Earnings Labs

Boyd Gaming Corporation (BYD)

Q1 2016 Earnings Call· Wed, Apr 27, 2016

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Transcript

Operator

Operator

Welcome to the Boyd Gaming first quarter 2016 conference call. All participants will be in listen-only mode. [Operator Instructions] Please note this conference is being recorded. I would now like to turn the conference over to Josh Hirsberg, Executive Vice President and Chief Financial Officer. Mr. Hirsberg, please go ahead.

Josh Hirsberg

Analyst · Telsey Group

Thank you, Andrew. Good afternoon, everyone, and welcome to our first quarter earnings conference call. Joining me on the call this afternoon is Keith Smith, our President and Chief Executive Officer. Our comments today will include statements that are forward-looking statements within the Private Securities Litigation Reform Act, including statements regarding our recently announced pending acquisitions and our guidance for the full year 2016. 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. There are certain risks and uncertainties that include those disclosed in our earnings release, our periodic reports and our other filings with the SEC that may impact our results. 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 lease in our Form 8-K furnished to the SEC today, and both of which are available in the Investors section of our Web site 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, today’s call is also being webcast our live on our website at boydgaming.com and will be available for replay on the investor relations section of our Web site shortly after the completion of this call. I’d now like to turn the call over to Keith.

Keith Smith

Analyst · Telsey Group

Thanks, Josh. Good afternoon, everyone. Welcome to our first quarter earnings call. As I’m sure you’ve seen, we’ve announced two separate acquisitions over the last several days. Yesterday, we announced that we had reached a definitive agreement to acquire the Las Vegas assets of Cannery Casino Resorts. And of course, last week, we announced a separate agreement to purchase the Aliante Casino Hotel & Spa. These are exciting growth opportunities for us. And later on this call, we will review these acquisitions and the benefits of adding these new properties to our portfolio. We believe these acquisitions will deliver strong long-term return for our shareholders. But before we talk about these acquisitions, I would like to start with a review of our first quarter results. Our company continued to perform at a high level and deliver strong results in the first quarter as we achieved our seventh consecutive quarter of companywide revenue and EBITDA growth. The strong trends we saw in 2015 continued throughout the business in the first quarter. In our Las Vegas Locals operations, year-over-year revenue growth accelerated to its strongest levels in more than a decade, thanks to a strengthening local economy, recent reinvestments in our business, and most of all, an excellent performance by our property management fees. In Downtown Las Vegas, double-digit EBITDA growth continued as well as we benefited from sustained growth in visitation throughout the downtown area. Borgata posted its strongest first quarter EBITDA performance since 2009, significantly outperforming its local and regional competitors. And had it not been for flooding in parts of the South and the introduction of a new competitor on Biloxi, our Midwest and South segment would have also continued its long-term trend of revenue and EBITDA growth. In all, our property operating teams continue to do an excellent…

Josh Hirsberg

Analyst · Telsey Group

Thanks, Keith. The acquisition of Cannery’s two Las Vegas assets and Aliante each represent very different, yet compelling, growth opportunities for our company. All three of these assets will participate in the healthy growth we are experiencing in the Las Vegas market. Eastside Cannery provides unique synergies created by being located directly across from Sam’s Town Las Vegas. And Aliante provides participation in the long-term growth in the northern part of the Las Vegas Valley. Including year one synergies totaling approximately $16 million, together, these acquisitions will represent over $60 million of incremental EBITDA in our first year of ownership with a net investment of $610 million. With combined recurring capital expenditures expected to be about $5 million, the acquisitions will generate free cash flow and will be accretive to EPS on a combined basis in year one. As Keith mentioned, leverage will increase modestly, by less than a half a turn. And within nine months, we’ll return to pre-acquisition levels. We’re financing these acquisitions with cash on hand and available revolver capacity, made possible by our recent $750 million, 6.375% senior note financing. The capital from this financing will facilitate not only these acquisitions, but also the refinancing of Peninsula’s debt, which we expect to occur later this year. Finally, we expect both of these acquisitions to close during the third quarter, pending Nevada Gaming Commission and Federal Trade Commission approvals. These strategic acquisitions do not change our focus on the opportunities in our existing business. Our focus on continuing to refine our cost structure, while at the same time growing profitable revenues, investing in our non-gaming amenities and deleveraging our balance sheet are all opportunities to further capitalize on our core business. Switching gears to discuss the quarter, despite the short-term increase in leverage for these acquisitions, we…

Operator

Operator

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from David Katz of Telsey Group.

David Katz

Analyst · Telsey Group

Hi. Afternoon, all.

Keith Smith

Analyst · Telsey Group

Hi, David.

Josh Hirsberg

Analyst · Telsey Group

Hi, David.

David Katz

Analyst · Telsey Group

So with respect to Borgata, the margin expansion and the profit growth, I know you talked about it a bit, but it’s quite impressive. Can you just provide a little more detail about where the cost saving or the cost benefit is coming from? To the degree that you can give us a sense for how much more expansion of margin you think there possibly could be before you’re cutting into bone would be helpful.

Keith Smith

Analyst · Telsey Group

David, this is Keith. I think the real growth in margins there is being driven by revenues, not any sort of expense reduction program. The majority of growth in the quarter on the gaming side showed up in the form of slot revenue, which is a highly profitable piece of the business, and we’ve been able to continue to grow our customer base there since the closure of four properties more than a year ago. And it’s just being done in a very, very profitable rate. And so, it isn’t as much about cost reductions as it is about focusing on growing revenues, being able to expand pricing in the hotel and food and beverage areas, and see that flow significantly to the bottom line.

Josh Hirsberg

Analyst · Telsey Group

The one thing I would add that, Dave, is just that they’re able to basically spend about the same amount of money on promotions and drive significantly more revenue. And so, that just goes to not only the health of the market in terms of demand for Borgata, but the Borgata product generally from the region.

David Katz

Analyst · Telsey Group

Got it. So I do want to congratulate you on acquisitions that you announced this week. I think the strategic benefits and the strategic logic behind it are very, very clear. I think, fairly, if one were to be critical, particularly of Aliante, they might be critical around the price and the multiple. And can you just talk about what your thought process was around getting to that price? And then secondarily, obviously, it’s a home run if it turns into being a 45, 50, $60 million property one day. And can we aspire to that sort of level on a much longer-term basis without you guiding us there?

Keith Smith

Analyst · Telsey Group

Look, we’re, obviously, very excited about both the acquisitions and the opportunities that they present. We spent quite a bit of time last week describing our rationale for the Aliante acquisition. We had posted our deck in our investor relations site that highlighted the tremendous growth and the tremendous opportunities that exist in North Las Vegas that we think will propel that property to $40 million or north of $40 million in the next three years or so. And so, we have great confidence. We think we’ll get to 30 million very quickly with the synergies that we can extract from the business. Today, it’s a standalone business with an awful lot of overheads that standalone businesses have. This is a fast-growing market. It is growing faster than the Las Vegas locals market generally when you look at the numbers. And so, we’re just very excited about the future prospects. The same could be said for the Cannery acquisitions. We are very excited about their prospects. And we feel like what we paid for Aliante as well as the Cannery were very fair price given the future potential of those assets. Remember this is an asset that cost north of $660 million to build, Aliante, that has not seen a whole lot of customers through it to date, so it’s in very, very good shape, requires very little capital going forward. So we’re excited about the opportunity. Josh, if you have anything to add?

Josh Hirsberg

Analyst · Telsey Group

No, I would just emphasize, when we looked at kind of what price we wanted to offer for the asset, it was really trying to gauge the long-term opportunity that we saw in the growth in the northern part of the Las Vegas Valley. And it’s like any other somewhat new development in a new market where you have to have the market kind of catch up to the expansion in supply, but here we don’t have the construction risk and we have a built in level of EBITDA that we’re very comfortable with and very comfortable kind of growing in a very short amount of time to a much larger number. So this is all about – for those of investors who have a longer-term view, this fits well with kind of how we think about growing our business longer-term. It’s not going to be something that turns around in a quarter or two, and that’s really what we’re paying for, the long-term growth of Aliante.

Q - David Katz

Analyst · Telsey Group

Understood. If I can ask one more, if you could talk about the parameters or the circumstances around which you might consider additional acquisitions, I suppose I’m asking, are we done?

Josh Hirsberg

Analyst · Telsey Group

This week.

David Katz

Analyst · Telsey Group

Just for this week? But if you can give us a little more sense about that, that would be helpful.

Keith Smith

Analyst · Telsey Group

Well, clearly, our focus in the near term is on closing these two acquisitions and getting them properly integrated into our business. That’s kind of our primary focus besides just running – continuing to run the existing core operation at the highest possible level. Beyond that, we’ve been clear we are quite selective when we look at assets. We look at a lot of opportunities. We don’t have many opportunities to expand in our business to buy quality assets in markets that we think are growing, in markets where we’re not clearly represented or we think we want to add additional assets. So, once again, we’ll keep our eyes open, but our near-term focus is clearly on closing these transactions and integrating them into the company.

Josh Hirsberg

Analyst · Telsey Group

Yeah. I think the – maybe to add a perspective, we can’t control as much as we may like to when opportunities come about to acquire assets. So this was, we’re heading down a path of continuing to focus on operating our business as efficiently as possible, investing in those assets and deleveraging our balance sheet. And then along comes an acquisition that we feel is strategic and has long-term growth opportunities, we may take kind of a side role for a bit to grab those opportunities, but it doesn’t shift us from the focus that we have had for the last year-and-a-half or two years, which is sticking to the things that we’ve stated previously. That’s how we certainly think about these as kind of opportunities that we needed to take advantage of, but it does not divert us from or cause us to change how we’re thinking about what we’re doing day-to-day in terms of running the business and the core opportunities with respect to that.

David Katz

Analyst · Telsey Group

Understood. Thanks very much.

Josh Hirsberg

Analyst · Telsey Group

Sure. Thanks, Dave.

Operator

Operator

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

Carlo Santarelli

Analyst · Deutsche Bank. Please go ahead

Hey, guys. If you remind, as we think about the weather impact and the flooding impacts, would you guys be able to provide possibly an EBITDA impact for the segment, mainly just focused on the weather issue and not so much the competition?

Keith Smith

Analyst · Deutsche Bank. Please go ahead

Yeah, Carlo. We tried to quantify the flooding. The biggest impact was at Delta Downs. And I think as we said in our remarks, Delta Downs would have been up, absent the flooding. The impact generally, both at Delta Downs as well as other assets in Louisiana and the Mississippi, was about $1.5 million or so. And then the remaining kind of decline year-over-year would have been primarily related to IP and maybe to a lesser extent Par-A-Dice.

Carlo Santarelli

Analyst · Deutsche Bank. Please go ahead

Okay, great. And then, Josh, you provided the CapEx statistics, any change you could kind of breakout the maintenance versus the project and maybe what’s left on the 45 million at Delta Downs as of the end of the 1Q?

Josh Hirsberg

Analyst · Deutsche Bank. Please go ahead

Yeah. So I don’t think I have a breakdown between – at Delta downs, it’s – we plan to spend about $37 million this year. And I don’t know how much of the 35 million that we spent in Q1 was related to Delta Downs, but maybe we can find out while we’re sitting on the call or I’ll shoot you an email with it.

Carlo Santarelli

Analyst · Deutsche Bank. Please go ahead

Sounds great, thank you.

Josh Hirsberg

Analyst · Deutsche Bank. Please go ahead

Sure.

Operator

Operator

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

Chad Beynon

Analyst · Macquarie. Please go ahead

Hi, great. Thanks for taking my questions. Firstly, with respect to the Midwest, South and Peninsula markets, excluding the flooding, can you give us a general sense of the cadence throughout the quarter? The February GGRs that we saw from the publicly released state data certainly looked better than with the leap day would suggest from a benefit standpoint and then March came in a little bit lighter. Wondering if there was anything else in the calendar, if you could kind of help us out, mainly within those segments. Thanks.

Keith Smith

Analyst · Macquarie. Please go ahead

Sure. Once again, things do bounce around from month-to-month, so we don’t take anything too much away, I should say, from any one month in particular. You noted that February had the extra day. You also note that March had a different calendar than last March in terms of weekends, also in terms of Easter falling into the last week of March versus the first week of April last year. That tends to have an impact on our business around the country. And so, I would say, generally speaking, as we look throughout January, February, March time frame, nothing to take away, no particular trends that are concerning or particularly different throughout the three months outside of, once again, calendar issues and some general seasonality in the business.

Josh Hirsberg

Analyst · Macquarie. Please go ahead

The only thing I would add to that is I think, and we said this earlier is that, I think the tends generally in the regions, absent the flooding and the competition, when you look at kind of how consumers are spending their money and the visitation and trends in that regard in the regional parts outside of Las Vegas and Atlantic City, feel pretty much like they did last year. And so, we feel pretty good about the underlying strength of the consumer, just kind of had a few bumps in the road with respect to weather.

Chad Beynon

Analyst · Macquarie. Please go ahead

Okay, thanks. And then with respect to your guidance for the Las Vegas EBITDA growth, 6.5%, so based on a similar type of flow through as you’ve seen in 2015 in the first quarter at 60, 65%, this implies roughly a 2.5% revenue growth for the year. Understanding that your comps do become a little more difficult in the back half of the year, is there anything else in there that could keep this as low as 2, 2.5%, certainly sounds and looks like trends are maybe a little bit better than that?

Josh Hirsberg

Analyst · Macquarie. Please go ahead

No, I think you’ve kind of interpreted what we – what we are trying to communicate. So there’s nothing felt in those numbers.

Chad Beynon

Analyst · Macquarie. Please go ahead

Okay. Thanks, Josh. Appreciate it.

Josh Hirsberg

Analyst · Macquarie. Please go ahead

Sure.

Operator

Operator

The next question comes from Felicia Hendrix of Barclays. Please go ahead.

Felicia Hendrix

Analyst · Barclays. Please go ahead

Hi. Thanks a lot. Josh, just getting back to the acquisitions, I just want to make sure I heard this right. You said that there was a total of 16 million in synergies among both the properties, is that right?

Josh Hirsberg

Analyst · Barclays. Please go ahead

Between the three properties, 16 million between – same thing, two acquisitions.

Felicia Hendrix

Analyst · Barclays. Please go ahead

The two acquisitions. Yes, 16 million. So 8 million from each. So we can back into it, the EBITDA is at Canary, I was wondering if you could tell us what the revenues were there?

Keith Smith

Analyst · Barclays. Please go ahead

No, I can’t. You can do some detective work and figure out the EBITDA, but we can’t really talk about other people’s numbers until we own them. So…

Felicia Hendrix

Analyst · Barclays. Please go ahead

Okay. And then Aliante, so the maintenance CapEx was 3 to 5 million, but did you say what it was for Cannery?

Josh Hirsberg

Analyst · Barclays. Please go ahead

Generally, what we said is that Cannery is about 3, Aliante is 3 to 5 depending on kind of what’s going on at the asset. We generally think of – assuming a close later this year, there is not going to be much impact, if any, on our overall budgets for CapEx that we’ve communicated to you, just given the kind of variability and what typically happens. So for this year, we wouldn’t expect any kind of material change in our CapEx as it relates to these acquisitions.

Felicia Hendrix

Analyst · Barclays. Please go ahead

Okay, that’s helpful. Thanks. And then just on Borgata, you kind of raised guidance by the upside in the quarter and that the quarter was stronger than expected, so just wondering, are you just being conservative for the rest of the year or is there something we should think about?

Josh Hirsberg

Analyst · Barclays. Please go ahead

I think we are not – we are trying to be conservative. The property has benefited from very robust business and is hitting on all cylinders really and everything is – regardless of what kind of revenue metric or cost metric you look at with respect to the asset, it’s doing quite well. And so, just a little bit of expectation or room in case something doesn’t continue in that trend. But if you remember, when we gave full year guidance, we kind of didn’t take into full account of the high hold we had last year and we made – so we kind of built in some growth in the guidance to begin with when we gave the full year at the end of the year. So there’s a little bit of accounting for that in there as well, if that makes sense.

Felicia Hendrix

Analyst · Barclays. Please go ahead

Yeah, that sort of makes sense. Final question, bigger picture, for both you and Keith, we are starting to hear from some segments of the consumer discretionary sector outside of gaming is kind of a weakness in the corporate traveler, the airline are talking about it, we’ve seen it in lodging. Obviously, we’ve seen a very different consumer in leisure and your numbers speak to that. Just wondering, are there any segments, other than the kind of the oil patch segments, but are there segments in any of your regions where some of these – that you’re seeing any kind of shift or change in your customer?

Keith Smith

Analyst · Barclays. Please go ahead

Yeah, Felicia, this is Keith. There really aren’t any significant changes as I think we alluded to a couple of times during the call that the trends we’re seeing in early 2016 pretty much mirror what we were seeing in 2015, some acceleration here in Las Vegas. The convention that is here in Las Vegas is tremendously strong, so we don’t see any weakness there. We have some limited convention facilities at the Orleans and at Gold Coast and several other properties we see very, very strong business there. And the consumer across the country seems backing the same in the first quarter and then to April as they did last year. And once again, we’re seeing more growth in Las Vegas than we saw last year and think that will continue. [indiscernible] different.

Felicia Hendrix

Analyst · Barclays. Please go ahead

Yeah, that’s helpful. Thanks a lot.

Operator

Operator

The next question comes from John DeCree of Union Gaming. Please go ahead.

John DeCree

Analyst · Union Gaming. Please go ahead

Hi, guys. Thanks for taking my question. I just want to kind of stay on the same topic and talk about the Locals, specifically about the customer and what you’re seeing there. Is it strength in the frequency of visit, the spend per visit, obviously a lot of population growth as you mentioned, are there new customers that you are seeing or maybe existing customers returning more frequently or with more discretionary income, any incremental color you can provide on that?

Keith Smith

Analyst · Union Gaming. Please go ahead

Frankly, it’s most of the above. We are seeing continued improvements in visitation, in guest counts, in kind of new guest counts, spending is good. I will tell you, maybe one of the more important trends is unrated play is continuing to grow and was very strong in the first quarter. And so, we all know that that was kind of the first business that went away, has been the last business to return, so the strength in unrated play I think signals a strong and growing business. So those are kind of the areas where we’re seeing it. I think that in the Las Vegas Locals area specifically, the growth we’ve seen in all these metrics is kind of throughout all of the segments in our business. And so it’s been not just in any one segment, it’s kind of been pervasive and very broad-based.

Josh Hirsberg

Analyst · Union Gaming. Please go ahead

And, John, the only thing I’d add to that is, obviously, a contributor to that has been some of the new non-gaming amenities that we’ve introduced where we’re just seeing new faces, more cash business related to that, and that’s helped drive some of the underlying strength that Keith spoke about, but obviously the economy overall is improving and that’s exhibited by some of the comments he made around the lower end or unrated customer segments also. So it is broad-based and I think we are seeing some of it and encouraging some of it through our own actions of investing, but also the market overall feels pretty good.

John DeCree

Analyst · Union Gaming. Please go ahead

That’s helpful. That’s good color. Thank you. And if I could follow-up, obviously, very active in the Locals market with two acquisitions. I was wondering if you could comment perhaps broader US M&A market in the regional assets, obviously, I’d assume you’ve been looking at everything. Is it with the Locals assets, they just broke loose and obviously were strategically for you, but is there willing sellers in the regional markets or perhaps buyers and sellers still too far apart elsewhere in the US, if you had any color or commentary you can provide on that?

Josh Hirsberg

Analyst · Union Gaming. Please go ahead

I think that as we look – what made the acquisitions possible in the Las Vegas Locals in terms of kind of unlocking them as part of processes was really the synergies that we were able to capture. And that enabled us to kind of meet some sort of middle ground with the buyer – between the buyer and the seller. I think that those opportunities do exist in the Midwest and South. We haven’t found those that are maybe have – as important strategically to us and so that’s why we’ve not really been able to maybe make some make sense for us. There continues to be a lot of assets for sale. And as we think about – either there the price is not reflective of what we think is a reasonable price relative to the strategic implications to our company or it just doesn’t make sense for us. We do look at a lot of stuff. We’re fairly active and involved in that part of our business. And we look at it as a key component of the way to grow. We want to try to be pragmatic about it and prudent in how we do it. But it just is something that you really can’t time. It depends on the certain circumstances of what benefits you can extract from the acquisition opportunity itself. So I’m probably not giving you much color, but it just depends on the opportunity and what we can ascertain from it and meet our overall objective of being strategic, representing of something that we think we can create long-term value from and helps us continue to kind of deleverage the business. So maybe that helps you think about it.

John DeCree

Analyst · Union Gaming. Please go ahead

Yeah. I think that’s clear, Josh. And if I could, one follow-up, more of a housekeeping item on Peninsula. I think in your prepared remarks, you’ve mentioned that the plan is still to consolidate that into the parent company. Did I hear that correctly? And if so, do you have sufficient or expect to have sufficient capital to do any of those refinancings or might you have to access the capital markets again?

Josh Hirsberg

Analyst · Union Gaming. Please go ahead

Yeah, I think when we think about the Peninsula refinancing, I’ve been pretty simplistic in how I think about it, is that Peninsula has some term loan and has some high-yield and so I’m generally going to indicate that within the Boyd capital structure is how I’m thinking about it today, plus or minus whatever is going on in the marketplace. So the initial bond offering that we did earlier this year was really an opportunistic financing to take advantage of the high-yield piece of it. And so, we have that capacity today to do that component of it. We’re really kind of waiting to get all the pieces in place to do the second step of it, which would be the term loan component which takes us a little bit longer to get ready and get all of our approvals for. But at that point, that’s when we would execute on the financing, assuming the market is there. So we plan to do it this year. I would expect it to be largely a term loan or a bank type of financing and then we’ll look to see what else we can accomplish to kind of further reduce interest expense. We have another opportunity with respect to our 9% that become callable middle of this year. And knock on wood, if the markets continue to stay good, we’ll look to kind of maybe do something with that as well. So we have a lot of opportunities to continue to kind of make our capital structure a little bit simpler, reduce overall interest expense and continue to provide the company flexibility for kind of growth opportunities as we go forward. So that’s how we’re thinking about it.

John DeCree

Analyst · Union Gaming. Please go ahead

Great. Thanks, guys. Appreciate the time.

Josh Hirsberg

Analyst · Union Gaming. Please go ahead

Sure. Thanks, John.

Operator

Operator

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

Josh Hirsberg

Analyst · Telsey Group

Thanks, Andrew. And thanks to each of you for joining the call today. If you have any follow-up questions, feel free to call us and we’ll try to help you through those. Thanks again for calling in.

Operator

Operator

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