BYD 2Q CONF CALL NOTES

While there were some non-recurring issues, Q2 was a surprisingly big miss.

"During the second half of the quarter, business trends began to weaken, and that clearly contributed to softness in our results. We remain encouraged by results at our Midwest and South properties, where we maintained or grew share in each of our markets.   This bodes well for our acquisition of Peninsula Gaming, which is on track to be completed in the fourth quarter."  

- Keith Smith, President and Chief Executive Officer of Boyd Gaming

CONF CALL NOTES

  • Results in 2Q were clearly not in-line with their expectation or guidance.  In May, they started to see weakening of trends that impacted their business in May and June.
  • Believe that Borgata will remain a market leader
  • In the Midwest, they maintained / grew market share in all of the markets they operate in - which is why they are so excited about the Peninsula Gaming acquisition. Closing proceedings on schedule.
  • Continue to look for more options for Dania: selling or developing the site
  • Well-positioned to capitalize on i-gaming whenever it passes under the state or federal scenario
  • Will remain opportunistic in pursuing new growth opportunities
  • Las Vegas Locals:  Beginning in May and continuing through June they saw weakness from casual gaming customers. Weak sports hold and spike in benefits accounted for 2/3rds of the miss vs. expectations. Promotional environment has impacted their casual gaming customers but not their top players.
  • Downtown:  They began to pull back on marketing programs put in place last year as business was strenghening, but lower promotions led to a pullback in business.  They corrected that already.  They expect business to stabilize in 3Q and resume growth in 4Q
  • Midwest/South:  Blue Chip increased their market share.  Delta Downs posted double-digit EBITDA growth.
  • Particularly pleased with continued strength at IP and the introduction of B connected should benefit the 3Q.  Also seeing a benefit of operating efficiencies.
  • Borgata: New projects opened generated no incremental growth in the market.  Management claims that Borgata managed to gain market share despite new competition but Borgata's gaming share ex Revel has declined from 21.8% in January to 20.5% in June so not sure we agree.
  • Working on new programs in the Locals market to regain the casual gaming customers they've been losing
  • BYD Debt:  $2.8BN (increase due to pre-funded of $200MM equity contribution of PENINSULA acquisitions)
  • BYD cash balance: $327MM
  • At June 30th: $1.4BN o/s under their credit facility.  Secured leverage was 3.7x and total leverage was 7.1x.
  • Borgata debt balance: $816MM
  • Borgata cash: $34MM
  • Tax benefit in the Q, they are assuming a 35% tax rate for 2012
  • Room project from Borgata was completed in 3Q 
  • Guidance: 
    • EBITDA: Wholly owned: $77-82MM; Borgata: $47-49MM for Borgata
    • EPS: $(0.05) to $0.00
    • Last year there was a $4.6MM property tax benefit for Blue Chip in 3Q11 
    • Interest expense will also be $67-68MM in 3Q

Q&A

  • What are they doing to mitigate impact of Revel in AC?
    • They are taking care of their top customers
  • Why were EBITDA margins so weak in AC given that promotional expenses were low? 
    • Property taxes increased by $2.5MM YoY so their tax rate there continues to move up.  The property tax issue will continue to impact them until the outcome of their tax appeal. 
    • Pulled back on some marketing dollars to see what was going to happen as Revel opened.  They are reinvesting at a higher rate in their customers going forward.
    • Some of the new food outlets in the market also took away some of their dining customers and traffic through their building
  • Guidance for AC only assumes a 5% decline compared to the 20% decline this quarter, despite the property tax issue not going away
    • They had some self-inflicted revenue loss by not marketing as aggressively as they were (didn't want to fight trialers)
    • 3Q is the strongest period of time and they are really seeing a limited impact on their gaming customers from Revel.  They don't expect to see a "material" impact from Revel until 4Q
  • Borgata room revenue is strong, slot and table business is strong...last year, they were closed for a few days because of the hurricane last summer.  So the comparison is also easy. Think that Hurricane Irene hurt 3Q11 results by $5-6MM.
  • In the LV locals market, they are focusing on where they have seen growth in the market:  casual gaming segment - so they are enhancing penny games. 
  • Kansas Star results really mirror normal openings - with an initial surge of first time visitation and then a more normalized level of business. The full facility opening will also give them a boost. 
  • Backing out the IP, results don't look so good.  The other adjustment is that there was a $2.8MM non-recurring property tax adjustment. Excluding that piece they would have been up slightly.
  • Bad luck impact on the sports book in the locals LV market? Baseball, parlay cards...many favorites won in the quarter. They are one of the largest Parlay writers in town.  Impacted them by $1MM in the Q.
  • Where is the low hanging fruit in improving results at Peninsula?
    • This is a very well run company with very strong margins.  However, there are some opportunities centered around purchasing efficiencies (food/insurance) and marketing. 
  • Thought process with the other Florida property since they already own Dania?
    • The site is very high quality (Saw Grass Mills Mall and Bank Atlantic Park). Think that IF there is a gaming expansion opportunity in Florida, that is a more attractive site than Dania
  • CA opportunity: The tribe does NOT have land in trust but they don't see that as being a large obstacle.  Land getting put in trust should happen within 1-2 years.
  • Will take out the existing Peninsula debt after the acquisition closes with their commitments
  • Max leverage covenant steps down to 7.25x at the end of the year, is that an issue? 
    • No, they don't anticipate it will be an issue. Only if they receive a management fee from Peninsula will that benefit their covenants. The Peninsula assets will be in a separate subsidiary. 
    • They plan on receiving a management fee
  • No significant cash outflows from either of the 2 new development projects
  • BYD is self-insured on the healthcare benefit side.  It is difficult to predict exactly what the costs will be.
  • As Revel has continued to add their amenities and assets, they have been continuing to refine their marketing programs and have become more aggressive.  The market as a whole is varied on marketing aggression - some are cutting back and others are very aggressive.
  • Midwest/South promotional spend are stable expect Biloxi, where they have decided to reduce marketing at IP vs prior owners.
  • Secured leverage ratio isn't a pressure point for them going forward - they have plenty of cushion. They are generally comfortable with their covenant levels.
  • Liquidity:  right now, they have very limited capex needs so they are ok with $50-100MM but normally they want $100-150MM available, exclusive of cage cash requirements (at Q end, it needs to be $100-105MM). Will increase when Peninsula gets consolidated. 
  • Their other M&A activities don't impact their thought process on acquiring MGM's stake in Borgata
  • CA project: 30 miles north of Sacremento.  Scale and scope discussions are a bit premature.

HIGHLIGHTS FROM THE RELEASE

  • Locals Las Vegas: "Visitation and spend-per-visit among our top-tier customers remained strong during the quarter. However, EBITDA was negatively impacted by lower hold in our sports books, higher expenses associated with employee benefit programs across the country, and declines in business volumes from casual gaming customers."
  • Downtown: "Certain changes in our Hawaiian marketing programs aimed at reducing costs had a temporary impact on business volumes, but we expect those effects to reverse themselves in the third quarter"
  • "Delta Downs, Treasure Chest and the IP produced solid results during the quarter.  Blue Chip reported strong results as well, after factoring out a nonrecurring $2.8 million property tax adjustment in the year-ago quarter."
  • "The IP contributed $47.3 million in net revenues and $11.5 million in EBITDA to regional results during the quarter.  Net revenues at the property declined 9.1% from the second quarter of 2011, while EBITDA rose 23.9%.  Revenue was impacted by more focused marketing programs, while significant improvements in operating margins drove EBITDA gains. We recently introduced our B Connected player loyalty program at the IP, and expect to start driving additional profitable business to the property in the third quarter."
  • "Results were impacted by higher property taxes, as well as lower volumes due to new competition in Atlantic City.  However, Borgata continued to lead the Atlantic City market by a wide margin, increasing its market share during the quarter, and we expect the property to deliver a strong performance during the summer season."
  • Peninsula Gaming acquisition: "In early June, the Federal Trade Commission granted Boyd Gaming an early termination of the waiting period required under Hart Scott Rodino. Subject to the satisfaction of various closing conditions, Boyd Gaming anticipates this transaction will close in the second half of the fourth quarter of this year"
  • "Boyd Gaming today announced that it has reached separate development agreements for new projects in Broward County, Florida and Sacramento County, California.
    • In Florida, Boyd Gaming has entered into an agreement with Sunrise Sports Entertainment, LLP, the operator of the BankAtlantic Center, a major entertainment venue in south Florida and home to the NHL's Florida Panthers. This agreement provides the Company the opportunity to take advantage of the potential of expanded gaming in south Florida at the site of the BankAtlantic Center.
    • Agreement with Wilton Rancheria, a federally-recognized tribe located about 30 miles southeast of Sacramento, California, to develop and manage a gaming entertainment complex.  The deal is subject to the receipt of all required local, state and federal approvals, a process we believe will take approximately 24 months