Churchill Downs Inc (CHDN) 2004 Q2 法說會逐字稿

Good day and welcome to the Churchill Downs, Inc. conference call. As a reminder, today's call is being recorded. At this time for opening remarks and introductions I would like to turn it over to Mr. Mike Ogburn.

Good Morning and welcome to this Churchill Downs, Inc. conference call to review the company's results for the second quarter of 2004. The results were released yesterday afternoon at press release has been covered by the financial media. A copy of this release announcing our news and any other financial and statistical information about the period to be presented in this conference call, including any information required by regulation G, is available at the section of the company's website entitled "investor relations" located at churchilldownsincorporated.com. Let me also note a release has been issued advising of the accessibiltiy of this confereence 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 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 SEC for a 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. expressely disclaims any obligation to release publicly any updates or revisions to the forward-looking statements to reflect any changes in expectations. I will now turn the call over to Tom Meeker, President and CEO.

Thanks for joining us this morning to discuss our second quarter results. In light of the call that we had three weeks ago, I will abbreviate my comments this morning. Following my comments, of course, Mike Miller will give you the details concerning the quarter, and thereafter we will entertain any questions that you might have. Today, I want to make a few comments about a number of topics, each of which is important to the long-term growth of the company and to say the least, occupy much of our focus today.

First, our CRM effort is fully underway and each day we are moving closer to the day when we will be able to have a much better picture of our customer profile, deliver better products and services to our customers, and most important, evaluate the overall effectiveness of our customers' service efforts. We are working hard on the technology side of the CRM equation. Technology platforms are being built that will allow us to significantly improve our ability to market directly to our customers on track, and more important, in those new markets that are available to us through point-to-point simulcasting and account wagering. We continue to push for an industrywide improvement in the [INAUDIBLE] platforms that are used in the industry. While the ultimate objective is a more efficient [INAUDIBLE] platform that affords us maximum security, another important part of the overall effort is the development of a taupe platform or platforms which provide needed open architecture to allow new and emerging customer interfaces to be used on the system.

As reported in our previous call, we are expending considerable resources, both fiscal and human, in pursuit of statewide slot referendums in the states of California and Florida. The ultimate costs associated with these efforts are yet to be determined; however, I can assure you, that whatever the costs may be, we are prepared to make the commitment. We cannot let these opportunities fail for lack of money or effort.

Each day brings new opportunities and new challenges; for instance, at times, it appeared that the California initiative was all but dead due to the governor's signing of new compacts with five Indian tribes in California. However, as of today, the landscape has changed dramatically, as several other tribes have now given clear indication that they are not willing to make similar deals with the state and are pursuing their own statewide referendum, Proposition 70.

It is important to note that in contrast to their referendum, Proposition 68, which is our referendum, which will be on the ballot, provides-- Proposition 68-- provides substantially more revenues to the state than does the Native American Proposition 70. That provides us some encouragement for the prospect of being successful in the state of California. In addition, the statewide efforts under way in Florida and California over the next several months will be expending considerable efforts lobbying legislatures in Indiana, Illinois, and Kentucky for passage of slot legislation. Given the recent passage of legislation in Pennsylvania, we believe there will be a greater interest in slot legislation in these other states.

The master development plan at Churchill Downs Racetrack continues on schedule and on budget. Last week we announced a 15 million dollar PSL program that is now well on its way to being sold out. The PSL program is part of our overall financing package for the master development plan. It involves approximately 3,000 seats that have been offered to a wide range of important customers of the track. Most important though, the PSL program provides us the necessary capital to deploy state of the art technologies in the new facility that, among other things, will provide greater access to wagering platforms for our customers. Finally, we continue to pursue the purchase of the fairgrounds. Absent any unforeseen events, we anticipate that sometime in mid-August there will be an auction of the property and Churchill Downs, Inc. will be involved in that process.

I will now turn the call over to Mike Miller who will give you the details concerning second quarter.

Thank you, Tom. Good morning, everyone. My remarks and our financial performance will center on the second quarter of '04 versus that quarter in '03, as well as the fluctuations and the balance sheet from June to June. I will then speak to guidance for both the third quarter and the full year. If you turn your attention first to the segment information, I will speak to the revenues for the company by our operating segments.

At our Kentucky operations, revenues increased by nearly 4 million which is primarily attributable to derby week revenues and the expanded venues available resulting from the master plan. Primarily, that's the addition of two more floors of our corporate suites being available for this year's derby. At Hollywood Park, the revenue increase is the result of the continued growth of account wagering and TBG deployment in California, which produced significantly higher source market fees. Revenues at Arlington are flat year on year.

Perimutual revenues are actually slightly down, as a result of having 4 fewer race meets in 2004, but this has been offset by increases in other operational revenues, such as group sales and sponsorships, as well as certain miscellaneous items. At Calder, the year on year revenue decline is the result of 2 fewer race days in 2004. Hoosier Park did have 9 more race days in 2004, but they were standardbred days which have a significantly lower per diem impact than thoroughbred race days.

CDSN's revenues decline of approximately 2 million is a function of several factors. First, CDSN had an unusually strong second quarter for 2003, as our signals were particularly strong versus those of Nira [PHONETIC], which had terrible weather conditions in the spring of last year. That situation actually reversed itself in 2004. Weather conditions at both Churchill and Arlington had a significant impact on field sizes at both tracks, and field sizes are probably the most significant element of the popularity of the betting signal. Larger field sizes means greater wagering alternatives which equates to greater handle. The reduction of race days at both Arlington and Calder also contributed to this decline.

I should point out this time the long term trends of CDSN, which we have consistently portrayed as the growth element of our perimutual business. Since we began separately accounting for CDSN as a business segment in 2000, its revenues grew at an annual compound rate in excess of 10%. While continuing growth at this rate becomes increasingly more difficult, and as much as it stems largely from taking market share, we are still confident that the quality of our product, the leverage that CDSN provides, and the growing account wagering market will continue to provide revenue growth into the future.

Turning now to the profitability of these revenues, our EBITDA margin in total slightly decreased by 40 basis points from 2003 to 2004. Given our revenue base of approximately $190 million for the quarter, an increase of 190,000 in expenses results in a margin erosion of 1 basis point. Thus, the overall decrease in margin can be readily explained by reference to the CRM and legislative initiatives in 2004 which we had talked about at length. As always, we continue to keep a close eye on our margin performance, and are quick to adjust our cost structure to meet changes in our business conditions.

If you'll now shift to the income statement, you will note that the decrease in our operating income from year to year is slightly greater than the EBITDA decline, a function of greater depreciation in [INAUDIBLE] 2004 primarily due to the master plan. Our interest expence for the quarter is 300,000 less than for 2003 in spite of increased debt level. This is a function of capitalizing certain interest calls related to the master plan and a continuing a favorable rate environment. With respect to interest rates, we recently entered into additional interest rates slots such that now we have effectively locked in the rates on 100 million of our floating rate debt, thus removing that element of risk from our operations.

Our effective income tax rate has increased by a full percentage point from 2003 to 2004, as a result of the nondeductible nature of our expenses associated with our strategic legislative initiatives. The resulting EPS of $2.04 is within the range of guidance we reported in our last call when we reduced our full year estimate.

That concludes my remarks on operations and now if you will turn your attention to the balance sheet where I will compare June 2003 to June 2004. The fluctuations in receivables and payables are primarily the result of timing of settlements and purse payments and are not attributable to any change in the level of activity. The increase in our assets is the result of recording the Arlington property tax refund in the fall of 2003. This refund is being paid out over a 2-year period.

Plant and equipment is increased by 55 million as a result of capital additions of approximately 75 million offset by 20 million in depreciation for the period. Of the 75 million in spending, 54 million is related to the master plan. We now estimate that our capital stand for 2004 will be approximately $97 million with 74 million of that relating to the master plan, which continues to be both on time and on budget. That's a slight increase from what we previously reported, as our 4-year capital spending which in the prior calls we said would be approximately $93 million.

The increases from the totals previously reported are primarily due to our CRM initiative and some new venues being built at Calder Racetrack. The increase in the accrued expenses is primarily due to an accrual at quarter end for master plan construction as well as for worker's comp expenses at Hollywood Park. The decrease in deferred revenues is the result of the recognition of revenues in the second quarter of deposits received in the jockey club suites in 2003. The $26 million increase in long-term debt is a function of our capital spending and dividends paid during this period offset by our cash flows from operations, continuing our tradition of managing our balance sheet and debt capital very efficiently. That concludes my remarks on the balance sheet.

With respect to guidance for third quarter, we presently anticipate earnings within the range of 33 cents to 38 cents, compared to 59 cents for the third quarter of 2003. As a reminder, included in the 59 cents was a one-time benefit of approximately 18 cents from the property tax refund at Arlington Park that I previously alluded to. Earnings for the upcoming quarter will continue to be heavily influenced by the spending on legislative initiatives in Florida and California as we head towards anticipated elections in November. At this point, we anticipate that present business trends will continue with revenues virtually flat to 2003. Our estimate for the full year is in the range of $1.44 to $1.53, consistent with our previous call when we communicated to you that we anticipated to fall short of our original EPS estimate of $1.70 by 10 to 15%. I would remind you again that these estimates are extremely sensitive to a very fluid referendum process and represent our best estimates at this time.

That concludes my remarks and we will now turn it back to the operator to take your questions.

We will take our first question from Tim Rice with Rice Felker.

Good morning. Could you tell me how would you would characterize the status of your TBG contract at this point?

Well, we have depending on which track, we have about a year and a half to two years remaining on our exclusive relationship with TBG.

Would you have any comment as to whether you intend to renew it for your tracks prior to expiration or what your outlook is for that relationship?

I think it is very positive beyond that ingt make any comment.

Second question, is I know you are aware, the owners of gulf stream have made some comments about year-round racing at that track. Could you talk about what outcome you foresee as far as the Calder calendar and whether you hold any hope that both yourselves and Gulf Stream could be put on a fair playing field so to speak with jai alai and dog tracks as far as your OTB operations.

Well, first let's talk about the relationship between Gulf Stream and Calder; I would hope that we would be able to rationalize the dates situation down there in a way that would be mutually beneficial to both companies, but more important, mutually beneficial to the horsemen who race down in south Florida. As to bringing us in parity with the dogs and jai alai pontons, I believe there is hope at some point in the future, in particular, if we are successful in achieving success on our referendum, that a more level playing field will be achieved in south Florida.

And if you made a comment, I apologize and I might have missed it, did you give any inclination about what you view as the prospects for the gaming legislation passing in Florida, and if not, have you seen any polls or are you aware of any handicapping as far as what the chances are.

Obviously, the initiative-- as we commence the process of developing the initiative-- that was significant polling done and you know, one can infer from that, that it had to be relatively positive or we wouldn't be involved in the process. In terms of handicapping the prospects of success, no I can't comment on that,.

Great, thanks very much.

We will take our next question from Ryan Worst from C.L. King.

Good morning Tom.

Good morning Ryan.

I was just wondering if there was any progress made in Florida since the last conference call? I think you said that you were close to the amount of signatures you needed.

We are pretty close. I would think within the next week or so we should have the thing certified.

In California, with the 2 gaming initiatives on the ballot, what happens if both of them are passed by the voters?

We have looked at that. We can't figure it out quite honestly. I don't think that would occur but there is an outside chance that it could. It would provide a lawyer's field day if that did happen. That's all I can say.

Okay. Thanks.

Sure enough.

We will take our next question from Charles Raney [PHONETIC] with Addison Clark. Good morning.

Good morning. What is the status on Pennsylvania, and how do you feel you are positioned, and what can you tell us about that?

Pennsylvania, if you have looked at the legislation that was passed, leaves open the question of who will get a license and what form of license in the Pittsburgh area; will it be a racino [PHONETIC] or freestanding slot operation. We have a relationship with Mr. Betters and his group. They are obviously proposing a facility on the Pacific Palisades property. And really we can't handicap it at this juncture. The ultimate decision will be made by the new gaming commission yet to be formed.

Is that something you think will be done in this year, next year.

I don't have a time line on that. You know, all indications are it will be done fairly quickly.

Okay.

But I doubt that would mean this year. There is a sense of urgency obviously from the governor's office up there.

Okay, thanks.

Again, if you would like to ask a question, press star 1 at this time. Mr. Meeker I will turn the call over to you.

Thank you for joining us this morning. We will look forward to chatting with you next quarter and provide you with better discussion of the legislative efforts. Thanks again.

That will conclude today's conference call. We thank you for your participation and you may disconnect at this time.