Churchill Downs Inc (CHDN) 2004 Q1 法說會逐字稿

Good day, and welcome to the Churchill Downs Incorporated conference call. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Mike Ogburn. Please go ahead, sir.

Good morning. And welcome to this Churchill Downs Incorporated conference call to review the company's results for the first quarter of 2004.

The results were released yesterday afternoon in a press release that has been covered by the financial media.

A copy of this release announcing earnings and any other financial and statistical information about the period to be presented in this conference call including any information required by regulation D is available at the section of the company's website entitled investor relations at www.churchilldownsincorporated.com.

Let me also note a release has been issued advising of the accessibility of this conference call on a listen-only basis over the internet.

As we start, 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 or beliefs about future events or results or otherwise are not statements of historical facts. 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 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.

Churchill Downs Incorporated expressly disclaims any obligation to release publicly any update or revisions to these forward-looking statements to reflect any changes in expectations.

I'll now turn the call to Tom Meeker, President and Chief Executive Officer.

Good morning, everyone, and thanks for joining us on the call this morning to discuss the first quarter results. Let me outline briefly how the call will be conducted this morning.

First, I'll provide you some brief comments concerning the first quarter. I'll also give you some comments and preliminary numbers relating to the Kentucky Derby weekend, and then I'll outline some of the key areas of focus that we have got as we move forward during the remaining parts of this year.

Thereafter, I thought it would be important that we give you a briefing on some of our CRM efforts, so I've invited Andy Skehan, our Chief Marketing Officer to briefly outline some of the things that are going on in that arena, the CRM arena, which is a clear strategic focus of ours as we move forward.

And then finally, Mike Miller, our CFO, will go over the numbers in detail and provide you a little guidance as to the next quarter. Following that, of course, we'll stand ready to answer any questions you might have. As it relates to the first quarter on balance, I was pleased with the first quarter results.

As you know, historically, we don't-- we operate at a loss during the quarter and this is due primarily to the absence of any live racing, and this quarter was no different.

While we were able to increase our EBITDA over last year, with additional costs that we incurred related to both the legislative efforts that are going on throughout our system as well as our CRM initiatives, we were able to increase our EBITDA year over year.

The results also were better than expected internally, and 3 cents better than the guidance that we afforded the street.

The derby numbers are not all in, obviously, and particularly our revenues and expenses, but the preliminary data that we've seen relative to the derby weekend are very encouraging and portend good things for both the company and the entire racing industry.

This year's event provided our president, Steve Sexton and his crew at the Churchill Downs Racetrack with a number of new challenges that were directly related to the master plan development, as you know, that is being-- that is ongoing here at Churchill Downs.

Beginning last summer, the club house was raised to the ground. And by this year's Derby, only two of the six floors were available for use and those floors were largely unfinished.

We just had drywall on the floors, concrete, no ceiling, et cetera, but they were critical in accommodating the crowds that attended both Oaks and Derby.

The Churchill Downs Racetrack team developed a complex plan that addressed a myriad of different things including moving the Marquis Village, which comprises over 55 corporate suites and Marquise.

They had to move that to a new location on the first turn.

They constructed a new temporary infield facility to host some 3500 patrons who would otherwise have occupied seats on the fourth, fifth and sixth floors of the club house, Millionaires Row.

They constructed a new temporary press facility to house the almost 2000 members of the credential press, and they also had to move the television media compound that housed all the electronic media.

And in short, the logistics associated with this Derby weekend were by far the toughest that I've seen in my 20 years here at the track. Construction was not the least of their challenges.

Starting on Friday morning, the rain began to fall in Kentucky and by 4:00 on Derby day, a Monsoon-like storm entered the picture and dropped almost an inch of water on the track.

It resulted in a washout - washout of the track, but through the efforts of our track superintendent and his crew, we had the track ready and by 6:10, the race was ready to go--and as you all know, Smarty Jones came across the finish line first.

Smarty also is going to be pictured on the front page of Sports Illustrated in this week, first time since 1983 that horse racing had that prominent position.

More over, the stories attending this horse including the Pennsylvania Breeding Connection, the ailing owner and rookie jockey and trainer, clearly rivaled the dream come true story that we experienced last year with Funny Side.

Without question, this horse will provide racing and indeed the entire the Triple Crown series with a genuine star, and hopefully he proceeds well as he goes through the [prickless] and hopefully on to Belmont with a Triple Crown win.

Now, the numbers associated with the Derby weekend were fairly impressive. First of all attendance was down 2.5% for the two-day event. Last year we had about 262,000 people. This year we had 256,000.

Despite poor weather condition and the construction, this number was well above the anticipated 5% loss that we had programmed into our plan. The real surprise, though, was total wagering.

Overall wagering on both days was up almost 2% with total handle of both days of 174 million compared to 171 million in 19 - excuse me in 2003.

Wagering on derby day was at 143 million, which is a North American record for a single day. And on the individual races, wagering on the Derby was up some 13% and the oaks was up some 14%.

Growth and account wagering was also impressive during Derby week, our three primary account wagering partners--TVG, Youbet and American Tab were up 26%, 46% and 46% respectively.

So that was a good showing there. Television ratings associated with the NBC telecast were equally impressive. NBC delivered a 9.3 rating with a 22 share for the 5:45-6:45 period compared to a 7.6 and 20% share in 2003. A 22% increase in the best since 1992.

The rating peaked at 10.8 and a 26 share, a 27% higher peak than the 8.5 and 21 share when Funny Side ran last year and won the Derby. ESPN numbers ratings were also very good. A 17% increase during the 2:30-5:00 period, and they achieved 1.4 rating during that period.

But by far, the most impressive number posted came from kentuckyderby.com, our special event internet site. 2.5 million unique visitors to that site on Thursday, Friday and Saturday of Derby week was 70% higher than last year.

The results were directly attributable to new and unique elements contained on the site.

Advanced coverage in the national media and various promotional relationships that we had with NBC, ESPN and Fox, and one of the most successful promotions was the pay day sweepstakes that alone produced some 250,000 sign-ups, each containing full - fields of customer information and, again, as you know, collecting data on our customers is a critical element of our overall CRM effort, as it expands our database of new - potential customers.

Again, while we've not reconciled all of the revenue and expense numbers associated with the derby weekend, the preliminary data we have seen suggests that this was a year - that this year was at or near what we expected in some areas--such as overall wagering and TV ratings--far exceeded what we had expected.

Now, let me turn to a couple of other matters. Construction at Churchill Downs Racetrack is on schedule and on budget.

We'll be closing the floors that we used during the Derby weekend, those two floors that I mentioned before, and restart the construction process next week.

Again, as we saw last year, the construction that will be ongoing will significantly impact the rest of the Spring Meet and the Fall Meet in 2004 here at Churchill Downs Racetrack. The overall project will be completed in the early spring of 2005 shortly before the opening of the 2005 Spring Meet.

At Calder, we will be opening a new card room around the middle of the year, and this will provide a new revenue channel for that operation.

Now, turning our attention to the legislative front, we are actively pursuing alternative gaming legislation in a number of states, including California, where together with Magna and various card clubs, we are supporting a state-wide referendum.

Legislative bodies will be meeting this year in Illinois and in Pennsylvania where - where we will be working to secure favorable legislation in those states.

There is also a possibility of a state-wide referendum in the state of Florida and we are developing plans obviously for new efforts in both Indiana and Kentucky.

Depending on the events that unfold and the opportunities that may spring forth, we will aggressively pursue alternative gaming legislation as a part of our overall strategic plan for growth.

The summer, three of our tracks, Hollywood, Churchill, and Arlington, will participate in the NTRA summer racing series. This series involves five weekends where the races will be broadcast over ABC and/or ESPN. Three of the five weekends will emanate from our locations.

This is a significant move towards creating a bridge television property extending from the Triple Crown races in the spring to the breeders cup races in the fall, something that we believe is sorely needed by the industry, and we're fully supportive of it.

Moreover, this series will provide our company an opportunity to showcase and strengthen our quality racing content. Finally, to prevent any questions regarding development activities, in particular, articles relating to activities in both California and Louisiana, let me reiterate our policy.

We do not comment on development activities unless and until such time as they reach a point of substantial completion. In short, we have not, nor will we, make any announcements about such matters until such a time as we know we can deliver on the promise.

I can state, however, that we will continue to look for additional racing content, particularly racing content in the first quarter.

Second, we will continue to explore any and all opportunities that will allow us to maximize asset utilization and in the appropriate case, monetize our land or other assets not needed in our core operations.

Now, as I mentioned, let me turn the call over to Andy Skehan, our Chief Marketing Officer and he'll give you a CRM update.

Thank you, Tom. I'd like to take the next few minutes to review why customer relationship management or CRM, as it is typically referred to, is an appropriate strategy for Churchill Downs, what steps we are taking to affect the strategy and then briefly touch on where we are in the process.

The strategy began to take shape more than two years ago when we realized that we could no longer conduct business as we had in the past.

The challenges presented by our rapid growth--escalating media costs, increased competition, and expanded distribution--necessitated that we explore new and more effective ways of communicating with and serving our customers.

In particular, the trend toward more convenient off-track channels of distribution, while promoting increased handle, complicates our ability to maintain a relationship with many of our customers.

Today, nearly 85% of handle is generated at locations away from the track where the actual race is taking place. While the lack of direct contact with so many of our customers presented a challenge, it also presented an opportunity.

As Tom briefly referenced in his remarks, by leveraging the Kentucky Derby through our online pay day promotion, we were able to capture information on more than 250,000 unique racing customers from around the world.

By implementing systems that enable us to efficiently collect, store and analyze customer information, we can then design and deliver personalized products, services and communications to create a true customer centric organization.

When we speak of CRM at Churchill Downs, we are speaking about the systems and processes that will enable us to deliver superior customer service no matter where you are located or how you interact with us.

To that effect, we have already installed new admissions and sales and catering applications at Churchill Downs racetrack in Arlington Park. These systems will enable us to market and utilize our group hospitality services much more effectively.

This is both a source of increased revenue and perhaps more importantly, the most effective means available to us for introducing new fans to the sport of thoroughbred racing. We have also selected our CRM solutions providers and we're done installing the date management systems that will enable us to execute our plan.

We have augmented our staff with accomplished CRM professionals to guide the process. We have added Atique Shah to our team as the technical leader of our CRM implementation. Atique came us to from [inaudible] Commerce, where he was responsible for a CRM implementation that was recognized by [Gardiners], the top CRM implementation in North America last year.

Prior to that, Atique led a full scale of CRM implementation at the NBA. Technology alone does not lead to improved results.

To ensure success, we are addressing the people and processes associated with the systems and strategy. We intend to instill a culture that places the customer at the center of every decision and recognizes the changes in essential and welcome element of creating that culture.

We have initiated a parallel effort to our CRM strategy focus on changed management. Specifically, we are looking at the people systems we employ to in sure they promote and reward the behaviors necessary to attain our strategic objectives.

We are revamping our performance management process at every level and evaluating ways to improve communications and promote a culture that recognizes customer centric behavior.

While it is still relatively early in the process, there are substantial indications that our efforts are making a difference. Through our [inaudible] Affinity program, we've - have achieved unprecedented success using basic database marketing techniques.

The new systems will enable us to dramatically increase the frequency and sophistication of these efforts.

We have also seen encouraging success with respect to customer satisfaction in areas where we have begun to implement systems and measurements that promote these behaviors. We expect to see more progress as the year unfolds, but do not plan to complete the system implementation until early next year.

Now I'd like to turn things over to our CFO, Mike Miller, to review our first quarter financial performance.

Thank you, Andy, and good morning to everyone. My comments will be directed to our results and our financial position for the first quarter and then to provide earnings guidance for the second quarter as well as for the full year.

First, I would ask that you turn your attention to the supplemental schedule revenues and EBITDA by operating segment. With regard to revenues, our parimutuel activity for the first quarter was predictably flat from year to year, given our lack of racing product and the results for the overall industry for the first quarter.

We did enjoy a revenue increase at Arlington, being awarded a greater share of the Dark Day host fee money in 2004 from the Illinois Racing Board.

The diminimus revenues for CDSN for both years reflects our having virtually no live racing during the quarter, CDSN being responsible for all of our export simulcasting.

Our EBITDA for the quarter was negative 13.1 million, an increase in our cash flow loss of nearly 3/4 million over 2003.

The positive swing--which may have been anticipated from the increased revenues--was more than offset by increased expenses incurred in connection with CRM--as Andy just discussed--our legislative efforts, and temporary venue expenses, which we incurred to get ready for Oaks and Derby.

Our normal operating as well as SG&A expenses, if I may use such a term as normal, were relatively flat from first quarter 2003 to 2004.

Turning now to the full income statement, the discussion of revenues and EBITDA generally explains the change in our overall operating loss from year to year, an increase of approximately $900,000.

I will let you know that the depreciation expense included in the first quarter loss was 5.2 million, up approximately 250,000 from 2003 levels, the results of our jockey club suites being place in service.

In other income category, you will note a 400,000 decrease in interest year to year, in spite of increased debt balances. During the first quarter of 2003, we included in our interest expense approximately 600,000 of unamortized loan issuance costs that we wrote off as a result of refinancing of our credit facilities in the spring of last year.

Aside from that write-off, our expense for 2004 would have slightly exceeded 2003--consistent with the increased debt balances.

Our diluted earnings per share of 89 cents is 2 cents worse than in 2003. The number of diluted shares was virtually the same, so the increase is directly attributable to the increased net loss for the period.

The 89 cents is 3 cents better than the guidance previously given, and this variance - variance is largely due to the timing of anticipated expenses. Next, I'll speak to balance sheet fluctuations.

Focusing at this time, only on March to March fluctuations.

The the 6.1 million increase in current assets is a combination of several factors. Increased cash balances, which are a function of the timing of parimutuel settlements; increased deferred taxes which arise from differences between GAAP and tax accounting; and increased - and an increased receivable related to the Arlington property tax refund recorded in the fall of 2003.

Our other asset category increased as a result of loan issuance costs from the spring 2003 refinancing I previously mentioned, as well as the recording of the long-term portion of the Arlington property tax refund.

Net plant and equipment grew by nearly 44 million, which is roughly equal to the amount spent on the master plan during this timeframe. I might add that at this time, we expect our master plan to be completed on time next spring, and as Tom mentioned, on budget at the $121 million level.

Our good will balances are unchanged for the period. We've - we have performed the obligatory impairment tests on all facets of the good will balance and are comfortable that no impairment exists at any of the facilities.

Accounts payable on accrued expenses have both increased as a result of our master plan activity.

In addition, part of the increase in accounts payable is due to an increased purse payable related to Arlington's position in 2004 as the host track for the Dark Day monies. The increase in deferred revenue stems from increased Derby and Oaks billings, primarily related to the jockey club suites.

Our total debt, both current and long-term, increased by 14 million to 142 million, which is the net of our master plan and other capital spending offset by the use of our free cash flows to reduce our debt.

For March to March, the use of our credit facilities to finance net assets other than plant and equipment actually decreased. The increase in equity from March 2003 to March 2004 results from our net income for the period, a slight increase in shares outstanding, and then reduced by our normal dividend.

Turning now to the guidance, we included in the release guidance for the second quarter in a range of $2.10 to $2.15, which includes anticipated expenditures for legislative initiatives in all jurisdictions, but with emphasis on California as well as for CRM expenses.

We are still in the process of finalizing just how successful Derby and Oaks were, given the increased expenses incurred to put on these events, but are cautiously optimistic that earnings will fall into this range several cents greater than the $2.09 reported last year.

At the same time, we are reaffirming full year guidance of $1.70. Both of these estimates will take on greater certainty as our recently convened race meets continue for a few weeks, allowing us to better assess business trends.

We know from the past that Derby and Oaks business levels are not necessarily indicative of what we might expect for the regular race meet.

That concludes my remarks. I will now turn it it back to the operator to open it up for questions.

Thank you. The question and answer session will be conducted electronically.

If you would like to ask a question, please press the star key followed by the digit one on your touch-tone telephone. Once again it, is star-one if you do have a question.

We'll go first to [Amy Marcel], Jeffries & Company.

Thank you. I was actually wondering if you guys could give us the Cap Ex for the quarter and maybe Cap Ex guidance for the rest of the year?

Well, in the call that we've had in February, we gave guidance for Cap Ex for the full year at $94 million.

And that's still, still the number, still a good number to use for the year.

Let me see if I have something-- oh yes, I do, for the quarter, for the master plan for the first quarter, Cap Ex was approximately 19 1/2 million, and for all other Cap Ex--including both CRM and then our regular maintenance Cap Ex,--it was approximately 6.3 million.

Okay, and could you quantify the construction disruption from this past quarter?

Well the - no, not really.

I mean we've reported before that we have incurred additional expenses to put on the Derby and the Oaks with respect to temporary venues, and we reported that number was about a million dollars. But, at this time, we're still determining all the financial results for Oaks and Derby, so it's very difficult to try to quantify that.

Okay. Thank you very much.

Thank you.

Now we'll go next to [Ryan Worst], C L King.

Good morning.

Good morning, Ryan.

Good morning, Ryan.

Couple questions. Mike, in your guidance, does that include everything you expect to spend on the initiative in California?

During the-- yes, it does indeed, uh-huh.

So that's all included?

Yes.

Okay, and Tom, have you guys seen an impact on the off-track betting wagering due to the new OTB in Indiana across from Churchill?

Yes. We can't quantify it first of all. Well, in one respect we can.

We had a, about a, I think it was about 10% decline in the track side operation here in Louisville. In terms of the meet, you know, we're just one weekend of the meet, so it's pretty hard for us to determine what's going to happen.

Parenthetically, you know they have not concluded the Indiana racing commission, has not made a final determination as to what's going to happen with the Kentucky signal going into Indiana. Currently, the Kentucky signal does not go into the Clarksville operation.

Ryan, let me clarify something too with respect to the guidance. We do have included in the second quarter guidance what we expect to incur in California.

The full year amount that may be spent there is still yet to be determined and it will depend on just how the process unfolds.

Okay. But you assume some spending there, I would guess in your guidance, but it could be more or less than that depending on what happens?

Indeed, indeed.

Okay. And then the other OTBs in Indiana are getting the Kentucky signal, it's just the Clarksville one that is not?

That's correct.

And now, when - -

I'm sorry, in terms of our operation, all of our operations are getting the signal. Evansville and Clarksville are not.

Okay, and when did the Clarksville OTB open?

February-- I can't give you--

I think it didn't open until March, finally.

Okay. It was delayed. Yeah, late February, early March, somewhere right in that area.

Okay. And then also, Tom, I was wondering if you thought there was going to be an industry-wide impact or maybe might, something that might impact your strategy for account wagering going forward in that TBG did not exercise their warrants over you guys, does that change your strategy or outlook for account wagering for the industry?

No.

Okay. And then on - the Dark Days in Arlington Park, is that going be the same next year as it is this year?

That's to be determined.

Okay. Thanks.

Thank you, Ryan.

Just a reminder, if you do have a question, please press the star key followed bit digit one. And we'll go next to Tim Rice.

Good morning. I know you get tired of me asking this and I get a little tired of asking it myself.

We'll see if we get tired of answering it.

But could you provide, again, your opinion as to whether there is any progress being made towards either any unified betting platform or unified television signal for the industry in this country?

I can only speak for our company, and as I reported in the opening statement, we are doing as much as we possibly can to broaden the reach of our account wagering platforms. We are now involved with American tab,Youbet.

Coincidently, the activities of TBG in terms of providing more ubiquitous distribution is alive and well.

According to the latest figures in the first quarter, they are now reaching 12 million-plus homes on a full-time basis and some 17 million homes if you add in the sport - Fox Sports net simulcast that they do, which is about a 40-plus percent year over year.

So on that front, there is more ubiquitous distribution, particularly in the areas of Comcast. They announced earlier a new relationship with Comcast, which will provide them greater coverage nationwide.

I think it continues to be our belief that in conjunction with our efforts to improve the overall tote system that, one, we need a much larger television exposure for racing.

Two, we need to establish a unified account for our patrons, regardless of what platform they go over, and, three, that the point of competition should be at the level of choosing what platform you want to pass over, not necessarily what signal you want to-- what video transmission you want to watch, and I think as we move forward, hopefully the industry will adopt such a paradigm. But in the end right now, think from a customer's standpoint, clearly the customers are demanding unified account.

Clearly the customers are demanding a full range of products, and hopefully calm, cool heads will prevail and we'll be able to achieve that objective.

Are you satisfied with your current arrangement with the rebaters?

No.

I mean obviously I think everyone would like to get more from the rebate operation, and I think as we move forward, we have seen significant improvement in our relationships in terms of the pricing of our products, the rebaters, as we move forward hopefully we'll be able to achieve even greater results.

Thanks very much.

Mm-hmm.

And there are no further questions at this time, gentlemen. I'll turn the conference back to you for any closing remarks.

Well, thank you.

As I mentioned in our last call, this will be a critical year for the company as we reposition the company in order to meet the new competitive challenges brought about by competition, the change in the distribution paradigm, et cetera.

Our legislative and CRM initiatives will continue to be our primary focus as we move forward for the remaining part of this year; however, we will also continue to seek new ways to strengthen our core racing products, such as the summer racing series that we're about to embark upon here shortly.

We'll continue to expand our distribution of in-home gaming products.

We'll continue to improve our overall tote system and today, we're - we are leading the initiative to improve the overall tote system, and in particular, to improve the customer interfaces available to us in our respective things, be they new self-serve machines, and/or PDA operations, et cetera.

And obviously, improve our, the security of the overall tote system. And finally, we will continue to focus on not only cost management, but - new ways to improve our overall asset utilization.

We are well on our way to accomplishing these tasks, and in the end, as we have done in the past, we believe these efforts will afford us an opportunity to continue to grow the company and in particular, produce greater shareholder value for our investors. And with that, I'll close today. Again, thank you for joining us this morning. We look forward to talking to you next quarter.

That concludes today's conference. Thank you for your participation.