Churchill Downs Inc (CHDN) 2003 Q2 法說會逐字稿

Please stand by. We were about to begin. Good day and welcome to the Churchill Downs, Inc. conference call. Today's conference is being recorded.

I would like to turn the call over to the Director of Investor Relations, Mr. Michael Ogburn. Please go ahead.

Good morning. To review the Company's results of the second quarter of 2003. The results were released yesterday afternoon in a press release that has been covered by the financial media. A copy announcing earnings and any other financial statistical information about the period to be presented in this conference call including information required by Regulation G Is available at the Company's website entitled investor relationship at www.churchilldownsincorporated.com. A release has been issued advising the accessibility of this conference call on a listen only basis over the internet.

Let me express that some statements made in this call will be forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include projections, expectations and beliefs about future events or results or otherwise are not statements of historical fact. Actual results may differ materially as that projected in such statements. Investors should refer to statements included in reports filed by the Company with the Securities and Exchange Commission with discussion of additional information concerning factors that could cause our actual results of operations to differ materially from the forward-looking statements made in this call. The information being provided today is of this date only. And Churchill Downs, Inc. expressly disclaims any obligation to release publicly updates or revisions to reflect any changes in expectations.

I will turn the call to Tom Meeker, President and Chief Executive Officer.

Good morning. Thanks for joining us on our call to discuss the second quarter results. As reflected in our press release, this was a terrific quarter for the Company. Our performance exceeded the expectation and was one of the strongest quarters of the history of the Company.

Today as I always do, I will give some general comments concerning the performance of the second quarter and following those comments my comments, Michael Miller, our CFO will give you our details. I will make a few comments about a number of things that are going on within the industry that will affect the growth not only the industry but our Company.

Let's turn our attention then to the second quarter. There were several factors contributing to the strength of the second quarter. First, was the shift in dates compared to last year and particular the Arlington Park operation gained 19 days during the quarter compared to last year. More over, during the six months Arlington Park's numbers were affected or impacted by a greater portion of the host fees, the dark time money that's attributed to the State of Illinois during the periods of January and February. Obviously, the success of Derby Week at Churchill Downs, racetrack had a significant impact on second quarter performance. Total wagering on the Derby and Oaks increased 13.8% and 8.2% respectively and the momentum provided by the Derby Week in Oaks activities carried through the Spring meet. The Spring meet at Churchill Downs closed with total wagering in excess of $600 million which was a record for the Churchill Downs racetrack.

The early opening of 24 suites in the partially completed jockey club facility which is the facility located above the grandstand including which in total buildout will be some 64 suites. We open 24 of them during Derby Week and that contributed significantly to the performance and revenue base of Churchill Downs racetrack. We will bring on an additional compliment of suites during this year's fall meet and that should help us, but I would remind everyone that the bulk of the suite revenues is attributed to the Kentucky Derby and the Kentucky Oaks. The lift in revenue for the fall meet will not be certainly as significant as occurred during the Spring meet.

By far the greatest impact on the quarter was the excellent performance of CDSN, our simulcast operations. Net revenues increased 23.6% over the same period last year and this equated to an increase of $170 million in handle through CDSN and its products. This increase was the result of several factors, aggressive marketing, greater deployment of the twins bars club program, the quality of the racing product and to some extent the exceptionally bad weather that occurred in the Northeast which negatively impacted some of our competitive signals. On balance, I can tell you that I'm pleased with the performance of CDSN.

Account wagering also increased significantly during the period and it continues to grow for the first six months of the year. Account wagering on CDSN products increased 73.7% over last year. The bulk of this occurring during the second quarter, obviously, when we were racing. Total wagering on CDSN products across the account wagering platforms totaled $60.7 million and TVG is distributed to over 11 million households across the country.

During the second quarter, the Company announced its intention to partner with Charles Betters with the purpose of constructing a new racetrack in Pittsburgh, Pennsylvania. We were actively assisting on this effort but there is a lot of work to be done. Currently, the Pennsylvania legislature is considering legislation which it passed and signed by the Governor would allow racetrack licenses to operate slot machines. We were watching what is going on in Pennsylvania very carefully, obviously. But I should also mention that if indeed the legislation passes, there is yet another hurdle to be passed and that is that we need to acquire a racing license in conjunction with the Bettors group and those licenses are limited and we can't be assured that we can obtain one.

During the quarter, the Company also embarked on a new project which I believe will significantly impact the manner in which we deliver customer service and ultimately significantly impact our ability to compete not only at the on-track sites that we operate, but also in the simulcast marketplace. This is our CRM initiative, customer relationship management initiative. At the core of this initiative is the Twins Bars Club Program which allows us to do a number of things including coming closer and delivering products and services that are designed specifically for targeted market segments which we are able to do through the customer intelligence that we gain through the Twins Bar Club Program. As we move forward, a number of other significant changes will be made in terms of how we deal with our customers, again both on-track as well as customers betting across various platforms in the internet environment and the account wagering environment.

So on balance, we were busy during the second quarter. The performance of the Company was excellent during the quarter. And could not be more pleased.

Let me make a few comments about what's going on in the industry. Much of this has been reported in the press. Clearly we are pleased with what we see in terms of the increased awareness of our sport in particular the events that occurred during the running of the Triple Crown and the effort, the campaign run by Funny Cide lifted the public awareness of our sport significantly. On the heels of that, we have the Sea Biscuit movie which has received rave reviews across the country and the focus is on racing which we believe will do nothing more than assist us as well as entire industry and promoting our sport across the country.

I'm cautiously optimistic also that the Thoroughbred Championship Tour, TCT, will come to fruition. TCT could provide the industry with a consistent quality product connecting the Visa Triple Crown series with the Breeder's Cup Championship Day specifically during the summer period, provide an excellent television product and more important showcase the quality horses that we have in the various divisions that would run as part of that. Much needs to be done to make this happen, but generally speaking I'm pleased with the number of industry leaders who embrace the idea including some of the significant owners who really are behind this effort.

Finally, let me report on the master plan development at Churchill Downs racetrack. It's proceeding on schedule and on budget. As I mentioned, today's one involves the construction of the jockey club suites over the grandstand. We will complete the construction of Phase One by the end of August. We will have that full facility available for occupancy during August and that's a critical factor in our ability to operate not only the fall meet of '03, but also the Spring Meet of '04. We will need that facility to accommodate the displaced patrons that will be moved as a result of the construction going on in Phase 2. Phase 2 has commenced. Demolition is under way on some of the outbuildings located here at Churchill Downs. And probably by the end of the year we should see steel construction up and major infrastructure construction completed. That project is not anticipated to go on-line fully until the end of '04.

I might also add that the sales of suites is going remarkably well. Of the total compliment of 64 suites, we have sold all but 7 of them.

Mike will discuss in detail and reaffirm our previous guidance for the year-end of approximately $1.80 per share EPS. If giving that guidance we continue to be troubled by the prolonged downturn in the economy. Clearly the longer the downturn continues and in particular as unemployment rises, the industry and the Company will be impacted to a greater degree.

I also remind you that fourth quarter will be impacted not only fourth quarter but the first and second quarters of next year will be impacted by the master plan construction at Churchill Downs racetrack. The track will incure additional expenses related to the construction of various temporary facilities to accommodate the displacement of customers as a result of the construction, but in the end, we will have a new facility, bring it online by the Derby of '05, which will be a significant addition to our overall asset base.

So with that, let me turn the call to our Michael Miller, our CFO, and he will discuss all of the financials in detail.

Thank you, Tom and good morning to everyone.

I will first review the highlights of our performance for the second quarter as well as the comment on certain balance sheet accounts and then I plan to discuss the guidance which Tom provided for the full year as well as the third quarter. After I'm through with my comments, we will turn it back over to the operator and respond to your questions.

First let me address the statement of net earnings for the second quarter of 2003 compared to the same quarter of 2002. Our net revenues increased $7.8 million or nearly 5%. As Tom alluded, we did benefit by changes in the racing calendar in Arlington Park, an increase of 19 days. But this was offset by a loss 14 days at Hoosier Park and $2.5 million decrease in revenues as a result of the subsidy at Hoosier being reduced for the full year and we discussed that in previous calls. Offer that in a way of reminder.

The strength of the Derby in Oaks, the balance of the Spring Meet at Churchill and the stellar performance. And as Tom has mentioned, CDSN has a terrific quarter. Benefitting from having an Arlington product for the additional 19 days, a strong Derby and Oaks performance and in general a quality racing product in all of our locations. In the interest of full disclosure, I must point out that the east coast suffered through miserable weather in the spring and CDSN was the apparent beneficiary of this.

We continue to focus on the efficiency of our operations again as we talked about in previous calls. And this is reflected in the modest increase in our operating expenses. As a percentage of net revenues, operating expenses declined quarter to quarter from approximately 71% of net revenues to 68%. We continue to stress best practices amongst all of our operating units and for the year we do expect profitability of our tracks as expressed by our EBITDA margin to be up somewhat over 2002. Just as with operating expenses, we continue to be vigilant about our SG&A expenses and held these costs flat year over year despite in wage and benefit increases and normal inflationary increases.

For the sixth month period, this category declined by $400,000, which was primarily result of legislative activity in 2003 compared to 2002. Our SG&A costs are largely fixed in nature and we believe that we now have the infrastructure largely in place such that any future increases in this category will primarily a function of inflation or increases as a result of future acquisitions.

Dropping down to the other category on the P&L, interest expense in 2003 continues to be less than for the prior year. We continue to enjoy the benefits of prudent application of free cash flow to reduce debt and favorable interest rate environment.

As a reminder, we restructure or debt facilities in April of this year and were able to achieve very competitive rates and terms. Our affective income tax rate changed slightly due to the shift of certain state allocation factors and anticipated level of lobbying expenditures. Our earnings per share on a fully diluted basis are $2.09 which is 2 cents above the range we provided during our last call. This variance is the stronger than expected Spring Meet in Churchill Downs, including Derby and Oaks, as well as the performance of CDSN both of which overshadowed softness in the live meets at our other tracks.

I will turn to the supplemental information by unit. First a comment about the form. The section labeled Intercompany Net Revenues reflects the activity between CDSN and the tracks for the purchase of the racing signal. As can be seen after eliminations, there is no net revenue generated so I would suggest the focus be on the top and bottom sections only which is revenues from outside sources and EBITDA.

For Hollywood Park, Calder and Arlington, there is a fairly direct correlation between the change of revenues from year to year and the changes in the racing calendar. And Hoosier, their revenues were not only impacted by having 14 pure racing days during the quarter but also the loss of the subsidy revenue alluded to earlier. Hollywood actually had the same number of days in the quarter for each year but suffered from weather problems early in its Spring Meet from which it never fully recovered. I have already spoken by Churchill CDSM which explains the strong performance of these units.

The profitability of all operating units is expressed in EBITDA margin except for Hoosier, as increase from year to year and we currently anticipate finishing the full year in a favorable position as well as compared to the prior year.

Before I leave the segment information, I would like to bring you up to date on Ellis Park. We previously reported that that unit was held for sale and as you recall in 2002 we took a write down of $4.5 million. Our carrying value of the track. To date we have not been successful in completing a transaction and as a result we have totally reengineered our approach to the operation such that it will effectively operate as a division of Churchill Downs. We expect the cost savings results from this change on a full year basis along with some revenue enhancement opportunities we were exploring to result in an asset that could be sold or fit comfortably in our operations.

Next I will discuss the balance sheet and I will be focusing primarily on changes from June to June comparison for December 31 are really problematic as we look at a balance sheet when we were not racing live when all of our tracks are racing at the end of June. The fluctuations and receivables from year to year are approximately $9 million is primarily the result of a timing of paramutual settlements but includes an increase of $3 million related to the sales of our new jockey club suites. The timing of the live meets and related purse and commission settlements explains the $10.5 million decrease in accounts payable from year to year. The increase in deferred revenue is a function of our new suites and as can be seen by looking at December to June, we did pay our dividend in the first six months of the year.

In large measure, our financial position at June 30 is unchanged from year to year aside from the impact of the master plan expenditures which can be seen in the increased plant and equipment as well as the related receivables and deferred revenues from these venues. From July 1, 2002, to June 30, 2003, we have spent $19 million on the master plan and $33 million in total on Cap Ex. In spite of these costs, our overall debt has increased slightly over $3 million. That concludes my comments on the second quarter financials.

With respect to earnings guidance, we now anticipate a range of 55 to 58 cents for the third quarter which is compared to 59 cents reported for the third quarter 2002. This decrease is a function of fewer dates of live racing. The impact the reduced subsidy in Indiana and cost associated with the demolition of the clubhouse at Churchill Downs is part of our master plan renovation. Business trends in general are anticipated to continue which reflect increases in overall wagering handle but softer on track performance.

Finally, as Tom said,we are once again affirming our guidance of $1.80 for the year. There are a lot of moving parts but we were cautiously optimistic that we will achieve the target. For those of you who have read this and have -- are trying to do the math and wondering how we arrived at $1.80 give what we reported, let me remind you that the variance in the second quarter from 2002 largely reverses in the fourth quarter primarily due to the racing calendar and again that's primarily at Arlington Park. That concludes my comments and I will now turn it back over to the operator for questions.

Thank you, Mr. Miller. Today's question and answer period will be conducted electronically. To ask a question, please press the star key followed by the digit one on your touch tone telephone. And if you are listening on a speaker phone, you may want to disengaged your mute button to allow your signal to reach our equipment. Once again, that's star one to ask a question. And, we'll take our first question from Tim Rice with Rice Fulcrum. Please go ahead, sir.

I had two questions. The first one relates to Hollywood Park. I realize that overall the numbers were somewhat flat. You reported I believe a 40% increase in the account wagering and I was curious whether that was related to the area close by Hollywood or whether it was an expansion of interest in other parts of the country and whether you see this as a system-wide trend and how you might be incorporating that into your plans.

Let me turn that over to our Chief Operating Officer.

TBG did do a large installation into the San Diego area in advance of this year's Spring Meet at Hollywood Park. The bulk of the increase that we saw in account wagering from California residence on the Hollywood Park product came from the San Diego area. And that's all good news. We did see a slight decrease in the amount of account wagering on Hollywood Park product from California residents from the immediate area around Hollywood Park which had been the primary television deployment from a year ago. We were very excited about the increase from California residents.

Do you see this as being a trend across your whole network of tracks? Or do you think it was specific to this TVG in San Diego?

We would expect that TVG would not only be able to launch and to deploy more cable systems into California, but throughout other parts of country as well. In the near term, the biggest beneficiary of the TBG platform will be coming from California residents on Hollywood Park product.

Thanks. And one other quick one. I'm a little confused about the state of racing days in Florida. Are you at an impasse? -- I mean [Calledder]. Will we have overlapping meets down there? Has that been resolved?

The state of Florida allows you to apply for and receive any dates that you race. Last year we unilaterally determined to file dates which we did. We also unilaterally determined to adjust dates on a second filing and while it's a possibility that Gulf Stream may determine to overlap what I would consider the traditional racing dates, I hope that doesn't occur. I don't think it would be good for the industry at large nor either one of our companies.

Thank you very much.

Star one for questions, please. We will take our next question from Ryan Wurse from CL King.

Good morning. I have a couple of questions. Just looking at the guidance that $1.80 number implies a break even quarter for the fourth quarter and it looks like the second quarter there are things to do with the increase that you guys achieved besides Arlington Park. Could you comment on how much you attribute the decline in the fourth quarter expectations from construction disruption and the buildout of temporary facilities and the economy in general racing trends.

Well, I'm not prepared to give full fourth quarter guidance right now, but let me comment on that. The racing calendar at Arlington shifts dramatically. We had full month of racing in 2002 that we lose in 2003 in the fourth quarter. That has a significant impact on the EBITDA there.

We will have a temporary venue expenses with little offsetting revenue at Churchill Downs in both the third and the fourth quarter and again as we stated before, the full year impact of the subsidy is about $5 million and that's spread fairly evenly throughout the year. Again, you can do the math there but it really is those three things so there will be a significant decrease in the fourth quarter this year. These will be the fourth quarter of last year, although I don't anticipate it to be a break even, but it will be significantly down from last year.

The other thing,Ryan, this is Tom, it's hard for us to project what is going to happen with this fall meet and the Spring Meet of '04 at Churchill Downs with this construction. We are doing everything possible to ameliorate any loss in attendant at the meet. But you talking about displacing a large portion -- well, not displacing but losing a large portion of facility that was the haunt of a large number of customers. Enough to we believe we will be able to displace them and put them in similar surroundings, but there is a big question mark that hangs over the fall meet of '04 in the Spring Meet of '05 -- excuse me, '03 and '04.

And also, the calendar is exacerbated because in the calendar last year at Arlington, don't forget, we had Breeder's Cup which gave us a significant lift and that won't repeat this year.

The seating capacity at Churchill Downs in the fourth quarter for the fall meet, you will have enough capacity there?

Yes, it's not a question -- it's a question of amenities. I'm used to be up on the fourth floor in millionaires row and now I'm located in the bows of the grandstand and that's a little bit of an exaggeration. But we are fortunate in that we will have completed the construction of Phase One which provided quality venues which we will be able to displace a lot of our patrons into those facilities that will be significantly enhanced. The other problem we have got will be operating from temporary kitchens. The dining areas will be sorely tested, concessions should not be adversely impacted but the dining facilities will not be as efficient as they were with a kitchen facility that we currently haves, in having not gone through a situation like this before, we were obviously are trying to be very realistic through the side of conservative revenues at Churchill.

Could you also talk about the trends at Arlington Park? I know you moved race states to the second quarter, but I would have expected a little bit stronger performance there.

I share that view. We are concerned a little bit about the performance of Arlington. I think it has a terrific potential. We are doing things much as we have done with Ellis Park and we seem to be getting some traction down at Ellis. We were hopeful we can implement some things that will do two things.

One, address some of the cost structure issues that we believe exist at Arlington, but more important start driving the top line. We are in a terrific marketplace there. The full potential of Arlington I don't believe has been realized. We are confronted obviously with some unemployment problems across the country and those problems are fairly acute in the Chicago land area with unemployment. But having said that, we were focused on that as part of our best practices program and I would hope that we would be able to solve that very quickly. The shift in the dates right now the meet hasn't been completed. But the shift in the dates seem to indicate at best a wash with what we were doing last year. With the later dates.

Tom, could you just talk about any strategy that you may have in place to convert potential trial customers created by the Sea Biscuit movie that could happen and the progress of TVG and any new states or if there is any upcoming expansion there?

Right. The CRM effort which really started with the Twins Spars Club Program, we are currently putting through 22% of our total handle goes through Twins Spars Club Program. That's exclusive of the California operation which has an industry-wide player affinity program called the Golden Rewards Program out there. But we do at our facility is 22%. Our objective is to increase that beyond the 50% mark by the end ofnext year.

It does a number of things for us. It identifies the new customers, the trial customers who come in. And we are able then to target promotions, products, et cetera, directly tied to them.

We, in conjunction with the Sea Biscuit movie, we are doing a lot of things in each of our facilities including giveaways, we had a premier here at the local market here last week. And we were trying to do everything possible not only as a company, but just as important as an industry through the NTRA to leverage the opportunities that Sea Biscuit provides to the industry.

But going back to my point, the CRM effort will ultimately result in refining our ability to do a number of things. One, identify all of our customers and develop a direct link between our racetrack operations and the customer through internet and or other direct mail opportunities. Number two, we will gain a lot of customer intelligence about the preferences of those customers, be that the type of unit of bets, types of races they play with and those sorts of things, which will allow us to target those customers with specific products, rewards and incentives.

And then finally and I think this is most important, we will be able to for the first time value our customers through an integration of all our databases which are manifested across the Company. We will consolidate the databases and retrieve the information on those databases and be able to identify for the first time the true value of each of our customers and be able to incent reward those customers who are valuable to us and provide us an appropriate margin in terms of profitability. So you put all that together and I think we are on the cusp of applying technology and data in a way that we have never done before and I think it will be something that will be very significant for the future growth of our customers -- of our Company.

TVG?

Let me go back to what John was commenting on and the parodinethat existed in California is like what we've seen here in Kentucky. When you start deploying through an account wagering platform in a particular market, the first thing that happens is within a local market and that's the on-track market which is roughly 25 miles from the racetrack, you see diminution in play as the patron decides not to attend the races as frequently and plays at home or wherever he or she might play, the advantage that TVG has is the ubiquitous deployment they have and while we were suffering and this was indicated in Hollywood, the local area within 25 miles initially there was a drop in the level of play from those customers in the on-track environment and they played off-track.

But TVG through Direct TV and through some of their cable distribution which they have been able to deploy the TBG signal on. In remote locations we are picking up new customers and that's the growth potential and in the short term you will see and Hollywood is a good example, Churchill was a good example five-years ago when we deployed TBG in this marketplace, the initial response or the metrics goes something like this. You will see a decline in attendance and handle at the track. But as the signal deploys farther and farther away from the racetrack, the offset that you get more than makes up for the on-track declines.

So I think TVG has done an excellent job. And for the last year or so has done an excellent job in increasing their distribution base. The deployment on Direct TV is significant. Some the cable distributions contracts that they have been able to negotiate, particularly the ones in the Southern California and San Diego marketplace, have been very helpful to us.

U-bet continues and we do through our relationship with TVG and U-bet and it continues to deploy in a more ubiquitous manner than TVG.

Is there any movement on the effort to legal the account wagering in New Jersey?

New Jersey has a closed system. They are insular in their approach. And the answer is, no. I mean, from an industry level, there are initiatives throughout the country that are targeted at increasing the legality of the account wagering specific statutes authorizing account wagering in various jurisdictions but New Jersey I don't think is one of them.

Thanks.

Just a reminder to ask a question please press star 1 on your telephone.

No one else?

There appear to be no further questions so Mr. Meeker, I will turn the call back over to you for any additional or closing remarks.

Thank you all for joining us today. Our view of the second quarter was that it was a significant quarter. We performed well.

And I want to pay particular attention to the efforts under taken by all of our employees across the Company from coast-to-coast. The significant challenge starting off with the economy, subsidy reductions et cetera, et cetera, they have performed exceptionally well. As we look forward, clearly we see additional challenges as it relates to the economy and other factors, movement of dates. In the end, I feel very confident that our employees are up to the task and will be able to deliver positive growth for our companies as we move down the road.

With that I will close. Thank you for joining us this morning.

Thank you. That does conclude today's conference call. We appreciate your participation and you may now disconnect.