Churchill Downs Inc (CHDN) 2004 Q3 法說會逐字稿

Welcome to the Churchill Downs Inc. conference call, today’s call is being recorded at this time for opening remarks and introductions I would like to turn the call over to Mr. Mike Osborne, Director of Investment Relations. Please go ahead sir.

Good morning and welcome to this Churchill Downs Inc. conference call to review the company’s results for the third quarter 2004. The results were released yesterday after 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 G is available at the section of the company’s website entitled investor relations located at churshilldownsincorporated.com. Let me also not that 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 investments 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 concerning factors that could cause our actual results of operation to differ materially from the forward looking statements made in this call. The information being provided today is of this day only. Churchill Downs Inc. expressly disclaims any obligation to release publicly any updates or revisions in any of these statements to reflect any changes in expectations.

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

Good morning everyone and thanks for joining us this morning to discuss our third quarter results. As is customary during this morning’s call, I will make some general comments about the company’s performance and following my comments, Mike Miller, our CFO will fill you in on all the details. Following Mike’s comments we will stand ready to answer any questions that you may have.

As we informed you during our fourth quarter call in 2003, management approached 2004 as the year in which the company would reposition itself for future growth. We projected that earnings would be flat as we commenced a number of projects including CRM, business change management and others, which in the end will ensure future growth and profitability, moreover, we anticipated that our Churchill Downs racetrack meets, Spring and Fall would suffer as we worked to complete the clubhouse in grandstand facilities under the master plan. In short, we advised the market that earnings growth would not be achievable in 2004. However as Michael explained, other factors have also had a material impact on our 2004 earnings, as such, we have revised our guidance for the year end.

By all measurements much was accomplished during the quarter, Arlington Park staged a very successful meet with strong attendance and handle numbers coupled with the aggressive cost containment efforts, despite hurricanes which result in the loss of three days of racing, Calder’s performance continued to meet or exceed expectations, however, these bright spots in operations were largely overshadowed by what was accomplished on the strategic front. Master plan redevelopment of Churchill Downs racetrack continued during the quarter and is well on the road to completion for next year’s derby, in fact two floors of the clubhouse will be opened during this Fall’s meet.

In addition we have exceeded the sales of our PSLs a critical part of the overall financing of the master plan, to date we have sold over $19m in PSL, that is $4m more than was in our plan. On October 15th, we completed the purchase of a fairgrounds (ph), this strategic target affords Churchill Downs simulcast network with the first quarter product, a critical need that has been identified for a number of years, moreover, this acquisitioning provides CDI with the opportunity to utilize alternative gaining revenues to strengthen its racing programs. In the short term, we have four objectives for the fairgrounds, first strengthen the ties with the local community, second reposition the racing program which is well under way and third, improve the VLP operations which are antiquated and are not performing in line with other VLT operations in Louisiana and four deploy slot machines at the race track. We are well on the way to completing each of these tasks.

The third quarter also saw us actively engaged in several legislative and valid initiatives. In California CDI together with Magna, Daymeadows (ph), Lasalmentos (ph) and several card clubs promoted a proposition 68 which among other things will provide significant powers to the state and prompt the Native Americans to pay their fair share of taxes. In lieu of that and in lieu Native Americans paying their fare share of taxes, the racetracks and the card clubs would get a complement of slot machines.

Three weeks ago we see spending on this initiative after the Attorney General changed the ballot language and more importantly the Native Americans overwhelmed the initiative with a costly television campaign. While proposition 68 remains on the ballot, polling indicates that is unlikely that it will pass. The failure of proposition 68 is not the end to our efforts in California. To the contrary, we intend to pursue legal and legislative names to advance the racing industry’s cause. We believe that the efforts undertook with proposition 68 have given the industry a seat at the table when a global solution to the question of rationalizing the overall deployment of gaming in California.

In Florida CDI, together with other peer (indiscernable) mutual operators in Dade and Broward counties are promoting amendment 4 as a means to provide much needed funding for education in state and at the same time enabling the racing industry to better compete with the competition from Native Americans casinos. Recently Magna joined in this effort and is assisting with funding. Most important, however, the amendment has guarded the support of various statewide and local groups including the Florida Education Association, the Florida Association of School Administrators, several union organizations including the AFLCIL, and those representing the police. For a more exhaustive list of supporters for the amendment, go to our website at www.yesforlocalcontrol.com. Based on daily polling done throughout the state, we are cautiously optimistic that the amendment will pass. Today we have spent $3.5m on this effort and we do not anticipate any further expenditures in 2004. However, if the amendment does pass local referendums must be held in both Dade and Broward counties. These efforts will be undertaken in 2005. Efforts are also underway to pass alternative gaming legislation in Kentucky, Indiana and Illinois. Just two days ago an interim committee at the Indiana legislature passed out a recommended bill that would allow for pull tabs at the race tracks in Indiana and at two Off Track Betting locations in Indianapolis and Fort Wayne. This is small step in the overall legislative effort but it’s one in the right direction.

During the quarter we continue to aggressively pursue our CRM objective. We have developed a number systems, products, and platforms that will be deployed in 2005. In addition, we have filled two key positions in the company, Vice President of human resources and Vice President of technology. The advanced skills brought by these individuals would be critical to the overall success or our success in the future. With that general overview, I’ll turn the call over to Mike Miller who will give you all of the details concerning the quarter and our guidance for the year end.

Thank you Tom and good morning everyone. It has been an extremely busy quarter, but all in all a very positive one given what we’ve accomplished. As Tom mentioned, the consummation of the Fair Groundss acquisition, our investments in the California and Florida legislative initiatives, and even the impairment write-down in Ellis Park, all of which impacted third quarter results served the position as for future growth and renewed profitability. I’ll focus my comments on operations to the third quarter of 2004 compared to that quarter in 2003 and then briefly highlight our balance sheet at the end of the third quarter. I’ll conclude my remarks by discussing the Fair Groundss as well as the guidance for the full year.

First, please turn your attention to the supplemental information by operating unit and focusing first on net revenues. From a revenue standpoint, our consolidated revenues were down from 2003 by $1.8 million. The Kentucky operations enjoyed an increase due to the decision to run 6 days per week at Ellis Park instead of the customary 5, but all other units reported decreases primarily due to shifts in the racing calendar resulting a combined 9 pure race stations 2004 coupled with a effects on Calder business from the various hurricanes passing through Florida. Along with the $500,000 one- time adjustment at Hoosier in the 2003-quarter related to River Boat subsidies. The decrease in revenues from other investments was the result of our internalizing our closed-circuit TV operations as we bought out our minority partners, Charlson Broadcasting at the end of 2003. The EBITDA story for the 3rd quarter is slightly more complicated. In addition to the impact of lesser revenues, we recorded the asset impairment at Ellis $6.2m. And we spent $5.1m in California and Florida on related referendums. The balance of the total decreases due to the a number of factors including CRM, increased expenses related to Sorbeams Oxy compliance efforts and disappointing results for the Ellis Park meet. The results of the Ellis meet for this year as well as looking ahead of the prospects of 2005 convinced us that it was necessary to once again look at the carrying value for both the fixed assets as well as the related goodwill for Ellis Park. By looking at expected future cash flows from this asset and applying the guidance under the appropriate accounting pronouncements, it led us to the $6.2m write-down.

We are now confident that the resulting carrying value will be fully supportable by ongoing operations. Let me say in advance that the evitable question let me state that we are not soliciting offers for Ellis currently and we’re hopeful for a much better 2005. Turning now to the statement of net earnings, the $14.1m shortfall in EBITDA translated into $14.6m variance in our operating income from a profit of $13.6m in 2003 to $1m loss in 2004. Depreciation in 2004 was slightly up over the prior year. Primarily due to the Churchill Downs master plan. And our interest income was down $900,000 from last year as a result of the recording in Q3 of 2003, the impact of property tax refund in Illinois. In spite of what you might expect, we actually recording an income tax expense for the quarter of $1.6m as opposed to a credit given our loss. This was due to the necessity of our revising our year to date effective tax rate to reflect a non-deductibility of the legislative initiative costs as well as a portion of the impairment loss.

This year-to-date impact was fully recorded in the third quarter. Please also note that our loss per share of 29 cents is calculated on basic rather than a fully diluted basis as is the norm when a loss is incurred. That concludes my remarks on operations. Now if you’ll turn your attention to the balance sheet, I’ll to highlight a few items. The fluctuation in receivables, payables, and accrued expenses are primarily due to the timings of billings, per settlements, etc. and are generally are not indicative of any fundamental changes in the manner or level of operations. However, included in accounts receivable at the end of the quarter, is approx. $9m related to the PSL program which Tom referred to at Churchill Downs which we rolled out in conjunction with the master plan. This new program also accounts for the increase in differed revenues as we have built an excess in $19m which will be amortized into revenue over a 30 yr period. The increase other current assets is attributable to deposits and advances made in connection with the Fair Grounds acquisition. Plant and equipment reflects our expenditure at Churchill Downs racetrack for the master plan which is on budget and on time scheduled to be fully operational prior to the spring meet in 2005. The decrease in income tax payable is approaching both the timing and reduced taxable income and the $39m increase in long term debt is primarily attributable to our capital expenditures and then again primarily to the master plan at Churchill Downs.

With respect to our long term debt, coincident with closing of the Fair Grounds, we amended both our revolver as well as our senior note documents to allow for the increased leverage we will experience in the near term as we invest nearly $90m in New Orleans over the next few months. The impact of this is to increase our rate spreads immediately by approximately 125 basis points, which will be reflected in increased interest cost beginning in the fourth quarter of 2004. This amendment also allows us sufficient access to capital to complete both the Fair Grounds investment as well as to continue to pursue our other strategic objectives.

Looking ahead to the fourth quarter, we now project to produce sufficient earnings to bring our full year results into the range of $1.00 to $1.05 as previously reported. We expect our earnings as we -- excuse me -- we will benefit in the fourth quarter from the gain on the disposition of our shares in Kentucky Downs, boosting earnings in what traditionally is a fairly flat quarter. This transaction allows us to monetize a currently non-performing asset plus it provides for future contingent proceeds should Kentucky adopt alternate gaming at racetracks.

Admittedly there have a lot of moving parts to our earnings this year, beginning in our first quarter guidance of $1.70 and now looking roughly at $1.00, but we are pleased with our accomplishments and our position, particularly in light of the fact that the combined impact of the legislative initiatives and the Ellis impairment alone, account for 76% of the difference -- 76cents of the difference. That concludes my remarks and I’ll now turn it back to the operator for questions.

Thank you. The question and answer session will be conducted electronically. If you’d like to ask a question today please do so by pressing the star key followed by the digit one on your touch tone telephone. If you are using a speaker phone, please make sure your (indiscernible) is turned off to allow your signal to reach our equipment. Once again if you do have a question please press star one now. We’ll go first to Tim Rice with at Rice Felker.

Good morning. Well I’m happy I don’t have to ask anymore about why you guys aren’t buying the Fair Grounds. First question involves the withholding on foreign bets. Can you tell me if that’s -- the elimination of that is going to have an immediate effect on your ability to simulcast outside of the US?

I don’t know if it will be immediate but that issue coupled with a myriad of other issues, much like the issues that were confronted domestically with such things as landing rights, the ability to get in to various jurisdictions with a foreign signal, all have to be solved before we can fully deploy internationally, but the events that occurred with respect to the withholding were very positive. I think it will take some time to solve the other problems related to international deployment.

Could you put that in any more specific of a time frame -- maybe by a year or something like that?

Yes I think within ’05 you’ll start seeing some more aggressive efforts by our company as well others to get into the international arena, but again I would caution much like what we found domestically, such as the events that occurred in both Louisiana and New Jersey which essentially by legislative enactment created an insular position for those two states which prohibited us as well as other providers from into getting those states. You got the same type of problem in foreign jurisdictions. So I think over the course of time the same things that happen domestically such as approaching the problems through reciprocity that is by taking signals from other jurisdictions into the U.S. which we are doing in some instances like out in California, we will be taking the Australian signal, those types of things will go a long way in developing the international relationships necessary to fully deploy internationally with the U.S. product.

One question on California, can you tell me where the plasn for the new Hollywood park stands at the moment?

Well I don’t think we have announced a new Hollywood Park. We continue to look at all of our assets in terms of maximizing the value of those assets and that’s about all I can say

Ok thanks A lot

Your next question is Yurin Chain at Jeffries and Company

Hi -- you mentioned that the

I’m sorry we can’t hear you

You mentioned that the poling in Florida was looking favorable -- Are there any numbers there?

No all I can say is that our efforts continue in Florida predicated on the polling day that we done down there.

OK. Do you have any indication of the primary poll passes? How the county polls are looking? Are you getting part of the feedback there (inaudible)

I can give you -- it looks positive there but more important in the prior effort I think it was three or for years ago, Dade and Broward county had strong support for the proposition that ultimately failed statewide.

And then turning to the Fair Grounds, do you have an estimation of how many machines might go in there?

Well its actually a public record. It will start out with 500 and then it can grow to 700, depending upon the growth of Harrah’s and their downtown casino location.

And the final question is have there been any developments in Kentucky or maybe Ohio, in terms of the gaining fronts there and Governor Tap maybe something with a change in governor in Ohio maybe, acting as a catalyst in Ohio and thereby acting as a catalyst in Kentucky anything like that?

I can’t comment on that, I mean virtually every race seems in some form or another, the participants in racing, the horsemen, racetracks are pursuing legislative efforts in the area of alternative gaming. And that holds true for each of the states that we’re doing business, including Florida and California which we commented on and in addition Illinois, Indiana and Kentucky each has their own set of problems - - political problems but we will continue to pursue the effort aggressively because it - - in the long term will be vitally important to our overall purse program in each of the states where we do business.

Okay, great. Good day.

Mm.

And I have a reminder. Please press *1 if you have a question. We’ll go next to Ryan Worst of C.L. King.

Good morning.

Morning Ryan.

- - Just a couple questions. When will you be able to deploy slot machines at the fair grounds? And could you also provide more detail on the spending - -the incremental spending for that acquisition up to $90m? Where is that money mostly going?

Yeah. We’ll take that in the two parts that you posed. The when depends upon a process that we’ve already commenced now and that is securing all the necessary permits and licenses and going through suitability and so, not all of that is under our control. We’re working very diligently at that, working closely with the authorities in Louisiana. So- - actually when that win be consummated - - it’s hard to tell. We also want to work with the community very closely and the business leaders of the community surrounding fair grounds to make sure we do this in a way that’s - -that fits in well with that neighborhood.

So, - -and you know, we’re hopeful that that happens in the near term Ryan, but not all that’s under our control but as you might imagine, as soon as we can possibly deploy there, we will.

Okay.

With respect to the $90m, there is a lot of pieces to that. As is public record now, we spent $47m to close with the debtor and then we spent approximately another $10m to close with the video poker operations, which was a third party and then with some OTBs which were owned by the Crantz family individually outside of that. So, you’re roughly then including our transaction costs of about $60m.

Right.

The rest of the money will be spent over the next few months primarily with improvements to the backside that we’ve committed to the horseman down there, as well as the hopeful build-out of the stand-alone slot operation there and the purchase of the machines and more capital to be invested in the video poker business today. So, it will probably not be fully spent until some time toward the end of ’06.

Okay and could you talk about the profitability of those operations combined a little bit?

Well right now is - - we’ve got a lot of work to do down there. We’re expecting right now that in 2005, the fair grounds in total, and also I’m including racing and alternative gaming will be dilutive and that will turn around in ’06 and in ’07, particularly as the slots come online.

So, are you including - -when you say it’s going to be dilutive in ’05, are you including slot revenue in that analysis?

No, we’re not because - - again at this point in time, I’m not sure exactly when the slot revenue will come on line.

Okay, fair enough. Mike do you have a tax - - what the tax rate is going to be going forward?

I don’t have that yet Ryan. If not, at our normal guidance in February - - if not before, we’ll give you an effective tax rate.

Okay, and then just one final question. I joined the call late so I apologize if I missed this but could you go over the strategic benefits of selling your portion of Kentucky Downs and also more detail on the earn-out provision and what exactly does that entail if you could? And also what the gain from that will be in the fourth quarter?

Well why did we do it? Well first of all we only owned 24% of it as I think we’ve discussed before this assets does not to produce earnings at this point and hasn’t for some time. And indeed we’ve contributed modest amounts of capital to that over the past few years. Brad Kelley, who is significant shareholder in Churchill Downs that is an assets which he would like and has asked us from time to time to acquire more of. He would like to get more control of that asset. So as we sit here today our ability to monetize that asset, particularly when it’s not making money, and reducing our risk with respect to capital contributions makes a lot of sense for us. I’m not going to disclose at this point in time the terms of the contingent pay up but suffice it to say you know we will get our fair share when these slots come along.

Okay was the impact of that 24% ownership, was there a significant impact on the income statement or even a noticeable one?

In the past you mean?

Yes.

No, it was – it’s a small loss every year and you know we just we have our share of it but it’s not anything you would notice.

Okay. Thank you.

Thank you Ryan.

And that conclude the question and answer session gentlemen I’ll turn the conference back over to you.

Okay I want to thank every one for joining us this morning. I’m very pleased with what was accomplished in the quarter and what our team members were able to put forth and the effort they put forth and doing all those things that have been accomplished during the quarter. And again I reaffirm our belief that 2005 based upon what we’ve been able to accomplish in 2004 will be back in line with what we’ve historically done in terms of growing the company. So with that again thank you for joining us this morning. We look forward to talking to you next quarter.

And that does conclude today’s conference. Again thank for your participation.