Churchill Downs Inc (CHDN) 2007 Q2 法說會逐字稿

Good day, landscaping and welcome to the second quarter 2007 Churchill Downs Incorporated earnings conference call. I will be your coordinator today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

I'd now like to turn the presentation over to your host for today's call, Ms. Julie Koenig, Vice President of Communications.

Thank you very much. Good morning. And welcome to the Churchill Downs Incorporated conference call to review the company's results for the second quarter and first six months of 2007. The results were released yesterday afternoon in a news release that has been covered by the financial media. A copy's of this release announcing results and any other financial and statistical information about the periods being presented in this conference call, including any information required by regulation G, is available at the section of the company's website titled "Company News," located at churchilldownsincorporated.com. Let me also note that a news release was issued advising of the accessibility of this conference call on a listen-only basis via the phone and over the Internet.

As we begin, let me express that some statements made during 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. The actual performance the company may differ materially from what is projected in such forward-looking 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 or 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 Incorporated, expressly disclaims any obligation to release publicly any updates or revisions to these forward-looking statements to reflect any changes in expectations.

In addition to President and CEO, Bob Evans, and Principal Financial Officer, Mike Anderson, Executive Vice President Steve Sexton joins us for today's call. Steve also serves as President of our flagship facility, Churchill Downs racetrack. Bob, Steve and Mike will make comments and then be available for a question-and-answer session with conference call participants. I will now turnpike things over to Bob Evans, President and CEO. Bob?

Thanks, Julie, it's always my favorite part. Good morning everyone. First, a quick note about our speakers today and how our comments will be organized. Steve Sexton will be joining us for our quarterly conference calls going forward. Steve oversees our racing and gaming operations and I've asked him to share information with you about how our racetracks and off-track betting or OTB facilities perform during the quarter. It's been our custom in the past to issue news releases at the end of each live race meet containing handle and attendance information, with year-over-year comparisons.

Years ago, handle and attendance were considered key metrics by which to measure a racing operations performance. However, what our meet end releases have not provided are details on how that handle translates into revenue, or any information on our non-pari-mutuel revenues, such as sponsorships, licensing, food and beverage monies, our new advanced deposit wagering or ADW revenues and other revenues, all of which have come to play a bigger role as our business has evolved. That information is included in our quarterly financial releases, and as a public company we discuss those numbers and metrics on a quarterly basis so we're making a change. We are discontinuing the practice of issuing meet end releases. Instead Steve will join us each quarter to provide additional color on how our tracks, OTBs and beginning this fall at Fair Grounds, on how our alternative games operations are performing. So here's how we'd like to spend our time with you this morning. I'll finish introductory remarks here, Steve will then talk to you about our second quarter performance at the operations level, Mike Anderson will take you through the financial numbers, and then I'll talk about what we're focussed on for the rest of the year, then we'll open up the call to your questions.

It dawned on me while preparing these remarks that our financial statements alone don't tell the complete story of what we accomplished during the second quarter of 2007 or how we have grown the business since a year ago. There are three communications challenges presented by the numbers we report. First, there's the continuing operations challenge. By selling Hollywood Park in 2005, selling Ellis Park in 2006 and closing on the sale of Hoosier Park in March of this year, it's become challenging to compare quarterly results over time. I'm sure many of you have noticed that. Secondly, there's the unusual developments challenge, most notably the insurance recoveries related to hurricane Wilma at Calder race course and Hurricane Katrina at Fair Grounds.

Last year for the year we had $19.2 million of insurance recoveries net of losses and we recorded $10.1 million in insurance recoveries during the second quarter of 2006, last year alone. This year, we've recorded less than $1 million of insurance recoveries year-to-date and none in the second quarter. The number of racing days has also varied pretty significantly this year as well. You'll recall that we had 45 additional days in Q1 compared to Q1 2006, and here in the second quarter we've had five fewer racing days. We've also sold a small parcel of land at our Quad Cities site in the second quarter. Then there's the matter of the equity grants that were part of my original compensation agreement last July. Since some of those grants were subject to shareholder approval, per GAAP rules we didn't accrue for them until that approval was granted at the annual shareholder meeting on June 28th of this year. Shareholders did approve those equity grants, so that dropped $2.6 million of compensation expense into this year's second quarter.

And third, there's the new capabilities challenge. We've been taking some pretty substantial actions to put in place certain new capabilities that we believe will increase future shareholder value. Consider that in the last five months, we have formed TrackNet Media Group to manage the video and wagering rights related to races at CDI tracks and Magna Entertainment Corporation tracks and through TrackNet we advanced a model that makes our racing content available to all reputable wagering providers that meet our standards for wagering integrity and security, including account wagering providers interested in swapping their license content with our account wagering platforms. We also launched TwinSpires.com, our ADW platform, and acquired the AmericaTAB and Bloodstock research information services companies, which included three account wagering platforms and a racing and breeding data business. The three acquired ADW platforms combined with TwinSpires.com gives us about 20% market share in the account wagering business.

We also acquired a 50% interest in HRTV, Horse Racing TV, and we installed our first synthetic racing service at Arlington Park where by the way, we're doing better financially than we did last year. We've been building these new capabilities while continuing to grow our core racing operations in terms of both revenue and, if you adjust for the unusual items, EBITDA as well. I'm very proud of the team and our ability to stay focussed on our business results during the first half of this year while we've been in the midst of making a number of substantial changes to our business. Let me now invite Steve Sexton to give you his report on our operations during the quarter. Steve?

Thanks, Bob. As Bob indicated, the second quarter featured five fewer racing days than the second quarter of '06. However, net pari-mutuel revenues from continuing operations were up more than 2% on a year-over-year basis. Our premier event days during the quarter, the Kentucky Derby and Kentucky Oaks, were affected by this inclement weather, as many of you know. We also experienced reduced field sizes in a couple key stakes races when Kentucky Derby Day underparred and we believe those smaller fields contributed to lower off-track wagering for the day. Nonetheless, we were very pleased to set new Kentucky Oaks Day wagering records and we were satisfied with our Kentucky Derby Day results. Especially considering outlets affiliated with the Choctaw Nation, as well as major rebate operator and two large account wagering providers, were not taking wagers on Oaks and Derby weekend races. It's important to note those groups also did not accept wagers on the Churchill Downs racetrack the entirety of the spring meet.

Churchill Downs racetrack's growth in net revenues and EBITDA is reflective of higher hospitality revenues resulting from some limited price increases, reserved seating, as well as short-term seat licenses for Kentucky Derby weekend. Looking at the balance of the Churchill Downs spring meet, most of which fell within the second quarter, we experienced a solid race season with increases in average daily attendance and average daily on-track wagering. While field sizes were comparable to the spring of 2006, as we believe the field sizes are important driver for both on-track and off-track wagering we are currently researching way to bring field sizes up at all of our operations. Export handle on Churchill Downs 2007 spring meet declined for the reasons we've already discussed. But our net pari-mutuel revenues from the account wagering providers that were taking our signals were up. Those higher revenues benefit not only Churchill Downs racetrack but they also benefit the horsemen who work with us to put on the show. So we're very pleased by that.

At Arlington Park we introduced a new polytrack surface prior to the meet opening in early May. The track has averaged eight-and-a-half starters per race since the beginning of the meet, which up more than one horse over last year. We believe that marked improvement started for race has helped boost on-track wagering as well as export wagering for the Arlington Racing product. Also, the introduction of a four-day race week for the first six weeks of the meet produced positive on-track momentum for the start of Arlington's 2007 season, with on-track attendance and wagering strong for the first two months. As you may know, Arlington will host its marquee event, the International Festival of Racing, which features three $1 million stakes -- $1 million stakes races, excuse me, on the turf. The Arlington Million, the Beverly D and the Secretariat Stakes this weekend. The Arlington teams looks forward to hosting a great weekend of competitive racing, a portion of which, including the feature race The Million, will be televised live on ABC Sports.

Moving over to Calder, inclement weather has really plagued the beginning of the race season there, with consistent rains in South Florida. As an example, through the end of June, 43 of the 60 scheduled turf races were moved to the main track and that can have an impact. Calder's results reflected those elements. Moving to Louisiana, our OTB operations continue to perform better than they did prior to Hurricane Katrina. This is true for both simulcast wagering and for video poker. Our results during the quarter were flat compared to the previous year. We believe the lack of additional growth during the quarter was due to a number of our regular patrons taking summer vacation,s as well as fewer out-of-market customers visiting our facilities this year. These would be individual who are living in New Orleans on a short-term basis right after the storm who have now returned to their home communities. Fair Grounds also again hosted the New Orleans Jazz and Heritage Festival during the second quarter and Jazz Fest revenues positively impacted Fair Grounds results for the quarter.

Throughout the quarter the Fair Grounds team was very engaged in efforts to open a temporary slot machine gaming facility, while moving forward with construction plans for the permanent facility. Our current plans are to open a temporary facility with about 240 slot machines later this fall. We've made considerable progress staffing the temporary facility and assembling a management team to focus on slot operations. We'll begin construction on the permanent facility this summer with a targeted opening in the fall of 2008 for the permanent structure. That facility will house a maximum of 700 machines. In summation, we continue to look for ways to improve the overall cost structure at our tracks, in conjunction with developing concepts that will allow us to maximize revenues through a variety of assets, including the Kentucky Derby and Kentucky Oaks. We'll share more of those with you as those plans continue to take shape. With that, I'll turn things over to Principal Financial Officer, Mike Anderson, to walk you through the financial statements.

Thank you, Steve. And good morning everyone. What I'll try to do is I'll try to tie Bob and Steve's comments into my review of the results for the second quarter, as well as make a few comments about our balance sheet. I'll be reviewing the information as set forth in the tables to the press release that can be found on our corporate website that Julie mentioned earlier, churchilldownsincorporated.com in the "Company News" section. First, let's begin reviewing the segment information which is contained on the schedule titled "Supplemental Information By Operating Unit" in the release. As Bob stated earlier, and as was the case during our first quarter earnings calls, the discontinued operations section of our financial statements and tables contain the operations of Hoosier Park which we sold during the first quarter of 2007, and Ellis Park which we sold during the third quarter of 2006. My comments today will focus on our operational performance from continuing operations only.

In total for the quarter, our revenues from continuing operations grew by 4.1% over the prior year. As Bob and Steve both indicated, we were able to accomplish this despite five fewer race days than last year. And just so you have the breakdown, Arlington Park had three fewer racing days, Calder also had three fewer racing days, while Churchill Downs racetrack actually gained one day versus last year. Churchill Downs racetrack revenues grew $2.2 million for the quarter with the help of that extra race day, but primarily grew this quarter as a result of the incremental seating and hospitality revenues from the Kentucky Derby and Kentucky Oaks event days. Arlington Park, even with the three fewer race days, improved in almost every revenue category, which we believe is attributable to a better racing product, as Steve mentioned. Steve just mentioned that our average starters per race at Arlington has increased by one full horse per race. In addition, our on-track attendance is up 24% over last year. So a much-improved performance thus far over last year's relatively disappointing lab race meet. This unit increasing our quarterly revenues by $1.9 million for the quarter.

Total revenues in the other investments segment grew by $3.2 million. This segment includes our account wagering business, TwinSpires.com, which as Bob mentioned, we launched in May just prior to the Kentucky Derby, as well as our acquired account wagering platforms which include winticket.com, BrisBET.com and TsnBET.com, which we just acquired late in the quarter. So obviously the contracts in revenues is the result of our entry into the account wagering business. Also, please keep in mind that these account wagering revenues earned, specifically TwinSpires.com were during the most profitable pari-mutuel quarter which includes the Kentucky Derby week. Future quarters may not be indicative of this level of earned revenues.

Now dropping down to the EBITDA section at the bottom of that page, EBITDA from continuing operations in total decreased $7.8 million, the overall decrease is the result of the $10.1 million in net insurance recoveries recorded in the second quarter of 2006, as Bob mentioned earlier, which impacted second quarter EBITDA levels for both the Calder race course segment as well as our Louisiana operations. For Churchill Downs racetrack, EBITDA improved by $2.3 million, which follows the top line revenue growth achieved through increased seating and hospitality revenues. Arlington Park's EBITDA also increased during the quarter and was impacted by the improved live race meet this year, which follows the revenue increases that Steve referenced earlier. In addition, Arlington's sale of approximately 74 acres of excess land around its Quad City Downs facility added $1.7 million to the bottom line EBITDA. In total, Arlington's EBITDA performance improved by $2.6 million over last year.

Now looking at Calder, Calder's EBITDA declined approximately $400,000 during the quarter, due in part to the reasons Steve already provided, but also keep in mind that the second quarter of 2006 included approximately $800,000 in net insurance recoveries. So if you take that into account along with the loss of three live race days, Calder was able to hold its own at the EBITDA level. In Louisiana, the EBITDA decline was significantly impacted by $9.3 million in net insurance recoveries recorded during the second quarter of 2006. Additionally, Fair Grounds 2007 second quarter EBITDA was impacted by additional costs allocated from the corporate segment for management fees that increased during the quarter versus 2006 levels. Fair Grounds is also incurring costs as it relates to the start-up of its temporary slots facility as well.

Now, let's take a look at the condensed consolidated statements and net earnings. If you'll look at the gross profit level, the second quarter gross profit of $61.4 million is up $1.7 million over last year's $59.7 million, with approximately the same gross profit margin of just over 36%. SG&A expenses is up $1.4 million, primarily the result of the recognition of compensation from the equity grants for the CEO of $2.6 million that Bob referenced earlier, which were granted upon his hire date last summer but not recognized as an expense until shareholder approval, which occurred in late June. Otherwise, SG&A costs were down over prior-year levels. As previously mentioned, we recorded net insurance recoveries of $10.1 million, which shows up as a separate line item here on the income statement during the second quarter of 2006, which relate to Hurricanes Katrina and Hurricane Wilma, damages that occurred in 2005.

Interest expense is up during the quarter as a direct result of our borrowing needs for the AmericaTAB and BRIS acquisitions in June and miscellaneous income is up during the quarter as a result of the gain on sale of land at the Arlington Park unit which we referenced earlier. Net earnings from continuing operations and the corresponding EPS amounts are both down versus last year, but certainly explainable when considering the net insurance recoveries that we recorded in 2006. Now, turning your attention to the balance sheet, at June 30th, besides the normal working capital accounts that continue to be influenced by our racing calendar and the timing of pari-mutuel related settlements, the biggest change in our balance sheet relates to the acquisitions of the AmericaTAB and BRIS companies in June. Goodwill and other intangibles are up $53.5 million and $24.5 million respectively, as a direct result of our acquisitions. And you can find additional detail about those acquisitions in the Form 10-Q in the footnote section that was filed with the SEC last night immediately after the earnings release was issued.

Net additions to plant and equipment were significantly impacted by two major capital projects at Arlington Park. The installation of the polytrack racing surface for approximately $11 million and the addition of a new dormitory for for approximately $3 million. Falling to the liability section on the balance sheet, our deferred revenue balance decreased significantly during the second quarter due to the recognition of all derby-related revenues and other second quarter revenues. And finally, our long-term debt increased approximately $55 million as a direct result of the AmericaTAB and BRIS acquisitions. That concludes my remarks. I'll now turn things back over to Bob for some final thoughts.

Thanks, Mike. Finally a quick high-level look at what we'll be working on over the balance of this year. We plan to open our temporary slot operation at the Fair Grounds with about 240 machines this fall and start construction on the permanent facility that will hope in the fall of 2008. We'll have the first full-quarter impact of our AmericaTAB and BRIS acquisitions starting in this, the third quarter. You will recall we closed those deals on June 11th, so they only had 19 days impact on our second quarter results. As Steve mentioned, we will be working on designing a new operating model to run our four racetracks, 19 OTBs, eight of which offer video poker in addition to pari-mutuel wagering and our new slots businesses. You may ask why a new operating model. If you look around the industry, you'll see that the two other major multi-track operators, Magna Entertainment and the New York Racing Association or NYRA, are having a very difficult time making money. So we're asking ourselves what efficiencies and economies can we realize in our multi-location, multi-business operations.

Also we're very focussed on three political and legislative developments in Kentucky, where in the November, this upcoming November's governor's election, the introduction of alternative gaming at racetracks and at new casinos is strongly endorsed by the democratic candidate. In Florida, Miami specifically, if we're successful in the January 29th -- next year January 29th referendum in Miami-Dade county, we will be able to operate a slot facility at our Calder race course. And in Illinois, where the ongoing special session of the Illinois legislator holds some remote prospects for expanded gaming. Finally, as we noted in our 2006 annual report, we're working on three ways to grow revenue in our racing operations. First, we want to increase the share of U.S. thoroughbred handle as wagered on CDI races. Second, we want to increase the share of U.S. thoroughbred handle that's wagered via CDI channels, whether that be on-track at our OTBs or via our ADW platforms. And third, we want to create and better monetize our intangible assets, things like media rights, licensing, sponsorships and our brands. We've been working hard to develop our plans in these three revenue areas over the last several months. And we hope we'll begin to see the effect of those efforts in our future business performance. Now we'd like to open the call to your questions. Operator, please could we begin the Q&A.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Steve Wieczynski with Stifel Nicolaus.

Good morning, guys.

Good morning.

One question for you, just on, say, come January the vote in Dade County passes, can you give us more color, have you thought about what your operation will look like down there in terms of -- I know you probably can't say the number of slots and whatnot, but what have you taken away from the guys in Broward and what they're doing, and seeing some pretty disappointing results from some of the tracks there, have you guys looked at that, just get your thoughts on that?

I'd say we are very much aware of the local market there and what's working and what's not. And we're factoring that into our plans. But at this moment, I don't want to go any farther and start to describe what we've actually contemplated and how many machines that might include and what the economics of that might be yet. But obviously we're paying close attention ourselves, and we've used some outside consultants to help us understand the local market.

Got you, thanks. And then just a real quick question for Mike. On the debt levels, understandably they're up just because of the acquisitions, but what do you guys see, are these debt levels going to be kind of hanging in this range? Are you going to try to pay those down? What's your plan there?

I would anticipate the debt levels to remain relatively constant with our capital needs we have for the temporary and permanent slot facility. We'll use a lot of our free cash flow towards that CapEx project. So I don't anticipate a significant decrease in our debt levels.

Okay, great. Thanks guys.

You're welcome.

Your next question comes from the line of Tim Rice with Rice Voelker.

Good morning. Two questions. My first one is, is there a fixed date at which all of the Churchill track content on television will revert to HRTV?

There are multiple dates, but they are fixed. Arlington Park, Steve, help me here, Arlington Park is today actually, August 8th. Next up would be Fair Grounds, just prior to the start of their meet in November. They're not running now. And then Calder, at the end of their meet next March or April.

So at that point 100% of Churchill Downs' tracks will be on HRTV?

Correct.

And my second question involves the distribution controversy over the TrackNet brand. Do you -- can you comment at all on where that is as far as, I guess, the ultimate goal of having universal distribution to all ADW's?

Well, it's still our objective. I think the best way the industry is served is by making all content from all racetracks available to any ADW, assuming they're reputable and have their appropriate level of integrity and wagering security. But making it available to all the ADW's that are out there, we've had that position and maintained that position since the beginning of this year. And so far we haven't been able to get the folks at TBG to agree with that point of view.

Is there any movement at all or any discussion or negotiation going on or is it totally dead for the time being?

We've continued to have discussions. I think Gemstar TV Guides, which is TBG's parent company's decision to put themselves up for sale -- that was there announcement a few weeks ago -- probably has complicated the issue in terms of what we might do, since we don't really know what the future of that business is at this point.

Thanks very much.

You're welcome.

The next question comes from the line of Ryan Worst with Brean Murray.

Thanks, good morning, guys.

Morning.

Mike, could you go over what the CapEx plans are for New Orleans, the temporary facility and the permanent facility?

We anticipate spending approximately $30 million in total for both the temporary build-out, which will open this fall, as well as the permanent facility next fall. We're still finalizing some contracts on the permanent side, so that may fluctuate slightly, but $30 million is our current estimate.

Okay. And then where does horse racing TV show up, is that in that other investment line as well?

Yes, sir.

The revenue and the costs? Okay. And then Bob, maybe if you could talk about the political situation in Illinois. Haven't seen the racetracks come up much in conversations on alternative gaming and solving the budget crisis there, what's the lobbying effort like there, and is there really any chance for you guys to benefit?

Well, Ryan, I spent 27 years of my 54-year life so far living in Illinois and I still don't understand Illinois politics. So all I can tell you is that the subject of expanded alternative gaming in Illinois has been discussed within the legislature and at the governor's level for a number of months now, and I'm not going to make any effort to try to predict what the outcome will be.

Okay. Fair enough. And then --

It changes daily.

Yes. And then concerning the deal with RGS, are there any other racetracks that use them as a rebate account wagering provider? Or telephone shop?

There are racetracks that accept wagers from that entity, is that your question?

Yeah, is NYRA using RGS as well?

I'm not sure if they are or not, I'm not sure if they're accepting wagers from RGS.

Okay, thank you.

You're welcome.

(OPERATOR INSTRUCTIONS) And your next question comes from the line of Steve Altebrando with Sidoti & Company.

Good morning, guys.

Good morning, Steve.

Do you have a breakout, I guess, of what amortization will be for this -- for the two acquisitions on a quarterly basis?

We don't. We have -- we've gone through our purchase price allocation on a preliminary basis with our evaluation experts, and in most acquisitions you know that those things could change as we firm things up over time. But we don't have -- I don't have a schedule for you today.

Okay. I know you mentioned on the last call you expected it to be accretive, assume that a couple million dollars in annual amortization and, say, $5 million or $6 million in interest expense or give up, you still expect those two acquisitions to add to the bottom line?

In 2008, yes.

In 2008?

Yes.

Okay. I'm sorry if I missed this, but can you comment at all about TwinSpires handle, how that's done so far?

No numbers that we can comment on right now but we're pleased, our internal forecast, we're on target with what we expected out of TwinSpires.com since its still relatively new, since it launched in early May. So we're continuing to look at TwinSpires.com as well as our other ADW platforms that we acquired in June, and I'd just say we're pleased with the performance thus far.

Okay. Am I correct that the quarter has -- it's a full quarter of loss from the HRTV, is that correct that's included? Under other investments?

Yes, I believe starting in April we've been recording the equity earnings or losses from that entity, beginning in April.

Okay. And I think on the last call you mentioned the -- how there's a significant uptick in yield on the ADW side and that was related, I believe, to the Kentucky property. Is that just for the Kentucky Derby or do those -- are those negotiated based on the entire meet and do you think that -- is that representative of all your properties, that type of uptick in yield?

Are you referring to the ADW yield?

Yeah, I think you mentioned it rose to about eight-and-a-quarter from five-and-a-half.

Yes, that is reflective of the entire spring meet at Churchill but that would a -- ideally for the other properties, but it is negotiated relative to signal export content with the model that tracks and horsemen are entitled to higher pricing on their product.

Are you seeing that sort of uptick in the other properties?

Well, Calder's still under TBG contract, Arlington converts today to TwinSpires.com (inaudible) and then Fair Grounds isn't racing. So yes we anticipate that, but we don't have all the properties racing at this time, as I noted.

Okay. Anything, as far as CapEx in '08, I know it's a little early but anything out of the ordinary excluding slots spending?

As part of the purchase agreement when we bought the Fair Grounds out of bankruptcy, we have an obligation to spend some capital and we have planned on building a dormitory -- a back side dormitory that will be built prior to the opening of this meet. In addition to the -- that, in addition to the $30 million for the slots facility, I don't anticipate any other significant CapEx investments other than maintenance capital.

Any polytrack at anymore locations or anything along those lines?

Not at this time.

No, okay. I know Arlington showed, it did show some improvement, but it looks like you're still a ways away from generating a solid return on that property, it's still pretty dilutive. I guess just what's -- what are the plans going forward as far as that property and how you're going to plan on increasing returns there?

Steve, that's not something we're going to offer comments about today.

Okay. All right, that's all I have. Thank you.

Thanks, Steve.

Thank you.

And sir, there are no further questions in the queue.

All right. Well, listen, thanks very much for joining us today. We appreciate the attention and if there's anything else we can do for you, let us know. Thanks.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.