Mar 3, 2008
Executives
Keith E. Smith – President, Director and Chief Executive Officer Paul Chakmak - Executive Vice President and Chief Operating Officer Josh Hirsberg - Senior Vice President and Chief Financial Officer
Analysts
Jane Pereira - Lehman Brothers Glen Reid - Bear Stearns David Katz - Oppenheimer Kent Green - Boston American Asset Management Dennis Forst - KeyBanc Joe Greff - Bear Stearns Larry Klatzkin - Jefferies & Company Felicia Hendrix - Lehman Brothers
Operator
Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2007 Boyd Gaming Earnings Conference Call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Mr.
Keith Smith, President and Chief Executive Officer.
Keith E. Smith
Thank you, operator, and good morning everyone. Welcome to our fourth quarter conference call.
Joining me on the call this morning is Paul Chakmak, our Executive Vice President and Chief Operating Officer; and our new Senior Vice President and Chief Financial Officer, Josh Hirsberg. 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 the first quarter 2008, 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 statements as a result of certain risks and uncertainties, including but not limited to those noted in our earnings release, our periodic reports and 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 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 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 on boydgaming.com and streetevents.com.
Earlier this morning, we released our fourth quarter results. These results were in line with consensus estimates as well as our guidance.
We were specially encouraged by the resiliency demonstrated in our Las Vegas Locals business as it posted its third straight quarter of adjusted EBITDA growth. And we were similarly pleased that four of our six Midwest and South properties recorded fourth quarter increases in adjusted EBITDA.
As we pointed out in our press release, our Midwest and South region was materially impacted by Blue Chip’s performance. Blue Chip experienced continued pressure from an increasingly competitive market, construction disruption that is expected to subside by the end of the summer, and to a lesser extent adverse weather during the quarter.
Paul will provide some color on our results in a few moments. While we’re able to meet expectations for the fourth quarter, we began to experience some softness or weakness in the business that began in late November and continued into January.
Fortunately we’re seeing some positive trends in February and remain cautiously optimistic that the recent trends will continue through the remainder of the first quarter. Now I’d like to spend a few minutes updating you on the progress we’re making on our development projects.
In Atlantic City, Borgata is in the final stages of construction of The Water Club. We’re installing furniture up through the 30th floor while we complete the finishing work on the higher levels.
The Water Club which will feature five swimming pools and a spa in the sky was conceived as an exclusive extension to the sophisticated and international style that already defines Borgata. The signature hotel will offer a serenely cosmopolitan setting, blending high design and modern amenities with an intimate and highly personalized guest experience that will be unrivaled by any other property in the Atlantic City marketplace.
We’re excited to unveil this magnificent property and we remain on track for a June opening just in time to catch the busy summer season. Our $130 million expansion of Blue Chip in Michigan City remains on schedule for an opening this December.
As most of you already know this development project will add a dramatic 22-story hotel tower that will include 300 new upscale guest rooms, a spa and fitness center, additional meeting and event space, new dining and nightlife experiences, and a new porte cochere. Our biggest challenge during the fourth quarter was the business disruption caused by the rerouting of the main entrance as we began to construct this new porte cochere.
We expect this disruption to continue through September of this year when the new porte cochere will be completed. We’re excited about our expansion project of Blue Chip and we believe the new additions will help us to compete more effectively.
With respect to Dania Jai Alai in South Florida, we’ve decided to postpone the redevelopment of the property at this time. There are a number of considerations that factored into our decision.
First the continued poor performance of Broward County casinos producing win per unit numbers well below our expectations. Second the introduction of Class III slot machines and the addition of table games at the nearby Native American casino.
Third, the pending introduction of casino gaming in Miami-Dade County, which will add unneeded capacity to an already competitive environment, and lastly, the introduction of legislation that will allow for VLTs at all pari-mutuel facilities in the state of Florida. And all of this is compounded by a prohibitively high tax rate for the pari-mutuel slot operators.
We’re not closing the door on the development of Dania. We still believe South Florida could be an attractive market under the right circumstances.
If and when these conditions change we’ll take a second look at redeveloping Dania but it simply does not make good business sense to move forward with the project at this time. In the meantime, it’s business as usual at Dania and we will continue to operate our Jai Alai facility there.
Moving to the Las Vegas Strip, construction on our Echelon development continues to advance as foundation work is nearly complete and our wholly-owned hotels which include Hotel Echelon, The Enclave, and Shangri-La Las Vegas. We expect to begin erecting steel in April.
Work on Delano and Mondrian is scheduled to begin in the second quarter. We remain on budget and on schedule for a third quarter of 2010 opening.
As I said in my opening comments there’s no question these are challenging times, and as we move forward in 2008 we will remain focused on our three main goals: improving our operating performance, continuing to execute on our current growth opportunities and rolling out our branding initiatives. Now, I’d like to turn the call over to Paul Chakmak, our Chief Operating Officer.
Paul J. Chakmak
Thanks, Keith, and hello everybody. Before I review our quarterly performance I’d like to begin with an update on the branding initiative.
We successfully launched the first phase of our nationwide consolidated Players Club Program on January 14. Our goal is to build and reward customer loyalty, drive cross-property visitations and offer the ability to seamlessly earn and redeem rewards at our properties across the country.
In this phase, which was effective last month, our four primary Las Vegas local casinos, Sam’s Town, Suncoast, Orleans, and Gold Coast were unified under our new Club Coast Players Card Program. For the first time, our Club Coast members are rewarded for their play based on a tiered-card system.
Guests qualify for one of three tiers, each offering an increasingly attractive series of services and benefits. The program also allows guests the opportunity to earn and redeem points at any Club Coast property with a single card, enhancing reward options for our players.
The introduction of our new Players Program in Las Vegas is the first stage of the nationwide rollout. We plan to connect the Club Coast card to our Players Gold program at our downtown Las Vegas properties and our new B Connected rewards program in our Midwest and South region.
Once the rollout is complete, players will be able to use their cards at Boyd Gaming properties in Nevada, Illinois, Indiana, Louisiana and Mississippi. The next phase will roll out in our Midwest and South region and is expected to be completed in the second quarter of 2008.
In reviewing the fourth quarter, it’s important to separate the results from the trends. As Keith stated earlier, there were some positives for the quarter, but by and large weakness that developed in the second half of the fourth quarter has carried into January, and to a lesser extent, February.
Now let’s discuss results from each of our operating segments. In spite of a 2% decline in revenue, we were able to achieve our third consecutive quarter of year-over-year EBITDA growth in the Las Vegas Locals market.
The EBITDA growth was once again attributable to the management initiatives we implemented earlier in the year, which yielded a year-over-year margin improvement in excess of 150 basis points for the fourth quarter. Given the current operating environment, we do not expect growth in EBITDA and EBITDA margins to continue at this pace for the first quarter.
Moving to downtown Las Vegas, fourth quarter adjusted EBITDA was down $2.4 million or 13.8% from prior year results. The decline was due to a combination of decreased gaming revenues as well as increased losses at our Hawaiian charter business.
The decline in the Midwest and South’s EBITDA was almost entirely attributable to Blue Chip. The combination of aggressive competition and promotions as well as construction disruption and inclement weather drove Blue Chip’s EBITDA down 55% or $13 million from prior year results.
This was in line with what we estimated on our last call. We expect the same dynamics at work last quarter to continue in the current quarter.
We aren’t sitting idle, quite to the contrary, as we’re refining and adjusting our operations to meet the current challenges head on. With our new expansion slated to open in December we believe Blue Chip will become a true regional destination.
In light of the decline at Blue Chip, it’s clear to see how well our other Midwest and South properties are performing, as collectively the group increased adjusted EBITDA nearly $7 million for the quarter. It’s during times like this that the value of our geographic diversity becomes clear.
The effects of competition and economy were also evident during the fourth quarter in Atlantic City where, excluding Borgata, gaming revenue for the market experienced a shortfall of 10.6% from prior year results. These declines were mainly attributable to new competition in Pennsylvania.
Despite the decline for the total market, Borgata grew gaming revenue by 3.7%, and increased market share from 14.1% to 16% over the prior year. Borgata maintained its top spot in the Atlantic City market for the 2007 fourth quarter, leading in virtually all gaming-related areas.
Its operating income and operating margins match prior year levels. The property remains positioned as the premiere gaming resort on the East Coast and will continue to assert its dominance with the opening of the Water Club in June.
Although we can’t control the macroeconomic outlook for the future, we can focus on what we do best: running our properties efficiently and most importantly providing our customers the high levels of customer service and outstanding entertainment experiences they associate with our brands. As this is the first call for 2008, we typically provide broader direction on various items in our annual forecast.
As we stated in our previous call, we are spending a significant amount of capital on the implementation of our One Card and branding initiatives this year. As such, we expect corporate expenses to run $8 to $10 million in excess of 2007 levels with all of the increased spend occurring in the first quarter of 2008.
Maintenance capital expenditures are expected to be approximately $120 million for 2008. Furthermore, we expect to spend $85 million to finish the hotel at Blue Chip and approximately $850 million on construction at Echelon.
Now, let’s take a look at the larger below the line items. We expect 2008 depreciation expense to be approximately $175 million.
We’re projecting cash interest expense at $170 million for the year of which $50 million will be capitalized. Non-operating expense for the Borgata deserves particular attention for the 2008 forecast.
First, please note that as the Water Club comes on line at Borgata, we will no longer be capitalizing interest on the $400 million we used to construct the project. Therefore, half of the interest expense associated with the $400 million will flow through our financials under Borgata’s non-operating expense.
In addition, as we have now used up the job tax credits we are granted for bringing Borgata into the Atlantic City marketplace, state taxes of the property will shift from a tax benefit to a tax expense. As a result of both of these changes, our share of non-operating expense will increase by approximately $15 million in 2008.
Our share-based compensation for 2008 is projected to mirror our 2007 expense. As you are aware, share-based compensation expense is excluded from our adjusted EBITDA but is included in our adjusted EPS.
Finally, we’re projecting the 2008 tax rate to be 36.5%. With those factors in mind for the first quarter 2008, we’re estimating adjusted EPS from continuing operations to range between $0.30 and $0.35, and that includes an estimated impact at Blue Chip of approximately $0.10 compared to the prior year.
We’re expecting adjusted EBITDA to range between $127 million and $137 million. Operator, at this time we’d be happy to take some questions.
Operator
And your first question comes from the line of Felicia Hendrix - Lehman Brothers.
Felicia Hendrix - Lehman Brothers
First of all, Keith, you gave us a little bit of a teaser there at the beginning saying that you’re starting to see positive trends in February, and I was sitting on the edge of my seat through your whole call trying to hope that you would give us some details on that, so wondering if you can now?
Keith Smith
I don’t think that we’re prepared to probably go into a lot of detail on that. January, as I indicated, continued the softness that we saw that began in November and December, continued into January, and just we’re seeing some stronger volumes.
We’re seeing some more customers through the door in early February. Don’t know if that’s going to continue.
The first three weeks of February are looking good, and as I said we’re cautiously optimistic. But we’re not prepared to go property by property or give anything further.
Felicia Hendrix - Lehman Brothers
Okay. So that you won’t even talk about region, because I think Harrah’s said on their call this morning that they might be seeing some stabilization in Atlantic City, so I was wondering if it was more coming from AC or the central regions or the locals market?
Keith Smith
No. Frankly, Felicia, it’s fairly broad-based.
I think we’re seeing a little bit of rebound across the board, whether it be in Atlantic City, where we had a good fourth quarter, and we continue to perform well there, or whether it be in the Midwest and South or here in the Las Vegas Locals market. So it’s not restricted to any one region.
It’s actually across the board.
Felicia Hendrix - Lehman Brothers
Okay. And then yesterday, Pinnacle talked a lot about potentially delaying some projects given the current credit environment, and at this point it looks like you have plenty of room on your bank line to continue Echelon, but I’m just wondering if you have any concerns about continuing to fund that project?
Paul Chakmak
No. As you know the total bank line is $4 billion.
We gave the details on oustandings at the end of the year. So we’ve got plenty of capacity under the bank line to support the wholly owned development we have underway.
Felicia Hendrix - Lehman Brothers
Great. And I was just wondering, there’s still a piece that you’re doing some third-party financing for, or you’re out trying to get financing.
I was wondering if you could update us on that?
Paul Chakmak
Sure, and that piece is in particular the Morgans joint venture for the Delano and the Mondrian that are part of the overall Echelon development. And we’ve ramped up our efforts on the capital raising for that project in conjunction with Morgans Hotel Group, and over the course of the next couple of months we look forward to pulling that together.
As we all know, the markets are much more challenging today than certainly they were six or nine months ago. But with that said, you know we benefit from a fabulous group of relationship banks that have supported Boyd for the long-term.
Those banks were part of the very successful syndication of the $4 billion credit facility and are at their anticipated hold levels prior to the market declines. And so as a result of that, we can certainly draw on a lot of resources and fire power that we have.
Felicia Hendrix - Lehman Brothers
Great, and then just finally one quick housekeeping, are you expecting to have any kind of write off coming from your decision to not go forward in Dania?
Paul Chakmak
We’ll certainly be looking at that in the first quarter. We don’t have that analysis, which is relatively complicated, fully completed.
There’s always a possibility of a potential write-down when you change course and enter into a delay like this. The total investment at Dania is just over $80 million.
Obviously there’s 47 acres of land that still have significant value, as well as really the option associated with the pari-mutuel license to have slot gaming at the location. I think the bigger issue comes up to the extent we are required to make the second $75 million payment sometime between now and 2010.
Operator
Your next question comes from the line of Larry Klatzkin - Jefferies & Company.
Larry Klatzkin - Jefferies & Company
Couple of questions here. First, on the course of Dania, so at this point in time, this is something that you’re continuing; you may even spend some more money on analysis and everything on that?
The way this number is coming in, in Florida, I think hit new record highs in the month of February so far.
Keith Smith
I think we’ll continue to monitor it. I don’t think we’re going to continue to spend a lot more money.
We’ve I think done a fairly thorough analysis of the market. I think the numbers are improving, but still well below what we had modeled out early on and I think well below what anybody expected early in the process.
And then when you look at all the other factors that have crept up, whether it’s once again the enhanced competition from the Native American casino by getting Class III slots and table games, or whether you look at the additional capacity that potentially is added in the surrounding counties, the environment isn’t right to go forward with the project. There’s not a reasonable return on investment you can get on your money at this point.
Paul Chakmak
Larry, as we’ve gotten into the high season, you’re right, the win per unit numbers have escalated. I think that was to be as expected.
I’m sure part of this as well is, gaming is now becoming more of just a mainstream item in South Florida. With that said, you can’t make a business decision based off of a one- or two-month trend.
And frankly, obviously the numbers relative to all of our expectations are still substantially below where our expectations were when everybody went into that market, and frankly don’t support a tax rate over 50% based on the capital investment that’s required.
Larry Klatzkin - Jefferies & Company
All right, that’s fair. Could you maybe quantify the cost of weather and construction disruption to you?
Did you do that analysis?
Paul Chakmak
You always attempt to do the type of analysis around weather and construction. It is much more of an art than a science.
We do know in January, in particular, in the Midwest properties, you had significant snowfall on Fridays and Saturdays which obviously are the biggest days of the week as opposed to what was a tough winter for the December month as well, albeit the timing was maybe a little bit better than what we expected. But we certainly don’t have any specific numbers or details at this point in time to share with you.
Larry Klatzkin - Jefferies & Company
All right. As far as AC, your January market share number was – congratulations.
Are you expecting to keep that kind of share in the market?
Keith Smith
I think Borgata, since its opening has been the premiere property in the market, and it just goes to show that quality does well in strong economies as well as the weaker economies. And we continue to do well.
The market continues to be very aggressive in spending marketing dollars. We continue to try and stay out of that fray.
But we have a very good property there, and we’ll continue to operate it the best we can.
Larry Klatzkin - Jefferies & Company
All right, last question, Echelon budget. How much do you have as fixed price at this point, and as far as advance orders of some materials, how are you?
Keith Smith
I don’t have those numbers off the top of my head. But it is as I said in my comments progressing on schedule and on budget and we don’t have any concerns about that at this point.
Operator
Your next question comes from the line of Joe Greff - Bear Stearns.
Joe Greff - Bear Stearns
My question relates to the Las Vegas Locals market. In the fourth quarter you did a great job on the expense side and growing EBITDA despite the revenue decline.
And Paul, you had mentioned that pace won’t continue in the first quarter here. I was hoping you could give us a sense, maybe factoring in competition throughout 2008, to keep EBITDA margin flat, what year-over-year revenue change break point would there be in order for you to keep margins flat?
So in other words, if revenues are down say 3% year-over-year, is that a level in which you think margins can stay flat in 2008 relative to 2007?
Paul Chakmak
Joe, that’s a tough one. I don’t think I have the numbers in front of me to give you any firm correlation on a break-even.
I would make the comment, and directionally where I was going with the comment about the first quarter was, that in fact we are starting to anniversary the efficiencies that we put into the business at some of the properties initially last first quarter, and maybe even the very end of 2006, but really fully effectively the first quarter of 2007. So as we anniversary those, we’ve already seen those efficiencies in the previous year’s numbers.
As a result, you don’t have the exponential effect across the board, though there’s still some modest benefit at some of the properties we got to later in the program.
Keith Smith
And you’re right, Joe, I mean given the operating leverage in the business, as we all understand it’s difficult to maintain those margins with declining revenues. So we’ll continue to be focused on it, as one of our goals this year is to focus on our operating margins.
But we don’t have the data here to give you a complete answer.
Joe Greff - Bear Stearns
Another question, an easier one to answer. The construction in progress balance at the end of the quarter?
Paul Chakmak
Joe, that’s still not a very easy question to answer off the top of my head − $276 million.
Operator
Your next question comes from the line of Jane Pereira - Lehman Brothers.
Jane Pereira - Lehman Brothers
Just had a couple of questions, on the downtown results, are you seeing difficulty there because of rising fuel costs or are you experiencing lower load factors in the jets that you send over to Hawaii?
Keith Smith
I think it’s a combination of factors; clearly fuel continues to be a challenge for us as fuel prices rise and so that I think was a challenge for us in most of 2007 and continues to be a challenge in early 2008. Yield is another issue.
When the load factors are up, there’s more competition in the market. So we’re seeing some issues in yield.
But generally speaking, the Hawaiian market remains a strong market for us. I think as big of an impact downtown is weakness on what we call the street or the downtown traffic in general.
While we don’t get a lot of business off the street, the business we do get is a very profitable business for us, kind of walks in the door. And as that business softens up it has a bigger impact on us.
Paul Chakmak
Yes, Jane, I think, the little more detail we’re seeing in Hawaii, since we obviously have people on the ground in Hawaii with our travel agency and many of our downtown executives spend a significant amount of time in Hawaii with customers and travel agents, is that the Hawaiian economy is benefiting from foreign travel into Hawaii as a result of the lower dollar. That’s something we’ve certainly seen before.
So whatever weakness occurs in the U.S. going west is picked up by traffic coming east out of Asia in particular.
And so to that point, from a consumer standpoint, we feel good about what’s going on with the rank and file, if you will, customers that we have in Hawaii.
Jane Pereira - Lehman Brothers
Okay. That’s good.
And then I had just one more question on the One Card system that you’re developing; are you expensing the cost of that or is that something you can capitalize? And also are you doing something to add points to the customers’ cards as they get the new cards?
Paul Chakmak
On the point side, there’s a transition plan obviously from the old card to the new card. That’s already occurred.
We already have accruals on the books relative to the different properties that we operate and the different programs that we currently have in place. So there will be no change from a numbers standpoint relative to the expensing of points.
And obviously from a development standpoint we have expensed the appropriate amount of the development of that program. The big part you’re seeing in corporate expense, as I mentioned in my comments, is really the launch cost associated with the programs, not just the basic stuff like printing new cards and putting new brochures, but really getting out there and talking about what is a rather significant change to the reward program that is very consumer-oriented to get the message out as to why Boyd Gaming is different than what it was, relative to the programs and why we’re different than our competitors.
Jane Pereira - Lehman Brothers
In a way, I would assume this is going to enable you to increase your market share. Are you seeing any – I don’t want to use the word “retaliation” − but any sort of counter moves from other competitors out in the Las Vegas Locals market?
Paul Chakmak
I think in the Las Vegas Locals market Station has certainly introduced a new program, that’s something that we saw after the roll out of our program. With that said, it’s probably too early to tell given it’s only been six weeks as to the impact of our program based on our history.
Keith Smith
Certainly the roll out of Station’s new program I don’t think was in response to what we did. I’m sure it was under development for quite some time.
These decisions are quite awhile in the making so I think it’s probably more coincidence than anything else.
Operator
And your next question comes from the line of Dennis Forst - KeyBanc.
Dennis Forst - KeyBanc
Just wanted to continue to focus on the locals business. Paul, can you tell us what the market share number was for you in the locals and what it did fourth quarter versus fourth quarter of 2006?
Do you have a ballpark number for that?
Paul Chakmak
I don’t have the market share number here, Dennis, no.
Dennis Forst - KeyBanc
Okay. Just gut feel, did it go up in the quarter, do you think, you got a little bigger share of the market?
Paul Chakmak
I think our feeling is we are making real good progress in the locals business. I think part of it is the refinement of the business overall under one cohesive management team.
That’s something that we’ve talked about in the past. And I think we’ve got some very good momentum, albeit in a very, very competitive market with great, great product offerings that our competitors have.
Dennis Forst - KeyBanc
And then the reward program once it’s fully instituted, it will drive market share hopefully and more top line, but it will add costs, you will be taking on a little bit more promotional expenses, is that not fair?
Keith Smith
I think as we looked at and designed the new club it was designed as part of the overall investment process in our customers. And so while the club has changed, it’s part of an overall plan.
So it’s really not about is a club more expensive or less expensive, it’s about the overall investment in the customer and how you look at that. So certainly the club is different today than it was before.
Paul Chakmak
But the perception shouldn’t be that when you look at promotional expense and marketing expense and you put them all together, this is not about spending more dollars and flooding the market with more dollars. This is about directing the dollars more efficiently.
Dennis Forst - KeyBanc
Okay. And then, next part on the locals.
The non-gaming component, we’ve all heard about the Las Vegas housing market and just consumer confidence level in general. I’m wondering whether there was a bigger impact on non-gaming revenues than on gaming revenues during the fourth quarter in the Las Vegas Locals market.
Keith Smith
It’s an interesting question. As we look through the data, you are seeing a little bit more of an impact.
It appears that the consumer is allocating the dollars that he is spending and appears to be allocating more of those to the gaming side than the either hotel or food and beverage side or entertainments side. So we did begin to see some of those trends.
Once again, it’s early, but that’s the early take on it. We are seeing some of that, some declines in non-gaming.
Dennis Forst - KeyBanc
I would have thought that. Then last question, Paul, can you give us an estimate for pre-opening for ‘08?
Paul Chakmak
Pre-opening, it’s always a bit of a wild guess. But pre-opening should be in the $25 million area.
Dennis Forst - KeyBanc
And I assume that pre-opening is excluded from your first quarter guidance of $0.30, $0.35, that excludes pre-opening?
Paul Chakmak
We adjust pre-opening out historically, yes.
Operator
Your next question comes from the line of Kent Green - Boston American Asset Management.
Kent Green - Boston American Asset Management
My question pertains to the non-Blue Chip markets where you had an EBITDA gain. Most people are talking about some of these regional markets being sloppier.
Are you gaining market share in those markets or doing special promotions or anything going on there to reverse this trend that we’re hearing from a lot of other operators?
Paul Chakmak
I think in the markets that we operate in, in Louisiana and Mississippi and in Illinois, we have spent an awful lot of time focusing market efforts, not ramping up marketing efforts relative to dollars, but focusing on what works right. We’ve also spent a significant amount of time in trying to position those properties as number one or two in their markets.
And frankly, I think based on the trends and the numbers you see in many cases, we are gaining share.
Kent Green - Boston American Asset Management
And then finally one last question is, is the downtown market just on a continuous type of cost escalation or slide? There’s been other properties which have not done well downtown, Binion’s comes to mind under new management.
Or is the cash flow versus the capital expenditure and the cost down there still very attractive to you?
Keith Smith
We’ve had a very, very stable operation downtown for years. We have a very strong management team that has operated those properties on a very consistent basis for years.
We have a very strong foothold in the Hawaiian market and they’ve been great customers for years. We have a very consistent level of capital reinvestment in those properties to keep them clean and modern and fresh and make sure that our customers continue to come back and enjoy their experiences there.
And over the years our EBITDA has grown year after year there. So, we saw a dip in the fourth quarter.
Don’t know what that means for the future. We think once again we’re seeing a little bit of a rebound in the first quarter, but we enjoy a very strong business downtown.
Paul Chakmak
From a straight return on capital standpoint, Kent, the downtown business is really almost off the charts to the positive. It’s relatively small to the overall business.
But it is a fabulous return.
Operator
And your next question comes from the line of David Katz - Oppenheimer.
David Katz - Oppenheimer
Most of my issues were addressed. But one of the things I’m trying to get my head around is the card rollout and what you’re spending and how we should measure that over the next one to four quarters?
How should that, what revenue pop or what return on that spend should we be thinking about as we sort of factor that into our models?
Paul Chakmak
That’s something that I think we’re just going to have to show to you David. As I mentioned in the Midwest and South we’ll be fully rolled out in the second quarter.
So the real impact of the Midwest and South rollout as a whole will really be seen in the back half of the year. With that said, we will do this really property by property, and so some will benefit really for most all of the second quarter while others will be picked up at the very tail-end of the second quarter.
And then I believe, and though we’ve done a lot of analysis on this, part of this too is what is the benefit to us in Las Vegas relative to the much easier transportability of customers and their benefits into this market, because we know they travel here very frequently but we had not historically made the connectivity between a Boyd property in the Midwest and South and a Boyd property in Las Vegas. And that is exactly what we’re doing with this program.
David Katz - Oppenheimer
Okay. And can we maybe spend a minute on Blue Chip?
There’s quite a few moving parts in it. And, with a construction project we can often look at historical levels and say okay here’s the spend on the project, what return is reasonable for us to expect.
When we factor in the addition of Four Winds and some of the other spending that’s going on in that market now, help us think about what is the new normal for that project that you might be looking toward down the road, margin-wise and all that?
Paul Chakmak
On the call, obviously here we gave you much more detail microscopically on Blue Chip than we typically would do to really help with that question, giving you the comparison in specific dollars to the prior year. Now, obviously winter isn’t the summer and we have to sort through the dynamics of what the impacts have been with construction as well on the fourth quarter number and then ultimately the first quarter number as well.
I think the best way to look at it once you establish a baseline run rate for Blue Chip, is that the opening of the hotel and spa and additional restaurants is going to be really all incremental to that baseline. And I say that because the Blue Chip hotel today, even with additional competition in that market, continues to run extremely full.
So hotel rooms are not in surplus in Northern Indiana or Michigan, the competing Michigan market. And I think really the analysis that needs to be done is based on a substantially improved room product at Blue Chip which will be focused on a very different customer than would typically stay there today.
What the incremental benefit of that customer is, not just relative to its hotel and restaurant spend, but obviously its casino worth, and that’s how we approach it. So we believe when the new hotel does open, it is really all incremental, because we’re not taking business away from ourselves anywhere else to the success of that property.
David Katz - Oppenheimer
Right. Now, and again I apologize if I missed it in the commentary or in the release, but in terms of what the cost structure is or what margins we should be thinking about as the new normal for that property.
Anything you can share there?
Keith Smith
No, I don’t think you missed it in the release. We went into a great amount of detail, we certainly didn’t go into that detail.
Look, the fourth quarter and continuing into the first quarter are difficult with weather, with the construction disruption. It is some of the most disruptive type of construction we can do when you move the front entrance of a building, (inaudible) has been very significant, the weather and then it’s early in the Four Winds impact.
They only opened in August and as these things happen, there’s a greater impact earlier on than there is later on. We have a very strong product of Blue Chip.
We opened our own $170 million brand new facility, brand new boat there not too long ago. We have a very strong product, our customers enjoy it.
And I think when we cycle through this disruption and we get out of some of this bad weather, we’ll see some better results. But think we’re not in a position to be providing direction on margins and run rates.
Operator
And your next question comes from the line of Glen Reid - Bear Stearns.
Glen Reid - Bear Stearns
Back to the locals market for a second, couple of things, one, and this is maybe a different way of rephrasing Joe’s question. But can you give us a sense for the percentage of your costs that are fixed?
And then, your ability to the extent that we see revenue weakness or more revenue weakness there, the ability to cut costs at those properties beyond what you’ve already done on that fixed versus variable basis. And then secondly, we can all look at lay-offs on the Strip that have been talked about in the press and the housing market, I mean, is that really what you look at and what you feel is the biggest factor for your business in the locals market?
Are those macro headlines and the trends that you see there? Thanks.
Keith Smith
With respect to the margin question, on a more global basis, we understand that the operating leverage in the business is very high and that incremental revenue has a very high degree of flow through. We have been aggressively working on margins in the locals business over the last year, and have made significant headway as you saw reported in the fourth quarter.
We still have some room to go. We have very strong management teams working those and we’ll continue to focus on those.
With respect to the local economy here, there’s still a tremendous amount of development going on up and down the Strip. There’s still a tremendous amount of construction activity.
And yes, it has slowed significantly from several years ago but we still like our Las Vegas Locals business.
Glen Reid - Bear Stearns
Okay. Now, I don’t know if you could peg it, but what the specific percentage or maybe even a range in your locals market of fixed cost to variable cost at those properties?
Keith Smith
I think we’re probably not in a position to go into that. I’m not sure we’d want to give our competition that much information to be able to understand our business.
So, I don’t think we’re probably willing to go into that information.
Glen Reid - Bear Stearns
Okay. Fair enough.
Thank you.
Operator
And your last and follow-up question comes from the line of Jane Pereira - Lehman Brothers.
Jane Pereira - Lehman Brothers
Sorry, I forgot to ask one question getting back to the card again. Once you fully implement the card, in terms of the way it’s intended to operate, is there going to be any real meaningful difference between your card and Harrah’s card?
And I’m assuming once you have Echelon open you’ll have a Las Vegas property that might entice more play, but in terms of the physical way that the program works is there anything significantly different from Harrah’s?
Paul Chakmak
I think the programs have their own structures and their own differences. Given we haven’t launched it yet, we’re not prepared to make comment on the specific differences because of the competitive pressure associated with changes that we would make and what our competitors may make as a result of that.
With that said, I don’t think this is just about Echelon. I think it’s about the other 5,000 hotel rooms that we own and operate in Las Vegas today that frankly, are at price points that are much more in line with many of our Midwest and South customers.
Jane Pereira - Lehman Brothers
Okay. So, in other words, you would anticipate maybe someone would stay at Orleans or one of the properties near the Strip?
Paul Chakmak
I think the Orleans and the Gold Coast are both very well positioned being really, truly Strip adjacent. No different than the Rio is for Harrah’s.
Jane Pereira - Lehman Brothers
Got you.
Operator
And at this time, this concludes our question-and-answer session and I would now like to turn the presentation back over to Mr. Keith Smith, President and Chief Executive Officer.
Keith E. Smith
Thank you for joining us this morning for our earnings call and we look forward to speaking to you next quarter. Thank you.