Earnings Call Transcript - BYD Q2 2021

Operator, Operator

Good day and welcome to Boyd Gaming Second Quarter 2021 Earnings Conference Call. Operator instructions were provided. Please note this event is being recorded. I would now like to turn the conference over to Josh Hirsberg. Please go ahead.

Josh Hirsberg, Investor Relations

Thank you, Tom. Good afternoon, everyone and welcome to our second quarter conference call. Joining me on the call this afternoon is Keith Smith, our President and Chief Executive Officer. Our comments today will include 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, 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?

Keith Smith, President and Chief Executive Officer

Thanks, Josh and good afternoon everyone. The second quarter was another outstanding performance by our company and our entire team. Our transformed operating model and enhanced capabilities delivered record results as our business continues to strengthen. On a company-wide basis, we achieved record EBITDAR of more than $385 million, up 66% from the second quarter of 2019 and record EBITDAR margins of just over 43%, and for the first time since the pandemic began, gaming revenues surpassed 2019 levels. In our Las Vegas Locals segment, EBITDAR rose 87% over 2019 levels as margins approached 57%. And in our core locals business, which excludes our closed properties in the tourism-dependent Orleans, we grew EBITDAR by nearly 107% over 2019 levels with an operating margin of more than 58%. Downtown Las Vegas, our two open properties, the California and the Fremont, each set all-time records for EBITDAR and operating margins during the quarter. Combined, they grew EBITDAR by 24% over 2019, with margins exceeding 45%. And in the Midwest & South segment, EBITDAR topped 2019 levels by nearly 58%, with margins of 42%. All 26 of our open properties achieved EBITDAR growth over the second quarter of 2019, with 25 properties growing EBITDAR at double-digit rates. While our second quarter results were strengthened by the impact of government stimulus, improving vaccination rates and the easing of COVID restrictions, the strong operating performance from the first half of the year has continued into July. Today, our cost structure is more streamlined, our marketing investment is more targeted and we are successfully driving play from our most valuable customers. And while there is a bit more uncertainty today surrounding the direction of the pandemic, we are confident in our ability to continue performing well above our pre-COVID levels as we continue to successfully execute our operating philosophy. This operating philosophy has continued to deliver significant results since we reopened last year, but the real planning and implementation of many of these initiatives began before the pandemic. We have been investing in new technology capabilities and analytics for several years now, all aimed at gaining a better understanding of our customer base, building stronger customer relationships with our best guests and creating a more efficient operation. Prior to COVID, we were seeing encouraging results from these investments with solid growth in EBITDAR and margins across our operations. These positive results continue to accelerate as we reopened our business last year. Since reopening, we have delivered consistent sequential growth in play and visitation from our core customers as we realize enhanced operating efficiencies throughout our business. The proven success of this business model is why we are optimistic we can maintain much of our regional margin improvements in the long term. Beyond the ongoing growth we are delivering from our core operations, we continue to pursue initiatives to further expand and enhance our business. One area of focus is the continued implementation of new technology to improve the customer experience. BoydPay, our cashless digital wallet, is an example of that technology. We are making good progress rolling out BoydPay, which is now active at five properties and should be live at 21 properties by year-end pending regulatory approvals. After successfully connecting the BoydPay wallet to our slot floors, we are now focused on expanding its capabilities. We will be launching a test program for non-gaming amenities in Nevada this week, followed by table games later this year. The customer response to BoydPay has been encouraging, with our core customers recognizing the convenience of a cashless gaming experience. As a result, we believe that BoydPay will be another key enhancement to our ongoing focus on building stronger relationships with our guests. Turning to the digital gaming space, our Stardust-branded online casinos are off to an excellent start in Pennsylvania and New Jersey, exceeding our expectations for player volumes and revenues since our launch in mid-April. Our sports betting partnership with FanDuel also continues to perform well. After successfully establishing partnerships with FanDuel in Pennsylvania, Indiana, Iowa, Illinois and Mississippi, we are now setting our sights on new opportunities in Louisiana and we are optimistic we will be able to launch FanDuel retail and mobile sportsbooks in that state before the end of the year. Our relationship with FanDuel continues to generate value for our shareholders, both through our revenue sharing arrangement as well as the significant value of our 5% equity stake in FanDuel Group. Based on our strong performance so far this year, we remain firmly on track to generate more than $20 million in EBITDAR from sports betting and interactive gaming this year. While digital gaming is an attractive growth opportunity for our company, we are also pursuing strategic opportunities to expand our traditional gaming operations. Our partnership with the Wilton Rancheria Tribe near Sacramento, California is just one example. Steel is in the ground at the Sky River Casino site, team member recruitment is underway and we are on time and on budget with the construction of this resort, which will include 2,000 slot machines, 80 table games and 12 food and beverage offerings. We share the tribe’s excitement for the tremendous potential of this resort and look forward to opening Sky River’s doors early in the fourth quarter of next year. As construction on Sky River continues, we are also evaluating opportunities to reinvest in our existing operations. One of these opportunities is Treasure Chest, which has long been a strong performer in our regional portfolio. We are currently in the planning phase of developing a land-based facility at Treasure Chest, which will significantly enhance the guest experience of this property. Finally, before concluding, I want to provide an update on the company’s ongoing ESG initiatives. Sharing our success with others and investing in stronger communities have always been core values of our company, and those tenets remain as important to us as the day we were founded. We have been fortunate that this company recovered so quickly after last year’s closures, but we are also well aware that there are many in our communities who are still struggling with the economic and social impacts of the pandemic and we stand ready to help. During the second quarter, Boyd Gaming provided nearly $1 million in cash donations to charities in the communities we serve across the Midwest and South. The majority of these donations went toward organizations focused on food insecurity, which is a strategic priority of our ESG efforts. These contributions follow a similar campaign we undertook in support of the Southern Nevada community last year. We are proud to work with our non-profit partners across the country to assist our neighbors in need and we will continue to step up for our communities in the months and years ahead. So in conclusion, the second quarter was another remarkable performance for our company and our entire team. Our nationwide portfolio continues to generate robust levels of EBITDAR and our operating strategy and tight focus on the right customer are producing the highest margins in our history. And we believe that our strong performance since reopening is largely sustainable. These achievements would not have been possible without the dedication and hard work of the entire Boyd Gaming team. It would be difficult to overstate what a great job our thousands of team members have done over these past 12 months that have helped take our company to new heights of performance. And to thank them in a meaningful way, Boyd Gaming awarded more than $10 million in one-time cash bonuses to our frontline team members in late June. We have the best team members in the business, dedicated, hardworking and committed to providing memorable service to our guests. It is a privilege to be part of such an incredible team and I look forward to achieving continued success together. Thank you for your time this afternoon. I’d now like to turn the call over to Josh. Josh?

Josh Hirsberg, Investor Relations

Thanks, Keith. The second quarter was obviously an outstanding one for our company. Keith noted the company EBITDAR and margin records as well as the all-time individual property records that were established during the quarter, but we know the key question is whether the strong performances that we have been delivering are sustainable. And we believe the answer is yes, we can maintain much of the margin and EBITDAR performance that we have achieved since reopening our properties. This confidence stems from the fundamental and recurring drivers of these results over the last 12 months. That is our more efficient business model, our ability to more effectively target our core customer and the consistency we have seen in our customer base. While Q2 was strengthened in part by government stimulus, the easing of restrictions and progress made rolling out vaccines, our fundamental customer trends have been consistent since we reopened last year and these trends have continued into July. As a result of our strong operating performance and careful management of capital expenditures, we are in a much stronger financial position today than pre-COVID. We have less debt, more free cash flow and lower leverage. Our leverage at the end of the second quarter was 3.1x and lease-adjusted leverage was 3.6x. During the quarter, we refinanced nearly $1.5 billion in senior notes with a combination of new notes and excess cash, allowing us to reduce interest expense on an annualized basis by nearly $50 million. We generated over $160 million in free cash flow during the second quarter after capital expenditures of $52 million. We expect capital expenditures for the year to be approximately $200 million. Due to continued uncertainty with the pandemic, in the near term, we will remain prudent with respect to our capital plans and the use of our free cash flow, while maintaining a strong, flexible balance sheet. As a result, we expect our leverage to continue to strengthen through the remainder of this year. So with the completion of the first half of the year and initial insight into Q3, we believe we have established the new normal for operating our business. Going forward, we expect EBITDAR and margins to be higher than pre-COVID levels, resulting in a much stronger balance sheet, providing enhanced flexibility to grow our company and create long-term value for our shareholders. Tom, that concludes our prepared remarks and we are now ready to take any questions.

Operator, Operator

Operator instructions were provided. And the first question comes from Joe Greff with JPMorgan. Please go ahead.

Joe Greff, Analyst, JPMorgan

Good afternoon, Keith. Good afternoon, Josh. Thanks for taking my question. I hear you on July looking a lot like June. If you looked at your older demographic, maybe more recently this month a Delta variant cases have spiked. From that older demographic, are you seeing any diminishing visitation or diminishing spend? And then just, overall, and I guess in Nevada, where employees are wearing masks for a short while here, given the mandate that was effective last Thursday, has that diminished anything when you look at it in the short term here?

Keith Smith, President and Chief Executive Officer

I think as we look at the customer demographics, we haven’t seen any significant or meaningful changes in trends from the older demographic. They were continuing to come out in larger numbers. We were continuing to see more and more customers we haven’t seen for a while. I think it’s still a little early, but we will obviously pay attention to it, but nothing meaningful in terms of trends. In terms of the masks we implemented last week, there has been no notable reaction. It’s only a team member mask mandate. Team members accepted it, customers have accepted it; it hasn’t created any issues — pretty much business as usual.

Joe Greff, Analyst, JPMorgan

Great. And Josh, you spent a lot of your time talking about the improvement in the balance sheet, lower debt, more free cash flow and lower leverage. When you think about the use of free cash flow, where are you with share repurchases? Why not buy stock here at these levels, particularly given the strength in the business and where your share price is right now?

Josh Hirsberg, Investor Relations

I think that from our perspective, we still want to be a little cautious around the pandemic, and get that clearly in our rearview mirror. And so that’s really the pacing item for us. I think we continue to, as we’ve talked about historically, have kind of one-off projects that are investments we believe will generate the returns we need to warrant the capital. And beyond that, we will consider returning capital to shareholders as we have done in the past. At the end of the day, it’s a Board decision, and we have to defer to that group. But the reality is that we will consider it and we have done it historically in the form of dividends and share repurchases.

Joe Greff, Analyst, JPMorgan

Got it. And just a quick follow-up on that comment, Josh, you brought up some CapEx at the Treasure Chest. Can you sort of give us some rough size for that? And would that be included within a $200 million of annual maintenance CapEx budget next year, year after that?

Josh Hirsberg, Investor Relations

Right now, we’re still in the planning stages for Treasure Chest and have to make sure that it pencils out from a return perspective for us and is consistent with what I said previously about the pandemic. Setting those items aside, the project would probably be on the order of $85 million to $100 million, and would likely take 18 to 24 months of construction. I would say the earliest it could start would be toward the end of this year or maybe the first of next year.

Joe Greff, Analyst, JPMorgan

Thank you very much, guys. Appreciate your thoughts.

Josh Hirsberg, Investor Relations

Yes.

Keith Smith, President and Chief Executive Officer

Thank you, Greff.

Operator, Operator

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

Carlo Santarelli, Analyst, Deutsche Bank

Hi, guys. Good afternoon. Josh, dating back to your fourth quarter call, you put some parameters around what you thought was reasonable for margin expansion. I thought at the time you talked about ranges with locals in the plus 800 basis points versus 2019 and Midwest & South maybe in the 500 to 600 basis point range. Obviously, what you are delivering is considerably higher than that. Has that expectation changed over the long term? I understand over the medium term given the levels of demand and stuff. Has that target kind of risen since then based on what you’ve seen on the cost side and the efficiency of the cost savings?

Josh Hirsberg, Investor Relations

Carlo, I think it’s a good observation. With the passage of time and our consistent execution at a very high level, we’ve become more comfortable with our businesses and have effectively shifted to a higher margin business. We were cautious coming out of the pandemic given the uncertainty, but with execution and the visibility we have now, we’re more comfortable with where we’re operating the business today.

Carlo Santarelli, Analyst, Deutsche Bank

Okay. That’s fair and helpful. Thank you. And then one follow-up on the locals market. Doing some simple math, it appears there is about $200 million of OpEx taken out of the business on an annual run-rate basis. If you could, talk about what’s out today versus what needs to come back from Q2 levels, how much incremental headcount and/or other expense do you believe comes back into the system over the next 18 months?

Keith Smith, President and Chief Executive Officer

I think the level of operating expense we’re seeing today will go up marginally from here, but it won’t go up significantly. One of the bigger challenges we face is simply hiring team members. Are we fully staffed today to deliver the level of service we want to our guests? No. So there will be some incremental hires here and there to take care of guests at the proper level, but they will not be significant. If there are incremental hires, which could be on the non-gaming side, it will be because of increased hours and that will come with increased revenue and increased profits. So overall, I don’t see any meaningful change.

Carlo Santarelli, Analyst, Deutsche Bank

Great. Thanks, Keith. Thanks, Josh.

Josh Hirsberg, Investor Relations

Thank you.

Operator, Operator

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

Barry Jonas, Analyst, Truist Securities

Great. Thank you so much. Guys, I just want to be clear on this. Is there any reason not to simply multiply the Q2 number by four or even the first half number by two with some adjustments for seasonality to think of the go-forward annualized run rate at a high level here?

Keith Smith, President and Chief Executive Officer

Q2 was certainly benefited by stimulus, easing of restrictions and the initial vaccine rollout, so Q2 is a little peaky and I wouldn’t recommend simply multiplying Q2 by four. We do think the business will continue to build and grow in a strong fashion, but Q2 is a little aggressive to annualize by four.

Josh Hirsberg, Investor Relations

Barry, Q2 is a little peaky for the reasons Keith mentioned, but our business is continuing to recover and improve. We still have rated business returning and more confidence in unrated business. We also have midweek and destination business and downtown business that is yet to fully recover. Given the mix and the customer trends, we feel comfortable with the fundamental level of business, but I can’t give you a precise multiple off Q2.

Barry Jonas, Analyst, Truist Securities

Got it. Understood. I appreciate the commentary on BoydPay. Just curious if you can give any color on who’s actually using the product so far? And if you think they see it as just a substitution for cash or if it’s actually driving increased play levels?

Keith Smith, President and Chief Executive Officer

It’s a little early and I don’t have all the statistics in front of me, but the type of customer using BoydPay is our core customer — generally a higher-value customer. They see it as a substitute for cash and find it more convenient. I don’t have commentary today on whether it has increased play levels, so I can’t answer that, but feedback has been positive and acceptance is growing as we continue to roll it out.

Barry Jonas, Analyst, Truist Securities

Perfect. Thanks so much guys and congratulations.

Keith Smith, President and Chief Executive Officer

Thanks.

Operator, Operator

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

Steve Wieczynski, Analyst, Stifel

Hey guys. How are you doing? I don’t know if you talked about this, and maybe I missed it in your prepared remarks, but did you call out what unrated play looked like in the quarter? If I remember correctly it was hovering close to 50% of volumes back in the first quarter. Just trying to figure out what that looked like in the second quarter? And then maybe also help us what kind of changes you’ve seen within your database?

Keith Smith, President and Chief Executive Officer

From an unrated play perspective, it is in the low- to mid-40% range, roughly 45%. It was there in Q1 and that’s where it is in Q2 — fairly stable in that range. It has not been at the 50% level. Early July results show it remains fairly stable. Regarding the database, it continues to perform as it did in Q1. Our core, higher-worth customers continue to play at strong levels, higher than 2019. New sign-ups are at higher worth than in 2019, so the database is continuing to perform with good growth at the higher tiers. Lower tiers, which we are not heavily marketing to, have fallen away somewhat, which is expected.

Steve Wieczynski, Analyst, Stifel

Okay. And if I flip that around and look at the rated side of play, is there a way to help us think about how much of that rated play has not come back to properties at this point? Hopefully that question makes sense.

Keith Smith, President and Chief Executive Officer

If you look at all customers who played in 2019 and how many are back today, the answer is not all of them. We still have a group, particularly older demographics, who haven’t fully returned yet, though that group has been building since April and May. However, we always see turnover — we gain new customers and lose others — so outside of normal churn we expect the majority to return over time.

Josh Hirsberg, Investor Relations

To add, more customers across all segments are coming back. There are continued opportunities across age segments. In the unrated segment, we’ve grown more comfortable with the level and characteristics of that business. Some customers who were unrated pre-COVID are returning consistently, and some rated customers may now be unrated. Overall, rated business continues to improve and return.

Steve Wieczynski, Analyst, Stifel

Okay, great. Thanks guys. I appreciate it.

Operator, Operator

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

Shaun Kelley, Analyst, Bank of America

Hi, good afternoon everyone. Josh, I wanted to drill in a little bit more into the Las Vegas Locals segment. I was wondering if mix shift was a factor in the quarter when you saw hotel coming back, gaming coming back relative to some of the non-gaming amenities. As we move through the year, do certain lower-margin amenities start to come back given a more tourist- and group-centric nature of parts of the business, or is this the new norm within locals with a lower cost structure?

Keith Smith, President and Chief Executive Officer

Your last point is the most accurate: it’s largely a lower cost structure overall. Our locals business is gaming-centric with a minority of revenue from non-gaming amenities, many of which are open but not yet at full capacity or full operating days. That will continue to grow, but in a profitable way, albeit at lower margins. On the hotel side, as that grows and meetings and conventions return, midweek business is incrementally profitable and high-margin as we fill hotels and maintain good room rates. While running mid- to high-50s margins in locals may be a bit aggressive to assume as a permanent level, the improved margin profile driven by the current cost structure is largely sustainable.

Shaun Kelley, Analyst, Bank of America

Thanks. Maybe the follow-up: some restrictions, particularly for larger groups and meeting capacities, weren’t lifted until June. Can you talk about how much that held you back at the Orleans? And I believe you alluded to one property still offline downtown. Across the portfolio, what is still not fully back to normal?

Keith Smith, President and Chief Executive Officer

On the two closed properties — Main Street Station downtown and Eastside Cannery — Main Street’s future depends on downtown business returning and Eastside depends on local volumes. The Orleans has the most significant meeting and convention space, and while it posted very strong results even without that business, there is great upside as meetings and conventions return. Destination business was building in Q2 but not back to pre-COVID levels, so Orleans will benefit considerably as meeting and convention demand returns and the arena and event utilization ramp back up. You won’t see similar upside at other Las Vegas properties to the same extent.

Shaun Kelley, Analyst, Bank of America

Understood. One last follow-up on meetings and conventions: it’s important to the broader Las Vegas market. What are you seeing in willingness to return and how does your forward book look as we move into the second half?

Keith Smith, President and Chief Executive Officer

Forward bookings for both hotels and meetings are growing. I don’t have specific meeting statistics here, but in June as restrictions were lifted phones were ringing and we began booking a lot of business. I don’t have the full data to give precise occupancy projections, but the signs are constructive.

Josh Hirsberg, Investor Relations

We are not a big meetings and convention portfolio overall, though Orleans and some Midwest and South assets do have meaningful meetings and destination business. One trend we’ve seen is that forward hotel bookings have started to match 2019 levels in many cases, and meetings are beginning to pick up. Given their relative contribution, we have limited data at this point, but trends are improving.

Shaun Kelley, Analyst, Bank of America

Thank you all.

Operator, Operator

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

Thomas Allen, Analyst, Morgan Stanley

Hi, good afternoon. Can you get into a little bit more detail on what you are seeing on the labor side? Are the shortages driving cost creep, and how are you dealing with labor shortages? Thank you.

Keith Smith, President and Chief Executive Officer

Hiring team members is a challenge, and we are competing for workers like many companies in hospitality and food service. There is a bit of wage inflation, but not significant. If I look at the average hourly wage from the fourth quarter to today, it’s not dramatically different, so it’s not materially impacting margins. We’re doing what we need to do to incent people to join us, but we’re not fully staffed in certain restaurants and we can’t open everything five or six days a week as we’d like. We continue to work on it, but it’s not driving significant cost increases at this point.

Thomas Allen, Analyst, Morgan Stanley

Thanks. And just as a follow-up, the two properties are still closed. Would it make sense to sell them?

Josh Hirsberg, Investor Relations

Our philosophy has been to believe demand will catch up, and to open properties in response to demand. We are making plans to potentially reopen Main Street Station downtown based on growing demand for our product there, and expect the same over time for Eastside Cannery in the locals market. We remain in recovery mode and we expect demand to continue to come back in the areas we discussed.

Thomas Allen, Analyst, Morgan Stanley

Thanks.

Operator, Operator

As we have no further questions, this concludes our question-and-answer session. I would now like to turn the conference back over to Josh for any closing remarks.

Josh Hirsberg, Investor Relations

Thanks, Tom, and thanks to everyone for joining. Since there are no other questions, we will go ahead and end the call. If anyone has any follow-up questions, please feel free to reach out to us. Again, thanks for your participation.

Operator, Operator

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