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Boyd Gaming Corp. (NYSE:BYD)

Q3 2007 Earnings Call

October 31, 2007, 12:00 PM ET

Executives

Keith E. Smith - President and COO

Paul J. Chakmak - EVP, CFO and Treasurer

Analysts

William Lerner - Deutsche Bank

Felicia Hendricks - Lehman Brothers

Adam Steinberg - Morgan Joseph & Co. Inc.

Lawrence Klatzkin - Jefferies & Co.

Dennis Forst - KeyBanc Capital Markets

Celeste Brown - Morgan Stanley

David Katz - CIBC World Markets

Joseph Greff - Bear Stearns

Justin Sebastiano - Nollenberger Capital Partners

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2007 Boyd Gaming Earnings Conference Call. My name is Francis and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer-session toward the end of this conference. [Operator Instructions].

As a reminder this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Keith Smith, President and Chief Operating Officer. Please proceed.

Keith E. Smith - President and Chief Operating Officer

Thank you, operator. Good morning, everyone. Welcome to our third quarter conference call. Joining me on the call is Paul Chakmak, our Executive Vice President and Chief Financial Officer and Treasurer.

Before we begin, I need to remind you that our comments today will include statements relating to our future results including the financial outlook and expectations for our fourth quarter 2007, our expansion and development projects and other market business and property trends that are forward-looking statements within the Private Securities Litigation Reform Act.

The Company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. 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.

I would also like to remind everyone that 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 in our Form 8-K furnished to the SEC today both of which are available in the Investor section of our website, at boydgaming.com. We do not provide a reconciliation of forward-looking measures due to our inability to project special charges and certain expenses including pre-opening expenses.

Finally, as a reminder, we are broadcasting this call on our website at boydgaming.com and streetevents.com. Earlier this morning, we released our third quarter results, the results for the quarter were in line with the earnings guidance we provided to you on our last call and reflect continued improvement at three of our four core operating segments.

Here in Las Vegas, we recorded our highest quarterly adjusted EBITDA increase in two years. And downtown Las Vegas again reached a new record level and adjusted EBITDA for the third quarter. In the Midwest and South Treasure Chest has achieved a new base line level of performance generating net revenues and adjusted EBITDA at similar levels for the four consecutive quarters, however, still far ahead of pre-hurricane levels.

As expected Blue Chip results decreased due to the opening of a new competitor in August 2007. In Atlantic City, Borgata continue to lead the market in almost every category. The most important Borgata's operating income for the quarter grew almost 6% as we continue to refine our operations and avoid participating in the aggressive promotional environment that continues to exist in the Atlantic City market.

Lastly, at Borgata, we are looking forward to the opening of the Water Club to further elevate the Borgata brand and maximize the potential of last year's expansion. Now I would like to spend a few minutes talking about the progress we are making on each one of our current growth initiatives.

Although the fire at the Water Club set back our opening schedule, we are looking forward to the opening of the Water Club prior to next year's busy summer season. We expect all cost to repair the Water Club fire damage will be covered by insurance less certain deductibles.

Furthermore, we are very excited about the plans that our partner announced earlier in the month for their new property in Atlantic City. The addition of another must-see property to the market will continue Atlantic City's transformation into a true resort destination. There is little doubt in our mind that Borgata will benefit from this new development, not only because of the additional visitation it will compel but also because the two properties will be connected.

Lastly, in Atlantic City, there was also some news recently about the Atlantic City Express or as we refer to ACES, a joint venture that includes Borgata and Harrah's. The venture is planning to launch a train service between New York and Atlantic City in the second quarter of 2008 and we will have more information on this new service before the end of the year.

In Northwest Indiana, at Blue Chip, our 300-room hotel project will add a new dimension to that operation that we believe will allow us to expand our reach with a more complete regional destination experience. We remain on track to open the new tower in late 2008 and we continue to feel optimistic that this project will strengthen our long-term competitive position in the northern Indiana market.

In South Florida, as we have said previously, in light of the challenges facing the new Casinos in Broward County we are taking our time to carefully and thoughtfully study the market and develop a project that will be successful and will provide an acceptable level, an acceptable return on our investments.

And on the Los Vegas Strip, construction on Echelon continues to ramp up in accordance with our development schedule. Construction procurement is well underway with significant interest from the contractor community in all aspects of the project.

As we've indicated before our development team, including our contracting partners, remain confident that we will be able to attract sufficient construction personnel to complete the work.

With regard to our branding initiatives, we began the first phase of our implementation process a few days ago with the realignment of our Club Coast program, resulting in a Player's Club platform that is consistent throughout the Company.

As we have previously mentioned, our branding initiatives will position our individual properties as part of a larger network creating additional synergies and further leveraging our highly regarded blend of gaming excitement and personal service. Our goal is to build and reward customer loyalty, drive cross-property visitation and offer the ability to seamlessly earn and redeem rewards in any Boyd Gaming property throughout the country.

We are poised to begin the second phase of this initiative in January with the launch of our new One-Card program. We anticipate completing the rollout of our new One-Card program in the second quarter of 2008. We will share more information with you on our next call, as we continue to rollout this program.

In summary, while we faced a number of challenges this quarter, we remain focused on the goals we set out earlier this year. Mainly, improving our operating performance, rolling out our branding initiatives, executing on our existing growth initiatives, and continuing to look for attractive growth opportunities to expand the Company. And I am happy to report that we have made solid progress in each of these areas during the quarter.

Now, I would like to turn the call over to Paul Chakmak, our Chief Financial Officer. Paul?

Paul J. Chakmak - Executive Vice President, Chief Financial Officer and Treasurer

Thanks Keith, hello everybody. As we reflect on the third quarter, we are pleased to see results that are inline with our expectations and accentuate the considerable effort that we have put forth this year.

At the end of last year, we announced our intentions to improve the financial performance of our Las Vegas locals region by integrating our properties and applying the Boyd Gaming operating model to our Coast brand. We are clearly seeing the results of those efforts. Notably EBITDA margins for the Las Vegas local segment improved nearly 200 basis points over prior year third quarter results.

Our margin improvement led the way to a 9.1% increase in adjusted EBITDA from Q3 2006 to Q3 2007. We believe the efficiencies gained in this segment will provide a strong foundation to continue EBITDA growth. We saw equally encouraging results from our downtown Las Vegas properties where EBITDA grew 8% over prior year levels. This marked the highest September quarter EBITDA ever achieved by the three properties in spite of increasing jet fuel prices affecting our charter operation.

Third quarter EBITDA for the Midwest and South was down $8 million versus prior year, primarily due to the final leg of normalization at Treasure Chest and the opening of a new competitor near Blue Chip. Treasure Chest is still well ahead of pre-hurricane levels. Our current trend shows that we have established a new base line for the property and therefore we do not expect any further material year-over-year EBITDA declines from our New Orleans riverboat.

Blue Chip's EBITDA declined slightly more than anticipated costing us approximately $0.06 per share versus the prior year level. Although the decline in gaming revenue was in line with our expectations, marketing-related expenses were greater than anticipated. We are currently refining operations to better match the current business volume. Collectively, the balance of our Midwest and South properties improved EBITDA on a year-over-year basis.

In Atlantic City as Keith said a moment ago, Borgata continuous to lead the market in almost every category. I want to share with you some of the many highlights; Borgata was number one in table game drop with a 21.4% market share achieving a 57.4% market share premium. Borgata was also number one in poker win with a 38% market share, and number one in race book win with a 35.1% market share. Overall, Borgata was number one in the market for total casino win achieving $204 million in the third quarter.

Borgata's operating income was in line with our guidance, slightly up from our Q3 2006 results. We look forward to the opening of the Water Club, the final phase of our expansion, and having a complete destination offering in Atlantic City.

To begin the guidance portion of our call, I would once again like to offer some additional details in regards to Blue Chip. Although we now have some clarity on the operations, experience has shown us that the trial phase of a competitor opening can last several months. As such we're forecasting a reduction of $0.09 per share compared to the prior year level.

Additionally, corporate expense in Q4 is forecasted to be approximately $0.03 per share higher than the prior year level due to increased spending on our branding and One-Card initiatives. Therefore, including both, the impacts of Blue Chip and corporate expense, for the fourth quarter 2007, we're estimating adjusted EPS from continuing operations to range between $0.37 and $0.42 per share and the comparable adjusted EBITDA to be between $135 million and $145 million.

Before we move on to any questions, I wanted to make one last point. Keith and I will be assuming our new roles in January that said, our search for a new Chief Financial Officer is progressing well and we expect to have that person in place by the end of the year.

Operator, at this time, we will be happy to take some questions.

Question And Answer

Operator

[Operator Instructions]. Your first question comes from the line of Bill Lerner with Deutsche Bank. Please proceed.

William Lerner - Deutsche Bank

Thanks. Hey guys. Just a question on locals market, sort of development, how are you thinking about it. I mean there is, my sense is there is a couple of sites; one, down in Henderson, I suspect you aware of maybe involved in, and then off 215 at Flamingo that seems to be covered by SB 208. Just want to get your kind of view on new development, obviously you are going to keep some stuff close to divest but whatever you can share with us on perhaps new local development for you guys and not including of course the North Las Vegas side. Thanks.

Keith E. Smith - President and Chief Operating Officer

Hi, Bill, this Keith. I don't know that we have anything new to report. We are very proud of... we have a very successful Las Vegas locals franchises, it's a very big part of our business and we are looking to continue to expand it. And we are always looking for new opportunities in the Las Vegas locals market. We think it's a very strong market, we think it is continuing to grow. And over the course of time will continue to grow and expand. And as you said there are sites available that are out there; not all the sites are locked up, so we continue to look for opportunities but we don't have anything else to say.

William Lerner - Deutsche Bank

Okay. Thanks, guys.

Operator

Your next question comes from the line of Felicia Hendricks with Lehman Brothers. Please proceed.

Felicia Hendricks - Lehman Brothers

Hi good morning guys, just two question, first off though on the Las Vegas locals market. Just wanted to know what... or get some idea from you, what the, how the promotional environment is looking, and when you think the inflection point might be regarding full supply absorption? And then also, if you think that your new branding initiative can help to stimulate that absorption? And then the second question is on Borgata. The... your EBITDA margins came in better than we had expected on lower revenues and Keith you had touched upon, just generally, some things that you were doing there to kind of offset the promotional environment, but I was wondering if you could be more specific? Thank you.

Keith E. Smith - President and Chief Operating Officer

Let me start with Borgata and then I will turn it over to Paul for the Las Vegas locals part. Basically at Borgata we simply have been very prudent with our marketing spend. Last year when we launched the expansion, we spend significant amount of marketing dollars to introduce the product, to make sure we have people in the building to visit the property and sample new products and get the word out. Through the course of this year I think we've... through the course of these calls have indicated that the promotional environment has been very aggressive in Atlantic City. I think that some of our competitors would blame Borgata for being part of that, but if you look through the numbers Borgata actually has not been part of that. We have kind of stood down or not participated in that increased marketing, so the short answer is, we simply been very prudent and very cautious with those marketing dollars and that is the result.

I think the other part of that, maybe to a lesser extent, is simply fine tuning the operation. When we launched the new restaurants a year ago they were inefficient as new restaurants are when you open them. And throughout the course of 07 we have dialed those restaurants in, dialed in the efficiencies and have understood how to run those much better. So those are the two main areas but nothing in particular.

Paul J. Chakmak - Executive Vice President, Chief Financial Officer and Treasurer

Felicia, I think on promotional environment for the Las Vegas locals market I don't think we've seen any material change for the good or the bad in that particular category during the third quarter, so it really seems to be status-quo at this point. I think relative to absorption obviously we are coming off of a new base in comping year-over-year, and as you can see growing both revenue and EBITDA. And so I think that speaks to the absorption piece.

We continue to see good healthy growth in the Las Vegas local economic and population environment, obviously, there continues to be a significant amount of construction-related jobs, and soon with the opening of some of the new script product, significant increase in labor demand which all tie back to our core customer base for our Las Vegas local properties. So, we think we are positioned well relative to the climate in Las Vegas, and obviously broader economic issues for the country as a whole, we really have to evaluate it separately.

Felicia Hendricks - Lehman Brothers

Okay. Thanks.

Operator

Your next question comes from the line of Adam Steinberg with Morgan Joseph. Please proceed.

Adam Steinberg - Morgan Joseph & Co. Inc.

Yeah, hi. Just a couple of real quick questions. Paul, in the release when you talk about your growth CapEx for the quarter at $77 million, does that include the $5 million in capitalized interest or is that extra?

Paul J. Chakmak - Executive Vice President, Chief Financial Officer and Treasurer

It includes it.

Adam Steinberg - Morgan Joseph & Co. Inc.

All right, so that $77 million, it's actually, $72 million plus the $5 million in capitalized interest.

Paul J. Chakmak - Executive Vice President, Chief Financial Officer and Treasurer

That will be correct. We capitalize interest as a part of CapEx.

Adam Steinberg - Morgan Joseph & Co. Inc.

Okay. And then just also in terms of CapEx at Water Club, how is the construction timeline been delayed there, and how should we kind of transition some of the spend at that property?

Paul J. Chakmak - Executive Vice President, Chief Financial Officer and Treasurer

We issued the press release several... I guess several weeks ago, at this point that indicated that we expect to be open before the summer season. We were initially looking for an opening in early 08, the best we can peg at right now is before the summer season, and once again, the damage is covered by insurance.

Adam Steinberg - Morgan Joseph & Co. Inc.

Right. But I was just thinking in terms of the CapEx timing, I heard you are paying most of that budget, a $40 million budget by the end of this year, and should I... how much should I take out of the next couple of quarters in transition?

Paul J. Chakmak - Executive Vice President, Chief Financial Officer and Treasurer

I think you probably see that the CapEx number as you would expect is most intense right prior to the opening and actually trials opening.

Adam Steinberg - Morgan Joseph & Co. Inc.

Right.

Paul J. Chakmak - Executive Vice President, Chief Financial Officer and Treasurer

And so I think the trends in your model are probably still accurate. Now again that's off Boyd's balance sheet relative to debt funding or for that matter the asset base, so probably it doesn't necessarily appear in how you look at us.

Adam Steinberg - Morgan Joseph & Co. Inc.

Right. And then I just have the last question, Paul. If I do the math on the $0.03 impact from the higher corporate expense, translates to about $4 million over last year's 4Q.

Paul J. Chakmak - Executive Vice President, Chief Financial Officer and Treasurer

Yeah, as I have said in the past every $0.01 is about a $1.4 million in EBITDA.

Adam Steinberg - Morgan Joseph & Co. Inc.

All right. How long do you have to run at that elevated levels, that could be a one or two quarter saying or is that going be kind of going forward.

Paul J. Chakmak - Executive Vice President, Chief Financial Officer and Treasurer

I won't be forever but it will definitely run in through the first quarter and maybe to a limited extent into the second quarter as well, as we fully launch the One-Card program. We are calling it out because it's not meant to be permanent by any stretch of the imagination but is meant to support the launch, an image portion of that overall campaign.

Adam Steinberg - Morgan Joseph & Co. Inc.

All right. Thank you.

Operator

Your next question comes from the line of Larry Klatzkin with Jefferies & Company. Please proceed.

Lawrence Klatzkin - Jefferies & Co.

Hey guys.

Keith E. Smith - President and Chief Operating Officer

Good morning.

Lawrence Klatzkin - Jefferies & Co.

CapEx for all of next year, you would have kind of a number to throw out there?

Paul J. Chakmak - Executive Vice President, Chief Financial Officer and Treasurer

Larry, I think on CapEx as we have done in the past, we will give some specific guidance on that in our next call as we are really right in the middle of completing our 08 CapEx budget process.

Lawrence Klatzkin - Jefferies & Co.

All right, the Indians just started doing some heavy duty bussing outside of Chicago, does that really more affect the Chicago boats or do you think you are going to feel some of the pressure from that?

Keith E. Smith - President and Chief Operating Officer

We don't do a lot of bussing at Blue Chip; we don't expect to see a big impact from that. I think you are right, Larry, I think the Chicago Boats would feel more of that impact than we will at Blue Chip.

Lawrence Klatzkin - Jefferies & Co.

All right. And as far as the law changes in some of the states here, are you seeing anything happening in like Illinois feel or anything else legislation wise that may affect you?

Keith E. Smith - President and Chief Operating Officer

Well there is always a lot of conversations going on, specifically in Illinois, but in other states. We obviously monitor all those conversations, but at this point they are just conversation so we'll pay attention to them, and if there is something to react to we'll be prepared to react.

Lawrence Klatzkin - Jefferies & Co.

All right. And what kind of upside, when you get this One-Club going, what do you see the benefit will be... what kind of financial benefit or return on the extra spending of CapEx do you think you will get back on that?

Keith E. Smith - President and Chief Operating Officer

Well I don't think we are prepared to specifically quantify publicly what that is, but we believe that there is tremendous upside by being able to keep people within our portfolio of properties as they come to Las Vegas. One of the reasons we started this several years ago was the understanding that our customers didn't have a full appreciation for the breadth of our portfolio of properties. When they came to Las Vegas they did not always stay with us. So, we want them to be able to earn points to be able to use here in Las Vegas, we think that's a big part of the program and we know that occurs they do travel here, so.

Lawrence Klatzkin - Jefferies & Co.

Do you think actually more the real benefit of that will be when you have a major Strip property open, and at that point, points they have earned over the last couple of -- next couple of years can then be translated into visiting your property at that point in time?

Keith E. Smith - President and Chief Operating Officer

I think that certainly will help. I think we will see a big benefit initially also but certainly having a major Strip presence will add to that.

Paul J. Chakmak - Executive Vice President, Chief Financial Officer and Treasurer

Yes, I mean, Larry, let's not forget that we have got 5,000 hotel rooms in Las Vegas today as we sit here. Obviously, Echelon adds another 5,000 to that compliment. But with properties, in particular, property like the Orleans that has nearly 2,000 hotel rooms, it's well positioned to compete with that mid-price target segment that many of our customers in the Midwest seek.

Lawrence Klatzkin - Jefferies & Co.

Okay. And then in Shreveport, the Indians continue to expand in Oklahoma, do you see that market having any chance of stabilizing or is that connectivity just be a gradual slow hit to the market?

Keith E. Smith - President and Chief Operating Officer

Well we certainly expect it to stabilize. Our performance at Sam's Town, Shreveport is fine, we see some improvement there year-over-year, so we expect it to stabilize.

Lawrence Klatzkin - Jefferies & Co.

All right. Then the last question, just your guys view on Batterfield and would you, if that become available, would you look to maybe bid on it, I know MGM said they would be interested, would you, you are going to fight it to the death, what's your kind of opinion on that?

Keith E. Smith - President and Chief Operating Officer

Well, I think from a development standpoint, we obviously are interested in continuing to grow the Company, we've said that publicly quite often. And when we look to invest our dollars in new projects, we look to invest them in markets that have stable tax and regulatory environments. New Jersey and Atlantic City certainly qualify for that.

We've also been on record on saying we're very excited about the Atlantic City market. We think there is a much more capacity that you can add to that market, there is much more demand from New York and Phili that many more people will come to the market, so we would love to have an opportunity to look at the Batterfield site, and when the State or the City get ready to do something with that, we will certainly will be looking at that.

Lawrence Klatzkin - Jefferies & Co.

All right. Thank you guys.

Operator

Your next question comes from the line of Dennis Forst with KeyBanc. Please proceed.

Dennis Forst - KeyBanc Capital Markets

Yes, good morning. I wanted to get a clarification on the branding initiative. I think you said that you started off and are completed the first phase, am I right?

Keith E. Smith - President and Chief Operating Officer

Yes what had to occur first is we had different platforms between Coast properties and our Boyd properties, so we had to conform them to the same platform before we can take the next step. That occurred earlier this week actually.

Dennis Forst - KeyBanc Capital Markets

So, you moved Coast to the Boyd platform.

Keith E. Smith - President and Chief Operating Officer

Correct.

Dennis Forst - KeyBanc Capital Markets

Okay, great. And then starting in January you said you will start with the One-Card rollout. Is that going to be in some particular region?

Keith E. Smith - President and Chief Operating Officer

Well at the risk of giving our playbook to our competitors, probably won't go in any more detail.

Dennis Forst - KeyBanc Capital Markets

Okay. About how much is this going to cost in terms of hardware and software to initiate or to launch, not necessarily in the marketing cost involved but just the hardware and software to get it all ready to go.

Paul J. Chakmak - Executive Vice President, Chief Financial Officer and Treasurer

The capital cost is really already hit us, that was part of the ACSE upgrade that we talked about last year, in a very material way. So, from a capital cost standpoint there is no additional significant material cost.

Dennis Forst - KeyBanc Capital Markets

Okay. And how much was that Paul, I don't recall it.

Paul J. Chakmak - Executive Vice President, Chief Financial Officer and Treasurer

I'd have to get back to you on that, Dennis, we've certainly talked about it, I just don't remember it of the top of my head.

Dennis Forst - KeyBanc Capital Markets

Okay. Fine. And then also on the locals business, are there any concrete plans about North Las Vegas?

Keith E. Smith - President and Chief Operating Officer

No not at this point. We are still monitoring that market waiting for the growth to catch up with --

Dennis Forst - KeyBanc Capital Markets

The capacity?

Keith E. Smith - President and Chief Operating Officer

Correct.

Dennis Forst - KeyBanc Capital Markets

Okay. And how did your market share do during the quarter. Do you have a way of monitoring, how your properties did vis-à-vis the whole locals market?

Paul J. Chakmak - Executive Vice President, Chief Financial Officer and Treasurer

Well. I mean I think there is different services that provide headcounts, if that's what you're referring to. Obviously, our competitors haven't announced yet, so we don't have any data from them to compare to. And I think until that occurs, you really can't have any judgment. Like we said we feel very good about the performance and the penetration of the business and look forward to continuing to grow that.

Dennis Forst - KeyBanc Capital Markets

Okay. Then lastly. I think it was stated that Shreveport showed some improvements. Is that third quarter cash flow up year-over-year because gaming revenues were up about $1 million in Shreveport, and was that enough to generate an increase in EBITDA from Shreveport?

Paul J. Chakmak - Executive Vice President, Chief Financial Officer and Treasurer

I think what we said is the four other properties: Blue Chip and Treasure Chest aside, taken as a whole grew EBITDA modestly quarter-over-quarter 06 to 07. We don't necessarily, obviously, breakout the specific properties because we don't want people to necessarily focus on individual-type, microscopic operations but suffice it to say, we think the Shreveport business is a stable business today and we expect it to continue to grow into the future.

Dennis Forst - KeyBanc Capital Markets

Okay. Great. Thanks a lot.

Operator

Your next question comes from the line of Celeste Brown with Morgan Stanley. Please proceed.

Celeste Brown - Morgan Stanley

Hi guys. Good afternoon and good morning.

Keith E. Smith - President and Chief Operating Officer

Hi Celeste.

Celeste Brown - Morgan Stanley

A couple of questions. First, Paul, you said in reference to the corporate expense, it sounds like it will be a runaround $17 million for the next few quarters. What is a reasonable level after that? Is it $30 million we saw in the third quarter?

Keith E. Smith - President and Chief Operating Officer

I think our guidance for this year was in total a number around $50 million, and that is within range a reasonable base line. So, I think if you take that estimate your $13-ish million number a quarter absent One-Card launch cost, etcetera, is probably pretty realistic for 08.

Celeste Brown - Morgan Stanley

Okay. And then in the Central region, I know you talked about tax change in Illinois last quarter as being beneficial to you, is that the primary reason why EBITDA didn't decline as much as revenue in the quarter?

Keith E. Smith - President and Chief Operating Officer

Well it's certainly a key contributing factor, it was a meaningful piece of upside benefit that we achieved but it certainly wasn't the sole piece.

Celeste Brown - Morgan Stanley

So, have you been cutting cost in that region in general?

Keith E. Smith - President and Chief Operating Officer

I think the focus is necessarily been cutting cost. I mean we've run the Midwest and South business quite efficiently. With that said marketing is always a key expense element and as we get smarter and smarter, as to how we focus marketing dollars, we can achieve better performance.

Celeste Brown - Morgan Stanley

Okay. Great. And then finally, now you guys have talked about going to the construction loan market with your partners Morgans on Echelon, are you seeing any issues in that market given the turmoil we've seen in the debt markets?

Paul J. Chakmak - Executive Vice President, Chief Financial Officer and Treasurer

Well, I mean, obviously, suffice to say the debt markets are materially different than they were back pre-summer of 2007. We're actually just beginning that process with Morgans in the very early stages; we will break around on that project in the second quarter of 2008. But I still feel very comfortable that we will have sufficient access to capital at competitive rates to make that project very successful.

Celeste Brown - Morgan Stanley

So, can you wait until you break ground or if you don't like what you are saying will you just wait until you need to raise the capital?

Paul J. Chakmak - Executive Vice President, Chief Financial Officer and Treasurer

Well, I mean, we always have that option. I think to-date Morgans and Boyd collectively have spent $15 million to $20 million in total on the design development phase, so its material from that perspective and we are certainly not just sitting on the sidelines waiting, at the same time you need to move forward at some point and drive the capital funding to the overall project.

Celeste Brown - Morgan Stanley

Okay. Thank you.

Operator

Your next question comes from the line of David Katz with CIBC. Please proceed.

David Katz - CIBC World Markets

Hi, good day everyone.

Keith E. Smith - President and Chief Operating Officer

Hi, David.

David Katz - CIBC World Markets

I wanted to just a follow-up one of the earlier questions on Atlantic City, and thinking about that market, looking out the next year or two. We have seen... I guess a couple of dynamics, right, some on promotional competition and then the potential impact of pocket share from Pennsylvania ramping up. When we look at Pennsylvania, there should be quite a bit more to come over the next couple of years. What are you, what if anything are you feeling on that and how are you positioning yourself over time to hang on to your pocket share?

Keith E. Smith - President and Chief Operating Officer

Well, at the Borgata, I think the Borgata has positioned itself quite well when you look at the expansion that we open last year and the upcoming 800-room Water Club, I think those products will continue to keep Borgata a leader in the Atlantic City market. What you've seen so far in 2007 is a lot of the day trip business visiting those slot parlors, and there are slot parlors in Pennsylvania or racinos. They have a lot of slot machines in the building. They are not complete facilities. Those day-trippers, if you will... the competition for that dollar is what has escalated I think the marketing expense in the Atlantic City market. So our... part of our marketing is our building and our brand and our image. And people come to visit for that reason, we have a very good product there and I think a very strong product, we will continue to have that with the Water Club opening next year. So I like our position going forward, I think the market will continue to be aggressive from promotional aspect as people fight for those customers.

David Katz - CIBC World Markets

All right. And one more, If I may, or maybe two more, but on Florida obviously a potential opportunity for an interesting market, and if you could talk a little bit more, I know you mentioned it in your comments, but if you could talk a bit more about what the range of strategies you are considering are... is it waiting to see how the compact shakes out, what needs to change for you to, I guess, reach a decision to move forward one way or another?

Keith E. Smith - President and Chief Operating Officer

I don't think there is any one guiding factor that needs to change, certainly understanding what's going to happen with the compact is important in determining our total level of investment and what the competitive landscape will be out there. There is still a lawsuit out there, and we are still in the process of studying and designing the facility, so lot of those things come into play, but it's not anyone any one thing in particular that is going to cause it to be a go or no go, we just have to design and develop a project that will give us an acceptable return on investment before we can go forward.

David Katz - CIBC World Markets

Great. And one last quick one, in view of the fact that you have quite a bit on your plate, do you have an appetite at this point for acquisitions and are there markets that you would like to be in that if opportunities presented themselves you would pursue aggressively?

Paul J. Chakmak - Executive Vice President, Chief Financial Officer and Treasurer

I guess I have said in the past David. We will continue to stay very inquisitive related to acquisitions you are absolutely correct we have a significant amount of development on our plate, and we believe we have that well managed with great teams involved in the day-to-day aspects of that. With that said we will not ignore opportunities on the acquisition side that may come to bear.

David Katz - CIBC World Markets

Are there specific markets you would like to be in?

Paul J. Chakmak - Executive Vice President, Chief Financial Officer and Treasurer

I think as we have said markets need to be strategic to our overall business, and they need to be major markets, whether they are domestic or international for that matter. And so those have to be the guiding lights given the size and base of the overall company to remain focused on continuing to build the platform.

David Katz - CIBC World Markets

Perfect. Thanks very much.

Operator

[Operator Instructions]. And your next question is from the line of Joseph Greff with Bear Stearns. Please proceed.

Joseph Greff - Bear Stearns

Hi, guys.

Keith E. Smith - President and Chief Operating Officer

Good morning.

Joseph Greff - Bear Stearns

I have an Echelon-related question. Yesterday our friends at MGM talked about construction cost going up for City Center. I know you are at different stage then they are, but may be you can just talk about how comfortable you are with the total construction cost and how you are thinking or involved in the planning process to mitigate construction cost inflations? Thank you.

Keith E. Smith - President and Chief Operating Officer

Well we are very obviously, very early and... we are in the very early stage of what is a long and difficult process. The design process is going very well. The contractor community has shown a great deal of interest in our project and we have confidence that we will be able to staff it properly. And frankly, we have a very talented development team working on this and a very experienced development team. Having said all of that, I think we are very satisfied where we are at today from both a design standpoint, a budget standpoint and a schedule standpoint, we are moving forward as we have planned, we are moving forward as we had laid out our plan and we are comfortable with where we are at. I don't know that I have more to say other than that.

Paul J. Chakmak - Executive Vice President, Chief Financial Officer and Treasurer

Yeah, Joe, obviously, we would update everyone to the extent there were changes and to-date we have no change.

Joseph Greff - Bear Stearns

Great. And then, Paul, back towards the acquisition appetite question, how important is size and scale... in looking at acquisition?

Paul J. Chakmak - Executive Vice President, Chief Financial Officer and Treasurer

I think size and scale is important. It's, whether it's an acquisition or a development, they are all challenging in their own right. By way of example, though, was the development opportunity did not see us bid on the licenses that came up in Kansas and that speaks exactly to the philosophy that I am trying to portray here as far as what we are looking at, so not that they weren't good opportunities but the size and scale didn't fit with what we are trying to achieve.

Joseph Greff - Bear Stearns

Great. And you talked about the promotional environment easing in the third quarter in Atlantic City, and obviously that was very helpful on the margin side. Could you comment what you are seeing right now in that market?

Keith E. Smith - President and Chief Operating Officer

Maybe just a point of clarification. I don't believe that in the Atlantic City market that the promotional environment eased, I said that Borgata, in particular, simply didn't participate. We were very prudent with our dollars and I don't see it easing in the fourth quarter at least through October. You generally see the same level of aggressive spending on the promotional side that we saw throughout the course of this year. I am not sure the third quarter was two much different than the first quarter or second quarter, so.

Joseph Greff - Bear Stearns

Great. Thanks guys.

Operator

Your next question is a follow-up from the line of Larry Klatzkin with Jefferies & Company.

Lawrence Klatzkin - Jefferies & Co.

Hey guys. Just one clarification here. 135 to 145 the EBITDA is that after taking out option expenses or before taking out option expense?

Paul J. Chakmak - Executive Vice President, Chief Financial Officer and Treasurer

It's before.

Lawrence Klatzkin - Jefferies & Co.

Okay, so after option we're reduce then, okay. Thank you very much.

Paul J. Chakmak - Executive Vice President, Chief Financial Officer and Treasurer

Larry, EPS would be after, obviously.

Operator

Your next question is from the line of Justin Sebastiano with Nollenberger Capital Partners. Please proceed.

Justin Sebastiano - Nollenberger Capital Partners

Thanks, hi guys. The $0.09 number you're saying, that's going to be come down from the increased competition for Blue Chip... that's about $12 million to $13 million in EBITDA, does that mean the rest of the Midwest and the South region is pretty much flat with last year's fourth quarter?

Paul J. Chakmak - Executive Vice President, Chief Financial Officer and Treasurer

I think that's depending on how your modal runs, that's probably a pretty fair estimation.

Justin Sebastiano - Nollenberger Capital Partners

Okay. Yeah, I am just looking at the last, the fourth quarter of last year's EBITDA number and backing that... okay, and as far as just some housekeeping, are you still looking that $3 million in stock-based comp because that's for the third quarter was little bit lower than it was in the first half of the year?

Paul J. Chakmak - Executive Vice President, Chief Financial Officer and Treasurer

Well, I mean the way the accounting works for stock-based comp, we typically issue grants in the fourth quarter, obviously, none have been announced or approved at this point in time, but that has been the historic cycle the Company has been on. With that you would typically see a slight bump up in stock-based comp in the fourth quarter. So, it might be a little bit higher than three even but not materially higher.

Justin Sebastiano - Nollenberger Capital Partners

Okay. All right, thanks a lot.

Operator

And your next question is a follow-up from the line of Celeste Brown with Morgan Stanley. Please proceed.

Celeste Brown - Morgan Stanley

Hey, Paul, back to the acquisition question again. When you mentioned international which is not something I think you guys have discussed before, do you... when you think about international without obviously getting you to name a company, do you think about more regional type gaming businesses like you see in Europe and the UK, are you looking for something bigger like something we would see in Asia?

Paul J. Chakmak - Executive Vice President, Chief Financial Officer and Treasurer

Well I would think it would be more the latter, if we were to pursue it. My point was to not exclude from the way you think about Boyd Gaming to be limited domestically, and it obviously needs to fit strategically into what we are doing not only with obviously Echelon and Borgata as the flagships on both parts of the country but as our, within our business overall. We are not looking necessarily to build from scratch a ground-up business in an international market.

Celeste Brown - Morgan Stanley

Okay. Thank you.

Operator

: And there are no other questions at this time. I would like to turn the call back over to Mr. Keith Smith for closing remark.

Keith E. Smith - President and Chief Operating Officer

Well, thank you for joining us here today, and we look forward to speaking to you again for our next call. Have a good day.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a good day.

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Source: Boyd Gaming Corp. Q3 2007 Earnings Call Transcript
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