Earnings Call Transcript - BYD Q2 2023

David Strow, Vice President of Corporate Communications

Good afternoon, and welcome to the Boyd Gaming Second Quarter 2023 Conference Call. My name is David Strow, 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. Our speakers for today's call are Keith Smith, President and Chief Executive Officer; and Josh Hirsberg, 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 8-K 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?

Keith Smith, President and Chief Executive Officer

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 EBITDAR in line with last year's strong second quarter results. Operationally, 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 1.5 years, 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 EBITDAR in the quarter, putting these businesses on pace to achieve $135 million in total EBITDAR for the full year. Let's review each of the segments in more detail. In our Las Vegas Locals segment, we faced a difficult comparison to 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 EBITDAR. As you may recall, early last spring, we saw a temporary surge in business after mask mandates and other cohort 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 remained 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 Locals 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 of pedestrian traffic remained 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 Station. 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 one-third of our table games were out of service during the quarter. Despite this disruption, EBITDAR 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 to hit 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 & 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 EBITDAR increasing sequentially since the fourth quarter of 2022. We also maintained strong expense controls during the quarter, with operating margins of 39% in the Midwest & South. Across the segment, customer trends are encouraging, including at our Louisiana and Mississippi properties with overall play of visitation growing sequentially during each of the last two quarters. And importantly, we saw the year-over-year gap in revenues and EBITDAR 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% EBITDAR gain driven largely by Panda's strong performances in Ohio and Pennsylvania, as well as the addition of Boyd Interactive. We also relaunched Starts 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 EBITDAR 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 of EBITDAR for the full year, an increase from our previous forecast of $50 million. In addition to these financial contributions from Online, there is substantial value in our 5% equity stake in FanDuel, the nation's clear leader in sports betting. Finally, in our Managed & Other 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 the 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 nor 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 Managed & Other segment will generate $75 million to $80 million in EBITDAR 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 Locals 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 & South, we expect stabilizing trends will continue. Finally, our Online and Managed & 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 & South segment beginning in the second half of 2024. And in Downtown Las Vegas, we expect to see strong returns from 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 projects 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 at 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 EBITDAR 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.

Josh Hirsberg, Executive Vice President and Chief Financial Officer

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 EBITDAR 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 EBITDAR 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. Year-to-date, 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 30. Additionally, we paid a regular quarterly dividend of $0.16 per share on July 15. And 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 2.3x and lease-adjusted leverage 2.7x. 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 effectively managing our business. We have a very strong balance sheet that generates substantial free cash flow, providing us the ability to continue investing in growth while returning a significant amount of capital to our shareholders.

David Strow, Vice President of Corporate Communications

Thank you, Josh. We will now begin our question-and-answer session. Our first question comes from Joe Greff of JPMorgan.

Joseph Greff, Analyst

I would like to explore the Locals market a bit more. Can you discuss the customer segments, particularly in terms of theoretical or net worth rather than just core local or out-of-town guests? Is there a significant difference in visitation and spending between the upper and lower tiers of your database? Additionally, how did these trends develop throughout the quarter?

Keith Smith, President and Chief Executive Officer

So Joe, this is Keith. In terms of kind of the higher end of the database or what we refer to as our core customers versus the lower end, the upper end of the database, our core customers performed well, as I said in my prepared remarks. What we saw was some pullback in visits. So the number of customers was stable, the spend per customer was stable, just a little lower in visitation. The lower end of the database, which has been kind of shrinking for years, just continued to shrink. It didn't accelerate or decelerate. It has been on a trajectory to just been soft. So I don't think there's anything noteworthy there. And once again, we simply saw some pullback in visitation. Now I indicated in my prepared remarks also that July is looking better. The trends we’re seeing in the first three weeks of July in the locals market, visitation is back up. And so those trends are not that three weeks makes the entire quarter, but the trends in the first three weeks of July have certainly changed compared to the second quarter.

Josh Hirsberg, Executive Vice President and Chief Financial Officer

Yes. The only thing I would add just broad-based and high-level is it was really about softness in April. And as we move through the quarter, things just sequentially improved. And then as Keith mentioned, have kind of turned positive in the first three weeks of July, and we'll see where it goes from here.

David Strow, Vice President of Corporate Communications

Thank you, Joe. Our next question comes from Carlo Santarelli of Deutsche Bank.

Carlo Santarelli, Analyst

Josh, so just following up on Joe's question, when you guys kind of looked at that April period and there was some softness. Did you notice any change or any change in the behavior promotionally from your competitors in the market? Or that little soft pass kind of went without much incremental promotions or offers going out?

Keith Smith, President and Chief Executive Officer

I would say here in the locals market, Carlo, that the promotional environment really hasn't changed for a while. Everybody has kind of laid out their position from a marketing standpoint and everybody is remaining relatively stable. A couple of aggressive competitors. But for the most part, everybody is continuing to do what they do. April, and Josh alluded to this a few minutes ago, really was about a comparison issue to last year. In April of last year, April of 2022, it was up nearly 100% in the locals market compared to 2019. And so while it was soft this April of '23, it was really more of a comparison issue. And as Josh said, May and June actually compared to 2022 were relatively flat. So I do think April was not about more softness than May or June; it was really about a comparison issue.

Carlo Santarelli, Analyst

Understood. And then just in terms of, as you look across the operating portfolio, obviously, if you kind of look and see what OpEx trends look like, they all look fairly stable in terms of non-gaming tax-related operating expenses. Is it fair to say that kind of any iterations of expenses from here would relate more to seasonality and certain markets and their respective seasonalities? Or are there still pressures or incremental hiring or things of that nature that haven't yet come through?

Keith Smith, President and Chief Executive Officer

No, I think you're right. If we think about our expense levels, they've been relatively consistent for a number of quarters now. And we've implemented wage increases. We had put our team members on a pathway or hourly team members on a pathway to $15 an hour. We've completed that. And so utility expenses are high in many markets, but that's in the current number. So I think any future variation will be based on seasonality and/or demand. As revenue goes up, we can see some incremental labor. But there should not be any significant changes in the overall kind of expense levels going forward.

David Strow, Vice President of Corporate Communications

Thank you, Carlo. Our next question comes from Steve Wieczynski of Stifel.

Steven Wieczynski, Analyst

So Josh or Keith, I want to go through the Southern markets, which you've now called out, I think it's been a couple of quarters at this point in terms of seeing some softness there. It sounds like it's a little bit more on the lower tier of your database. And I guess the question is, has that market or those markets, is that deteriorating? Or is that still just it's soft, but it's stable. And hopefully, that makes sense.

Josh Hirsberg, Executive Vice President and Chief Financial Officer

Yes, I'll give it a try, and then Keith will add to it. In Louisiana and Mississippi, we began to notice significant softness in the fourth quarter of last year. As we entered this year, things have continued to stabilize along the bottom and are beginning to show signs of improvement in customer trends, revenue, and EBITDA. The variances year-over-year in financial performance are narrowing. Customer behavior trends, including the number of customers, their frequency, and spending, are all starting to improve. While it's a bit early to determine if this upward trend will continue, there are signs of recovery from a stable bottom. We're gaining confidence that this part of the business, along with other markets outside Mississippi and Louisiana, has stabilized.

Keith Smith, President and Chief Executive Officer

Yes. Maybe just to reiterate what Josh said, fourth quarter of 2022 is kind of a bottom sequential improvements. And so I wouldn't view it as kind of deteriorating; it's actually able to stabilize and improving since Q4 of last year.

Steven Wieczynski, Analyst

Okay, and for my second question, I want to ask about your balance sheet. You continue to have one of the strongest balance sheets in the industry, especially when compared to your peers, which puts you in a very favorable position. Can you provide an update on your interest in any large acquisitions currently? Where do you see potential opportunities to utilize that balance sheet for acquisitions?

Keith Smith, President and Chief Executive Officer

Yes. Look, I think the only thing we could probably comment on is those of you who have followed us for a while as the company has grown over the years quite dramatically through M&A. And what I like to call smart M&A. We've done a great job of picking the right assets and then being able to grow EBITDA from those assets, which has gotten us to where we're at today. We tend to be very, very disciplined. And if there's something interesting in the future, we could take a look at it. But we're not going out of our way to do anything, but we have grown. It is our history to grow through acquisitions, but we will continue to be very disciplined.

Josh Hirsberg, Executive Vice President and Chief Financial Officer

Yes. I think the only concept I'd add to what Keith is saying is we like having a low-leveraged balance sheet because it enables us to consider growth opportunities if they come along. And if they don't come along, that's fine too. Just because we can do acquisitions, doesn't mean that we will. It just continues to be about being disciplined around that. And I think what we want to really focus on is continuing to be able to return capital to shareholders and be able to pursue growth initiatives at the same time should they come along to be able to do that whether the environment is good or bad. And that's why we have chosen to kind of be at this level from a leverage perspective. It's kind of what we view as an all-weather balance sheet.

David Strow, Vice President of Corporate Communications

Thank you, Steve. Our next question comes from Dan Politzer of Wells Fargo.

Daniel Politzer, Analyst

I want to follow up on the digital guide. The $55 million to $60 million, just so we can kind of understand where that's coming from. Is that simply just taking year-to-date and then adding the back half of last year because this is obviously tied to Sandy. And so to the extent that we're thinking about possible upside there, is that the scenario? And along with that, if you can just comment on any kind of early take since you've launched on the iGame side and as long to start us online casino?

Josh Hirsberg, Executive Vice President and Chief Financial Officer

I'll address the Online segment and then Keith will discuss Boyd Interactive. Initially, we projected $50 million, but consensus estimates were slightly higher. The strong performance in Q2 has brought us in line with those estimates year-to-date. We anticipate that our Q3 performance will determine our guidance range of $55 to $60 million. If we exceed expectations in Q3, we could end up closer to the upper limit. Our current approach incorporates our year-to-date results and an optimistic outlook for Q3, aligning with last year's Q4 figures, which included some unique payments and the commencement of markets we expect to face increased competition in the coming year. Thus, we believe our current forecast for the Online segment is a balanced expectation.

Keith Smith, President and Chief Executive Officer

Regarding your second question about the launch of Starts, our online casino business, we relaunched in Pennsylvania and New Jersey in early May. The first 60 days were dedicated to fine-tuning the product without significant marketing efforts. In July, we began to increase our marketing activities. Overall, we are pleased with the launch and the organic growth we are seeing from simply having the product available, despite minimal marketing. The response from our brick-and-mortar customers has been positive, and their participation has been encouraging. However, it's important to note that this is a small segment for us. Our focus is on long-term growth rather than immediate results. Thus, we do not anticipate a significant short-term impact. Nevertheless, we consider it a successful launch and are happy with the early outcomes.

Daniel Politzer, Analyst

Got it. And just to continue.

Josh Hirsberg, Executive Vice President and Chief Financial Officer

Yes, I think that's correct. From an EBITDA perspective, we estimate the Downtown impact to be around $2 million to $3 million. I anticipate experiencing pressures in Q3 due to further disruptions, but we plan to recover some of that in both Q4 and Q1 as the business begins to come back. It won’t all return on the first day of Q4, but that’s how we envision the remainder of the year for Downtown.

David Strow, Vice President of Corporate Communications

Thank you, Dan. Our next question comes from Jordan Bender with JMP Securities.

Jordan Bender, Analyst

Looking into the Locals market, maybe just an update on the convention and group business, what you're seeing in the next couple of months and maybe pricing over last year as well.

Keith Smith, President and Chief Executive Officer

Probably the only comment we have on overall convention business, and we have some limited square footage at the Orleans and a few other properties. So it isn't a huge piece of our business, but we see it continue to grow back. Convention business was up significantly year-over-year, still running slightly behind 2019, but is up significantly year-over-year, so it continues to grow. I don't have any specific statistics about the next several months. The summertime here in Vegas is traditionally a very slow time for convention business, probably won't pick up significantly until mid-September. And once again, we participate mainly at the Orleans with that, with the room base we have there and some of the meeting and convention business we have there.

Jordan Bender, Analyst

Great. And then maybe a bigger picture question on the distributed gaming business. That's a market that's slowing and maybe lower margin. I was just wondering how Lattner kind of fits into the portfolio longer term.

Josh Hirsberg, Executive Vice President and Chief Financial Officer

Yes. We have started to explore that specific niche market to gain a better understanding of it. If it becomes legal in other states, we would think about expanding. Currently, our situation in Illinois remains largely unchanged. We provide them access to some of our technology and marketing resources over time, so they receive significant support. That's the current state of affairs.

David Strow, Vice President of Corporate Communications

Thank you, Jordan. Our next question comes from Brandt Montour of Barclays.

Brandt Montour, Analyst

Just 1 question, if we could go back to the Midwest & South segment and dig in a little bit on the seasonality for the back half and what I'm really trying to get at is, Keith, you described it as stabilizing here, which is reassuring. I guess if you look back at 2019 seasonality, it would suggest Q3 is typically weaker than Q2, maybe that was an off year, but that would still suggest down comps at the EBITDA level year-over-year in the Q3. So just maybe you could help us understand the stabilization comment how we should think about that into the third quarter.

Josh Hirsberg, Executive Vice President and Chief Financial Officer

Yes. I do think that while the business is stabilizing, seasonal variations will still be present. We've observed some weakness related to specific consumer trends in our Louisiana and Mississippi operations, but those trends are beginning to recover. Consequently, we expect the financial performance of our Louisiana and Mississippi assets to improve. Year-over-year comparisons may show a decline initially, but these declines are decreasing as we progress from the fourth quarter to the first quarter and into the second quarter. We’re not suggesting that seasonality will disappear; instead, we expect the year-over-year differences to lessen.

David Strow, Vice President of Corporate Communications

Thank you, Brandt. Our next question comes from David Katz of Jefferies.

David Katz, Analyst

You covered a lot of ground. I just wanted to, if you don't mind, touch on the dividend, which is well, how you think about growing it over time, how you think about its use and value drive today as it sits and where it could lead one day.

Keith Smith, President and Chief Executive Officer

Well, look, we look at returning capital to our shareholders. It was a multi-pronged approach. So obviously, we have a large share repurchase program committed to, and as I said, we'll supplement that with an ongoing dividend program, and we'll return nearly or over $1 billion between the two of them by the end of this year. We think that, look, the dividend is just one element of returning capital. It's up to our Board and how they view this in terms of where it goes each year. I really can't say much more on the dividend than that. I mean it will be up to the Board to sit and talk about it. But I think I would see it continuing. It's an important part of how we return capital to shareholders. Not all shareholders view getting capital back the same way. Many like share repurchases, and some like dividends. And so we're trying to accommodate kind of all of our investors through that.

David Katz, Analyst

Understood. And if I can just follow up quickly in another direction with respect to the margin performance, which was actually pretty good, right? I think that's been sort of a recurring focus of how much can you really sustain. How do you view sort of the next few quarters with respect to that? Do you feel like you have, Josh, all the sort of cost under control that you can foresee at the moment, and/or should we be just a little more conservative about that?

Josh Hirsberg, Executive Vice President and Chief Financial Officer

Yes. My own perspective is I think our operating teams do a great job managing to the level of revenues that they are seeing come in the door every day, quite honestly. And that's enabled them to offset pressures, whether it's from labor from time to time, from utilities that are seasonally driven. Another big increase that we've seen recently is insurance. But yet, despite those pressures, they get a lot of press, so to speak. The reality is as these guys find ways to kind of offset that and to continue to deliver what I believe to be very consistent levels of margin performance. And we've said from the beginning, coming out of COVID, we weren't going to be able to maintain those levels of margin, but we're going to stay in that neighborhood. And I think we've lived up to that. Our teams have lived up to delivering that. And I'm sure there'll be periods of time where it's not always that way. But generally, I think that this is what you should expect in terms of levels of performance in terms of margins from us.

David Strow, Vice President of Corporate Communications

Thank you, David. Our next question comes from Chad Beynon of Macquarie.

Chad Beynon, Analyst

First, I wanted to talk about additional projects in the future organically. Downtown and Treasure Chest, you've kind of laid those out, and those have all been in our models, and you've talked about the returns that we should see in the next 6 to 12 months. As we get beyond that, are there other properties where you could make any adjustments, whether it's hotels, casino floors, add, just something to think about getting additional returns within the organic portfolio.

Keith Smith, President and Chief Executive Officer

Yes. So we have a number of things that we are considering and evaluating right now, trying to prioritize them. We have several very high-performing properties that we can leverage up an existing strong market and strong management team to further grow at those properties. We don't have anything to announce right now, but we will be prepared to start to lay out what we think those next projects are. But they're in the ZIP code of the 3 months and the Treasure Chest, so it's nothing significant. But once again, we have several very, very strong opportunities to continue to grow those just not ready to talk about them at this point.

Josh Hirsberg, Executive Vice President and Chief Financial Officer

And the only thing I would add to that, Chad, is Keith gave you a sense of order of magnitude in terms of size. We're not going to kind of open the floodgate and start so many at one time. It's going to just continue to be paced along just like we did with Fremont and Treasure Chest and kind of double them into the capital allocation process.

Chad Beynon, Analyst

Okay. And then in terms of the FanDuel partnership, we're coming up on the 5-year mark. I don't know if this was disclosed or if it's public from when the partnership originally came together. But is there anything that's out there that we should be aware of in terms of terms on the deal that changed after a 5-year mark? Was it a longer partnership? We're just hearing a lot of these 3- to 5-year deals are coming up for renewal?

Keith Smith, President and Chief Executive Officer

So I think the short answer is there's really nothing pending or coming up in the short term. Ours were longer-term deals that were structured differently because we had a portfolio type of approach across nine states and how it all rolled out and what the extension options were in a whole bit. But there's nothing in the short term.

David Strow, Vice President of Corporate Communications

Thank you, Chad. Our next question comes from Joe Stauff of Susquehanna.

Joseph Stauff, Analyst

Josh, just two clarifications, if I could. You're asked largely on kind of M&A, but capital markets certainly have opened a bit. I was just wondering, maybe if you could describe, say, maybe the number of inbound calls. Is it fair to say that it has increased to some degree? And then I just wanted to ask to clarify your comments on July trends. And correct me if I'm wrong, but I thought you said that in terms of your core customer, the number of visits has increased sort of sequentially versus what you saw in the second quarter, and that spending levels per visit kind of remain consistent. I guess a clarification on that. And I'm wondering if the out-of-town visitors have also, say, increased again relative to your July guidance first three weeks?

Keith Smith, President and Chief Executive Officer

Yes. Regarding the core customer comments and the trends we've observed in early July, I mentioned that in Las Vegas during the second quarter, we experienced fewer visits, although spending remained stable, and the number of core customers stayed relatively unchanged. However, in the first three weeks of July, we saw an increase in visits. Spending has been flat to slightly rising, indicating positive trends. I want to emphasize that three weeks of data is not necessarily indicative of a long-term trend, but it is certainly an improvement compared to Q2. Additionally, we are noticing an influx of out-of-town customers. As for M&A activity, I'm uncertain whether the volume of calls has increased or decreased; it tends to be irregular. Therefore, I can't say we're receiving more or fewer inquiries compared to the past year or two.

Josh Hirsberg, Executive Vice President and Chief Financial Officer

Yes. The only thing I would say is like we're really focused today. It's not so much about M&A unless it's an opportunistic opportunity that comes along. It's really about just continuing to run the business, reinvest in our existing portfolio and return capital to shareholders. And we have the balance sheet to continue to do that in an uncertain environment. And to the extent that something came along that was attractive, we would expect that not to affect kind of how we're thinking about running the business today. But that's just kind of how we're thinking of it. It's not like we're going or we're 2.5x leverage, generating a ton of free cash flow and we're running around looking for things to buy. That's not the attitude of the company internally.

David Strow, Vice President of Corporate Communications

Thank you, Joe. Our next question comes from John DeCree of CBRE.

John DeCree, Analyst

Maybe just one question for me on non-gaming revenue, F&B and room revenue. It's been recovering pretty rapidly. Last quarter, which was a pretty strong quarter, this quarter, it looked like that non-gaming revenue was kind of flattish year-over-year versus the 2Q last year. Curious if you could speak to the trends that you're seeing in that business? Is it more seasonal that we'll see uplift? Is it still recovering? Was just a tough comp to last year? I was curious to get your thoughts on those segments.

Josh Hirsberg, Executive Vice President and Chief Financial Officer

Yes, John, I'll take it, and then, Keith, feel free to add your thoughts. When we analyze room revenue by segments, you'll eventually see in our upcoming report that room revenue in Las Vegas has actually increased. The decline in room revenue primarily stems from construction disruptions in Downtown. Regarding our non-gaming segment, particularly food and beverage, we experienced flat performance in data, but overall growth aligns with our previous discussions about stabilizing and improving trends in the Midwest and South. We’re seeing growth in food and beverage outside of Nevada as well. This reflects the overall business trends and the commentary for the quarter on the non-gaming aspects.

David Strow, Vice President of Corporate Communications

Thank you, John. Our next question comes from Stephen Grambling of Morgan Stanley.

Stephen Grambling, Analyst

Two quick follow-ups. First on the digital guidance increase. I don't think I heard you say kind of what you're thinking about with Pala. And as you're talking about this ramp in start-ups, is that usually when there's this increase in effectively customer acquisition, there could be increased losses. So are you assuming that there's going to be incremental investment there that's offset by strength in the rest of the business?

Keith Smith, President and Chief Executive Officer

Yes. Pala is a very small component of the overall business. We acquired Pala Interactive, which has been profitable and will remain so, but it is still a small entity. When we discuss starting marketing, which began in July, the investment is minimal. It's not substantial enough to influence the overall business direction. Therefore, I don't expect this to be noticeable to anyone.

Josh Hirsberg, Executive Vice President and Chief Financial Officer

So Steve, as Keith suggested, it's small. When we acquired it, it was generating about $5 million in EBITDA. In our projections, we expect it to maintain that EBITDA for this year as it transitions and enhances its capabilities. There is definitely potential for growth, but 2023 will be a foundational year for the business as it moves over to our platform and develops its technical abilities to facilitate future growth. We are not approaching this business like some of our peers who may expect significant marketing investments and early losses. This business is performing well, and we are not allocating more resources that would indicate a downturn.

Stephen Grambling, Analyst

Got it. That's helpful. Regarding the South and Midwest, I want to ensure we're on the same page. From an EBITDA perspective, are you indicating that revenue is stabilizing and EBITDA should also stabilize at the current levels? Should we expect it to remain relatively consistent going forward?

Josh Hirsberg, Executive Vice President and Chief Financial Officer

No, let me clarify. We're discussing year-over-year performance. Q4 and Q1 in the Midwest and South were primarily affected by Louisiana and Mississippi, where we saw weaker consumer trends leading to declines in revenue and EBITDAR, impacting the overall segment. However, the rest of the business remained stable. As we enter Q2, that stability continues, and we’re beginning to observe improvements in customer trends in Louisiana and Mississippi, which should positively influence their financial performance. Year-over-year, if we saw a decline, those declines are subsiding over time as we transition from Q4 to Q1 to Q2. This isn't suggesting we will lose seasonality; rather, it indicates that the year-over-year fluctuations should start to lessen.

David Strow, Vice President of Corporate Communications

Thank you, Stephen. Our last question comes from Barry Jonas of Truist Securities.

Barry Jonas, Analyst

Just wanted to start. Can you maybe give us an update on any risks around competitive openings we should be mindful of from here?

Keith Smith, President and Chief Executive Officer

Yes. So Barry, as it comes to competition, the only, I think, pending opening is obviously the Durango project here in the Las Vegas Locals market. We have had HHR open in Kentucky, which have impacted, and we haven't completely anniversaried their impact at Belterra Resort and Belterra Park in Ohio and Southern Indiana. And then the Four Winds project in South Bend that opened recently, which has had some minor impact on our Blue Chip operation in Northwest Indiana. But once again, those have been open for a while. Durango Station will open whenever they say it's going to open later this year. And my only comment would be, I think, like other openings, and we certainly have a lot of experience with these types of things, opening of new properties, customers will go visit it. They always do. It's a shiny new toy, and the majority of our customers will come back home. And that's generally what we've seen happen over the years. If you look here in the Las Vegas Locals market, when The Palms opened a number of years ago, we had our customers go and visit and the majority of them have come back, and it has not had a significant overall impact on either the Orleans or the Gold Coast, which is where it would be felt. And so they'll go visit, and we'll be prepared for it. And once again, we certainly have a lot of experience with these type of competitive openings, and we are prepared for it, and we'll see how it goes.

Barry Jonas, Analyst

Great. And then I guess just for a follow-up. I believe there was a change in the Board leadership with Mr. Boyd moving to the Chairman Emeritus role and congratulations to him. Just wondering if we should expect a pretty seamless transition from here?

Keith Smith, President and Chief Executive Officer

I would expect that nothing has changed and nothing will change, so it will remain the same. The Board is stable and we have a very solid Board. Everyone is doing well, so you should not expect any changes.

David Strow, Vice President of Corporate Communications

Thank you, Barry. This concludes today's question-and-answer session. I'd now like to turn the call over to Josh for concluding remarks.

Josh Hirsberg, Executive Vice President and Chief Financial Officer

Thanks, David, and thanks, everyone, for joining today. And if anyone has any follow-up questions on anything we discussed today, please feel free to reach out to the company, and we'll try to get those questions answered for you. Thank you.

David Strow, Vice President of Corporate Communications

Thanks, Josh. This concludes today's call. You may now disconnect.