Boyd Gaming Corporation (BYD) CEO Keith Smith on Q2 2014 Results - Earnings Call Transcript

Jul.31.14 | About: Boyd Gaming (BYD)

Boyd Gaming Corporation (NYSE:BYD)

Q2 2014 Earnings Conference Call

July 30, 2014 05:00 PM ET

Executives

Josh Hirsberg - SVP and CFO

Keith Smith - President and CEO

Paul Chakmak - EVP and COO

Analysts

Joel Simkins - Credit Suisse

Carlo Santarelli - Deutsche Bank

Shaun Kelley - Bank of America Merrill Lynch

Felicia Hendricks - Barclays

Thomas Allen - Morgan Stanley

Chad Beynon - Macquarie

John Maxwell - Jefferies

Operator

Good day and welcome to the Boyd Gaming Second Quarter 2014 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Josh Hirsberg, Senior Vice President and Chief Financial Officer. Please go ahead.

Josh Hirsberg

Thank you, Andrew. Good afternoon, everyone, and welcome to our second quarter earnings conference call. Joining me on the call this afternoon are Keith Smith, our President and Chief Executive Officer; and Paul Chakmak, our Executive Vice President and Chief Operating Officer.

Our comments today will include statements relating to our estimated future results and other market, business and property trends 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 as a result of certain risks and uncertainties, including, but not limited to, those noted in our earnings release, our periodic reports and our other filings with the SEC.

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.

Finally, as a reminder, today's conference call is also being webcast live on our website, boydgaming.com, and will be available for replay on the Investor Relations section of our website shortly after the completion of this call.

I'd now like to turn the call over to Keith Smith, our President and CEO. Keith?

Keith Smith

Thanks, Josh, and good afternoon, everyone. Thank you for joining us for our second quarter earnings call. The results we reported earlier today for the second quarter clearly did not meet our expectations. Persistent weakness in spending among casual players and the shifting spend pattern of today’s consumer continue to impact our industry and our operation across the country. This level of performance in the second quarter is not acceptable to us and we remain focused on various strategic initiatives and then improving our results in the current environment.

I will walk through the progress we’re making in those initiatives in a moment but first let me take a few minutes to review our top line results and provide some color on the trends we’re currently seeing in the business and factors that drove the quarter. Revenue across our wholly owned business declined approximately $25 million on the year-over-year basis while wholly owned property EBITDA was down approximately $12 million as we were able to mitigate more than half of the revenue shortfall through cost efficiencies.

The softness in our wholly owned business was concentrated in our regional operations which accounted for $23 million of the $25 million shortfall and approximately half of this decline was attributable to three properties that are dealing with capacity issues in their markets. Outside of these areas, the vast majority of our regional markets are clearly stable from a competitive perspective and then most cases we saw a sequential EBITDA improvement from the first quarter.

Our Las Vegas locals business saw top line trend that was similar to first quarter and had it not been for lower hold and higher utility expenses EBITDA would have on par with the prior year. Our long-term outlook for the Nevada business remains positive. The Southern Nevada economy is clearly strengthening and with the call structure we put in place we’re well positioned to generate increased profitability. The economic recovery drives growth. The challenge we have is predicting exactly and when exactly how that recovery will translate in a consistent increases in spending from local residents specially those at the lower end.

We believe Borgata continues to outperform the competition. Borgata’s land base business saw a top line growth as more than $2 million however the EBITDA -- the gain in EBITDA was much more substantial due to our recent property tax settlement, which contributed $11.8 million to quarterly results. This is not the total cost of Borgata’s strong quarter even without the tax rate benefit Borgata’s land-based operations would have posted a strong year-over-year increase in EBITDA.

Quarter-after-quarter, we see the Borgata’s customers are willing to bypass more convenient options to enjoy our brand of hospitality and first-in class gaming and nongaming amenities. For three of the last four quarters, Borgata has gained the market share in the broader northeast region which includes Atlantic City, Eastern Pennsylvania, New York, Maryland, and Delaware. The same cannot be set for Atlantic City competitors.

In recent weeks, several properties have announced plans to close. This is obviously not welcome news for anyone. While all these closures are painful for the local economy, they should help create a more rationale environment in this market. Looking at our business nationwide, we continue to believe that economic recovery will help drive sustain growth in our business especially as casual play recovers. However, as our second quarter results clearly show, this is not happening yet. Accordingly we have revised our full-year guidance as you saw in this afternoon’s press release. This revised guidance assumes that our performance in the third and fourth quarters will be similar to last year. While we believe that these revisions are realistic given what we are seeing in our markets today we are not satisfied with this level of performance, and we’re not simply waiting for the economic recovery to show up in our business. We are working diligently to recline and strengthen our operations to address the trends we are seeing in our markets and position the business to return to sustainable and predictable growth. Let me outline the progress we have made in the last three months.

First, we have strengthened our senior management team. As we announced last week we are increasing our focus on strategic marketing, naming Chris Gibase to the newly created position of Chief Marketing Officer, with oversight of our marketing and advertising efforts across the company. We have also announced several additional executive appointments. We have appointed Steve Schutte to the position of Senior Vice President of Operations with oversight of our two Iowa properties, Sam's Town Shreveport, and Sam's Town Tunica. Steve brings significant operating experience with the fresh perspective to our senior management team, having previously served in senior operating positions with Hard Rock Cleveland and Station Casinos. We promoted Vince Schwartz, General Manager of the IP to the position of Senior Vice President, Operations of the IP, Treasure Chest and Amelia Belle and we’ve expanded the responsibilities of Ted Bogich, giving him oversight of Blue Chip, Par-A-Dice, Kansas Star, Delta Downs and Evangeline Downs. By expanding the responsibilities of Vince and Ted, two of our talented operations executives, we are able to further leverage their skills and expertise.

Next, as we talked about on our last several calls, we have identified target opportunities to reposition and transform select amenities throughout our portfolio. Our industry has seen a significant and sustained shift in consumer behavior over the last few years. Spending patterns have changed, and we need to make sure that our products are aligned with what the customers are looking for today. We must also prepare for long-term changes in the demographic to make up more customer base. While mindful of the great value of our existing base of loyal customers and the need to find ways to expand our relationship with them, with the meaningful upside potential and attracting new customers with redesigned and reimagined amenities. These include our hotel rooms, food and beverage facilities, nightlife and event program are among others. We firmly believe these initiatives will not only speak to new customers, but will also help us gain a greater share of relatively existing customers.

Many of our properties across country can be successfully enhanced taking advantage of the shifts in consumer spending we are seeing in our industry.

Our gaming product remains appealing to our core customer; delivering experience that has appealed beyond the casino floor, one who speaks to consumers that we aren’t seeing today will broaden our customer base, improve our competitive position and generate long-term sustainable growth. The potential of the strategy has been demonstrated by The Orleans of Gulf Coast, were both properties are benefiting from recent hotel room upgrades. Redesigned rooms of these properties give us a pleasure in more appealing room product, which is driving higher rates and expanding our audience. And in the coming months we will continuing this strategy by investing a portion of our existing capital budget for upgrading remaining room product at The Orleans and at the IP. We also plan to reposition our room product at the Suncoast and our regional hotel Tower Blue Chip. In addition we are in the early stages of redesigning and reconstructing a number of our food and beverage facilities in our Las Vegas local properties.

This strategy will be a multi-year process to reposition and upgrade or properties and ways that will allow us to expand our customer base and diversify our business. And while it is early, we are already seeing encouraging results from customers both existing and new. We are enhancing our operations in other ways as well. Over the last several years our focus on creating efficiencies has helped us build strong flow through potential into our business without compromising the high-quality experience that our customers expect. While we have already removed significant costs, we are committed to finding additional opportunities to improve our margins and maximize profitability. We will also continue to leverage, Be Connected, a nationwide loyalty program, as an opportunity to enhance topline results. We continue to make progress on this front in the second quarter and are nearing the completion of the rollout of this program at five Peninsula properties. While it is still early we are seeing encouraging initial results with meaningful games in cross property play at Evangeline Downs and Amelia Belle in the first two months following their launch in Be Connected. Going forward we'll focus on using the expanded Be Connected network to increase our share growth and keep customers loyal to our nationwide family properties.

Looking beyond our existing portfolio we are continuing to pursue important development opportunities and remain on the outlook for additional ways to strengthen our growth pipeline. One important part of that pipeline is online gaming. And while early results from New Jersey have fallen short of initial expectations, we continue to see online gaming as a long-term strategic opportunity to expand our customer base, diversify our business and create a new channel for marketing our land based business. Since launching our online operations last November, approximately 75% of the accounts that have been created our customers who are not active players of Borgata, and we are seeing great initial response in actively marketing our land based product to them. While online revenues have flattened out in recent months, we believe it is due to seasonality of the business; similar to what’s been experienced with online gaming in Europe. During the warm summer month’s people simply spend less time online. As colder weather returns, we believe the trends should reverse increasing visitation and spending on our online gaming sites.

Accordingly, we believe trends will strengthen in this business later this year. In our online business posted an operating loss of approximately $1.8 million in the second quarter. We reached a key milestone in July as our online business broke even for the month. We believe this business will continue to operate on a breakeven basis in the third and fourth quarters. Looking ahead, we believe there is opportunity for further growth online and we are well positioned to take advantage of this growth, should other states decide to move forward with the legalization and regulation of real-money online gaming and we’re actively taking advantage of online and mobile growth opportunities that are available to us now.

For example in the next several weeks, we will be formally launching a mobile sport wager product in Nevada in time for the upcoming football season. Finally, strengthening our balance sheet remains a top priority for us. We pay down approximately $100 million in debt for so far this year and remain on track for $200 million in debt reduction in 2014. We will also continue to benefit from our $1.1 billion loss carry forward, which eliminates our federal tax burden for the foreseeable future. We will remain diligent and focus in our efforts to strengthen our balance sheet using free cash flow to reduce debt. And we will remain resilient in our commitment to maximizing shareholder value.

Thanks for your time. And now I’d like turn the call over to Paul to provide more details on our operating results. Paul?

Paul Chakmak

Thanks, Keith. Hello, everybody. Obviously, we’re not satisfied with performance our operations in the second quarter. Conditions remain quite challenging in markets throughout the country, but as Keith noted, we’re aggressively addressing the issues we’re seeing in the business and we continue to good progress implementing our long-term strategy throughout our operations.

Let’s start with the review of our Las Vegas Locals business. We saw a modest revenue decline in line with what we’ve experienced in the first quarter. Results are below expectations for several reasons. One factor was lower hold which reduced EBITDA by about $1 million and had a negative impact on revenue as well. Absent this issue, revenues would have been close to flat with the prior year. We were also affected by two separate rate hikes by the local electric utility earlier this year, which impacted EBITDA by an additional $1 million in the second quarter.

But there were positive developments. We saw growth in hotel revenues across the market and gains in our food and beverage business as well. The Orleans posted a solid quarter as strong destination business generated top line and EBITDA growth. Our newly upgraded room product at the Orleans and Gold Coast puts us in a good position to continue building on encouraging trends in our destination and meeting business.

As Keith noted earlier, we are actively looking additional opportunities to enhance and reposition our amenities within our current capital budget. We will be completing a renovation of our meeting space at the Gold Coast later this year and upgrade of our rooms at the Suncoast is scheduled to begin in the coming months. And we are in various stages of timing for several new restaurants concepts at our Locals properties.

Moving to our downtown Las Vegas business, the most significant factor impacting our results was usually low business volumes throughout the downtown area during May and June. However, this dip appears to have been temporary as visitation to our properties has recovered in July. We continue to outperform our competition during the quarter growing our leading market share by an additional 40% basis points and business from our Hawaiian customer segment remains solid.

Despite temporary softness in the second quarter, we remain optimistic about the long-term outlook for the downtown market and we plan to execute on opportunities to selectively reposition our nongaming amenities in this business segment as well.

Next, let’s discuss our business in the mid-west and south where condition is most challenging in three markets contending with increased capacity Biloxi, Shreveport, and central Illinois. These markets accounted for about two-thirds of the EBITDA shortfall in a regional segment. At our nine other properties, our performance was much closer to prior year levels.

Delta Downs remains the strongest performer in the company, growing EBITDA by nearly 12% and setting second quarter records for both the revenue and EBITDA. Blue Chip first class amenities helped to outperform the competition in a challenging market as the property gained 40 basis points in market share. An EBITDA trends at Kansas Star significantly improved from Q1 to Q2. This property is now operating at a margin of more than 45% by far with best in our company.

Looking ahead, the second phase of our expansion project at Kansas Star remains on time and on budget. A 150 room hotel expansion is nearly completion, which will son double the properties room count. And with the addition of meeting space and a question room support facility later this year Kansas Star will be an excellent position to generate further growth through enhancement to its nongaming amenities.

We expect to see benefits from the introduction of B Connected at the five peninsula properties as well. It will take some time to realize the full benefits of this program. We are confident that B Connected will give us a competitive advantage in these markets operating drive long-term growth and cross property play across our portfolio.

I’ll conclude with Borgata, which posted a solid performance in the second quarter. Must attention has been paid to the difficulties of Atlantic City market. But as our results show the difference between Borgata and its competition could not be clear. Borgata grew top and bottom line results growing market share by more than 240 basis points. Our 23% share of gross gaming revenue was the largest second quarter share in Borgata’s history. We also set second quarter market share records for slots, tables and poker revenue. Borgata EBITDA benefited significantly from our recent property tax settlement with the city which was an extremely positive development for the property. This settlement resulted in an $11.8 million benefit during the quarter and lower property taxes should benefit EBITDA by approximately $6 million a quarter on an ongoing basis. We saw solid growth in slots and hotel business during the quarter, table game revenue rose as well, but this is primarily a function of improved goals. We also continued to solidify our market lead in online gaming. Since our launch in November of 2013 Borgata has posted a standalone market share of 28.8% and combined with our partners at Party Poker, the Borgata network holds a 10 point lead on our nearest competitor.

So to recap, conditions remain challenging; however we saw some encouraging developments in our business as well. Destination business was solid at our Nevada properties as prior enhancements to our amenities paid off with growth in hotel and food and beverage revenues. We will continue to pursue opportunities to strategically reinvest in our business, in positioning the product to appeal to broader groups of customers. And while our regional business had a difficult quarter the majority of the decline was attributable to just a few markets. Compared to others in our business our regional operations are much less exposed to increase capacity and as a whole in those regional markets where new competition is not an issue we’re seeing sequential improvement in year over year trends. In Atlantic City our confidence in Borgata is unchanged, our first in class amenities are driving growth throughout the business and our recent property tax settlement will benefit EBITDA in the quarters ahead. Borgata has firmly established itself as one of the East Coast’s leading entertainment destinations and we believe we will continue to gain market share in the months ahead. Thanks for your time today and now over to Josh.

Josh Hirsberg

Thanks Paul. Despite weakness in our business in the second quarter we continue to make progress and strengthening our balance sheet. As noted earlier, year to date total debt reduction has been approximately $100 million, and we expect this pace of debt reduction to continue for the remainder of the year. Over the last 18 months we have reduced debt by more than $600 million, our quarter end debt and cash balances were provided to you in our earnings release. In terms of capital expenditures during the quarter we invested $35 million including $8 million at Peninsula and $7 million at Borgata. Year-to-date capital expenditures have been $54 million. For the year we expect to spend a $120 million between Boyd and Peninsula and another $25 million at Borgata.

Now for guidance. Given our results in the second quarter we are taking a more guarded view for the remainder of the year. More specifically we expect our property level segments to perform in the third and fourth quarters of this year on par with the second half of last year. For the second half of this year we expect our Las Vegas locals and downtown segments to be even with the second half of last year. For the Midwest and south segments, remember to consider the 9.3 million property tax adjustment that benefited Blue Chip in the fourth quarter of 2013 and will not reoccur in 2014. After removing that fourth quarter benefits from 2013 this segment should generate third and fourth quarter EBITDA even with the second half of last year. For Borgata, before the estimated property tax benefit of $6 million applicable for each of the third and fourth quarters, we expect the property to generate EBITDA even with or slightly better than the second half of last year, given the weak fourth quarter for this property last year.

For corporate expense we expect to incur $27 million for the second half of the year. Given all of this we’ve updated our guidance for full year EBITDA to a range of $580-600 million. Finally, I will discuss a couple of items that are not included in our guidance related to Borgata. Borgata has two remaining actions yet to be finalized related to its property tax appeals, first we expect to receive a onetime cash benefit of $88 million related to the 2011 through 2013 property tax settlement. This payment is dependent on the city of Atlantic City issuing bonds, upon our receipt this payment will be used to reduce term debt at Borgata. Additionally, our 2009 and 2010 appeal is moving through the legal process, recall in October 2013 the tax court ruled in our favor and that ruling is currently being appealed by the city of Atlantic City. We remain optimistic about Borgata’s prospects given its proven ability to compete regionally and potential long term benefit from online gaming and property tax reductions. Operator, that concludes our remarks and we’re now ready to take any questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Joel Simkins of Credit Suisse. Please go ahead.

Joel Simkins - Credit Suisse

Keith, Josh and Paul, I have to ask the question because investors are asking us, can you sort of give us your view on some of these shareholder activism out there, and if you say no, let me move next question?

Keith Smith

Joel, I don’t think we have anything to report in particular on that. So short answer is we have nothing to report.

Joel Simkins - Credit Suisse

Okay and in terms of the online gaming business I thought there was helpful color in terms of how that tracking for you, so I guess my question, if you’re the market leader right now in online gaming New Jersey and you’re operating at a breakeven probably first assume everybody else it is losing a lot of money. Like the domestic or like the Atlantic City bricks and mortar business, do you think you’re going to see some of your peers slow down operations or cease operations potentially in that market, is it takes time to build revenue?

Josh Hirsberg

I think over the course of time that we will see consolidation in the online business. As like we see on the consolidation and the land-based business, how quickly that happens or difficult to estimate, so it’s very early. This is a product that has only been out there for some eighth months now, but I do suspect that consolidation will be occurring probably in the near future.

Joel Simkins - Credit Suisse

Okay and one final question now, you mentioned some renovation that you’re going to move forward at the Orleans. And I believe Suncoast obviously the convention market and Vegas continues to get better match in those properties together bit of overflow on convention, is there any potential sort of impact as you take those hotels under the knife and that conventional business continues to recover?

Keith Smith

Well, I mean I think obviously, there is certainly upside for us and that’s why we are focused on those investments. I think we’ve gotten pretty at being able to renovate hotel rooms, meeting space and those things in periods where we can kind of take advantage of lulls in the market. Those projects tend to move pretty quickly with only a few rooms out of service. So if indirectly you're asking if we think it did have any impact while that’s going on, the answer is certainly not.

Operator

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

Carlo Santarelli - Deutsche Bank

I just wanted to touch on Borgata a little bit. You’ve mentioned that the property tax benefit in the quarter was 11.8 million, so we were to strip that out and look at kind of go through on the incremental 9 million of revenues guys did, it looks like it about 33% and you obviously had favorable year-over-year hold both the slot payable site there, I guess the question is has the market become a lot more promotional despite some of the closures? Or are you guys doing a little bit more in terms of promoting to gain share? Or is this mainly the drag that we’re seeing entirely from online kind of coming through?

Keith Smith

So Carlo I think that if you take the numbers that are actually provided, online has included in the revenue numbers. If you strip out online, the revenue up about $2 million or so I believe and I think the EBITDA number is up greater than that, it’s about 17% increase and EBITDA on the land basis by itself. So we did see some very go through. I would not say that the environment is overly promoted and it’s probably about normal. I think our team there has been in place since we opened the property more than 10 years ago does a great job of knowing when to step on the gas on a promotional environment, when to back off and not overspend. So I think we had a very strong quarter book driven by good revenues and good flow through.

Carlo Santarelli - Deutsche Bank

Great, thanks Keith, that’s helpful. And then quick Josh, I know, you guys had provided some non-op guidance earlier in the year, not going to ask you if you guys were pivot but is anything meaningfully changed as it pertains to D&A preopening any of those things?

Josh Hirsberg

All of those things should be pretty much on track as it to what we provided yearend. I appreciate you’re not asking me to provide it, but I don’t have it with me.

Operator

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

Shaun Kelley - Bank of America Merrill Lynch

Keith, I think in some of your prepared remarks you guys mentioned a little bit about kind of the Atlantic City and how some of the competitors there -- the committed landscape there is changing quite significantly and I was just wondering, if you could possibly elaborate a little bit further and just to kind how do you see the landscape playing our? Do you think something closure can benefit Borgata in the short or medium terms or maybe what your experience was after the Atlantic Crop closure? And then just kind of -- do you see how you kind of see this playing out over the next more 18 to 24 months for people?

Keith Smith

The Borgata ends up benefiting in a couple of different ways. First of all I think as capacity goes out of a market that has seamless capacity today that it does start to rationalize and promotional environment should settle down. There are more customers and just less places for them to go, so that will work to our advantage. I think some of those customers will find their way to the Borgata. Clearly, it always has been the premier facility in the areas, so I think we will see some pick up from there. We didn’t see a tremendous pickup in business from the closing of the Atlanta club property I think if you look at the numbers you saw a lot of that go to, to the other properties in the market but think as we see additional properties close we’ll definitely see some pickup on the revenue side and will definitely benefit from just a more rational promotional environment.

Shaun Kelley - Bank of America Merrill Lynch

Thanks for that then I guess the other question would be the same region but there’ve been a number of headlines, more recently about the possibilities of northern New Jersey starting to kind of look at a gaming facility again, what are your contacts, I mean obviously you guys know as much or more about the market than anyone, you know what are your contacts telling you about the possibility there and is that something you worry about or think about at all, or do you think it’s a long shot at this stage.

Keith Smith

I think if you were to take longer term beyond the next couple of years, I certainly think it’s a conversation that’s out there, there’s a lot of conversations by the politicians about it, and it’s something we’re clearly paying attention to because it could have an impact on Atlantic City. I think the flip side of that is you know Borgata is a very-very strong brand and once again and once again one of the strongest brands in the northeast there. If something were to happen in northern Jersey I think Borgata will have a very good chance of being able to participate in that, given the strength of its brand in the market, the strength of our management and the leadership there but I don’t think there’s anything imminent, I don’t think we’re overly concerned that something’s going to happen in the next year or two, but as we look further out something certainly could happen.

Shaun Kelley - Bank of America Merrill Lynch

Got it, my last question will just be on CapEx. You mentioned some of the initiatives you guys are targeting around some of the properties, it sounded like [indiscernible] and pretty sure you said that a lot of it is just redeploying or altering kind of capital spend that’s already been designated. Is that true or is there some incremental CapEx you see or envision spending as you lay out your plans for ’15 and start to do some of your initiatives on food and beverage and more of the non-gaming stuff that you talked about.

Unidentified Company Representative

We said here today when we look at those projects and look at the spend we believe it was in the existing capital budget as we go forward it in fact changes that guidance will be provided as we look at the ’15 capital budget. But sitting here today I would not see any real improved spending our CapEx to accomplish those projects, we simply have been refocusing those dollars, spending a little differently, I think spending [indiscernible] give us a higher return and so we’re confident it’s within the existing numbers we provided, the guidance we’ve provided.

Unidentified Company Representative

I was just going to add I think Keith’s last point is what may differentiate, the answer to your question that is, how we spend about spending dollars that we previously allocated to some other property, so that at the end of the day instead of perhaps coming at it for just a refurbishment or a upgrade to an existing amenity we may try a totally different approach but not spend any more incremental dollars. At least that’s the plan for now.

Unidentified Analyst

Got it, and thanks, appreciate it.

Operator

The next question comes from Felicia Hendricks of Barclays, please go ahead.

Felicia Hendricks - Barclays

Hi, good afternoon everybody. Josh just a point of clarification on the EBITDA guidance that you provided in the release the 580-600 million, just wondering does that include or exclude the Atlantic City tax benefit from the second quarter and what’s left to realize in the second half.

Unidentified Company Representative

Felicia it includes the 11.8 million that we would have recorded in the second quarter, and also includes 6 million in each of the third and fourth quarter that are coming up for the rest of this year.

Felicia Hendricks - Barclays

Okay, great, perfect. And then Keith just wanted to get back to Atlantic City and the promotional allowance you said you’ll spend in this quarter, in the first quarter, so they were higher in the first half of the year this year versus last year and I’m just wondering if some of that’s being driven by online and if so I’m wondering what that promotional allowance should look like excluding the online expense. I’m not just trying to be tricky to find out what you’re spending online I’m just trying to figure out because you said obviously you guys have done so well there and you have competitors leaving the market, so I’m just trying to think rational, I’m trying to figure out why the promotional allowances will be higher year over year.

Unidentified Company Representative

So, I think you actually didn’t answer the question, it is online and that is why it is driven higher, we’re not kind of breaking those numbers out but the increase is clearly related to online.

Felicia Hendricks - Barclays

Okay, so just excluding that, we should assume that at Borgata the promotional allowances are lower year over year.

Keith Smith

I would think of them as flat, not as lower.

Felicia Hendricks - Barclays

Okay so with the competition kind of diminution there would expect those to decline through the rest of the year?

Keith Smith

Well, I would say that the promotional environment should be rationalized. Where we spend that money, whether it shows up a promotional allowance or whether it shows up another marketing costs or giveaways. I mean how incent and how we speak to customer shows up a number different line items, so I can’t see it’s going to open any one line item. But we’re clearly specking of the overall promotional environment it will be rationalized as a result of those closure. So I wouldn’t just focus on that one line item.

Josh Hirsberg

As Keith talked about right, he compared Borgata to the markets in the northeast that obviously we have full information on. And I think you have to start to think about Borgata in that context. So when you look at promotional activity or marketing expense for Borgata, it’s competing against a much larger set including all the states around it. So that’s why we are starting to get those sorts of numbers and it’s doing quite well in that competitive group.

Felicia Hendricks - Barclays

And then either Keith or Paul, just my final question is obviously if challenges in the quarter in I’d say is a little [indiscernible] but you get a lot of intonation there in particular some of the adjustments to EBITDA and to revenues that you made your revenues year-over-year. So just wondering you spent a lot of time over the past year or so talking about your strategy with Penny Lane and B Connected and I am just wondering to what extent those programs have to somewhat offset what kind of then in even weaker quarter?

Keith Smith

Well, I mean it’s always hard to answer that question I am certainly glad we executed on those different programs both here and Las Vegas as well as throughout the country with really only a couple of markets left to go on the Peninsula side and that’s all good stuff that’s giving us a lot to talk to our customers about and it’s given us a differentiating factor. I mean look the facts are that we see the numbers that posted out in Nevada, the locals market, however you measure and however you group them is slightly down year-over-year in gaming revenue. And that is just a challenge to the business, there are some competitive threats within Las Vegas that we have talked about up to the casual player and I think the bigger players in the market have done well given the dynamic but it is just complicated market that is out there.

Felicia Hendricks - Barclays

And Josh on the 600, 620 the prior EBITDA guidance that did not include the tax property tax benefit in the Atlantic City right?

Keith Smith

That’s correct, it did not.

Operator

(Operator Instructions). The next question comes from Thomas Allen of Morgan Stanley. Please go ahead.

Thomas Allen - Morgan Stanley

On [indiscernible] gauge 3 for Northern Illinois properties, it’s sort of a lot of your EBTIDA short fall. You guys have talked about increased capacity. Can you just give us a little more detail there where is the increased capacity coming from? I mean we know Margaritaville but it seems like that was lapping this quarter. So can you just give some more color there?

Keith Smith

Margaritaville in Shreveport did lap at the very end of this quarter it opened in the middle of June of last year. So as far as Shreveport competitive set is concerned, the third quarter will be a first apples-to-apples comparison. In Biloxi, there has been a significant amount of gaming expansion in the State of Alabama on the North American side. And our property VIP intensive focus on destination oriented play. There is no question about that. Our reach tends to be to the East and just with more capacity and more products in those regions, it certainly adds the cost of doing business in that part of the world.

And that opened up this earlier this year; it’s when there was a mid expansion on the Middle American side in Alabama, Central and Southern Alabama in particular.

And then lastly, the Central Illinois I referenced for us that’s the area I mean everybody has been following the expansion of effectively slot machines at VLTs in the State of Illinois now some 17,000 plus units at bars and taverns, really well beyond anybody’s expectations of where this would go and the types of restrictions that would be put on the ability to have these types of units. And it is not ending. I mean it’s surprising to us every month, there seems to be another 1,000 or so units that goes into that market which by the way excluded Cook County, because Cook County opted out of the expansion as compared to others. So it’s just another casual alternative closer to markets because it’s just down the street from everybody with really no controls from a responsible gaming perspective and non controls for marketing because it’s just a whole separate set of rules that those operators are allowed to participate with.

Thomas Allen - Morgan Stanley

And then my follow up question, high level as we think about guidance. In the first half your EBITDA declined around 6% and now you are guiding to flat EBITDA growth in the second half. It seems -- I mean that’s a one off saying for example the $9 million property tax benefit in 4Q ’13 is offset by the Borgata more or less offset by the Borgata adjustment in the second half of ’14. What gives you confidence just given the current revenue trends that things can be flat? I think some of us thought that your guidance seemed not the best in last quarter and it seems like you cut it a lot but still it seems when other people, other operator talking about current trends they are still kind of seeing down revenue trends? Thanks.

Keith Smith

Sure, Thomas I will try to take a shot at that. So basically I think the way we thought about the guidance and the way our conversations have been, were in the context of what happen year-over-year in the second half of last year. We were surprised by the weakness in our business in the second half of last year and we think we did it largely to, really two months September and December. And we felt like as we came into the year, we had with, while we have weather impacts both in Q1 of this year as well as late last year was very difficult to kind of figure out where the consumer was. And our perspective was look, consumers generally stable we feel like we can grow year-over-year. And our guidance now reflect kind of what we’ve seen in the second quarter continuation of those trends in the second quarter would put us how towards the low end of the guidance, but will give us some comfort to be flat into large declines that we saw in late last year, I mean in September of last year our regional businesses were down over 20% in EBITDA and December they were down another 25%. So kind of middle of the range just to assume that we do own pull off with that level of performance in the second half of the year. And so that’s how we kind of thought about it and we’ve also have some general benefit of what’s going on more recently as well. So those are the counter factors that we consider as we adjusted our guidance.

Operator

The next question comes from Chad Beynon of Macquarie. Please go ahead Mr. Beynon.

Chad Beynon - Macquarie

Outside of the weakness from the cash one retail player could you talk broadly about what you’re seeing from some of your co-players whether it be on trips or spin per trip in the second quarter?

Josh Hirsberg

Sure. I think in every market it might be slight different but overall for our better player both their frequency which means the number of times they come from as well as there’s spent per visit are flat year-over-year which is really a positive statement from where we’ve been.

Chad Beynon - Macquarie

Okay. Thanks. And are there any other regions in your portfolio where you are seeking lower property taxes that you can talk about right now, that could also be a list in future margins going forward?

Josh Hirsberg

Yes. The one that is going through in a few process now is in Kansas, so there’s opportunity there we don’t necessarily expect any of that will be this year and frankly may not even be next year, but there is a process going on in Kansas.

Chad Beynon - Macquarie

Okay. Thanks. And then lastly would it be connected launch your principal properties, how do you talk about the match duration or evolution of the program kind of how long it takes to drive, whether it be overlap play or higher visits maybe some anecdotes when they rolled it out at your programs over the past 12 months?

Josh Hirsberg

Sure, I mean we see and frankly have seen sort of immediate change in cross property play simply because you make it a lot easier for flock to play we then have to go back and bicep it because some of that is simply a person who would have player club cards at both properties if you will they now has one and so they fully starts to deconsolidated, once we look at that and make those adjustments we slowly up invest and play, well typically happens and why it takes a little bit longer is that obviously certain of our properties whether they are in Las Vegas or in the Gulf Coast or even in the North tend to be account special occasion types properties for flocks that leave throughout the country. And flock do tend to consolidate their play and built plates in order to be able to transport with them for vacations and other advance or whether they are meeting or conventions or anything else and that’s we start to see a longer term affect when we announced rationale affect to the program.

Operator

And the last question for today comes from John Maxwell of Jefferies. Please go ahead.

John Maxwell - Jefferies

Josh the $88 million, the Atlantic that you said is dependent on the reinsuring bonds any timetable when that’s expected to concern, happening any concern on your part that they won’t be able to pay you back?

Josh Hirsberg

We don’t have any concern that they won’t pay us back. I think the agreement contemplates area scenarios if that were to happen, but the timeframe is generally by kind of prior to year end.

John Maxwell - Jefferies

Okay. It doesn’t it sound like Atlantic City waits for all of these property tax appeal, the one that you’re appealing on your rebate is as well as other properties to do it all in one bond issue they are going to do with, it sounds like they could be doing a piece meal.

Josh Hirsberg

They typically go to market in the fall for their cities needs and do that they’re just going to put this in with their normal bit of bonding issues that they do it in the fall and so it’s like the fall is kind of the timing that they step up for this, so.

Operator

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

Josh Hirsberg

Thank you Andrew and thanks to each of you on this call today. And if you have any follow-up questions we’re certainly available. Thanks again.

Operator

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

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