Churchill Downs Inc (CHDN) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2008 Churchill Downs Incorporated earnings conference call. My name is Torlisha, and I will be your operator for today. (Operator Instructions). I would now like to turn the call over to your host for today, Mr. Kevin Flanery, Senior Vice President of Churchill Downs Incorporated. Please proceed, sir.

Thank you, Torlisha. Good morning, and welcome to this Churchill Downs Incorporated conference call to review the Company's results for the third quarter of 2008. The results were released yesterday afternoon in a news release that has been covered by the financial media. A copy of this release announcing results, as well as 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 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 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 of 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 of operation to differ materially from the forward-looking statements made in this call. The information being provided today is as 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.

Members of our executive team are here and will be available to answer questions after some formal remarks. We will begin now with our President and Chief Executive Officer, Bob Evans. Bob?

Thanks, Kevin. Good morning, everyone. Thank you for joining us today for this discussion of our third quarter financial performance. I'll begin by making a few comments about our results, and then I'll turn it over to our Chief Financial Officer, Bill Mudd, who will take you through the numbers in more detail and we'll then be happy to take your questions.

I'm very pleased with our third quarter results, and here are the highlights. On a continuing-operations basis, we reported 11% higher EBITDA and more than double the net earnings, compared to the third quarter of 2007 on about 4% less revenue. In short, our online ADW and gaming businesses offset weakness in our racing business. And our conservative approach to managing our balance sheet has left us in a strong financial position with the resources available to pursue growth opportunities that may present themselves.

As has been our practice of late, I would like to focus on the five things we think you should know about the Company at this point in time. Number 1, the economy is having a very pronounced negative impact on all gaming businesses, including US thoroughbred racing. According to the National Thoroughbred Racing Association, handle, or the amount wagered on US Thoroughbred Racing was, on a year-over-year per-day basis, down about 2.2% in the first quarter, down 3.7% in the second quarter and down 8.7% in the third quarter. We had three tracks running during the third quarter. Churchill Downs only conducted five days of racing, down from six days during 2007's third quarter. Handle was down at Churchill at 20%, but that was largely caused by the horsemen's dispute, as well as the one less race day.

Calder's handle was down 27%. The disputes with Florida horsemen and with Florida breeders over how much of future slot revenue they would receive in purses were resolved during the quarter, but clearly there have been aftereffects on handle from the decision that have still not been overcome. In addition, Calder's signal was not available to any national advance-deposit wagering businesses during the quarter.

Arlington Park, which raced through September 21 in the third quarter saw handle off about 6%, outperforming the industry. So far in the fourth quarter, according to their respective press releases, Keeneland's fall meet, all sources wagering was down about 17.3%. On track handle for Oak Tree's Santa Anita meet was down 14%, and the average per-race wagering on the Breeder's Cup Championship races, there were 14 this year versus 11 last year, was down about 17%.

Fair Grounds opens for live racing on November 14th. The slot and video poker operation there will allow us to offer the highest daily overnight purses in Fair Grounds history, so we hope we'll do better than the industry trend in the fourth quarter and going forward.

Number 2, the current economic and industry situation is demonstrating just how important advance-deposit wagering, or ADW, is to US thoroughbred racing. The conventional wisdom seems to be that ADW is bad for racing. Supposedly, all ADW handle is stolen from other channels, particularly the ontrack channel, and ADW wagering undercompensates the tracks and horsemen who put on the race that generates that handle. Well, we see it quite differently.

According to the 2008 Jockey Club factbook, over the five-year period between 1997 and 2002, ontrack handle declined an average of $135 million a year. ADW started to generate significant handle in 2002, and since then, over the last five years, through 2007, ontrack handle has dropped about $72 million a year on average, roughly half the rate of decline as in the prior five-year, pre-ADW period. We conclude that ontrack handle was declining long before ADW arrived, and that the rate of decline has actually slowed by roughly half since ADW started in earnest around 2002.

So, if ADW handle isn't coming from ontrack, where is it coming from? Well, some will say that ADW is stealing from offtrack betting, or the OTB channel. Well, if you're a track or horseman who put on the race that produces that handle, you should be very pleased. On average, only about 3.5% of inter-state OTB handle is returned to the horsemen and tracks that put on the race. The horsemen and tracks then split that, which means that each receives about 1.75% on average. When the exact same wager is made through, say, the TwinSpires.com ADW channel, the horsemen and tracks that put on the race share in about 9.1% of the amount handled, split roughly 4.5% each.

The decline in ontrack handle has slowed markedly since ADW really took off, starting in 2002, and any handle that ADW steals from the OTB channel produces over 2.5 times more for the horsemen and track that put on that race.

Total industry handle on a per-race-day basis was off 8.7% in the third quarter. Although the total ADW industry numbers haven't been released yet, we believe ADW handle was probably up in Q3. We know that TwinSpires.com's handle was up 62% even though TwinSpires.com did not have access to either Churchill or Calder races during the third quarter. TwinSpires.com's new account signups during the quarter were double the 2007 level, and average daily wagering on TwinSpires.com increased by more than 53%.

It seems increasingly clear to us that during the third quarter, a time of growing unemployment, high gas prices and declining consumer confidence, customers increasingly chose the more convenient and far lower cost way to wager, ADW. We should all be listening carefully to the two wake-up calls that the ADW business is delivering so loudly. First, the industry and our company's results in the third quarter suggest that ADW is increasingly a new positive for racing, and that may, in fact, may very well be offsetting what would otherwise be an even more precipitous decline in total handle, and second, there are many races on which customers can bet, and if your track's races aren't available, no problem, plenty of others are. As Calder's results show, if you shut off your track's signal, don't be surprised if customers have moved on to other racing even if you've turned that signal back on.

Number 3, we will continue to look for ways to expand our gaming operations. Our video poker and temporary slot operations in Louisiana are doing quite well. Video poker performance improved during the third quarter over 2007, and the net win per unit on our 250 slot machines averaged $239 in the third quarter. Since we only started our slot operation in Louisiana last September, year-to-year comparisons aren't yet meaningful. We look forward to the grand opening of our permanent slot facility in New Orleans on Friday, November 14th, with approximately 600 machines. Just last week, we appointed Austin Miller, formerly a Harrah's executive, as the president of our operation in New Orleans. Austin joined us originally in May 2007, and has been responsible for leading our gaming success there so far.

We also announced that Eric Halstrom, a 15-year racing industry veteran, who most recently served as the Vice President of Racing and Simulcast operations at Canterbury Park in Minnesota, will join us to run our racing operations at the Fair Grounds. At Calder, we are in the process of finalizing our plans and securing the required regulatory approvals for construction of a slot facility.

With the election this week now over, and as we move into 2009, we will again engage in the legislative process in both Illinois and Kentucky to try to secure alternative gaming rights at our tracks there. With Maryland voters just approving slots there this week, Kentucky is now the only one of the three states that conduct racing's storied Triple Crown without legislation allowing slot machines.

Number 4, racing. As I mentioned earlier, US thoroughbred racing is, like many industries, particularly those that depend on the consumer's discretionary income, going through a very difficult period. I read a Wall Street Journal article recently about the US gaming industry, where Harrah's, which was acquired last year by private equity funds is struggling, and firms like Las Vegas Sands and MGM Mirage are trading 80% to 90% below their 52-week highs. Historically, the gaming industry and the US thoroughbred industry were considered largely recession-proof, so these are very unusual times. As a result, we are paying very close attention to our expense structure, and we are being quite conservative in committing capital as we do our 2009 planning for our racing business.

Number 5, we will continue to proactively manage our costs and improve our margins. We have reduced employment, we have outsourced some functions, we have continued implementing a new purchasing process across the Company, and the results show. Our EBITDA margins in the third quarter improved by 150 basis points over the third quarter of 2007. Now, we aren't managing to a particular EBITDA target or EBITDA margin target each quarter. If there are good, growth-based reasons to spend money, we spend it, but on a trended basis, we will continue to work and improve our cost management and margin performance.

Let me now turn this over to our CFO, Bill Mudd, who will give you a bit more insight on our reported financial results, and then we'll be back to take your questions, Bill?

Thank you, Bob, and good morning, everyone. I'll be reviewing the information as set forth in the tables of the press release that can be found under the Company news section that Kevin referred to earlier, which is located on our website, churchilldownsincorporated.com. Following my comments, we will open the call for questions and answers in which Bob and I will respond to your questions. As a reminder from our previous calls, the discontinued operations section of our financial statements and tables contain the operations of Hoosier Park, Ellis Park and Hollywood Park. My comments will focus on the performance from continuing operations for the three months ended September 30th.

Let's begin by reviewing the segment information which is contained in the schedule titled Supplemental Information by Operating Unit in the press release. As Bob mentioned in his comments, the National Thoroughbred Racing Association has reported that handle was down 8.7% year-over-year on a per-race-day basis in the third quarter. We also felt the impact of that industry decline across our tracks.

Churchill Downs racetrack net revenues from external customers declined 23% with a 20% reduction in handle. In addition to the industry headwinds, Churchill finished the spring meet with 5 live race days in the quarter versus 6 last year, and was not able to distribute the signal to national ADW providers due to the ongoing dispute with horsemen.

Arlington Park ran 58 live race days during the third quarter, an increase of 1 day over the prior year. Net revenues from external customers decreased only 4% on a handle decline of 6%. While ontrack results declined, much like the rest of the industry, Arlington saw an increase in export handle through online account wagering. With various horsemen disputes making other content unavailable for ADW businesses, we believe that Arlington was the beneficiary of limited competition in this channel. It appears that customers wager on whatever product is available. Regardless, we are happy with the result, and Arlington outperformed the industry.

Our Calder operation recorded a 26% decline in net revenues from external customers on a handle decline of 27%. Calder ran 56 live racing days, 2 days fewer than the prior year. As a result-- excuse me, as a reminder, the Florida horsemen did not consent to sending the Calder signal outside of the state of Florida over a dispute regarding purse contributions from the future slot facility. While this dispute was resolved in early July, we continue to feel the effects of the signal dispute both ontrack, as well as in the export market.

Our online business grew net revenues from external customers 46% to $13.1 million on handle growth of 62%. This is the first quarter for which full-year comparisons are relevant. Full-quarter comparisons are relevant. Since we launched TwinSpires.com in the second quarter of 2007 and acquired the AmericaTAB and BRIS family companies in early June last year. The increase in revenues is the result of an increase in wagering content and an increase in the number of new customer accounts.

Gaming revenues increased primarily as a result of our temporary slot facility at our Fair Grounds property. Our video poker business also improved as a result of opening a new facility in Boutte, Louisiana, increases in machine count at select locations and the installation of new jackpot chips. When you consider that our slot operation was closed for 7 days and our OTB and video poker facilities were closed up to 15 days for Hurricanes Gustav and Ike, we are very pleased with these results. At this time, we do not anticipate filing any insurance claims for business interruption or damage. In total, our quarterly net revenues from continuing operations were down slightly to $99.6 million.

Dropping down to the bottom of the segment data, I'll highlight some of the EBITDA changes by segment for the quarter. EBITDA from continuing operations, in total, increased $1.1 million, or 11%. Our racing operations EBITDA declined by $3 million. While this is primarily a result of the external revenue decline, it is also driven by $1.1 million of severance expense related to actions we took to address our cost structure.

Our online business EBITDA increased $1.4 million, driven primarily by increased wagering content, an increase in customers, and an increase in average daily wagering activity of existing customers. Our gaming EBITDA increased primarily due to our temporary slot facility at Fair Grounds, which opened in September of 2007. Now, let's look at the condensed, consolidated statement of net earnings. Third quarter operating profit of $4.3 million is down slightly versus last year's $4.6 million. Operating expenses decreased by $3 million, or 3%. This does include an increase of $1 million, and depreciation in amortization primarily related to capital spending for our temporary slot operation and technology investments in our ADW platform.

Excluding this increase, our operating expenses decreased at a greater rate than our revenues. SG&A expenses decreased by $1 million as a result of prior-year spending on professional services to establish our ADW business and open the temporary slot facility at Fair Grounds. Additionally, current-year severance expense was more than offset by good cost-management in the racing segment and lower equity award compensation.

Interest expense decreased as free cash flow generated over last year was used to pay down debt. Equity losses in unconsolidated investments improved primarily as a result of a prior-year write-off for Empire Racing, but also includes better performance of HRTV and TrackNet Media. Net earnings from continuing operations more than doubled to $2.3 million, or $0.17 per diluted common share.

Now, if I could turn your attention to the condensed, consolidated balance sheet, I will briefly review a few variances. Accounts receivable decreased primarily due to the collection of Kentucky Derby and Churchill Downs racetrack spring meet related receivables in addition to simulcast receivable collections. Income taxes receivable declined as a result of year-to-date earnings, which have generated approximately $22.8 million of tax expense, partly offset by 2008 estimated tax payments, tax payments made.

Net additions to property and equipment balances are primarily due to the CapEx spending at Fair Grounds for the permanent slot facility. In addition, spending was incurred related to technology investments, or enhancements at TwinSpires.com such as TwinSpires TV. Good will increased $7 million as a result of the accrual of earnout payments related to the acquisition of AmericaTAB and BRIS.

During the quarter we reached the-- during the second quarter we reached the handle objectives of the acquired ADW business, thus triggering a payment of $3.5 million, which we made in July. We anticipate that wagering levels requiring the remaining payout will be reached prior to the end of the agreement. Accounts payable and accrued expenses increased consistent with the commencement of the race meet at Arlington Park, which concluded late in the third quarter.

In addition, payables related to TwinSpires increased consistent with the growth of the business during the year. Deferred revenue decreased slightly since December as a result of the Derby and other spring meet revenues recognized during the year. And long-term debt decreased as a result of payments under our bank revolver using cash generated from our various collection activities and EBITDA generation.

That concludes our remarks, and I'll turn it over to Bob for your questions. Bob?

Thanks, Bill. I would like to ask the operator, Torlisha, if you could put through any questions that might be out there, that would be great.

(Operator Instructions). Then our first question comes from the line of Ryan Worst with Brean Murray. Please proceed.

Thanks. Good morning.

Good morning, Ryan.

Good morning.

Thanks. Hey, Bill, could you just-- I'm sorry if I missed this, but what was CapEx in the quarter, and also what was the severance expense in the quarter?

Yeah, the severance expense was $1.1 million in the quarter, and the CapEx in the quarter, you know, on a year-to-date basis, if you-- you've got both periods, but about $13 million in the fourth quarter discretely-- or third quarter discretely.

$13 million?

Right.

Okay. And then, as far as the payments go to the acquired ADWs, how much more do you owe on that?

About $3.5 million.

Oh, is that the last payment that you guys have?

We accrued $7 million into good will in the second quarter. We paid $3.5 million of that out in July, and there is $3.5 million to go, which will be paid sometime between now and the end of the agreement.

Okay, and when you're talking about your increase in handle, does that include the separate platforms last year? So, your 62% over the combined platforms?

Yes, last year had the acquired businesses. I would say that content and states that we're in and things like that change year-over-year, so it is a tough comparison to-- but it does contain the operations of both for the full period.

So, did you say wagering was, like, $64 million through TwinSpires this quarter?

The handle on TwinSpires is-- hang on just one sec, let me grab the Q, I'll give you the exact number. I might have that page-all right, all right, online was $56 million.

$56 million? Okay. And then maybe you or Bob could comment on what the content picture looks like for your-- for TwinSpires relative to last year in the third quarter and then in the fourth quarter, or not only content but states you're accepting wagers in.

Maybe Bill Carstanjen is the best guy to answer that question since he deals with it day in and day out. Bill?

Sure. I think it's hard to tell exactly what the content picture will be in one quarter. Hopefully it will be consistent with what we had last year, but those are the sort of decisions that get made right before meets open, so they haven't been made yet, but certainly we're optimistic and hopeful and will work as hard as we can for-- to get as much content as possible, and that's in everybody's interest.

And then-- how does the environment look for open content and getting additional content from, like, TVG or providing your content to other ADW players?

We've said from the beginning, when we got into the business, that we want to see a world of open content sharing between the major ADW platforms, so we'll still working hard to achieve that. I think that day is coming, and when it comes exactly, I'm not sure, but we'll remain hopeful. It's something we thought would get done this year. It hasn't, but as contracts-- as tracks have come off their exclusive contracts with TVG, generally we've felt pretty good about getting access to those tracks.

Okay, and then one question concerning New Orleans. When you guys talk about that net win number, what goes into that? Are you taking out-- are you deducting promotional expenditures to get to that net win?

Yes, it's less promotional expenditures and less taxes.

Okay. And then, in terms of Calder racetrack, how much of the deterioration was related to the contract dispute that is now over, would you say?

It's hard to be definitive about that, so I've got to be a little bit careful up here because my lawyer is looking at me, but we clearly say that it's down more than the industry and it's still down kind of in the range of-- in certain places where we were during the conflict, and we haven't seen it come back as much as we would like, so I think it's more than-- I think it's a pretty good portion. Now, clearly, the industry is down, too, so that's affecting it as well. The split is hard to determine.

But-- throughout the dispute, you were not able to export the signal to other states, and now you can, right?

Right.

Thank you.

Torlisha, any other questions?

Yes sir. Our next question comes from the line of Steve Wieczynski with Stifel Nicolaus. Please proceed.

Hey, good morning, guys. Would you mention sort of the CapEx forecast for next year yet?

We, well, first of all, we don't talk about forward-looking statements, so, no, we haven't talked about anything about CapEx for next year.

Okay, and any update, Bob, in terms of what you're going to do with Calder? Any thoughts there?

Yeah, I know there are a number of people that are interested in the specifics there. We've got a plan. That plan is making its way through the permitting and other sort of regulatory processes, so once we've got it confirmed, we'll be the first guys to announce it, but we just aren't ready to do that yet.

Do you have any idea about the timing on it? Is it a quarter away, is it six months away?

It's a good question. We're dependent on various regulatory agencies to sign off on things, so we'll get it done as quickly as we can. We want to move forward quickly, but we just need them to do it, so I'm not going to try to predict what they're going to do.

Okay, great. Thanks.

Sorry about that.

(Operator Instructions). And our next question comes from the line of Steve Altebrando with Sidoti and Company. Please proceed.

Hi, guys.

Hi.

Morning, Steve.

Can you give us some color about what's remaining CapEx wise on the permanent New Orleans facility?

Yes, we've provided that number in the past, so I'll be happy to provide kind of what's remaining. Between the temporary facility and the permanent facility, the number that we've provided was around $32 million total. There is about $9 million of that to go. A good portion of that will be paid in the fourth quarter, but there will be-- it will probably finish up in the first quarter of next year.

Okay, and then in terms of Florida, I know it was just brought up, but I think it has kind of been out in the press that there's-- that you guys have a contractor or-- is that accurate?

Bill Carstanjen, do you want to answer that one?

Sure. We've hired architects and contractors to help us do this as part of the process of getting our plans ready, so we-- it's just part of the process that's actually necessary to have those folks lined up as we move through the permitting process, as well.

And then lastly, Bob, if you could talk about sort of-- you mentioned earlier, in your prepared comments about the flexibility of your balance sheet. If you could give just kind of a sense about what you look at as a priority-- are you thinking of expanding more in the ADW segment? Are you thinking more of a regional track with slots potential? If you could just kind of give a sense of how you view that.

I would love to, but I've got a whole bunch of people looking at me and saying, no, no, no, no, no. So, I'm going to give-- I'm unfortunately going to give you the standard answer that we're not going to speculate about what we might do going forward. So-- it would be an interesting discussion to have, but, unfortunately, we're not going to have it.

Are you thinking about kind of buckling down right and now and not expanding? Or are you looking around? Can you give us just a little bit of a sense of the game plan?

As I said in my comments, that we've been pretty conservative with our balance sheet, and that has left us in a pretty strong financial position. We've got the resources to pursue growth opportunities, and you can find whatever meaning you choose to find in that.

Okay, that's helpful. Thank you guys.

(Operator Instructions). And there are no additional questions at this time. I would now like to turn the call over to Mr. Bob Evans for any closing remarks.

Thanks, Torlisha. Thanks everybody for joining us. I appreciate the time this morning, and we'll talk to you in a few more months. Bye.

Thanks.

This concludes your presentation. You may now disconnect, and have a great day.