Churchill Downs Inc (CHDN) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Churchill Downs Incorporated Second Quarter Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, today's conference call is being recorded.

I would now like to introduce your host for today's conference, Ms. Julie Koenig, Vice President of Corporate Communications. Ma'am, you may begin.

Thank you, [Devin]. Good morning and welcome to the Churchill Downs Incorporated conference call to review the Company's results for the second quarter and six months ended June 30, 2011. 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 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 titled Company News located at churchilldownsincorporated.com, as well as at that website's Investors section. 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 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 Incorporated expressly disclaims any obligation to release publicly any updates or revisions to these forward-looking statements to reflect any changes in expectations.

I will now turn the call over to our Chairman and CEO, Bob Evans. Good morning, Bob.

Good morning, Julie. Thanks everybody for joining us. Well, it was a really good quarter. Revenue from continuing operations was a record $250 million in the second quarter, up 16% over the second quarter of 2010, which was the previous record. Second quarter EBITDA of $85 million was up 41% over the second quarter of 2010 and that was also a record. The previous high was $62.9 million in the second quarter of 2006, although that included $10.1 million in hurricane insurance recoveries. The previous quarterly EBITDA high, excluding insurance gains, was $60.4 million in the second quarter of last year.

Our EBITDA performance during the quarter benefited from a one-time $2.7 million gain on the conversion of a convertible note into common stock. Bill will talk a little bit of more about that in a minute. And the resolution of our tax-increment financing or TIF claim in Kentucky, which added $2.9 million.

On the other side of the ledger, as you know, we were forced to close Harlow's Casino Resort & Hotel for 25 days in May due to Mississippi River flooding. We estimate an EBITDA loss of about $3 million related to Harlow's closure. We are working with our insurance carriers to recover that amount as part of our business interruption plan.

So net-net, it was a very good quarter. Let me turn this over to our CFO, Bill Mudd, who will take you through the numbers in greater detail. Bill?

Thanks, Bob, good morning, everyone. As Bob stated, it was really good quarter. Using the tables of the press release, I will take you through some of the key variances. My comments will focus on our performance from continuing operations for the three months ended, June 30. After that Bob will make a few closing remarks and we'll open the call for a few questions.

I'm going to start with a summary of the second quarter results from the schedule titled, Condensed Consolidated Statements of Net Earnings for the three months ended June 30. For the quarter, we had continuing net operations from external customers of approximately $250 million, an increase of 16% over the comparable period of 2010. Our second quarter revenue growth includes the operations of Harlow's Resort, Hotel & Casino, which we acquired in December, and two extra months of Youbet.com, which we acquired in early June of last year.

Operating expenses increased primarily as a result of our acquisitions and expansions in the Online and Gaming segment. Partially offsetting these increases was a reduction in sales tax expense in the Racing segment of $2.9 million related to the tax-increment financing agreement with the Commonwealth of Kentucky associated with the 2005 renovation of our Churchill Downs Racetrack facility. We expect to receive cash for these refunds later this year. In addition, we recognized a $1.3 million software impairment in the second quarter of 2010, as it was determined that the software owned by TwinSpires.com will not be used in connection with the acquisition of Youbet.

SG&A expenses were up 17%, or roughly $2.7 million. The Harlow's and Youbet acquisitions account for approximately $1.8 million of this increase. Increases in equity and long-term incentive compensation of $1.8 million were offset by a year-over-year reduction in business development spending of $1.9 million.

Interest expense increased by $2 million over the prior year, primarily due to the recognition of $1.4 million in interest expense related to the conversion of related party convertible note into common stock. That also includes the impact of higher average outstanding debt balance required to finance the acquisitions of Youbet.com and Harlow's.

Miscellaneous other income increased primarily due to the recognition of $2.7 million in gain related to the conversion of the related party convertible note through the issuance of 452,603 shares of our common stock, and the elimination of the associated short forward contract liability and long put option asset.

By including the $1.4 million of interest expense, previously mentioned, and $540,000 of associated taxes, the net income impact of this transaction is approximately $780,000. It is also important to note that these conversion shares have been included in past diluted share counts for purposes of computing diluted earnings per common share. Earnings from continuing operations were up 41% to $40 million, or $2.36 per diluted common share.

Now let's review our segment performance in the schedule titled Supplemental Information by Operating Unit for the three months ended June 30. Total racing operation's net revenues from external customers increased 1% in the quarter as non-pari-mutuel revenues such as admissions, sponsorships, and licensing fees primarily related to the Kentucky Oaks and Kentucky Derby Week offset pari-mutuel revenue declines at all four of our racetracks.

In total, we conducted 105 days of live racing versus 112 in the same period of the prior year, a decline of 6%. Handle across the four tracks totaled $791 million in the quarter, a decline of 5% versus the second quarter of 2010. According to industry information released by Equibase, total second quarter handle on U.S. thoroughbred horse racing declined 7%, on a 9% reduction in the number of race days versus the same period of 2010. In total, our non Kentucky Oaks and Kentucky Derby Week Racing segment results were in line to slightly better than the overall industry.

Our gaming business grew net external customer revenues by $13.6 million, or 38% in the quarter. Our Harlow's property generated $9.5 million of this increase despite its closure for 25 days due to the Mississippi River flooding. We opened the 200 seat temporary buffet on June 17 and our renovated hotel reopened on June 28 after undergoing repairs from the February windstorm.

Unfortunately, our steakhouse permanent buffet and entertainment arena are still closed. We are looking at alternative plans to replace the steakhouse, permanent buffet and entertainment arena in a new design paid for by our expected insurance proceeds. Regardless, the business continues to perform well and we expect that business interruption will be substantially covered by insurance proceeds in these coming quarters.

Calder Casino revenues improved $3.5 million, or 19% year-over-year, driven by what we believe is an improved economic environment in South Florida and improved direct mail and advertising campaigns implemented earlier this year. Gross win per unit improved 20% to $139 and average daily poker revenues improved 59%.

Our Louisiana gaming properties also experienced revenue gains with our fair ground slots, up 4% and our video poker business, up 3% year-over-year. Our Online business grew net revenues from external customers by 56%, or $16.7 million on handle growth of 58% including the two additional months of Youbet.com. Including the full quarter of Youbet operations in the prior year, total Online handle was down 2.4% for the period. 70% of this reduction is from one very low margin customer. Handle, when excluding this customer for both periods, was down 0.7% and has improved every month this year on a year-over-year basis showing its first increase in June and a larger increase so far in July.

Now let's look at the EBITDA performance by segment at the bottom of the page. EBITDA from racing operations was $58.4 million in the quarter, an 18% improvement over prior year. Gains in this segment were driven by $6.4 million increase in Kentucky Oaks and Kentucky Derby Week, profits as a result of higher sponsorships, admissions, broadcast rights, corporate hospitality, and pari-mutuel wagering.

Kentucky tax-increment financing sales, tax credit, previously discussed, added $2.9 million of EBITDA to racing operations for the quarter. Pari-mutuel revenues reduced from reductions from lower wagering levels across our other racetracks were mostly offset by $0.5 million reduction in allocated corporate overhead.

Our gaming segment EBITDA improved $6.1 million over the prior year to $12.8 million. Our new Harlow's property generated $2.3 million of EBITDA in the quarter despite being closed 25 days. We believe the business interruption losses associated with the flood are largely recoverable through our insurance policies, which cover loss revenues minus saved expenses after the deductible has been met. Our current estimate of the impact of this lost EBITDA associated with being closed for the bulk of May is approximately $3 million. We are currently working with our insurance carriers to finalize our business interruption claim and we'll recognize that recovery once we have an agreement with the insurance carrier.

Our total deductible for property and business interruption is approximately $1.3 million associated with this loss. Since we anticipate replacement cost will exceed the net book value of the impaired assets by more than $1.3 million we have not recognized any flood losses in the second quarter.

EBITDA at our Calder Casino improved $3.3 million year-over-year driven by gains in revenues on better economic environment and improved marketing strategies. Our Louisiana Gaming business also improved EBITDA by $0.4 million on higher revenues. Our Online business segment reported EBITDA of $11.3 million, an increase of $6.7 million year-over-year. The improvement is driven by two extra months of operations of Youbet, following the June 2010 acquisition and includes cost synergy savings of $2.5 million by combining the two businesses. A software impairment charge of $1.3 million incurred in 2010 and a $0.6 million improvement in HRTV performance also contributed to the improvement.

Corporate EBITDA improved primarily due to $2.7 million gain related to the conversion of a related party convertible note, previously discussed. Total EBITDA increased $24.6 million, or 41% over the prior-year.

Now please turn to the page titled Condensed Consolidated Statement of Cash Flows. First half net cash provided by operating activities improved to $104.8 million from $57.9 million reported a year earlier. Our year-to-date EBITDA improvement of $40.8 million is the biggest driver of this improvement while we also received $8.5 million in federal tax refunds from lower payments made in 2010 and a $1 million refund related to the amended returns, claiming deductions for local lobbying expenses.

Additionally, we paid $1.8 million less in 2011 estimated payments driven partly by the ability to utilize net operating loss carryforwards acquired as part of the Youbet acquisition as well as the deductibility of intangibles acquired in the Harlow's transaction.

Year-to-date spending for additions to property and equipment totaled $10.9 million, $9.3 million of this amount was for maintenance related expenses, compared to $7.2 million in the prior year. We still expect to spend approximately $20 million on maintenance capital in 2011.

As seen in our 10-Q, free cash flow, which we define as net cash from operating activities plus maintenance related capital expenditures for the first six months of the year was $95.5 million versus $50.7 million in the prior year.

Now turning your attention to the Condensed Consolidated Balance Sheets, I'll briefly review a couple of key variances. Accounts receivable increased $7.9 million primarily driven by an insurance recovery for the property damage at Harlow's. This is offset by a $9.8 million reduction in the property and equipment line, reflecting the estimated book value of the property damage at Harlow's.

Long-term debt decreased by $80.2 million, as we used free cash flow to pay down borrowings under our revolver. The decrease in the convertible note payable of $15.1 million is due to the conversion to stock previously discussed.

That concludes my remarks. I'll turn it back over to Bob for some further comments and then he can turn it open to questions. Bob?

Yes, thanks, Bill. Special thanks also to the team at Harlow's. At the beginning of the quarter they were cranking long, in the middle of the quarter we were completely shut down and [we have to go and it was] filled with water. By the end of the quarter, we were back up and running to the extent that we are. So, great job to the gang in Greenville.

Before we turn to your questions, let me update you on a couple of developments that will probably be part of your questions anyway. First, historical racing machines in Kentucky, this matter is before the Kentucky courts and it's not likely to be resolved until sometime next year. You may be aware that two Kentucky racetracks have announced that they are proceeding with the installation and operation of these machines and Churchill Downs will not be doing that at this time. We think it's a good idea to get a definitive answer from the court before making that kind of investment.

Also, and we've said this before, we're still not convinced these machines will be economically competitive in the Louisville market, which already has casino-style gambling only 14 miles away at the Indiana Riverboat Casino in our area.

Second, the two items from Illinois, Arlington Park share of the so-called Molaro Bill money, that's the legislatively mandated tax that certain Illinois Riverboat Casinos are supposed to pay. That totaled $44.2 million at the end of the second quarter, of that about 60% will be used to increase purses at Arlington Park and the balance goes to Arlington Park itself. We hold these funds at the direction of the court in an escrow account, and they appear on the balance sheet as restricted cash.

Also in Illinois during the second quarter, the Federal Seventh Circuit Appeals Court dismissed the Riverboats' case against us, which is good news. However, the Riverboats have clearly demonstrated that they will play this matter out for as long as they can. So we may see additional legal action on their part in the Federal or Illinois State Court.

Also in Illinois, the State Assembly has passed a gaming bill that authorizes Arlington Park to operate up to 1,200 slot machines and Quad City Downs to operate up to 900 machines. The Illinois Senate President is yet to send that bill to the Governor. While we are cautiously optimistic about the bill being enacted into law, it's really not possible to predict the ultimate outcome or the timing in Illinois.

Third, we continue to work in the political, technology, and alliance areas necessary to be prepared for Internet gaming, should it be legalized at the State or Federal level. And we're encouraged by the fact that legislators at all levels are looking at bills that will not only strengthen consumer protections against illegal Internet gaming, but will also create new sources of revenue that are desperately needed at all levels of government.

And finally, we continue to look at potential acquisitions, primarily in the regional casino space, but in other areas as well. We also continue to be very disciplined buyers of value.

As Bill noted, we continue to generate considerable cash flow from operating activities, $105 million in the first six months, up from $58 million in the first half of 2010. Our long-term debt at the end of the second quarter was $185 million, a reduction of $80 million from year-end 2010.

In the short run, we will continue to pay down debt. Longer-term, we believe there will be attractive opportunities to deploy capital to create new shareholder value. And as always we will continually evaluate our dividend policy and a potential for share buyback program.

We'll now be happy to address your questions. Devin, if you could present any questions, please?

Yes, Sir. (Operator Instructions) Steve Altebrando, Sidoti & Co.

Hi, guys. How are you?

Good.

Good morning, Steve.

I am still, in terms of the ADW segment, still trying to get a handle, I guess, where EBITDA margins eventually fall out. The sequential improvement is that all related to volume essentially or increased handle?

Bill, do you want to take that one and Rohit Thukral who runs TwinSpires is on the line too. Rohit, if you have some comments after Bill.

Yes, I would say that -- well, first of all, we put the businesses together last year, Steve, as you know. And we took out, I think, the last time we reported is about $12.4 million worth of annualized cost. The business is very scalable, so there's obviously a good piece of what I would call base cost or fixed cost that sit below the revenue line. And when you typically add another dollar of handle to that business, the cost you really add is the fee associated with the product. So we pay the track and the horsemen for showing that. And then of course there's some marketing in total cost and what not, but those are the two big costs.

So when the volume is higher, clearly the margins are better. And the second quarter, second quarter is always the biggest, because you have the Triple Crown in that quarter. So I would say, clearly some of it is related to volume, some of it is related to taking cost out, and then of course HRTV was better about $600,000 in the quarter as well.

Okay. I might have missed this in your prepared remarks. But, do you have somewhat of an organic top-line number for the ADW segment, year-over-year?

In my comments, Steve, I talked about I think in the first quarter, we had reported on a combined basis and including what Youbet had reported for the first quarter of 2010 results, the combined handle was down 10% in the first quarter. In the second quarter, the combined handle was down 2.4%. But when you look at that 2.4%, there's one customer that accounted for a significant portion of it, and when you pull that customer out it was down 0.7%.

Okay. Perfect. And then just quickly on the --

And that was with the industry being down 7 points in the second quarter.

Okay. On your cash flow statement, there is a acquisition of gaming license in the quarter. Is that from Harlow's?

That's Calder.

Calder, okay. And then --

The annual gaming license fee in Calder.

Okay. And then the last one. And I know you mentioned it for potential share purchases, but I guess, I'm wondering why not have at least an authorization in place. I mean, you guys have looked for acquisitions and -- versus where your stock is trading at. We find it hard to imagine you would find something as compelling. Why not at least have an authorization to be potentially opportunistic?

That's a possible -- consider we already have, we do this quarterly. I don't really want to comment on it beyond that except we're aware of that issue.

Okay. All right. Thanks, guys.

Thank you.

(Operator Instructions) Ryan Worst, Brean Murray.

Good morning. Thanks, guys. Good quarter.

Thanks, Ryan.

This question Bill or Bob, on the Illinois Horse Racing fund from the ongoing payments from the tenth license. How do you see that flowing through to your income statement?

On the tenth license -- do you want this one, Bob, or do you want me to take it?

This is with respect to the River Casino and display?

Yes.

Yes, go ahead.

As you know, 15% of that is allocated to a fund for horseracing. However, Steve it needs to be appropriated by the legislature in order for the horseracing interest to get that money. The legislature has yet to appropriate those funds. So as of right now we do not what the timing of receiving any of that money would be.

Okay. And then how long are the -- I know you entered into new sponsorship in TV contracts for the Derby and Oaks. How long are those contracts?

They are each five years. This year is the first year, there's four more years on each of those contracts.

Okay. And then, Bob, maybe you could touch on the political climate in Kentucky. I know there has been news out there recently of a potential referendum or at least someone supporting a referendum that's usually pretty anti-gaming. Could you just try to fill us in on kind of the reasons for that support, the change there and what you think, how you think a referendum would potentially play out?

I always love trying to predict political outcomes. The big political matter in Kentucky is the race for the Governorship. The incumbent, Steve Beshear against the challenger Republican, David Williams, currently the Senate President. Beshear has historically been a supporter of expanded gaming, Senate President Williams has not. I doubt if much progress is made on the issue of expanded gaming in Kentucky until after that election, which -- it's a bit unusual and it's been an off year, this year in 2011. So I think we just need to wait and see how that plays out and what the legislature may want to do following that. So I doubt if anything makes much progress before that.

Okay. Thanks.

You're welcome.

(Operator Instructions). I'm showing no further questions at this time.

Okay, Devin, thank you very much for your assistance. Everybody, thanks for joining us. We'll talk to you again in about 90 days. Bye, bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, you may all now disconnect. Thank you, and have a nice day.