Churchill Downs Inc (CHDN) 2003 Q3 法說會逐字稿

Good day and welcome to the Churchill Downs, Inc. conference call. Today's conference is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to Mr. Mike Osborne [sp], director of investor relations. Please go ahead.

Good morning and welcome to this Churchill Downs, Inc. conference call to review the company's results for the third quarter of 2003.

The results released yesterday afternoon in a press release covered by the financial media. A copy of this real release announcing earnings and any other financial and statistical information about the period to be presented in this conference call included any information required by regulation G is available at the section of the company's web site entitled investor relations at www.churchilldownsincorporated.com. Let me also note a release has been issued advising of the increase ability of the conference on a listen OEM base over the internet.

As we start, let me express 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, or beliefs about future events or results or otherwise are not statements of historical fact. Actual performance of the company may differ materially from that projected in such statements. Investors should refer to statements included in reports filed by the company with the Securities and Exchange Commission for discussion of additional information such as factors which could cause factors to differ materially from the forward-looking statements made in this call. The information being provided is of this date only. Churchill Downs, Inc. expressly disclaims any obligation to release publicly any update or revisions to these forward-looking statements to reflect any changes and expectations. I will now turn the call to Tom Meeker, president and chief executive officer.

Good morning, everyone. Thanks for joining us this morning to discuss our third quarter results. As always, I'll begin with a brief discussion of the results and provide you some thoughts and comments about various matters affecting the performance of the company and a little bit of a look forward. Following my comments, I will turn the call over to Michael Miller, our CFO, who will give you all the various details.

First let's talk about the third quarter. Despite racing 37 fewer days against last year and despite losing approximately $1.1 million in revenues from the Indiana subsidy, the company performed well during the quarter. The loss in revenues was offset by continued emphasis on cost control and the continued growth of CDSN. In addition, our earnings were impacted by impending settlement of real estate tax claim at Arlington Park, and Mike will give you the details during the course of his comments.

I was pleased with the improvements at the Arlington Park meet that posted increasing and ontrack attendance and total handle. We've been working hard to improve this operation and while there's much to be done, I was pleased with the positive signs of improvement. Similarly, I was pleased with the performance of Ellis Park as it closed off its meet with some very impressive numbers, a major change in the racing program and some additional expense reductions Ellis [sp] Park headed for a much better future.

Let me briefly give you some comments about what is happening around the company. At Churchill Downs racetrack, the master plan construction is under way. Phase 1 completed and will be fully operational during the course of this fall meet. All suites have been sold which is very important. and phase 2 commenced following the Spring Meet. And phase 2 I'll remind you is the renovation -- actually, the raising of the club house and rebuilding of the club house facility, and that is scheduled to be completed during the first quarter of '05. The project in total is on schedule and on budget. The club house area which is affected by phase 2 will not be in service during the next three race meetings, with the exception of Derby '04 when we will temporarily open portions of the club house to accommodate the Derby and Oaks crowd. Steve Sexton, our president, and his folks are doing a terrific job in providing temporary venues or temporary venue for these meets. In particular for the '04 Derby we are constructing two new venues, one in the in field that will accommodate approximately 3500 patrons who will be displaced from the sky terrace areas of the club house, and another venue located in the marquee village area which will accommodate some of the fans who will be displaced from such elements as soaks [sp] and some of our restaurant facilities that will no longer be available.

All in all, it is estimated that the incremental cost associated with the temporary facilities will have a negative impact on our EBITDA for 2004 in the range of $1 million. 2004 will be a challenge for Churchill Downs racetrack. In addition to the problems associated with the construction a new OTB will be built or his being built directly across the river in Indiana by Indiana downs, and this will present another competitive dynamic in the marketplace not heretofore had. While we do not believe the impact will be significant on the live racing activity at Churchill Downs, it will have some impact, we believe, on the track side operation during the simulcast operations in the global market. Hoosier Park business levels have been flat to down except the Maryville track side facility. And again, this is function of fewer live racing days, the impact of the new racetrack in the Indianapolis market, and the consequent loss of 50% of the subsidy which heretofore had been given to Hoosier Park.

Recently the Indiana racing commission ruled the subsidy will again be divided in 2004 at 50/50 split. This is a change. Originally they had provided that 50% of the subsidy would be divided 50/50 and the other 50% of the subsidy would be divided based upon the total handle generated by each of the tracks. This change brings us to the same format that exists today in 2003 for 2004.

Hollywood Park continues to underperform compared to last year and several factors seem to be involved in -- at Hollywood Park. First, the growth in the TVG account wagering seems to be pulling fans away from the racetrack. And TVG is growing very significantly, particularly in the Southern California market where new arrangements have been made with MSO's in that market for a fuller distribution of the TVG signal.

Clearly the increased competition provided by Native American casinos continues to hurt Hollywood Park and indeed all of California racing. Finally, short fields which negatively impact simulcast sales continue to be a problem for all operations in California, not just CDI operations. This condition is exacerbated by the fact that some California horsemen are moving their racing stables to other tracks in other states in an effort to avoid the extremely high worker's compensation rates found in California.

Calder’s performance for the first nine months has been good. However, third quarter year on year performance has slipped a bit. We believe several factors contributed to this. First, Calder lost approximately 25 turf races due to heavy rains in the south Florida area during the quarter. Second, a statewide smoking ban was implemented on August 1, and that has had a significant impact on the operation there at Calder as well as other parimutual [sp] operations in the Florida market. It's interesting to note that the Native American gaming operations in south Florida are not subject to the smoking ban so they have gained a competitive edge in that marketplace. And, third, while we can't quantify this, the economic conditions in the south Florida market continued to impact all entertainment venues. And this is particularly true for patrons who are on fixed incomes. And anecdotally we have talked to a number of our patrons and their per capita wagering has has slipped as a result of the economic conditions they find themselves in. But of all these factors, the smoking ban seems to be have had the most deleterious impact on the south Florida market.

On the legislative front, slot legislation continues to be a topic of much discussion and focus in several jurisdictions in which we do business. In particular, with the election of Governor Schwarzenegger out in California, there seems to be a new interest in slot legislation at California tracks. Heretofore Governor Davis because of his close association with the Native American casino operators has not been supportive of this initiative. Indiana, Illinois, Florida, Indiana, Kentucky are considering slot initiatives and obviously we are actively involved in promoting such legislature in those jurisdictions.

On a positive note, we continue to aggressively pursue our CRM initiatives and have accomplished much during the quarter. Recently, we opened a call center here at Churchill Downs racetrack which will be a model for all of our company. And we continue to work on a number of new programs and systems that will substantially alter how we interact with our customers company wide.

As I look to the future, I am confident in our ability to meet the earnings guidance that we provided for you for 2003. And while it is a bit too early to see what will happen in 2004, we are aware of some challenges that we face. First of all, the construction at Churchill Downs racetrack and its impact on the overall operation, the new competition in the global market, the continuation of the 50% split in the Indiana subsidy, and the smoking ban in Florida are all challenges that we are going to have to face in the coming year.

So with that, I'll turn it over to Michael Miller who will give you all of the details concerning third quarters and year to date figures.

Thanks, Tom. Good morning, everyone. As has been our routine, I will review the quarterly financial statements included in the press release and then provide an update on full year earnings.

First let me begin with the consolidated statement of net earnings. With respect to operating revenues, it is once again very difficult, just as it has been throughout the year, to compare year to year revenues by quarter because of the changes in our racing calendar. Probably the most notable change this year was the shift of a month of racing from the fourth quarter back to the second quarter for Arlington Park. So rather than try to dissect the revenues for the third quarter, I am going to take a different approach. A broader view, if you would, and report to you what business trends indicate for the full year.

Our current forecast indicates that revenues for our full year 2003 will lag 2002 by approximately $13 to $14 million. This variance is readily explained by reiterating the same comments we have made throughout the year. First, the full year racing calendar for 2003 includes 50 fewer race days than 2002, with the majority of this decrease being at Hoosier Park. Using actual results for our 2003 race meets, we can reasonably estimate the loss of these dates account for approximately $13 million in lost revenue in 2003. Secondly, as we previously reported, Hoosier Park will have 5 million less in river boat subsidy revenue in 2003 as a result of the rulings in the Indiana horse racing commission. So if you add these two things together, that's total decrease of 18 million, which I am pleased to say offset by the strength of the CDSN revenues, that is interstate simulcasting, as well as the strong performance for the Churchill Spring Meet including record Kentucky Derby and Oaks. So the business trends we have communicated throughout the year appear to be reflective for the full year. That is, slightly declining ontrack business and continued strength in the simulcast market which is about 85% of our paramutual business.

Turning back to just the third quarter, with respect to operating expenses. Just as revenues are down slightly 6%, so are the operating expenses, a $6.2 million decline from 2002. A significant portion of this decrease may be described to decrease in purse expense which naturally follows decreased paramutual revenues. Also during the quarter we reached agreement with taxing authorities in Illinois regarding contested property taxes at Arlington Park for the years 1992 through 2000. The credit operating expenses after all the related costs and fees are deducted amounted to $3.1 million and was recorded fully in this quarter. We had been anticipating the settlement in this matter during the year but only in the third quarter did the negotiations proceed to the point where the benefit could be recorded. The total benefit is approximately $4.1 million. The difference between this amount and the recorded decrease to operating expenses of $1.0 million represents statutory interest and is reflected in interest income for the quarter. The impact of this benefit is partially offset by another one time live event in Arlington, that is the establishment of a reserve at receivables in the amount of $1 million. This happens to relates to a change in Illinois relating to the purse recapture program which is historically then funded in Illinois budgets. As a result of Illinois's financial situation, the general assembly did not fund this purse program in either 2002 or 2003. Rather than risk our relationship with horsemen or damage our racing program for 2004 and beyond, we have opted to take a long term view in the recovery of this receivable and established a present value reserve. Our ability to estimate the amount of any necessary reserve was delayed until the closing of Arlington Park's race meet.

On down to P&L, our SG&A expenses virtually flat for 2002. As a remainder this portion of our P&L represents expenses generally fixed in nature and don't fluctuate to any significant degree with our business levels. Moving to the other category, I have already spoken of the fluctuation interest income. Our interest expense continues to trend favorably against prior periods, a function of our disciplined approach to cash management as well as favorable rate environment. Our net earnings on fully diluted basis exceeded the range in guidance previously issued by 1 cent and exceeded the consensus estimate by 3 cents.

The variance to our guidance is attributable primarily to the one time items at Arlington Park. However, when previously providing guidance, we had anticipated a significant portion of this impact. These same items also result and are now providing earnings guidance for the full year slightly in excess of $1.80 previously provided which anticipates virtual break even situation in the fourth quarter.

In general, this fourth quarter performance is the result of the shift in the Arlington Park racing dates from last year as well as the cost of temporary venues for the fall meet at Churchill Downs necessitated by the renovation. With respect to the segment information on a separate schedule, I think we have covered all significant trends and developments other than to comment on the continued strength of our simulcast signal on the export market as evidenced by the continued strength of CDSN revenues. Given that export simulcasting is now the bread and butter of paramutual wagering business, we are glad this ongoing trend of the establishment of the business unit in 2002.

Next I will turn to the balance sheet and focus primarily on fluctuations from September as comparisons from the December information are not very meaningful due to the seasonal nature of our business.

Now, the total increase in receivables from year to year. A little over $5 million is due to derby and sweep fillings [sp] at Churchill Downs, $3.8 million of declining subsidy receipts at Hoosier Park and $2 million has been recorded at Arlington representing the current portions of real estate tax refund that was recorded. Other assets increased by 3 million which is the long term portion of the real estate tax portion being recorded in this quarter.

The increase in net plant equipment is the result of our master plan expenditures at Churchill Downs we’ve discussed. Our capital expenditures are expected to be less than our depreciation charges for the year. The liability section accrued expenses by $3 million all due to timing of various expense items. Our deferred revenues increased directly with the increase in the receivables at Churchill Downs for the Derby related billings that I talked about in discussing the receivables. These revenues are defferred and recognized during the second quarter when the Derby is run. The increase in income taxes payable as a result of changes in tax law for 2003 which allowed us to postpone the installment of our estimated taxes until October.

That includes concludes my remarks on the financial statements. I will turn the call back over to the operator and Tom and I will respond to any questions.

Thank you, Mr. Miller. If you would like to ask a question at this time, you may do so by pressing the star key followed by the digit 1 on your touchtone telephone. If you are on a speaker phone, please turn off the mute function to allow the signal to reach our equipment. Begin, star 1 if you would like to ask a question. First question from Amy Marshall [sp] at Crews and Company [sp].

Hi guys. Good quarter. I was actually wondering if you could give me the exact cap ex and capital interest for the quarter.

I brought this morning was the cap ex for the nine months. Let me give you that and I can get back to you on the quarterly amounts.

Okay.

For the full nine months the cap ex is about $23 million and about $15.5 million of that is for the master plan.

And was there any capitalized interest in there?

There was indeed. I don't have that number at my hand but I will be glad to get back to you.

And how much exactly are these temporary convenient you going to cost you? I know you said it was a $1 million impact on earnings.

The $1 million Tom referred to in his comment was related to '04. For the fall meet of '03 which is about to commence this week, as a matter of fact, we are also setting up temporary venues and I don't have the exact amount available at this point.

Okay. And now I know in Illinois there is a November session. How do you guys feel about that?

Well, make no comments about legislative sessions. We obviously would like to see some positive changes, particularly in the BLT or slot area. But we have no comments concerning any of the legislative sessions.

Okay. Thanks guys.

Just a remainder, if you would like to ask a question, you need to press star 1 now.

While we are waiting on the next question, I will tell you that we have calculated while we were waiting that the cap ex for the third quarter the total was $4.2 million.

Gentlemen, we are actually standing by with no further questions at this time. Mr. Meeker, would you like to make any additional or closing remarks?

Thank you, everyone. I appreciate you being on the call. Let me just look forward again and kind of summarize with an observation about 2004.

I think 2004 will be a terrific year for the company in terms of what it will accomplish. And it will be a year in which we will reposition the company for further growth as we look forward to the future. We have a number of things, challenges, obviously, which I have described before but we have a number of things on the plate. First of all, of course, is the redevelopment of Churchill Downs racetrack. And while it will not be completed to '05, a substantial amount of the work will be completed during '04. We continue and will continue to aggressively implement and deploy our various CRM initiatives which again will reposition the company for future growth and we will provide us new opportunities to interact with our customers. And, finally, we will continue to pursue BLT initiatives in those states in which we do business.

All in all, it will be a challenging year. But as we look forward, there are a lot of things that we will be doing that I think will have a material impact on the long term growth and viability of our company. And with that, I will close and again thank you very much for being with us this morning.

Thank you for your participation in today's conference and you may disconnect at this--- 0