Boyd Gaming Corporation

Good afternoon, and welcome to the Boyd Gaming second quarter 2023 conference call. My name is David Strau, Vice President of Corporate Communications for Boyd Gaming. I will be the moderator for today's call, which is being recorded on Thursday, July 27, 2023. At this time, all lines are in listen-only mode. Following our remarks, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star then zero for the operator. Our speakers for today's call are Keith Smith, President and Chief Executive Officer, and Josh Hershberg, Executive Vice President and Chief Financial Officer. Our comments today will include statements 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. There are certain risks and uncertainties, including those disclosed in our filings with the SEC, that may impact our results. 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 8K, furnished to the SEC today, and both of which are available at investors.boydgaming.com. We do not provide a reconciliation of our forward-looking non-GAAP financial measures due to our inability to project special charges and certain expenses. Today's call is being webcast at boydgaming.com and will be available for replay in the investor relations section of our website shortly after the completion of this call. So with that, I would now like to turn the call over to Keith Smith. Keith?

Thanks, David. Good afternoon, everyone. The second quarter was another solid performance by our company as the benefits of our proven operating model, our strong management teams, and our successful growth initiatives all contributed to company-wide revenue and EBITDA in line with last year's strong second quarter results. We maintained our focus on driving play from our core customers. During the quarter, core customer trends improved sequentially over the first quarter and were consistent with last year's record levels as a result of stable frequency and spend per visit. However, the consistency in core customer trends was offset by continued softness in retail play that began in the second half of last year. During the quarter, our management teams continued to do an excellent job controlling expenses in a challenging environment. Over the last year and a half, we have held property level expenses essentially flat during this highly inflationary environment. As a result, we achieved property level operating margins of 42% in the second quarter, consistent with recent quarters and remaining well above our pre-pandemic levels. Finally, we realized substantial benefits from our ongoing growth initiatives, including online gaming, sports betting, and Sky River Casino. Combined, our online and managed segments generated $33 million in EBITDA in the quarter, putting these businesses on pace to achieve $135 million in total EBITDA for the full year. Let's review each of the segments in more detail. In our Las Vegas local segment, we faced a difficult comparison the last year. This comparison was most pronounced in April. which accounted for roughly 90% of the quarterly year-over-year decline in locals' revenue and EBITDA. As you may recall, early last spring, we saw a temporary surge in business after mask mandates and other COVID restrictions were lifted in Nevada. By comparison, both May and June were nearly flat with prior year in the local segment, and we are encouraged that these positive trends have continued into the first few weeks of July. During the quarter, Core customer trends remain solid in the segment, with core guest counts growing slightly year over year. This strength was offset by softness in play from out-of-town gaming customers, as well as retail customers in the local market. However, we continue to effectively manage expenses during the quarter, with margins exceeding 51% in the local segment. Overall, we remain confident in the long-term trajectory of our local's business. which should continue to benefit from a strong and vibrant Southern Nevada economy. Visitation to Las Vegas continues to recover, increasing nearly 10% over the trailing 12 months, while air traffic to the market is at all-time highs. And while meeting and convention business is still 13% below pre-pandemic levels, it is up more than 40% over the trailing 12 months. We are seeing encouraging metrics within the local economy as well. Employment in Southern Nevada is up more than 4% over the prior year, the third strongest job growth rate among major U.S. cities. And with more than $10 billion in projects now under construction and more in the pipeline, Southern Nevada has a solid foundation to continue this employment growth well into the future. These positive conditions across Las Vegas are also benefiting the downtown market. During the quarter, business levels and pedestrian traffic remain strong throughout downtown Las Vegas, which has become an increasingly popular tourist destination. Last year, nearly 60% of Las Vegas tourists visited downtown Las Vegas at least once during their stay, driving continued growth in visitation throughout the downtown market. Additionally, we continue to see solid demand from our Hawaiian customer base. While the overall downtown market is performing well, our results during the quarter were impacted by construction disruption at the Fremont and Main Street stations. At the Fremont, disruption was related to our ongoing casino renovation project that began in January. While we had originally planned to complete this renovation in phases throughout 2023, we recently decided to accelerate this work during the slow summer season. As a result, about 20% of our slot machines and a third of our table games were out of service during the quarter. Despite this disruption, EBITDA at the Fremont for the quarter was essentially flat with the prior year. This is an encouraging preview of the growth potential of the Fremont once we complete this renovation in October. Next, at Main Street Station, we began a hotel remodel early in the second quarter. As a result, only 20% of our rooms at Main Street Station were available during the quarter, impacting results at both the California and Main Street. We expect this remodel to be completed early in the fourth quarter. While construction disruption will continue in the third quarter, we are confident these investments will help drive long-term growth in our downtown Las Vegas segment. Moving outside of Las Vegas, results in our Midwest and South segment were impacted by continued softness in Louisiana and Mississippi. However, our performance in this segment has continued to improve with both revenue and EBITDA increasing sequentially since the fourth quarter of 2022. We also maintain strong expense controls during the quarter with operating margins of 39% in the Midwest and South. Across the segment, customer trends are encouraging, including at our Louisiana and Mississippi properties, with overall play and visitation growing sequentially during each of the last two quarters. And importantly, we saw the year-over-year gap in revenues in EBITDA continue to narrow at our properties in the South. Next, our online segment continues to be an excellent story for our company. During the quarter, this segment achieved a 75% EBITDA gain, driven largely by FanDuel's strong performances in Ohio and Pennsylvania, as well as the addition of Boyd Interactive. We also relaunched Stardust branded online casinos in Pennsylvania and New Jersey during the quarter. This marks the first time we have leveraged the Boyd Interactive platform to manage our own online casino operations. In all, our online operations generated $13 million in EBITDA during the quarter. We now expect our online segment, which includes contributions from FanDuel, other market access agreements, and Boyd Interactive, to generate $55 million to $60 million in EBITDA for the full year, an increase from our previous forecast of $50 million. In addition to these financial contributions from online, there are substantial value in our 5% equity stake in FanDuel, the nation's clear leader in sports betting. Finally, in our managed another segment, Sky River Casino continues to perform at an exceptionally high level. This property has consistently exceeded expectations since it opened last August, and it did so again in the second quarter, generating $17 million in management fees for our company. Given the success of Sky River to date, the company's loan to the property is being paid down more quickly than originally anticipated. We received a $32 million payment on this loan during the second quarter and an additional $33 million payment in July. This brings the current outstanding loan balance to $31 million, which we expect to be fully paid by the end of the year. The success of Sky River has been a tremendous benefit for the Wilton Rancheria tribe, allowing the tribe to finally realize their vision of self-sufficiency. And given the property's strong start, the tribe is now working on plans to expand Sky River, potentially expanding the casino and adding a hotel, meeting space, and other amenities to the property. While neither a timeline or scope for this project have yet to be finalized, we share the tribe's optimism for the potential of this expansion. Based on Sky River's current level of performance and including contributions from our Illinois distributed gaming business, We expect our Manage Another segment will generate $75 million to $80 million in EBITDA this year, consistent with the forecast we provided during the last quarter's call. So in all, we are pleased with the company-wide results we delivered during the second quarter. And as we look ahead to the second half of the year, we currently do not expect any meaningful change in customer trends based on what we are seeing today. In the Las Vegas Local segment, We expect play from our core customers to remain stable at current levels, though we will continue to face challenging year-over-year comparisons during each of the remaining quarters this year. Downtown Las Vegas will continue to experience disruption from the Fremont and Main Street projects in the third quarter, but results will improve once work is completed on these projects early in the fourth quarter. And in the Midwest and South, we expect stabilizing trends will continue. Finally, our online and managed and other segments will continue to be important contributors to our overall performance. Further ahead in 2024, we believe we will see benefits from our ongoing expansion projects. In Louisiana, the expansion of our Treasure Chest Casino remains on track for completion next spring. By moving to a single-level land-based facility with expanded gaming and non-gaming amenities and improved customer access, we will significantly enhance this property's appeal. contributing to incremental growth in our Midwest and South segment beginning in the second half of 2024. And in downtown Las Vegas, we expect to see strong returns for our ongoing property investments. Given the excellent demand we have seen for our recently completed upgrades at the Fremont, we are confident these enhancements will position our downtown segment for long-term growth. Growth investments in our existing portfolio are an important part of our approach to creating long-term shareholder value and we expect to have additional opportunities to share with you as our current project's near completion. And thanks to our low leverage and strong free cash flow, we're able to balance these investments with a robust capital return program. Similar to our second quarter, we intend to continue our pace of share repurchases at $100 million per quarter, supplemented by regular dividend distributions. Since we reinstated our capital return program in late 2021, We are on track to return over $1 billion to our shareholders by the end of this year. Through our capital allocation decisions, we are utilizing our strong free cash flow to create significant long-term value for our shareholders while maintaining a strong balance sheet. In summary, we are pleased with our second quarter results as our effective operating model, strong management teams, and ongoing growth initiatives all contributed to solid results during the quarter. Throughout our nationwide operations, our core customer remains healthy. Our management teams continue to do a great job managing the business efficiently despite higher costs, maintaining property-level margins of 42%. And we continue to see strong returns from online gaming and Sky River. With limited capital outlays, we have created two new business segments that accounted for nearly 10% of our total EBITDA this quarter, generating a tremendous return on investment for our shareholders. I would like to thank the entire team for their contributions to our continued success. Once again, they have proved that we have the right team in place to achieve solid results through challenging conditions. Thank you for your time today. I would now like to turn the call over to Josh.

Thanks, Keith. I'm going to present a few financial items related to the quarter and update you on our capital investments and shareholder return programs. Total company-wide revenues of $917 million rose 2.5% over prior year, while EBITDA of $351 million nearly matched last year's strong second quarter performance. As Keith described, we faced difficult year-over-year comparisons during the quarter. with April accounting for nearly 70% of the year-over-year property level EBITDA declines. May and June's year-over-year variance improved sequentially, with June performing essentially even with prior year. Property level margins were 42%, while company-wide margins exceeded 38% during the quarter, both consistent with the last several quarters. As an aside, Our online segment included a tax pass-through amount of $63 million, compared to $48 million last year in the second quarter. These amounts are recorded as both revenues and expenses in this segment. During the second quarter, capital expenditures were $75 million, including spend for both Fremont and Treasure Chest. Here today, capital expenditures have been $171 million. We continue to project total capital expenditures of $350 million for the year, including $250 million in maintenance capital and $100 million related to Treasure Chest in Fremont. We repurchased $100 million in stock during the quarter, representing 1.5 million shares at an average price of $67.02 per share. This brought our actual share count at the end of the quarter to approximately 100 million shares. In less than two years since we resumed our capital return program, we have repurchased 14 million shares, or about 12% of the shares outstanding at the initiation of our repurchase activity. We had approximately $533 million remaining under our current repurchase authorization as of June 30th. Additionally, we paid a regular quarterly dividend of $0.16 per share on July 15. In pending Board approval, our next dividend is expected on October 15. Our balance sheet remains in excellent shape, with total leverage at the end of the quarter approximately 2.3 times and lease-adjusted leverage 2.7 times. We have no near-term debt maturities and ample borrowing capacity under our credit agreement. In conclusion, this quarter reflected the benefits of our diversified portfolio, our growth initiatives, our focus on our core customer segments, and officially managing our business. We have a very strong balance sheet, generate substantial free cash flow, providing us the ability to continue investing in growth while returning significant amount of capital to our shareholders. David, that concludes our remarks, and we are now ready to take questions.