Boyd Gaming Corporation (BYD) Q2 2014 Earnings Report, Transcript and Summary

Good day and welcome to the Boyd Gaming Second Quarter 2014 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. Please go ahead.

Thank you, Andrew. Good afternoon, everyone, and welcome to our second 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 for our second quarter earnings call. The results we reported earlier today for the second quarter clearly did not meet our expectations. Persistent weakness in spending among casual players and the shifting spend pattern of today’s consumer continue to impact our industry and our operation across the country. This level of performance in the second quarter is not acceptable to us and we remain focused on various strategic initiatives and then improving our results in the current environment. I will walk through the progress we’re making in those initiatives in a moment but first let me take a few minutes to review our top line results and provide some color on the trends we’re currently seeing in the business and factors that drove the quarter. Revenue across our wholly owned business declined approximately $25 million on the year-over-year basis while wholly owned property EBITDA was down approximately $12 million as we were able to mitigate more than half of the revenue shortfall through cost efficiencies. The softness in our wholly owned business was concentrated in our regional operations which accounted for $23 million of the $25 million shortfall and approximately half of this decline was attributable to three properties that are dealing with capacity issues in their markets. Outside of these areas, the vast majority of our regional markets are clearly stable from a competitive perspective and then most cases we saw a sequential EBITDA improvement from the first quarter. Our Las Vegas locals business saw top line trend that was similar to first quarter and had it not been for lower hold and higher utility expenses EBITDA would have on par with the prior year. Our long-term outlook for the Nevada business remains positive. The Southern Nevada economy…

Thanks, Keith. Hello, everybody. Obviously, we’re not satisfied with performance our operations in the second quarter. Conditions remain quite challenging in markets throughout the country, but as Keith noted, we’re aggressively addressing the issues we’re seeing in the business and we continue to good progress implementing our long-term strategy throughout our operations. Let’s start with the review of our Las Vegas Locals business. We saw a modest revenue decline in line with what we’ve experienced in the first quarter. Results are below expectations for several reasons. One factor was lower hold which reduced EBITDA by about $1 million and had a negative impact on revenue as well. Absent this issue, revenues would have been close to flat with the prior year. We were also affected by two separate rate hikes by the local electric utility earlier this year, which impacted EBITDA by an additional $1 million in the second quarter. But there were positive developments. We saw growth in hotel revenues across the market and gains in our food and beverage business as well. The Orleans posted a solid quarter as strong destination business generated top line and EBITDA growth. Our newly upgraded room product at the Orleans and Gold Coast puts us in a good position to continue building on encouraging trends in our destination and meeting business. As Keith noted earlier, we are actively looking additional opportunities to enhance and reposition our amenities within our current capital budget. We will be completing a renovation of our meeting space at the Gold Coast later this year and upgrade of our rooms at the Suncoast is scheduled to begin in the coming months. And we are in various stages of timing for several new restaurants concepts at our Locals properties. Moving to our downtown Las Vegas business, the most significant…

Thanks Paul. Despite weakness in our business in the second quarter we continue to make progress and strengthening our balance sheet. As noted earlier, year to date total debt reduction has been approximately $100 million, and we expect this pace of debt reduction to continue for the remainder of the year. Over the last 18 months we have reduced debt by more than $600 million, our quarter end debt and cash balances were provided to you in our earnings release. In terms of capital expenditures during the quarter we invested $35 million including $8 million at Peninsula and $7 million at Borgata. Year-to-date capital expenditures have been $54 million. For the year we expect to spend a $120 million between Boyd and Peninsula and another $25 million at Borgata. Now for guidance. Given our results in the second quarter we are taking a more guarded view for the remainder of the year. More specifically we expect our property level segments to perform in the third and fourth quarters of this year on par with the second half of last year. For the second half of this year we expect our Las Vegas locals and downtown segments to be even with the second half of last year. For the Midwest and south segments, remember to consider the 9.3 million property tax adjustment that benefited Blue Chip in the fourth quarter of 2013 and will not reoccur in 2014. After removing that fourth quarter benefits from 2013 this segment should generate third and fourth quarter EBITDA even with the second half of last year. For Borgata, before the estimated property tax benefit of $6 million applicable for each of the third and fourth quarters, we expect the property to generate EBITDA even with or slightly better than the second half of last year, given the weak fourth quarter for this property last year. For corporate expense we expect to incur $27 million for the second half of the year. Given all of this we’ve updated our guidance for full year EBITDA to a range of $580-600 million. Finally, I will discuss a couple of items that are not included in our guidance related to Borgata. Borgata has two remaining actions yet to be finalized related to its property tax appeals, first we expect to receive a onetime cash benefit of $88 million related to the 2011 through 2013 property tax settlement. This payment is dependent on the city of Atlantic City issuing bonds, upon our receipt this payment will be used to reduce term debt at Borgata. Additionally, our 2009 and 2010 appeal is moving through the legal process, recall in October 2013 the tax court ruled in our favor and that ruling is currently being appealed by the city of Atlantic City. We remain optimistic about Borgata’s prospects given its proven ability to compete regionally and potential long term benefit from online gaming and property tax reductions. Operator, that concludes our remarks and we’re now ready to take any questions.

(Operator Instructions) The first question comes from Joel Simkins of Credit Suisse. Please go ahead.

Keith, Josh and Paul, I have to ask the question because investors are asking us, can you sort of give us your view on some of these shareholder activism out there, and if you say no, let me move next question?

Joel, I don’t think we have anything to report in particular on that. So short answer is we have nothing to report.

Okay and in terms of the online gaming business I thought there was helpful color in terms of how that tracking for you, so I guess my question, if you’re the market leader right now in online gaming New Jersey and you’re operating at a breakeven probably first assume everybody else it is losing a lot of money. Like the domestic or like the Atlantic City bricks and mortar business, do you think you’re going to see some of your peers slow down operations or cease operations potentially in that market, is it takes time to build revenue?

I think over the course of time that we will see consolidation in the online business. As like we see on the consolidation and the land-based business, how quickly that happens or difficult to estimate, so it’s very early. This is a product that has only been out there for some eighth months now, but I do suspect that consolidation will be occurring probably in the near future.

Okay and one final question now, you mentioned some renovation that you’re going to move forward at the Orleans. And I believe Suncoast obviously the convention market and Vegas continues to get better match in those properties together bit of overflow on convention, is there any potential sort of impact as you take those hotels under the knife and that conventional business continues to recover?

Well, I mean I think obviously, there is certainly upside for us and that’s why we are focused on those investments. I think we’ve gotten pretty at being able to renovate hotel rooms, meeting space and those things in periods where we can kind of take advantage of lulls in the market. Those projects tend to move pretty quickly with only a few rooms out of service. So if indirectly you're asking if we think it did have any impact while that’s going on, the answer is certainly not.

The next question comes from Carlo Santarelli of Deutsche Bank. Please go ahead.

I just wanted to touch on Borgata a little bit. You’ve mentioned that the property tax benefit in the quarter was 11.8 million, so we were to strip that out and look at kind of go through on the incremental 9 million of revenues guys did, it looks like it about 33% and you obviously had favorable year-over-year hold both the slot payable site there, I guess the question is has the market become a lot more promotional despite some of the closures? Or are you guys doing a little bit more in terms of promoting to gain share? Or is this mainly the drag that we’re seeing entirely from online kind of coming through?

So Carlo I think that if you take the numbers that are actually provided, online has included in the revenue numbers. If you strip out online, the revenue up about $2 million or so I believe and I think the EBITDA number is up greater than that, it’s about 17% increase and EBITDA on the land basis by itself. So we did see some very go through. I would not say that the environment is overly promoted and it’s probably about normal. I think our team there has been in place since we opened the property more than 10 years ago does a great job of knowing when to step on the gas on a promotional environment, when to back off and not overspend. So I think we had a very strong quarter book driven by good revenues and good flow through.

Great, thanks Keith, that’s helpful. And then quick Josh, I know, you guys had provided some non-op guidance earlier in the year, not going to ask you if you guys were pivot but is anything meaningfully changed as it pertains to D&A preopening any of those things?

All of those things should be pretty much on track as it to what we provided yearend. I appreciate you’re not asking me to provide it, but I don’t have it with me.

The next question comes from Shaun Kelley of Bank of America Merrill Lynch. Please go ahead.

Keith, I think in some of your prepared remarks you guys mentioned a little bit about kind of the Atlantic City and how some of the competitors there -- the committed landscape there is changing quite significantly and I was just wondering, if you could possibly elaborate a little bit further and just to kind how do you see the landscape playing our? Do you think something closure can benefit Borgata in the short or medium terms or maybe what your experience was after the Atlantic Crop closure? And then just kind of -- do you see how you kind of see this playing out over the next more 18 to 24 months for people?

The Borgata ends up benefiting in a couple of different ways. First of all I think as capacity goes out of a market that has seamless capacity today that it does start to rationalize and promotional environment should settle down. There are more customers and just less places for them to go, so that will work to our advantage. I think some of those customers will find their way to the Borgata. Clearly, it always has been the premier facility in the areas, so I think we will see some pick up from there. We didn’t see a tremendous pickup in business from the closing of the Atlanta club property I think if you look at the numbers you saw a lot of that go to, to the other properties in the market but think as we see additional properties close we’ll definitely see some pickup on the revenue side and will definitely benefit from just a more rational promotional environment.

Thanks for that then I guess the other question would be the same region but there’ve been a number of headlines, more recently about the possibilities of northern New Jersey starting to kind of look at a gaming facility again, what are your contacts, I mean obviously you guys know as much or more about the market than anyone, you know what are your contacts telling you about the possibility there and is that something you worry about or think about at all, or do you think it’s a long shot at this stage.

I think if you were to take longer term beyond the next couple of years, I certainly think it’s a conversation that’s out there, there’s a lot of conversations by the politicians about it, and it’s something we’re clearly paying attention to because it could have an impact on Atlantic City. I think the flip side of that is you know Borgata is a very-very strong brand and once again and once again one of the strongest brands in the northeast there. If something were to happen in northern Jersey I think Borgata will have a very good chance of being able to participate in that, given the strength of its brand in the market, the strength of our management and the leadership there but I don’t think there’s anything imminent, I don’t think we’re overly concerned that something’s going to happen in the next year or two, but as we look further out something certainly could happen.

Got it, my last question will just be on CapEx. You mentioned some of the initiatives you guys are targeting around some of the properties, it sounded like [indiscernible] and pretty sure you said that a lot of it is just redeploying or altering kind of capital spend that’s already been designated. Is that true or is there some incremental CapEx you see or envision spending as you lay out your plans for ’15 and start to do some of your initiatives on food and beverage and more of the non-gaming stuff that you talked about.

We said here today when we look at those projects and look at the spend we believe it was in the existing capital budget as we go forward it in fact changes that guidance will be provided as we look at the ’15 capital budget. But sitting here today I would not see any real improved spending our CapEx to accomplish those projects, we simply have been refocusing those dollars, spending a little differently, I think spending [indiscernible] give us a higher return and so we’re confident it’s within the existing numbers we provided, the guidance we’ve provided.

I was just going to add I think Keith’s last point is what may differentiate, the answer to your question that is, how we spend about spending dollars that we previously allocated to some other property, so that at the end of the day instead of perhaps coming at it for just a refurbishment or a upgrade to an existing amenity we may try a totally different approach but not spend any more incremental dollars. At least that’s the plan for now.

Got it, and thanks, appreciate it.

The next question comes from Felicia Hendricks of Barclays, please go ahead.

Hi, good afternoon everybody. Josh just a point of clarification on the EBITDA guidance that you provided in the release the 580-600 million, just wondering does that include or exclude the Atlantic City tax benefit from the second quarter and what’s left to realize in the second half.

Felicia it includes the 11.8 million that we would have recorded in the second quarter, and also includes 6 million in each of the third and fourth quarter that are coming up for the rest of this year.

Okay, great, perfect. And then Keith just wanted to get back to Atlantic City and the promotional allowance you said you’ll spend in this quarter, in the first quarter, so they were higher in the first half of the year this year versus last year and I’m just wondering if some of that’s being driven by online and if so I’m wondering what that promotional allowance should look like excluding the online expense. I’m not just trying to be tricky to find out what you’re spending online I’m just trying to figure out because you said obviously you guys have done so well there and you have competitors leaving the market, so I’m just trying to think rational, I’m trying to figure out why the promotional allowances will be higher year over year.

So, I think you actually didn’t answer the question, it is online and that is why it is driven higher, we’re not kind of breaking those numbers out but the increase is clearly related to online.

Okay, so just excluding that, we should assume that at Borgata the promotional allowances are lower year over year.

I would think of them as flat, not as lower.

Okay so with the competition kind of diminution there would expect those to decline through the rest of the year?

Well, I would say that the promotional environment should be rationalized. Where we spend that money, whether it shows up a promotional allowance or whether it shows up another marketing costs or giveaways. I mean how incent and how we speak to customer shows up a number different line items, so I can’t see it’s going to open any one line item. But we’re clearly specking of the overall promotional environment it will be rationalized as a result of those closure. So I wouldn’t just focus on that one line item.

As Keith talked about right, he compared Borgata to the markets in the northeast that obviously we have full information on. And I think you have to start to think about Borgata in that context. So when you look at promotional activity or marketing expense for Borgata, it’s competing against a much larger set including all the states around it. So that’s why we are starting to get those sorts of numbers and it’s doing quite well in that competitive group.

And then either Keith or Paul, just my final question is obviously if challenges in the quarter in I’d say is a little [indiscernible] but you get a lot of intonation there in particular some of the adjustments to EBITDA and to revenues that you made your revenues year-over-year. So just wondering you spent a lot of time over the past year or so talking about your strategy with Penny Lane and B Connected and I am just wondering to what extent those programs have to somewhat offset what kind of then in even weaker quarter?

Well, I mean it’s always hard to answer that question I am certainly glad we executed on those different programs both here and Las Vegas as well as throughout the country with really only a couple of markets left to go on the Peninsula side and that’s all good stuff that’s giving us a lot to talk to our customers about and it’s given us a differentiating factor. I mean look the facts are that we see the numbers that posted out in Nevada, the locals market, however you measure and however you group them is slightly down year-over-year in gaming revenue. And that is just a challenge to the business, there are some competitive threats within Las Vegas that we have talked about up to the casual player and I think the bigger players in the market have done well given the dynamic but it is just complicated market that is out there.

And Josh on the 600, 620 the prior EBITDA guidance that did not include the tax property tax benefit in the Atlantic City right?

That’s correct, it did not.

(Operator Instructions). The next question comes from Thomas Allen of Morgan Stanley. Please go ahead.

On [indiscernible] gauge 3 for Northern Illinois properties, it’s sort of a lot of your EBTIDA short fall. You guys have talked about increased capacity. Can you just give us a little more detail there where is the increased capacity coming from? I mean we know Margaritaville but it seems like that was lapping this quarter. So can you just give some more color there?

Margaritaville in Shreveport did lap at the very end of this quarter it opened in the middle of June of last year. So as far as Shreveport competitive set is concerned, the third quarter will be a first apples-to-apples comparison. In Biloxi, there has been a significant amount of gaming expansion in the State of Alabama on the North American side. And our property VIP intensive focus on destination oriented play. There is no question about that. Our reach tends to be to the East and just with more capacity and more products in those regions, it certainly adds the cost of doing business in that part of the world. And that opened up this earlier this year; it’s when there was a mid expansion on the Middle American side in Alabama, Central and Southern Alabama in particular. And then lastly, the Central Illinois I referenced for us that’s the area I mean everybody has been following the expansion of effectively slot machines at VLTs in the State of Illinois now some 17,000 plus units at bars and taverns, really well beyond anybody’s expectations of where this would go and the types of restrictions that would be put on the ability to have these types of units. And it is not ending. I mean it’s surprising to us every month, there seems to be another 1,000 or so units that goes into that market which by the way excluded Cook County, because Cook County opted out of the expansion as compared to others. So it’s just another casual alternative closer to markets because it’s just down the street from everybody with really no controls from a responsible gaming perspective and non controls for marketing because it’s just a whole separate set of rules that those operators are allowed to participate with.

And then my follow up question, high level as we think about guidance. In the first half your EBITDA declined around 6% and now you are guiding to flat EBITDA growth in the second half. It seems -- I mean that’s a one off saying for example the $9 million property tax benefit in 4Q ’13 is offset by the Borgata more or less offset by the Borgata adjustment in the second half of ’14. What gives you confidence just given the current revenue trends that things can be flat? I think some of us thought that your guidance seemed not the best in last quarter and it seems like you cut it a lot but still it seems when other people, other operator talking about current trends they are still kind of seeing down revenue trends? Thanks.

Sure, Thomas I will try to take a shot at that. So basically I think the way we thought about the guidance and the way our conversations have been, were in the context of what happen year-over-year in the second half of last year. We were surprised by the weakness in our business in the second half of last year and we think we did it largely to, really two months September and December. And we felt like as we came into the year, we had with, while we have weather impacts both in Q1 of this year as well as late last year was very difficult to kind of figure out where the consumer was. And our perspective was look, consumers generally stable we feel like we can grow year-over-year. And our guidance now reflect kind of what we’ve seen in the second quarter continuation of those trends in the second quarter would put us how towards the low end of the guidance, but will give us some comfort to be flat into large declines that we saw in late last year, I mean in September of last year our regional businesses were down over 20% in EBITDA and December they were down another 25%. So kind of middle of the range just to assume that we do own pull off with that level of performance in the second half of the year. And so that’s how we kind of thought about it and we’ve also have some general benefit of what’s going on more recently as well. So those are the counter factors that we consider as we adjusted our guidance.

The next question comes from Chad Beynon of Macquarie. Please go ahead Mr. Beynon.

Outside of the weakness from the cash one retail player could you talk broadly about what you’re seeing from some of your co-players whether it be on trips or spin per trip in the second quarter?

Sure. I think in every market it might be slight different but overall for our better player both their frequency which means the number of times they come from as well as there’s spent per visit are flat year-over-year which is really a positive statement from where we’ve been.

Okay. Thanks. And are there any other regions in your portfolio where you are seeking lower property taxes that you can talk about right now, that could also be a list in future margins going forward?

Yes. The one that is going through in a few process now is in Kansas, so there’s opportunity there we don’t necessarily expect any of that will be this year and frankly may not even be next year, but there is a process going on in Kansas.

Okay. Thanks. And then lastly would it be connected launch your principal properties, how do you talk about the match duration or evolution of the program kind of how long it takes to drive, whether it be overlap play or higher visits maybe some anecdotes when they rolled it out at your programs over the past 12 months?

Sure, I mean we see and frankly have seen sort of immediate change in cross property play simply because you make it a lot easier for flock to play we then have to go back and bicep it because some of that is simply a person who would have player club cards at both properties if you will they now has one and so they fully starts to deconsolidated, once we look at that and make those adjustments we slowly up invest and play, well typically happens and why it takes a little bit longer is that obviously certain of our properties whether they are in Las Vegas or in the Gulf Coast or even in the North tend to be account special occasion types properties for flocks that leave throughout the country. And flock do tend to consolidate their play and built plates in order to be able to transport with them for vacations and other advance or whether they are meeting or conventions or anything else and that’s we start to see a longer term affect when we announced rationale affect to the program.

And the last question for today comes from John Maxwell of Jefferies. Please go ahead.

Josh the $88 million, the Atlantic that you said is dependent on the reinsuring bonds any timetable when that’s expected to concern, happening any concern on your part that they won’t be able to pay you back?

We don’t have any concern that they won’t pay us back. I think the agreement contemplates area scenarios if that were to happen, but the timeframe is generally by kind of prior to year end.

Okay. It doesn’t it sound like Atlantic City waits for all of these property tax appeal, the one that you’re appealing on your rebate is as well as other properties to do it all in one bond issue they are going to do with, it sounds like they could be doing a piece meal.

They typically go to market in the fall for their cities needs and do that they’re just going to put this in with their normal bit of bonding issues that they do it in the fall and so it’s like the fall is kind of the timing that they step up for this, so.

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

Thank you Andrew and thanks to each of you on this call today. And if you have any follow-up questions we’re certainly available. Thanks again.

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