Boyd Gaming Corp Q3 FY2020 Earnings Call

Good afternoon. And welcome to the Boyd Gaming Third Quarter 2020 Conference Call. All participants will be in listen-only mode. (operator instructions) After today’s presentation, there will be an opportunity to ask questions. (operator instructions) Please note, this event is being recorded. I would now like to turn the conference over to Josh Hirsberg, Executive Vice President, Chief Financial Officer and Treasurer. Please go ahead.

Thank you, Gary. Good afternoon, everyone, and welcome to our third quarter 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. 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 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. Today’s call is also being webcast live 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, Josh. Good afternoon, everyone. Thank you for joining us today. Our third quarter results clearly reflect the tremendous progress we have made since we began reopening our properties five months ago and the strength of our operating teams across the country. Their ability to adapt to the significant changes brought about by the COVID pandemic has been a key factor in our success. As we discussed on our last call, when we started the reopening process in late May, it was clear we had to adapt our operating strategy to meet a much different environment. The world has changed and we had to change with it. With limited capacity on our casino floors and reduced amenities for our guests, visitation to our properties was down significantly from a pre-COVID world. We knew we needed to rebalance our operating and marketing cost to match this reality, and we had to find a way to control cost without compromising the great guest experience that our customers expect from us. At the same time we needed to develop and implement entirely new safety and sanitation protocols throughout our business aimed at ensuring a safe environment for our guests and team members. Successfully developing and executing this strategy over the course of just a few months was one of the greatest challenges we have ever faced. I am extremely proud of how our operating teams have responded to this challenge, as well as the outstanding results they have produced. During our first full quarter since reopening, companywide EBITDA is up nearly 12%, as operating margins increased more than 1,000 basis points to 36.6%. This is the highest companywide operating margin in our history. During the third quarter, 18 of our properties grew EBITDAR at a double-digit pace. Eight of our properties achieved all-time record quarters for EBITDAR and three more set records for the third quarter, including Delta Downs, which incredibly lost three weeks of business due to damage from Hurricane Laura and still produced a record in the third quarter. While overall guest counts and revenues are down, our targeted marketing approach is driving strong play from top-tier customers. This targeted approach resulted in company-wide gaming revenues for the quarter that were down less than 8%, even with significant declines in our Downtown Las Vegas region. On a segment basis, in our Midwest and South segment, margins were up nearly 1,100 basis points to almost 40%, as we delivered the strongest quarterly EBITDAR performance in this segment’s history. EBITDAR rose nearly 17% during the quarter, despite the repeated closures of our Louisiana and Mississippi properties due to hurricanes. The results were even stronger in our Las Vegas Locals business, as EBITDAR increased more than 23% to a new third quarter record. Overall, segment margins rose more than 1,600 basis points to an all-time high of 46%, as we achieved our best quarterly EBITDAR performance in nearly 15 years. EBITDAR growth was broad-based across the Locals segment. The one exception was The Orleans, which continues to be impacted by declines in convention business and destination travel to the Las Vegas market. However, our Locals play at The Orleans remained strong and kept The Orleans’ results close to last year’s record performance. The impact of reduced visitation to Las Vegas has been more significant in our Downtown properties, which have been particularly affected by a near total shutdown in travel from Hawaii. But with an easing of travel restrictions now under way in Hawaii, we expect our Downtown performance to improve in the future. It is important to keep in mind that, today, the Downtown segment represents only a modest portion of our current nationwide business. In 2019, Downtown Las Vegas accounted for just over 6% of our total property EBITDAR, compared to 29% for our Locals business and 65% from our Midwest and South segment. Overall, our business has been remarkably stable since we reopened our properties. With more than 90% of our business coming from customers who live within driving distance to our properties, we have been able to successfully execute a strategy built on visitation from our premium regional customers. And as we look at the first three weeks of October, the positive operating trends from the third quarter have continued into this month. Well, there’s no doubt that as conditions begin to normalize, there will be pressure to go back to the way things were to return to normal. There will be pressure to add back operating and marketing costs to drive more people into our buildings and compete for casual play and there will be some situations where it may make sense to add back some level of marketing and overhead costs. But, overall, today is our new normal. We have established a more efficient and more focused business model over these past several months and we are determined to sustain higher margins going forward. And while we are encouraged by strength in our most loyal customer segments, we also believe that there are ample opportunities available to us in the future, as customers who have not yet felt confident enough to venture out grow comfortable visiting our properties once again. Just as we are successfully implementing a new way of operating our traditional business, we are also expanding our digital presence. Through the convergence of digital technology and the traditional casino entertainment experience, we are creating new opportunities to engage our customers both inside and outside of our properties. A good example is the continued expansion of our partnership with FanDuel. In addition to our 5% equity ownership in FanDuel Group, we are increasingly leveraging our partnership with FanDuel to market our properties to millions of FanDuel sports bettors across the country. We are also partnering with FanDuel to offer a growing segment of our customers the ability to participate in our business from the comfort of home. During the third quarter, Boyd Gaming and FanDuel added mobile sports betting products in Illinois and Iowa. With these latest launches, we now offer mobile sports betting in five states encompassing 30 million adults and we are planning to further expand into the iGaming space with the launch of our own real money online casino product in the coming months. Consistent with this strategy of growing our digital presence was the launch of our Stardust Social Casino in July and a new digital initiative B Connected Mobile that we launched in September. B Connected Mobile will allow us to seamlessly integrate our growing digital portfolio with our traditional casino experience. Developed in partnership with Aristocrat Technologies, this mobile app will become the hub of our customer experience offering guests frictionless access to our universe of online, social and mobile gaming brands including FanDuel, Stardust and B Connected Sports, our Nevada-based sports betting app. In the future, we envision tying together all of our digital and traditional casino experiences into a single digital wallet within B Connected Mobile, fully transferable between our digital brands and our casino properties across the country. Through B Connected Mobile, we plan to give our customers the ability to use their smartphones to make wagers and cash out on slot machines and table games. They will be able to use the digital wallet to make mobile sports bets, to wager at online casinos and to purchase credits on our Stardust Social Casino and they will be able to use points or cash within their accounts to pay for restaurants, hotel rooms, entertainment and other amenities at our properties. We are taking the first steps towards this convergence as we speak. A few days ago with our partners at Aristocrat, we launched our cashless wallet technology at our Blue Chip property in Northern Indiana. During this test, Blue Chip customers can create a digital wallet linked to their B Connected card, then use their card to place wagers and cash out on slot machines. Based on the success of this initial launch and pending regulatory approvals, we plan to expand this digital wallet to additional amenities and additional Boyd Gaming properties across the country, and then integrate that wallet into B Connected Mobile to create a true all-digital experience. And lastly, we remain focused on our partnership with the Wilton Rancheria Tribe in Northern California. We are putting the final pieces in place to allow the Tribe to secure project financing in the next several months and move ahead with the project construction. This first-in-class resort will be strategically located on a major highway just south of Sacramento and is ideally situated to capture a significant share of the lucrative Northern California gaming market when it opens its doors in the second half of 2022. We are honored to be the Tribe’s partners on this exciting project, which will allow the Wilton Tribe to finally realize a longstanding goal of self-sufficiency. So, all in all, our team delivered an outstanding performance in the third quarter. As we look to the future, we believe an important part of our continued success is the health and well-being of the communities that we serve. From the day they founded Boyd Gaming 45 years ago Sam and Bill Boyd instilled in our company a commitment to sharing our success with others. By investing in our communities, we help create healthy communities and when our communities thrive, we thrive. We have remained firmly committed to this philosophy throughout these last 45 years and we continue to advance this philosophy today, helping our communities respond to the challenges of 2020. Following the impact of Hurricane Laura in late August, we provided significant financial assistance to our hard hit Louisiana team members. We assisted the broader Louisiana community as well with donations to community relief organizations like the American Red Cross. And here in Nevada, we are actively providing support to our hometown as it deals with challenges created by the COVID pandemic. To assist those who have been financially impacted by declines in travel to Las Vegas, we are expanding our long-term partnership with Three Square Food Bank, providing cash and in-kind contributions to support their mission of helping Southern Nevada residents in need. To assist local children with remote learning while our schools are closed, we are providing funding to the Boys & Girls Club of Southern Nevada to help provide remote learning facilities to low income K-12 students. As a company, we are proud of our ability to keep creating shareholder value despite new challenges and as we continue this long track record of growth, we will keep investing in our communities, strengthening the foundation for our future success. Thank you for your time today. I will now turn the call over to Josh. Josh?

Thanks, Keith. As we think about our business today, the one word that comes to mind is consistency. Since reopening our properties, our own ability to execute an operating strategy engineered to drive enhanced profitability, as well as our customers' behavior has been amazingly consistent. Going forward, we expect to retain much of the efficiency that has been captured in our operational performance since reopening. We are focused on serving our best customers in an environment of reduced operating expenses and highly targeted marketing. Now turning to the quarter, corporate expense and taxes were higher than we expected as a result of transitioning our properties from being closed to reopen. We expect fourth quarter corporate expense to be similar to third quarter levels. These are not however good run rate levels for 2021 corporate expense as these amounts include catch up items for the periods we were closed. Capital spending during the quarter was $29 million, bringing year-to-date to approximately $105 million. We expect to spend about $25 million during the fourth quarter, excluding investments related to the repairs at Delta Downs, which are expected to be reimbursed from insurance proceeds. During the quarter, we used a portion of our cash balances to repay our fully drawn credit facility. As a result of completely reducing these borrowings, we had approximately $500 million of cash at the end of the quarter and more than $930 million of availability under our credit facility. After quarter-end, we extended our credit facility and Term Loan A maturities to align with our Term Loan B maturity in September of 2023 and we increased our revolver commitments such that our undrawn availability now exceeds $1 billion. In all, our operating teams have done a tremendous job executing on the company’s strategy since we reopened our properties. Their hard work resulted in the performance we delivered for the third quarter. Just as exciting there is no sign of these results changing. October continues to trend at Q3 and while there are certainly risks and challenges that will present themselves, we are committed to sustaining our more efficient and profitable operating model into the future. Gary that concludes our remarks and we are now ready to take any questions from participants on the call.

(operator instructions) Our first question comes from Joe Greff with JPMorgan. Please go ahead.

Good afternoon, guys. Congrats on the results. Josh and Keith, can you just talk about the mix and the rate of recovery between the non-rated retail and the rated database players in the Locals and Midwest and South gaming regions? And then what I am kind of trying to get to is, to the extent that the recovery — looking ahead the recovery in the rated database player segment is stronger than that non-rated segment, to what extent is that a negative margin mix and reverses some of the margin gains, how do you think about that?

So a couple of comments, Joe. I think as we look at the database, we continue to see strong play from our upper-tier customers and from our higher-worth customers. Those segments in some cases are actually growing year-over-year. Unrated play as a percentage of total play is actually up a little bit and that’s just because it declined less than our rated play overall, so it shifted a little bit, not significantly. I think as we look forward, as I said in my prepared remarks, we think there’s still a good deal of upside as customers who have not yet come out and are comfortable coming out to visit us will come out in the future. And so there continues to be, I think, positive momentum in the business. Josh?

Yeah. The only thing I would add to that, Joe, is, I think, Keith’s comments certainly are accurate and they reflect what has been really going on in the business since we reopened. The trends that we have seen since we reopened whether it’s in the rated segment or the unrated segment have really not changed, and both segments have been equally kind of strong and contributing in their proportionate share. I think is the point. We have not really seen any degradation in one segment or the other as we pass through time whether it’s as a result of unemployment benefits going away or other changes that folks would have perhaps logically thought would have affected one segment over the other. I think largely in the rated segments certainly these are customers that we know well and have seen before and are playing at the levels that they have historically and similarly from the perspective of the unrated segment.

Great. Excellent. And then just as a follow-up you actually couldn’t tell by looking at the EBITDA results in the Midwest and South, but can you quantify the hurricane impact in 3Q?

When you look at Q3 last year we also had some hurricane impact which mitigated a comparable impact for this year. But this year was obviously worse and impacted us more significantly. Josh?

Yeah. Keith is correct. We had hurricanes last year and so that mitigated a comparable impact for this year. But this year was obviously worse and impacted us more significantly. And we estimate kind of $3 million to $5 million kind of an impact.

Okay. Thank you very much, guys.

The next question is from Carlo Santarelli with Deutsche Bank. Please go ahead.

Hey, guys. Thanks for taking my question. Josh and Keith, both of you mentioned kind of in your respective commentary that the higher net worth customer within the database, you have seen a lot more frequency and spend or play from them. Is that something that over the longer term you believe is sustainable and what do you think is kind of driving the outperformance of that segment specifically?

If you dial the clock back, because this actually is a journey we have been on for a number of years as we re-launched our B Connected program a couple of years ago and started to focus on higher-worth play and then the COVID pandemic and the requirement we had to shut down the business entirely allowed us to completely refocus and maybe supercharge that effort. So, we are really focused on this high-end play. We are able to, I think, speak to them differently as we reopen the business, speak to them more directly, provide maybe higher touches than we did in the past. I can’t tell you that they are spending at a significantly higher level. We just have more of the higher-worth customers in the building and fewer of the lower-worth customers in the building. I mean, if you were to look at averages, the average spend is up, but largely driven by just fewer lower-end customers in the building.

That makes sense. Thank you. And then I don’t know if you guys would be willing to kind of take a shot at answering this. But if we ignore the Downtown segment for a second, obviously both the Locals margins up 1,600 basis points year-over-year, and the Midwest and South up a little over close to 1,100 basis points. Would you guys, like, I think Josh said most of the savings operational you would expect to keep. If we looked at those two growth rates in the margins and kind of assumed more than half of them on a go-forward basis. Is that in your eyes at similar run rate levels to what we are looking at right now reasonable and could you maintain 800 basis points and 500-plus basis points in Midwest and South EBITDAR margins on a go-forward basis?

So I think that it’s more in those ranges as a ballpark than either at the upper end or the lower end. If you think about the drivers of expense of our business, the biggest components are obviously labor and marketing, and the changes that we have made to those categories in particular in a large way are largely permanent in the way we think about those. Now there’s a certain aspect of marketing that will naturally come back potentially based on consumer demands or competitive pressures, but that’s nowhere near the order of magnitude of what we have removed from the business in terms of marketing. And I think on a much smaller case the same thing you could say about labor and many of the other categories where we have taken a fresh approach in looking at our expenses across the board and largely made decisions that are permanently removing many of those costs.

Some labor will be added back into the business over time as we open additional amenities as we deem appropriate. So there will be some incremental labor, but as Josh said, we view a lot of the changes that have taken place as permanent in nature.

Great. Thank you, guys.

The next question is from David Katz with Jefferies. Please go ahead.

Hi. Afternoon. My primary question, I think, you just answered quite artfully and thank you for that. What I also wanted to ask about is, when we look across the space and your peers and the roll out of digital and I know Keith you touched on this a bit. But how — at what point could we be in a position to pencil something in terms of that opportunity for you, right? Because we have others that have kind of laid out arguably different types of strategies than what you have, but you are a participant as well. What light can you shed for us?

So as we look at this opportunity and we started down this road a couple of years ago when we signed our agreement with FanDuel, we approached it strategically a little bit different than others, whereas our focus was on creating cash flow and creating EBITDA and not building large infrastructure and incurring large losses to compete in this business. And so we have executed obviously a number of deals with FanDuel across the country, whether it’s in Pennsylvania or recently in Illinois and Iowa and Indiana and Mississippi, and hopefully there will be more as sports betting is approved across the nation. I would tell you that today or as we think about 2020, just kind of recurring EBITDA coming out of that business today is in the $8 million to $10 million range and that includes Illinois that just launched in July, so it’s not even a full year of Illinois. So an $8 million to $10 million doesn’t account for one-time fees that we will receive as a result of selling additional skins in other states, doesn’t account for the growth in other states and doesn’t account for the EBITDA that would come out of our forthcoming online gaming application that we will launch during the next couple of months. So it’s $8 million to $10 million and it’s growing. Once again the $8 million to $10 million isn’t really a full year or full run rate.

Perfect. Thank you very much.

The next question is from Shaun Kelley with Bank of America. Please go ahead.

Hi. Good afternoon, everyone. Thanks for taking my question. Josh or Keith, either one — maybe want to start with the Locals margins again. But I think one question we had was, from the time you were open, it does look like your margins actually improved in Q3 over Q2. So I was wondering if we could dig into that a little deeper. What would drive that sequential change? I mean, again, you are open for longer, some costs would come back and admittedly you are probably late on some of the low margin stuff. But I am just kind of curious on how we would go from up 1,300 to up 1,600, if you could elaborate on that, because it’s very impressive?

Well, I have been saying that we have got a tremendous management team here in the Las Vegas Locals market that is just doing an outstanding job driving the business. That’s really at the heart of it. But setting that aside, I think the other explanation is, the Las Vegas Locals business quite frankly started slow when we reopened in June, whereas other businesses in the Midwest and South actually started very strong. Here in Las Vegas it started a little softly and has grown. And I think as it has grown, we have obviously gotten better and we have learned what works and what doesn’t work. Again the team’s done a great job, but the only real explanation is it did start slow in June and early July and it has gotten stronger.

The only thing I would add to that, Shaun, is leading up to the reopening period, there were a lot of questions around the impact any weakness on the Strip would have on our customer and we were and some of our peers in the Locals market were basically saying, look, this is a regional market like any other regional market. And if anything, we have the backdrop of a fairly strong Las Vegas economy and I think that’s what’s proven out here: regional market customers have behaved like regional customers.

Great. And then just as my follow-up, Josh, you have been very clear on, I think, the driving buckets for what’s going to be sustainable out of the margin improvement, pointing to both labor on property and then the promotional and marketing side. Could you — now we have got a full quarter of data, could you just help us a little bit with quantifying any of these aspects either on the labor front, maybe just a generic property, how much were down in FTE counts on a year-over-year basis or on the promotional or marketing front, how much is marketing spend down or promo dollars down? Again, just to really help us kind of dial in on what types of magnitudes of reduction have come out of the business?

Shaun, I’d really like to give you that information, but I think our competitors would like to hear the same thing from us at the same time. So I think each of the companies is approaching this in a similar way, but unique to their own approach to the business, and so I think I want to withhold from answering that question.

Entirely fair. Thank you both.

The next question is from Felicia Hendrix with Barclays. Please go ahead.

Hi, guys. Good afternoon. So, Josh and Keith, especially today we could see there’s a lot of concern in the market about where we are in this COVID cycle. As we head into the colder months and concerns get greater about a second or third wave, do you see risks in the states that you operate in for re-closures? And then Josh, your liquidity runway right now is very strong, but if you could just remind us of your balance sheet capacity to raise more funds if you needed to? That would be great.

Felicia, in terms of the risks of future closures, certainly we don’t control that and you can see, and probably have seen in the state of Illinois where they have started to put more restrictions on a variety of businesses, including casinos in certain counties where the positivity rate has risen beyond a certain level. So that certainly could be an impact or risk to the business. We view that as a short-term risk that would pass through, but you certainly can’t ignore that risk. We don’t see that in other states at the moment. We are watching it in Illinois. The jurisdiction we are in as of now is fine. We are not one of the jurisdictions that has to reduce their capacity to 25%, but we are certainly watching it. Any huge resurgence could be a risk to the business.

Felicia, to your second question, in my remarks I mentioned we have over $1 billion of undrawn capacity. We had cash at the end of Q3 of about $500 million. Specifically, we have the ability even in this period of covenant waivers through our amendment process to raise another, I think, $600 million or $700 million of secured debt that we are allowed to do. So, we have more than ample capacity — conservatively over two years of runway if we had to completely close the business every property again. That’s at a run rate when we had run through this the first time of about $65 million of closed run rate expenses. We had different levels that we could have chosen to pull the trigger on to reduce those expenses even further. So, I would say, conservatively over two years of runway if we had to completely close the business again.

Okay. That’s super helpful. And then, Keith, when you look at your Las Vegas Locals market and you mentioned The Orleans and convention business, what are you anticipating in terms of what it would take to bring back breath of life into that part of the business, and then similarly what would it take for you to open the properties that are closed now?

As we think about the recovery here in Las Vegas, two words come to mind: long and slow. I think it’s going to be a slow recovery. There is some pent-up demand and when the governor recently lifted the cap on meetings to 250 or 10% of certain spaces, the phone started ringing. We had people interested in holding those events, which shows there is some demand, but it will be a long slow recovery. The good news at The Orleans is we have a strong component of Locals play there that kept it very close to last year’s record results. With respect to the closed properties — there are three of them: Main Street, Eastside Cannery and Eldorado. We probably see reopening them in that order, but it will depend on how the business flows. We think that Hawaii and the downtown market will probably come back quicker than the Boulder Strip market. We have good business at Sam’s Town. We just don’t have enough demand to open Eastside yet or the Eldorado. As soon as the business demands it; I’d expect sometime next year we certainly get Main Street open.

Great. And just a quick housekeeping, as far as the properties that were open, was your market share relatively steady or improved?

The market share in Las Vegas, I would say, was steady to up. Depending on the period of time you look at for the last three months reported, which would be June, July, August, we actually were up.

Thank you, Felicia.

The next question is from Steve Wieczynski with Stifel. Please go ahead.

Hey. Good afternoon, guys. So I want to go back to your overall database and on your last call you talked about significant growth in that database during the second quarter. I just want to ask was that growth similar in the third quarter or did that slow? I assume probably the latter. Just trying to gauge a little bit more about how those new-to-property or new-to-brand folks are trending at this point?

Steve, I don’t think we were alluding to disproportionate growth in our database. The customers we are seeing are rated customers that we know and have seen before. They are playing at levels similar to prior levels. Per-unit averages are up just because we don’t have the dilution from some lower-value players. We do have a significant portion of older demographic customers who are not coming out and playing right now because they don’t feel comfortable. We are seeing more of a younger demographic, but I would not necessarily characterize those as new customers to our database — we know their play and they are rated customers. The unrated segment has also been healthy. So, that’s how we are framing it.

That’s super helpful. Thanks, Josh. And then second question, you talked about October being very similar to the trends you witnessed through the third quarter. How are you thinking around some of the upcoming events coming up in the fourth quarter, like the election and then the holidays this year, which may lead some folks to stay closer to home and ultimately could be a benefit for you guys?

I don’t think our crystal ball is that clear that far out. We are benefiting from regional business where largely people can drive to us, so to the extent people stay closer to home that continues to benefit us. If they decide to come to Las Vegas then we will receive that benefit, which is the benefit of having a geographically diversified portfolio. What happens with the election and how that impacts people — whether it changes spend patterns or going out — you can log on to the sportsbook and place a bet if you want, but I am not going to make a prediction at this point.

The one thing I would add is the way we think about our customer today: this is their pastime and their form of entertainment. That’s why they have performed so consistently. They were the first ones to show up when we opened, they played through social distancing and mask wearing, and when unemployment benefits changed they largely played through that as well. There’s no guaranteeing they will overcome every future hurdle, but surveys and the trends in our database suggest they will continue to be a core customer.

And, Josh, one more quick one: have you seen any change in the 65-and-up customer or has it been status quo?

We have started to see small improvements in that demographic. Nothing I would call a significant trend at this point, but we have seen some come back and engage with us.

Okay. Great. Thanks, guys. I appreciate it.

The next question is from Barry Jonas with Truist Securities. Please go ahead.

Thanks. So I wanted to start with approaching the risk question from a different angle. How do you think about risk to this model under the scenario that we have a working vaccine?

If there is a working vaccine and more people become comfortable coming out, some of our customers who aren’t yet comfortable will come out and join us. So the vaccine is incrementally positive to our overall business. Is it possible some customers that are with us today would spend some dollars elsewhere? Certainly possible. But this tends to be a core form of entertainment for our customers, so I think there’s a natural balancing effect. Once customers who have been hesitant come back, overall it should be positive.

Sorry, I meant more on the cost side in terms of some of the amenities that have been removed?

We are monitoring that as we go and to the extent we need to bring back amenities, we will carefully monitor and bring them back to ensure they are accretive and not a drain on the property's EBITDA.

Great. And then just one more: curious to get more color on your foray into cashless gaming. How do you think about upside on the topline or on the cost side to justify the investment?

First, it’s about safety and security and providing our guests a contactless opportunity to engage in our entertainment. Second, there are opportunities to reduce costs with less cash in the building and it is a marketing feature: higher-worth guests prefer not to handle cash. In the few days since launch at Blue Chip we have already had several hundred customers take advantage of it with no marketing — we’re just kicking off marketing this week. So I think there’s real opportunity.

Great. Thanks so much.

The next question is from Thomas Allen with Morgan Stanley. Please go ahead.

The caller experienced technical difficulties and was breaking up, and could not be heard clearly.

The next question is from Jared Shojaian with Wolfe Research. Please go ahead.

Hi. Good afternoon, everyone. Thanks for taking my question. I imagine the slot performance is meaningfully outperforming the tables right now. I know the data is not explicitly broken out that way, but I would also imagine that’s probably affecting mix on the margin side just given that slots are significantly higher margin. Is that having a meaningful effect on the mix right now on your margins or would you say no?

Not really. While we have fewer opportunities on the table game side because capacity is limited — for example four seats at blackjack and fewer at craps or baccarat — the average bets are increased on the table gaming side, yielding the table games business as well as the slots business. Clearly, 80% of our revenue as a company comes through slots and as they perform better it has a bigger impact on overall margin. But table games is performing and it’s not dragging down the overall margin improvement.

Got it. Thank you. And switching gears, given what we have seen with valuations in the sports and iGaming names, can you talk about how you are thinking about your FanDuel stake over the longer term? Is that something you would consider monetizing or do you believe there is strategic importance to holding onto it?

To date we are very happy with the partnership and our equity ownership. FanDuel has been a great partner with great tech and is a leader in the business in most states they operate in. Right now the partnership is great and we are happy with the ownership interest we have. Longer term — three to five years from now — where that goes I couldn’t tell you. We are focused on the next several years and today it’s a great partnership.

All right. Thank you very much.

The next question is from Chad Beynon with Macquarie. Please go ahead.

Hi. Good afternoon. Thanks for taking my question. Obviously extremely early given that Circa opens in the next few days, but in terms of what you are hearing about the property and who it caters to, has anything changed in how you view how Circa fits into the Downtown market? Most believe it is a different product and won’t really take away from you and some of your competitors, but just wanted to get an update on that if you have any views there?

I would agree. It is a differentiated, higher-end product than what is down there today, with the exception of the Nugget which is also high-end. It will draw a lot of visitors to the Downtown area. We have a property a block away and two properties directly behind it, so we will take advantage of and be a beneficiary of the foot traffic. Remember, the lion’s share of our Downtown business is driven by Hawaiian customers. All the traffic that comes down to visit Circa will be incremental. I think it’s great for the Downtown market and we are looking forward to having it open later this week.

Great. Thanks, Keith. And then Josh, on CapEx, I believe you said $25 million for the fourth quarter and we are not expecting much slot CapEx in that budget. But how are you thinking about maintenance CapEx and the mix between gaming product and other items going forward? Do you believe there will be as big a need or budget for updating gaming product?

I think folks are playing slot machines and we have to make sure we have the best slot product on the floor at all times, so our budgets will reflect that. I don’t think it will be larger than historically, but coming into next year we think it will be about the same. When you have a floor with more capacity than you utilize today and are getting the results you are getting, you must rethink how the floor is laid out and how many slot machines you have out. Then decide how you will reinvest in slots and other gaming technology. It could be the same overall spend but with fewer units — we are going through that process now to figure out reinvestment in a smaller footprint.

Okay. Thank you very much.

The next question is from John DeCree with Union Gaming. Please go ahead.

Hi, everyone. Thanks for taking my questions.

Hi.

I have a follow-up. A lot of markets are still operating with significant capacity constraints. Can you comment on what you are seeing during peak periods? Do you feel capacity constrained at any point and when might those constraints loosen so you could benefit from more capacity?

For the majority of our properties today during peak times we are not capacity constrained. We have a few properties with lower machine counts like Delta Downs with 1,600 units and they are generally at around 50% restriction and could use a few more during peaks, but for the most part we are not bumping into ceilings with respect to capacity. Remember, we have significantly reduced visitation throughout our buildings so we haven’t seen capacity constraints during the opening phases.

Got it. That’s helpful. And one more: in assessing the potential risk of additional closures, if we saw reduced revenue going forward for whatever reason, closures or a difficult winter, how much slack is in the system, realizing you have already cut a substantial amount of costs? If you saw a notable revenue decline, is there flexibility and variable costs outside of gaming taxes that you could tweak if it was a sustained period of lower revenue?

That’s a tough theoretical question because it depends on how much and where the revenue decline comes from — which customers and which markets. There are many variables, and the answer would differ depending on that. It’s hard to provide a single intelligent answer without more specifics.

One thing I would add is the crisis has shown there are very few fixed expenses in our business and we have a lot of flexibility to adapt. The industry has shown an ability to adapt quickly from significant revenue to very little revenue. Everything in between becomes iterations of that ability to adjust.

Got that. That’s helpful. Thank you.

The next question is from Joe Stauff with Susquehanna. Please go ahead.

Good afternoon. Two follow-ups if I can, please. Josh, what level of 2019 traffic or normalized traffic would require a notable change in marketing spending? In other words, at what point would you change the marketing approach if customer volumes return?

I don’t think we would think about it as a function of reaching a single traffic level. The way we’re approaching marketing now is to ensure loyalty of our best customers and to reinvest at appropriate levels for different tiers of customers we choose to market to for profitability. Historically we tried to drive volume for volume's sake. We are not doing that now. The reopening allowed us to better see who is profitable and who is not, and we have adjusted reinvestment strategy accordingly. So it’s data-driven, not a single traffic threshold.

Understood. One follow-up: on the digital side, you will have your real-money proprietary offering in the coming months using FanDuel’s tech stack, correct? What are the economics there — are you paying them a B2B fee and receiving revenue share? How are those economics arranged?

We are using their tech stack and asking them to run it for us. We will get a revenue share out of that arrangement. That revenue share and the online business is part of the $8 million to $10 million recurring EBITDA number I discussed for 2020, and we expect it to grow next year.

Yes. The key point is we are focused on partnering to create recurring EBITDA rather than incurring large losses building infrastructure ourselves.

Thanks very much.

We have time for one more question and that question is from Thomas Allen with Morgan Stanley. Please go ahead.

Hi. Good afternoon. Regarding the $8 to $10 million that you are generating this year on sports betting, can you help unpack that between the retail sports books and the market access? Also, what trends are you seeing from more mature retail sportsbooks versus newer ones in terms of benefit to broader properties?

Thomas, I’ll take the first part. The $8 million to $10 million number Keith spoke about is purely revenue share coming from FanDuel for mobile and online operations. It doesn’t include the retail component, which is included in individual property-level results. The online piece is separated out and is building throughout this year, so it’s not yet a full run rate. Keith, do you want to take the second part?

As sportsbooks mature, what’s helpful is FanDuel’s market-leading offering and breadth of bet menus. As customers become more sophisticated about sports betting, they appreciate the quality of the app, the ease of use and the breadth of types of bets, which attracts more players. We’ve seen growth in states like Mississippi as customers become more comfortable and sophisticated, which benefits the property.

Got it. Helpful. Thank you.

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

Thanks, Gary. And thanks to all of you for joining today and if you have any follow-up questions or would like to discuss further, please feel free to reach out to the company. Thank you very much. Have a good rest of your day.

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