gaming business this year, the loss in the first quarter was primarily driven by the startup costs and launch advertising, which is fairly typical in a new business. Many times you may have preopening costs, we didn't have that luxury because we opened just recently. And so a lot of advertising happened in the first quarter. We would expect that by the end of the year that this will be cash flow neutral or profitable. And so we don't see it as an impact on the Borgata results when you look at the full year 2014. Once again, the loss, when you strip out the startup costs was about $1 million in Q1. So we think that, that will narrow fairly quickly as we go through Q2 and Q3.

I guess, the second part of my question is really how do you -- are you worried at all that if you pull back your marketing spend, you're going to lose some of the great market share you're taking so far?

No, not really. I think a lot of our market share that we've gained is not due to the $2 million or so that we spent in marketing and startup advertising. It really has to do with the power of the Borgata brand. I mean, the Borgata has been in the market for more than 10 years now, it's developed a very strong brand. And I think the reason we control, generally, 1/3 of the market by ourselves is simply the power of that brand. So we'll continue to market and advertise in a prudent fashion, where we think we need to, when we think we need to and provide the right incentives to our customers to keep them on our site. But we don't think kind of pulling back to a more normal run rate is going to impact our market share or our ability to continue to run a good business there.

Your next question comes from Shaun Kelley from Bank of America Merrill Lynch.

I was just wondering if you could talk a little bit about the -- just what you're seeing right now in the regional landscape and if you are a little bit more cautious? We've heard a number of operators kind of hinted that. And very specifically, could you give us just any color on what you're seeing in Kansas? Because I did notice, I think the March numbers came out today, and Kansas Star was actually down, I think, double digit in March. So I was wondering if there's any kind of reason for that, or possible is it -- if it's possibly construction disruption from what you guys are working on at Phase 2? That would be really helpful.

Sure. I think -- well, first, as it relates it relates to Kansas Star, it's not construction disruption, we just broke ground on that project and it really wouldn't be fair to certainly claim that. I think the level of revenues at Kansas Star, which I think actually came out about a week or so ago in a preliminary fashion, actually, were down -- actually to a lesser extent than it was the past couple of months. I think you have to just look at the overall time line. It was just a little over a year ago that the permanent casino, Kansas Star, with all its bells and whistles and restaurants, opened up to very, very strong demand and very high visitation. They're typically, if you just trend out a new property opening, there is a sort of plateauing out and pullback as everyone who wanted to go see it kind of went. And I think we're now in sort of a more or less, I'll call it a steady state operating environment, having been open now for some time. So a little bit of what we see is what you get at Kansas Star. Still over half of the total gaming revenue generated in the state of Kansas, very, very successful property. And really doing pretty much really what we expected. And I think we will get a nice uplift with the addition of the hotel room amenities, the additional hotel rooms that I mentioned this summer, followed by some really, really nice meeting space and all the equestrian support facilities that continue to drive more events in our arena at that property. So a long road to go there. I think to the first question, which was about general trends that some of our competitors have mentioned the last week or so. In April, I think we would probably just echo their comments. There is a number of sort of events in April that are generally not traditionally super positive to gaming. Those being tax day, which is not a great day for the gaming business, which was combined right on top of Easter weekend, which is definitely one of the slower weekends. So not totally unreasonable to think there would be some trends down, but we're still looking for some good business uplift as we get into May and June. And as you know, many of the regional markets showed their -- the most strength in the summer, particularly to the North, where, obviously, it has been a brutal winter.

And I guess my follow-up would be, as it relates to the guidance, I was wondering are you guys factoring in any impact from Golden Nugget and Lake Charles on Delta Downs or do you think that's going to open actually late enough in this year that will, really, not be an issue for '14, more of an issue for '15?

We have definitely factored it in. And I think, based on what we're hearing in that market, their opening is probably a little bit later in the year than maybe we would have thought it was going to be a number of months ago. So really, we only expect an impact in the fourth quarter of this year.

And to be clear then, you think even with that, Midwest and South can be up on a year-on-year basis, I would assume then?

Absolutely.

Our next question comes from Carlo Santarelli from Deutsche Bank.

So Josh, I just wanted to confirm one of the things you said as you were going through the guidance. The Midwest and South for the 2Q, you should see declines akin to the 1Q x weather, which I guess is quantified as close to $6 million or so.

Yes. That's correct. I was worried that people wouldn't get it, I'm glad to know you got it correct, Carlo.

Well, if I got it, everybody got it then.

Good.

The other question was you guys made reference to comps getting easier and obviously, some of that is competitive in nature so you'll start to see a lot less on the cannibalization front. But when you think about just going up in the easier comps as we've seen, not at your properties, but across regionals, in general. We've kind of seen easier comps and looking like the light at the end of the tunnel when things could turn positive. I guess my question is, as you look to the second half, predominantly in the Midwest and South, what gives you, I guess, the optimism that just facing easier comps is going to allow kind of some of these properties to breathe and grow a little bit?

Yes. I'll take a shot at it, and if any of my other folks on the call want to try to help out, they can. But I generally think that just -- what we saw last year in the third and fourth quarter was a real degradation in the business beyond kind of what we would have considered as normal weakness in terms of the trends of the business. If you remember and look back, really, starting in the third quarter and those folks who have met with me subsequent to that, really talk about the second half of the year. And even through the first quarter of this year, we've seen a weakness in the lower-end consumer. I would say, there were periods of time, certainly last year, where we saw some dramatic reversals in consumer behavior. And we just don't -- obviously, they were unexpected last year, and I don't think we expect them to reoccur this year. In other words, they were just -- while things were weak, they just got much weaker in certain periods of time. And I think that's drive some of it. I think, also, we generally are -- we're kind of cautious at this point, just given what we're seeing in April. But at the same time, some of the trends that we're picking up like in some of the markets where we see competition, some of our properties are actually doing better than we would have expected at this point. So we think there is an underlying weakness of the lower-end consumer that continues to persist. But it does seem to feel a little bit better, and we're somewhat hopeful that we don't see kind of the surprises that we felt last year, primarily in the second half of the year.

Our next question comes from Harry Curtis from Nomura.

A couple of quick questions. Going back to Las Vegas, can you give us a sense of just your customer behavior as far as frequency and spend per visit?

Well, I think, as it relates to Las Vegas, a little bit different by market Downtown and Locals. But I mean, overall, I think, as others have said, frequency is down. And some of that, obviously, in the Midwest and South is very much weather-related. But, nonetheless, we've seen frequency down. Spend per visit or daily actual or daily theoretical is up in the Las Vegas Locals business and has been for now going on 2 years.

And my follow-up question is sort of the elephant in the room. Keith spoke about the board's emphasis on creating value. Can you give us some commentary on the pros and also the challenges of the specific proposal to consider the read option?

Sure, Harry. Well, as I said in my comments, we spent a lot of time thinking about ways to improve and create shareholder value in the company. And those take any number of forms, whether it be acquisitions or new developments or new businesses like online gaming or other strategic alternatives. Each one of these takes a considerable amount of time and effort to analyze and vet through and understand the issues and the challenges, both short term and long term, and to ensure that they are the right long-term positioning for the company. Historically, we haven't talked about any of these types of things until we knew that they were right for the company and we wanted to say something to all of our shareholders. Not unlike an acquisition, where we would announce it once we had a deal. And so there's really not much more to say, except that we continually study all of these alternatives and all of these options to make sure that we are taking the right actions on behalf of all of our shareholders creating long-term value. But once again, until we're finished vetting them, until we believe that there's a good direction for the company to take, we're really not going to engage in what I consider premature dialogues on the topic.

[Operator Instructions] And our next question comes from Robert Shore from Union Gaming Group.

I had a question on the Downtown segment. We're definitely seeing a lot of development happening in Downtown Las Vegas, driving the younger and non-gaming customer Downtown. Is there an opportunity to reprogram some of their assets to better capture these new customers coming Downtown?

Well, I mean, I think -- I mean, the younger customer is certainly looking for something different Downtown. Really, no different than in any other market. And I think others have talked about it even on the strip as well. And you've seen developments on the strip to continue to focus on the younger customer. It is really an unbelievably broad mix of folks that are coming to Downtown Las Vegas, all age groups, all nationalities from all parts of the world. And again, I think we have just done a really good job, especially at the Fremont, to be able to capture, really, what ends up being as I think a disproportionate share of folks that come down, whether it's somebody looking to play blackjack or slots or go to Dunkin' Donuts or Tony Roma's. It is -- I guess, all of those types of things are available and appeal to a broad mix of folks.

And our next question comes from Jake Fuller from FBR. James Alan Fuller - FBR Capital Markets & Co., Research Division: I was hoping to get an update on the time line around the Borgata property tax issues, namely the 2011, 2013 case. And then any thoughts on the appeal process for the '09, '10 years?

Well, with respect to the appeal process, I mean, it is working its way through the system and really don't have any estimate of when that appeal process will kind of run its course. With respect to the other years, what I can tell you is that the new administration has clearly shown a desire to find ways to move this forward, and we're engaged in what I think are productive discussions with the city. But other than that, we don't have anything to report it's -- we don't know if we'll get to a deal or when we'll get to a deal and what that deal may look like. But we're at least engaged in what I consider productive dialogue, so it's a positive step. James Alan Fuller - FBR Capital Markets & Co., Research Division: I think, on the last call, you had mentioned having some expectation for a resolution around or before the end of this year. It sounds like that isn't necessarily the case any longer?

It's hard to tell. Sometimes, conversations speed up and sometimes conversations speed down or slowdown, it's really hard to tell at this point. So I'm probably less willing to predict today.

And everyone, at this time, I'm showing no additional questions. I'd like to turn the conference call back over to Mr. Hirsberg for any closing comments.

Thanks, Jamie, and thanks to each of you for joining the call today. If you have any follow-up questions or think of anything after the call that you need to address, please don't hesitate to call the company. Thank you very much.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines.