Churchill Downs Inc (CHDN) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Churchill Downs Incorporated Third Quarter Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions following at that time. (Operator Instructions). And as a reminder, this conference call is being recorded.

And now I will turn the call over to Julie Koenig, Vice President of Corporate Communications. Please begin.

Thank you, Tyrone. Good morning and welcome to the Churchill Downs Incorporated conference call to review the Company's results for the third quarter and nine months ended September 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 News located at churchilldownsincorporated.com, as well as within the 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.

Thanks Julie. Good morning everyone. Thanks for joining us. I've got good news this morning; I have no prepared remarks. A couple of days ago when I started writing them I realized I was saying the same things that I said at our shareholder meeting and our Q2 earnings release this past summer. So, I thought why repeat those things again.

It was a good quarter. We are happy with the results. Let me turn this over to our CFO, Bill Mudd, who will take you through the numbers in a little more detail. And then we will all be back to take whatever questions you might have. Bill?

Thank you Bob. Good morning everyone. As usual I will review the information set forth in the tables of the press release. My comments will focus on the performance of continuing operations for the three months ended September 30.

Let's begin by reviewing the segment information contained in the schedule titled Supplemental Information by Operating Unit for the three months ended September 30. For the quarter we had $166.3 million of net revenues from external customers, an increase of 13% over the prior year.

Racing operations external customer revenues declined 1% in the period on an equivalent number of live race days. Total wagering handle at our race track locations was down 0.4%, compared to the total US thoroughbred market handle decline of 7.4% as reported by Equibase. Wagering handle outperformed the broader market at our race tracks that were live for the bulk of the quarter with Arlington Park handle flat to prior year and Calder handle down 1%.

Our gaming business has increased quarterly net revenues from external customers about 50% year over year. While the primary growth driver was the Harlow's acquisition, our other gaming properties all posted year over year organic growth. Our Calder Casino improved 19% over the prior year in what we think is a better South Florida economy and an improved marketing and promotion strategy. Both of our Louisiana businesses reported single digit increases on a marginal pickup in market share. Our online businesses appear to be on track with organic revenue growth of 7% on handle growth of 4% in the quarter.

Since we closed the Youbet.com acquisition in June of 2010, this is the first quarter with comparable basis in the prior year. With industry handle declining over 7% in the quarter, this 4% increase means online handle grew 11% faster than the overall market and represents the strongest quarter of the year thus far for the TwinSpires.com business on this basis.

Other investments external revenues decreased 7% in the quarter as a result of low margin customer loss in United Tote earlier this year.

Dropping to the bottom of the page I will highlight some of the EBITDA changes by segment in the quarter. In total, EBITDA from continuing operations increased $25.9 million. Our racing operation's EBITDA increased by $19.2 million. The major driver of this change is $19.3 million of benefits related to the recognition of the Horse Racing Equity Trust Fund monies being taken out of escrow and recognized in the operations during the period. Otherwise, EBITDA was roughly flat to the prior year on a 1% decline in revenues as our cost-out efforts have been able to offset the impact of inflation, particularly in employee compensation and healthcare spending.

Our gaming segment EBITDA increased 67% to $13.1 million for the quarter as we benefited from a full quarter of operations of Harlow's which was acquired in December of last year. Harlow's generated $4 million of EBITDA which included $0.5 million of corporate expense allocations. While we are pleased with this performance, Harlow's profitability continues to be below historic levels and our expectations as we continue to operate without a permanent buffet offering, steakhouse or an events arena. We are working hard to get agreement with our insurance carriers on the scope of both the business interruption and the property damage and hope to make an announcement in the next couple of months on our rebuilding plans for this location.

Our Calder Casino EBITDA grew 38% year over year to $3.3 million after overhead allocations. Our Louisiana gaming properties increased EBITDA to $5.8 million on a slight increase in gaming revenues.

Our online business EBITDA increased 69% to $9.8 million. The prior year included $1.7 million of charges for employee-related costs resulting from the restructuring of the business following the Youbet acquisition. The remaining portion of the improvement is driven by cost synergies recognized from combining the two businesses as well as improvements in volume and our equity investment in HRTV.

Corporate EBITDA was a loss of $1.5 million versus a gain of $0.3 million in the prior year. The prior year included the effect of a favorable settlement with a third party for $1.3 million and is the primary driver of the year-over-year reduction.

Now let's look at the condensed consolidated statements of net earnings for the three months ended September 30. Our net revenues grew 13% to $166.3 million in the quarter as previously described. SG&A expenses were up 6% or $0.9 million driven by the Harlow's acquisition. Higher compensation costs driven by improved financial performance were offset by costs incurred in the prior year related to the restructuring of our online business as well as the recognition in the current year of insurance recoveries related to the tornado damage sustained at Churchill Downs Race Track.

Third quarter operating income of $10.1 million increased $6.8 million over last year's $3.3 million. Miscellaneous income improved by $18.1 million, primarily from the release of the Horse Racing Equity Trust Fund monies and was partially offset by the 2010 third party settlement of $1.3 million.

Net earnings from continuing operations for the quarter were $19.7 million or $1.16 per diluted common share compared to $3.7 million or $0.22 per diluted common share in the same period of the prior year.

Now if I can turn your attention to the condensed consolidated balance sheets. I will briefly review a few variances. Restricted cash decreased $11.4 million primarily related to the Arlington share of the Horse Racing Equity Trust Fund monies being released from escrow. The horseman's share of these funds remains in restricted cash until they are paid in the form of purses.

Income tax receivables decreased $11.7 million primarily driven by the receipt of refunds related to a prior year overpayment and amended federal returns related to state lobbying expense reductions. Property and equipment decreased $25.5 million as the current year depreciation expense exceeds current year capital spending which was $16.8 million. Year to date our maintenance capital spending has been $11.9 million and we are still forecasting approximately $15 million to $20 million of maintenance capital for the year. It is likely to be on the low to middle part of that range. In addition we reduced property and equipment by $9.8 million reflecting the estimated property damage at Harlow's.

Purses payable increased $11.1 million and other non-current liabilities increased $12.4 million primarily as a result of purses that will be paid in future periods at Arlington Park in conjunction with the Horse Racing Equity Trust Fund proceeds.

Long-term debt decreased $108.8 million reflecting repayments funded by cash from operations, including the Horse Racing Equity Trust Funds and income tax refunds.

Lastly, I wanted to note that we received $8.5 million related to the note and gaming tail associated with the sale of Hoosier Park. There will be a gain in discontinued operations of approximately $3.4 million recognized in the fourth quarter.

That concludes my remarks and now I will turn it back over to Bob and for questions. Bob?

Thanks Bill. Tyrone, we will be glad to take any questions if you have any.

Thank you. (Operator Instructions). We have a question from Jeffrey Thomison of Hilliard Lyons. Your line is open.

Good morning.

Good morning.

Excellent quarter, by the way. I have two questions for you. First, your overall EBITDA margin was a bit above my expectation. I was wondering if you were pleased with the overall cost structure and if you feel that is where it needs to be given demand in the respective business segments. And then secondly, I was hoping you could address future cash flow utilization and that is just touching on the priorities for applying your cash flow beyond investing in your existing businesses. This perhaps could be further debt reduction, potential acquisitions or a potential increase in the dividend which I believe has been at the same rate for about 14 years.

Any color on those possibilities would be great.

All right, well Jeffrey, thanks for the two good questions. On the first one, we have had for several years a pretty aggressive cost-out program that we run just on an ongoing basis. And I feel like that has been pretty effective in largely offsetting the effect of inflation on our cost structure. Once you get below the company level you have got businesses that have very different growth profiles at the moment.

In racing there is very little upward revenue growth, so the premium there is really on cost reduction and capital conservation. Other businesses like our online business, both the existing TwinSpires advanced deposit wagering on horse racing business, and other online businesses that we may at some future date pursue, are obviously growth businesses and the cost performance is a little different on those.

We are pretty happy with our cost-out program. It has been delivering results every year and we will keep sort of the same level of attention paid to that as we go forward.

On your second question, the use of cash flow going forward, it is no secret, we have said before that we are interested in doing additional acquisitions in the regional gaming space and other areas. We continue to look at those. I don't have anything to announce today but we are actively looking for opportunities to put capital to work at reasonable returns.

And every year we consider dividend and whether to increase that or not. We haven't made that decision yet for this year. We will later this fall. And with respect to stock buybacks, that is something that we review with the board every quarter. And if we think that is an appropriate thing to do we will act on it.

So, all of the options that you mentioned are available to us. We consider them regularly. And meanwhile we will continue to pay down debt as we generate cash in excess of our capital spending needs. Two good questions, thank you.

Tyrone, (multiple speakers) any other questions?

Yes sir. Our next question is from Ryan Worst of Brean Murray. Your line is open.

Thanks. Good morning guys.

Good morning Ryan.

Maybe if you could talk about just your strategy as it relates to online poker and what you are doing to prepare for that if it does become legal, what kind of resources are you putting towards that? That would be helpful.

Good morning, Ryan. It's Bob. There is not a whole lot I can talk about here given our unwillingness to make any forward-looking statements. But I've said before that if internet poker is legalized we will be prepared to compete both for a license and assuming we can get licensed with the other competitors in that market place. We do have people working specifically on that. Obviously it requires legislative changes at the state and/or federal level. And other than just saying we will be prepared, I don't really have anything else I will share at this time.

Okay. Bob, in Illinois could you talk about the latest in the political, in terms of the political environment there and how does that affect your strategy in that state and with Arlington Park?

Good question. Let me ask Bill Carstanjen, our President and COO who has been working this one most directly to comment on that.

Sure Bob. So I think as most people probably realize at this point the governor of Illinois laid out an alternative framework for expanded gaming in Illinois and it was a framework that didn't include racinos or slots at the tracks. So that was in the face of a bill that had passed through the legislature but hadn't yet been presented to the governor to sign. So, the governor preempted that and said in his prepared remarks that he wouldn't sign it and he had an alternative framework that didn't include the race tracks.

That has led to a lot of discussion in the legislature in Illinois. And we will have to watch how that plays out. We remain heavily involved. Don't want to predict what happens. Don't think this is over by any means. But we will just have to watch and observe and respect the legislative process.

Okay. I mean what if you are not able to get the slot machines? Would you consider alternatives at that real estate?

We have said in various public forums before that racetracks without alternative gaming are an endangered species on a long run basis unless they have some other form of subsidy. Long-term, I think that is a real problem if we can't get gaming at Arlington Park and at our other racetracks.

As far as when those changes might take place, it is hard to say. I have also said in various forums that racing's biggest friend these days is the depressed commercial/industrial real estate market which last time I checked was off 40% or 45% from its previous peak. But that does seem to be coming back somewhat and will put a lot of pressure on people to make tough decisions about how they use their real estate assets.

Okay, thanks, that is helpful. And then maybe if you could just talk about Harlow's and the impact of not having those amenities on that property?

Let me toss that one back to Carstanjen as well.

Thanks Bob. So the market generally has been down in Mississippi since the flood. And that is part of the impact on us.

While we feel the team has done a very good job recovering, the fact is it is hard to perform at the prior levels when you don't have a buffet and when you don't have the amenities that you had previously. So we are hard at work on the insurance recoveries, as Bill Mudd indicated, and we're hard at work on the plans to replace what we have lost as soon as we can sort out the details. So our team I think has done a Yeoman's effort recovering business to the extent they can, but the customer doesn't get the same experience that they got before because we have lost these amenities.

So we are watching costs very, very carefully. We are taking out costs when we can. And we are planning for the future, but right now it is not a great hand that we have been dealt to have to function without things like buffets and the arena.

So Bill, given your balance sheet, why not just get a buffet up and running and what you need.

Well we actually had a temporary buffet, Ryan, but were using some basically trailers on the outside of the building to operate as a kitchen. Unfortunately you have to have -- we don't have enough space. We have to actually create a new buffet. And as part of the discussions with the insurance company we have to decide whether we want to refurbish the old buffet space or create something new. So that is kind of where we are in the process.

And I wouldn't call what we have now as really an adequate replacement for what we had. We are serving food. But we are also dealing with all of the permitting and other requirements that go with constructing things on the wet side of a levee. It takes time, it is a harder process than say a standalone construction in most places. We have to be careful, we have to be observant of all of the requirements that are out there before you can do anything.

That makes sense. Thank you.

Tyrone, any other questions?

Yes sir. The next question is from Steve Altebrando of Sidoti & Company. Your line is open.

Hi guys, how are you?

Fine. Good morning.

The restricted cash I guess was a little bit higher than what I expected given that the subsidies settled. I know you had mentioned some of the purse payable is included in that. What is the balance of that? Is it a tax payable?

No, the restricted cash balance, Ryan.

Steve.

Excuse me, Steve. When we released the Horse Racing Equity Trust Funds, it was $45 million. And only $19.3 million of that went to Arlington Park. The remaining $25 million, $25.5 million or so stays in restricted cash and is actually paid out as purses. So, the reduction in restricted cash wouldn't have been for the full amount. And then any, I think the total restricted cash balance change was $11.4 million. The rest of it is increases associated with some horse racing stallion stakes in Florida as well as a little bit of online growth from restricted cash from customers.

Okay. And then in terms of the purses that are payable, is there a P&L impact? What is the timeline of that money being paid out to horsemen? Is it something that just runs through the cash flow statement?

Yes. Actually it won't even run through the cash flow statement because it is in restricted cash. It never shows up as an operating source of cash and it will never show up as an operating use of cash. So it is like it was never there. And in terms of, so it will have no P&L impact either. No cash or no P&L impact.

In terms of timing of when that will be paid out, it somewhat is predicated on what happens in Illinois with respect to the gaming bill. Assuming that the gaming bill does not pass, then it will get paid out based on an agreement with the horsemen over the next three years, the remaining balance.

Okay. So when you consider your restricted cash, you probably don't consider it as part of your capital structure in terms of --?

No, any restricted cash that is on our books is not accessible by us and we don't have access to it.

Okay, and then if you could remind us with the Rivers Casino opening in Illinois, the benefit for you guys and also the P&L implications if you could? I know the timing as well is going to be a little (multiple speakers)

15% of the gross gaming revenue generated by the Des Plaines casino goes into a Horse Racing Equity Trust Fund type of account. Now that account unfortunately needs to be appropriated. It goes into the account, it's not spent, but it needs to be appropriated by the legislature before Arlington or the horsemen or any of the other racetracks and horsemen groups in Illinois have access to the cash. That balance today is about $12 million and based on the formulas that are in the bill, Arlington's share of that would be just south of $2 million.

So depending on what the gross gaming revenues are at the new facility, they are running about $350 million right now. The annualized share of that for Arlington, excluding the purse account, would be roughly $7 million a year.

And that's profit, right?

Well that's the Arlington share of it, yes. And it would be booked as an other operating income type of impact. Similar to what we booked the Horse Racing Equity Trust Fund monies in the current period. So it would have no revenue impact but would have a $7 million EBITDA favorable impact.

So annual benefit of $7 million in EBITDA versus what you are running now? Assuming the run rate continues of the Rivers.

Right. We don't provide forward-looking guidance to be clear, but if Rivers runs $350 million, whatever they do, then that is roughly what the impact of Arlington Park would be.

Okay. And in terms of it hitting your P&L, because of the appropriation, is it something that would go through quarterly or is a one-time, one quarter per year? Do you recognize it based on when the appropriation takes place? And is it something that is a once-a-year appropriation?

That's a good question. I'm not sure if it will be once a year, if they will turn it when they appropriate it. It all depends on what the legislature does. Yes, if they appropriate it one time we will get it one time. If they appropriate it such that it comes directly to the horsemen's groups then it will come in quarterly. So it all depends on where the legislature goes with that.

Okay, thanks. And then the last one would be, and I know you can't get into too much in specifics, but what you are seeing in the market and on the acquisition front. Are there more properties available than there were six months ago, less? What is the financing environment? How has that changed the market? And if you can give any color. Are there banks more willing to, some of their gaming assets, basically at this point essentially divest them when they had previously seemed to be holding on?

I would say simply that deal flow is about the same as it has been all year. The valuation multiples are flat to down slightly from where they were three to four months ago. And the cost of money is a function of everybody's balance sheet, so that differs by company pretty dramatically. But largely the same as it has been despite a recent spike in high yield interest rates.

So, about the same deals, slightly better valuations, about the same cost of money.

Okay, and then I believe your revolver, is it 2013 it matures? When do you get into talks to extend that?

Yes. It is 2013 so we have about two years left on that revolver.

Okay, it looks like it is late 2013. All right, thanks guys.

You are welcome. Tyrone, anything else?

No sir. Our next question is from Steve Wieczynski of Stifel Nicolaus. Your line is open.

Hey guys, this is actually Brad Boyer in for Steve. Just wanted to see if you guys could provide any anecdotal color as it relates to the Breeders' Cup coming up here in the next couple of weeks, just what you are seeing as far as kind of the corporate booking environment and that sort of stuff?

I don't want to be difficult on this, but I would prefer to pass on that question. It is the Breeders' Cup's event. You probably should direct the questions about the event to them rather than us. And, again, I'm not trying to dodge your question, I just think it is their matter to discuss, not ours.

Fair enough. Thanks.

Sorry.

Thank you. And our next question is from Anil Gupta of Imperial Capital. Your line is open.

Hey guys, thanks. So a couple of just real quick ones. One is it looks like Arlington racing revenues were up about 2% year over year which was a pretty nice surprise compared to I believe it was the nine prior quarters had year over year declines. I was wondering if there was any one-time impact there. Can you talk a little bit about what is going on or where the growth came from?

Yes, this is Bill Mudd. Hi Anil. I would say that in the prior year the Monmouth Race Track ran what they called an Elite Meet where they paid basically $1 million per day in purses. And when they ran that meet it took a share of the export market. So, whenever they produce simulcast signals and show those signals in other locations, OTBs, online, at other racetracks, more people focused on those races because they had the better product, driven by those higher purses. And that took away some of that export market share from Arlington Park. We were able to recapture that market share this year when they didn't repeat that Elite Meet at Monmouth.

Great. And any intra-quarter commentary on the online properties? I think last quarter you guys mentioned that every month you saw increasing, or improving trends in the online business. So any commentary you could provide there?

Yes, I think in terms of if you look at what is the online channel doing versus the growth in the core industry, so actually the industry being down 7.5%, 7.4%, and the online space being up a little over 4%, 4.2%. We are actually seeing growth in our online business again now. I think that is largely a function of last year we had a little bit of disruption after we purchased Youbet.com. And then when we integrated the two businesses together last November we saw a few customers that didn't like the way that integration happened.

And that is largely behind us now and we fixed those issues and now we are seeing that we are outperforming the industry by that 11 point spread which is what we typically see kind of pre the integration of those two platforms. And that is back to where it was kind of pre-acquisition.

Okay, great. And then last question is, I believe yesterday there was a gaming bill that was introduced into the Florida legislature which would expand gaming across Florida. And just wondering if you guys had any preliminary thoughts on that or how it would or would not impact the Churchill Downs business in Florida?

Hi, it's Bill Carstanjen again. That is a good question. I think the ultimate answer to that will be it depends. We didn't necessarily care for the initial drafts that were filed yesterday, but it is the beginning of a process and there are lots of discussions about terms that would be good for us. But what will actually happen here over the term that they discuss the bills is anybody's guess. So we will remain very, very active politically in that jurisdiction. We will monitor it carefully but we will just have to see what actually ends up being the terms of that bill, if the bill even comes close to going through.

Okay, thanks.

You are welcome. Tyrone, anything else?

No sir, I'm showing no further questions at this time.

All right. Well thanks everybody for joining us today. I think we won't be together again until after the fourth quarter so have a great holiday season. And we appreciate your questions and joining us today. Thank you.

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