Churchill Downs Inc (CHDN) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Churchill Downs Incorporated first quarter results conference call. At this time all lines 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 turn the conference over to your host, Courtney Norris, Director of Communications. Please begin.

Good morning, and welcome to this Churchill Downs Incorporated conference call to review the Company's results for the first quarter ended March 31, 2012. 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 in 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, Courtney. Good morning, everyone. Glad you could join us today. Let's start with our first quarter 2012 results. Bill Mudd, our CFO, will take you through the details, but here are the highlights. Our net revenues were up 5% in the first quarter of 2012. EBITDA was up 55%. Net earnings went from a $3.2 million loss last year to a $1.4 million profit this year. All three metrics set records for the first quarter.

Looking at first quarter EBITDA in the last three years is instructive. In the first quarter of 2010 we lost $5 million. Last year we made $11.2 million. This year we made $17.3 million. So a very solid quarter. I will now turn it over to Bill, and then I'll be back with some comments about Oaks Derby Week and about a couple of exciting new developments. Bill.

Thank you, Bob. Good morning, everyone. I will review the information in the tables and the press release that can be found under the investors' section of the website that Courtney referred to earlier. Following my comments I will turn it back over to Bob for some final thoughts before we open the call to questions.

We will begin be reviewing the segment information contained on the schedule titled, "Supplemental Information by Operating Unit," in the press release. Before we review our Company's performance, I thought it is worth discussing how the U.S. thoroughbred industry is doing as it affects our on-line and racing businesses. According to figures published by equibase.com, betting on U.S. thoroughbred racing grew for a second consecutive quarter since it started declining in 2007. For the first three months of 2011, the industry grew handle by 5.4%, due in part to a mild winter yielding fewer race-day cancellations. After five consecutive years of declines, it is good to see some increases.

Now let's look at our segment performance for both revenues and EBITDA. In the first quarter , our racing segment generated $30.2 million in revenues, down 5% from the previous year. Fair Grounds is the only race track that had live racing this year, and posted a 5% decline on two fewer race days. In addition to the two fewer race days, Fair Ground's largest race day, the Louisiana Derby, fell on April 1 this year, or in our second quarter, as compared to first quarter during the prior year. So overall we're very pleased with these results.

Our Calder operation conducted four days of live racing in the first quarter of 2011, and now run those days in April, resulting in a 30% decline at the track for the period. From an EBITDA perspective, our racing operations improved 9%, or $1.1 million dollars over the prior year. The improvement was primarily driven by lower utility expenses associated with milder weather conditions and cost control measures implemented to offset revenue declines. Our gaming segment posted revenues of $59.3 million during the quarter, essentially flat to the same period of the prior year. Our Calder location continued to grow revenues, up 6% year-over-year, after growing revenues 24% year-over-year in the prior quarter.

We believe the slower growth rate is largely a fact of the new entry into the south Florida gaming market as customers try out the newest property. Offsetting this increase was a 6% decline in our Harlow's property revenues as a result of operating without a permanent dining facility or entertainment venue as a result of a flood that occurred during May of 2011.

At the EBITDA line, our gaming business improved to $20.4 million, up $2.9 million over the previous year. There were two unusual items favorably impacting the segment during the quarter. The first is a $1.5 million net insurance gain related to the final settlement of the wind damage sustained at Harlow's during February of 2011. The second is a $0.8 million gain from the collection of receivables related to the 2005 Miami-Dade Gaming Referendum, which was fully reserved.

Excluding the impact of the unusual items , our Calder EBITDA improved $0.9million and was partly offset by a $0.2 million reduction at Harlow's. Both of those are driven by revenue. Our on-line businesses revenue increased 20% to $44 million in the quarter on handle growth of 15.2%. The improvement was primarily driven by growth in unique customers, up 14% in the period, as average revenue per user was essentially flat. With the industry up 5.4% during the period, our handle growth continued to outpace the industry growth by about 10%.

Our on-line business EBITDA increased 38%, or $2.9 million, in the quarter. The improvement driven by revenue growth was partly offset by one unusual item for employee separation expenses unfavorably affecting the segment by $0.8 million. Excluding this item, EBITDA growth would have been even higher and shows the operating leverage of the business as revenues grow. Our other investments EBITDA declined $0.2 million as we spent $0.3 million on fees associated with our Ohio joint venture agreement. Total EBITDA came in at $17.3 million, an improvement of $6.2 million over the prior year.

Now if you would, please turn to the table that is titled, "Condensed Consolidated Statements of Net Earnings." Total net revenues from continuing operations increased 5%, or $6.6 million, as gains in our on-line segment more than offset the decline in racing operations. SG&A expenses were essentially flat as employee separation expenses of $0.9 million were mostly offset by $0.8 million gain from Miami-Dade Referendum receivable. Insurance recoveries net of losses added $1.5 million to EBITDA in the period and represents the final payments related to the windstorm claim at Harlow's.

Additionally, the Company came to a final agreement on the claims associated with a flood that impacted Harlow's in May of 2011. We received $5 million in insurance proceeds during the quarter just ended , $7 million in April, and $3.5 million during 2011, for a total of $15.5 million after deductibles.

We will book a net gain in our second quarter results of approximately $5 million from these insurance proceeds. In total , flood insurance recoveries will fully fund our Harlow's renovations, including a new buffet, steak house, business center, spa facility, fitness center, pool and multipurpose event center. We are working through the permitting process for the Harlow's renovations, but at this point we are still on schedule and on budget for the opening later this year. Our fully diluted earnings per share from continuing operations for the quarter was $0.08 compared to a loss of $0.19 cents in the prior year.

Now please turn to the page titled, "Consolidated Statement of Cash Flows." Net cash provided by operating activities declined $5.4 million to $55.1 million in the quarter. The decline is primarily driven by an $8.5 million tax refund received in the first quarter of the prior year. Partially offsetting this decrease was improved EBITDA associated with our on-line business. The $17.8 million increase in cash used in investing activities is primarily driven by $13.5 million of spending related to our acquisition of Bluff Media, our investment in our Ohio joint venture, and our purchase of additional equity in Kentucky Downs during the quarter.

Spending for additions to property and equipment was $9.1 million in the quarter. $4.9 million of this was for maintenance compared to $4.6 million in the prior year. We still expect maintenance capital to be approximately $20 million in 2012. The remaining $4.2 million in property and equipment is related to our corporate office move, renovation at Harlow's, U Tote customer installations, and luckity.com, which Bob will discuss at the end of the call.

Now if you could turn your attention to the schedule titled, "Condensed Consolidated Balance Sheets," I will briefly review some changes. Accounts receivable decreased $25.7 million from year-end primarily as a result of the collection of derby-related receivables and insurance recoveries related to the damage sustained at Harlow's. Deferred revenue increased $22.6 million since December as a result of additional first quarter billings of derby-related and live-racing-meet memberships that will be recognized as revenues in subsequent quarters. Long-term debt decreased $19.8 million, reflecting repayments from our free cash flow. With that I'll turn it back over to Bob for some final comments. Bob.

Yes, thanks, Bill. Well, we had quite a Kentucky Oaks and Derby Week. By "Week" here I mean the period of time from our Opening Night event on Saturday , April 28, through the Kentucky Derby itself on Saturday, May 5. And as always, this soon after the event, these numbers are preliminary and are subject to change.

Total attendance for the week was 349,700, down 3% from 2011. Fortunately, on Oaks and Derby Days, when ticket prices are at their highest, attendance increased. Total, all sources handled for the week was $253.5 million, up about $22 million, or 9%, from 2011. While still preliminary and subject to change, Oaks and Derby Week EBITDA will likely be about $4.5 million to $5.5 million higher than in 2011 and will be a new record.

The week kicked off on the Saturday before the derby with our Opening Night event. 26,527 fans braved the severe weather forecast only to find that the weather man was right. With the onset of an intense and frankly scary thunderstorm, featuring golf-ball-sized hail, we had to suspend racing for a little over an hour so that the horses and humans could seek cover. As you might guess, this did not help our attendance or handle numbers. Attendance on Opening Night was down 30% from the 38,142 in 2011. This decline accounted for the entire decline in Oaks and Derby Week total attendance. All sources handle at $6.5 million was off 27%.

We don't conduct live racing on the Sunday or Monday of Oaks or Derby Week. Attendance and handle on Tuesday, Wednesday and Thursday were essentially flat with 2011's numbers, and total for these three mid-weekdays we had a little over 45,000 attendees and $20 million in all sources handle. On Thursday night we held our third Taste of Derby event. This year we moved the event to a new venue to accommodate larger crowds. Attendance increased 13% to 1,407, nearly double the attendance at the first Taste of Derby in 2010. With the outstanding support of the 19 world-class chefs from around the world and from our wonderful sponsors, we used Taste of Derby as our fundraising vehicle to support hunger-related charities. This year Taste of Derby raised over $56,000 for hunger-related charities.

The all-time records started to fall on Friday, Kentucky Oaks Day. Oaks attendance of 112,552 was the second highest ever. 2010's 116,046 was the all-time high, and we were up 2% over last year's 110,112. Weather, again, plagued us on Oaks Day as an oncoming severe thunderstorm forced us to evacuate the infield for the first time in our history that we have ever had to do that, and that delayed racing by nearly an hour. Similar to Opening Night's hailstorm, the Oaks Day storm had a pretty dramatic negative effect on handle, particularly on track handle. Nonetheless, all sources Oaks Day handle of $39.9 million was a record, up 7% over 2011's $37.5 million, which was the previous record.

There are over 40,000 thoroughbred races conducted annually in the U.S. The Kentucky Oaks is the third biggest race in the U.S. in terms of attendance and the 6th biggest race in terms of handle. As we have been saying now for several years, we continue to believe that there is a growing financially viable market for high-quality thoroughbred racing, combined with compelling entertainment elements. That is what Opening Night, the Kentucky Oaks and the Kentucky Derby are all about. Oaks Day again produced significant results for our charitable interests generating in excess of $150,000 for our fundraising partners Stand Up to Cancer and Kentucky First Lady Jane Beshear's Horses and Hope breast cancer program. Since we started our now famous Oaks Day Pink Outs in 2009, and our Taste of Derby event in 2010, we have raised over $700,000 in support of cancer-related and hunger-related charities.

And then there was the Kentucky Derby Day. Pick a record, and we probably set it this year. Attendance was a record 165,307, up from the previous record of 164,858 set last year. All sources handle for the 13 races on Derby Day totaled a record $187 million, up 13% from last year's $165.2 million and 7% above the previous record of $175.1 million set in 2006.

Handle on the Kentucky Derby race itself was $133.1 million, up 19% from last year's $112 million, and 12% higher than the previous record of $118.4 million set in 2006. We didn't set a record for our TV ratings, but it was still a terrific telecast. I literally just got the viewership and national ratings about 15 minutes ago, and viewership was 14.8 million, up from last year's 14.5 million . The national rating was 9.0, up from last year's 8.5, and at 14.8 million viewers this year's derby was the third most watched derby in 23 years since Sunday Silence won in 1989.

We beat the final round of this year's Masters Golf Tournament, the Daytona 500, the Louisville, Kentucky, Final Four Basketball Game, and the NBA All-Star Game. Since the Super Bowl, only two sporting events this year have had higher overnight ratings than the derby. The NCAA Basketball Championship Game and the Ohio State/Kansas Final Four Game.

In our digital marketing and on-line areas, most of our key metrics also set new records. Derby Nation on Facebook now totals a record 209,000 people, up 33% over last year. Our popular Kentucky Derby app has now been download by 199,000 people. Total page views of our websites, kentuckyderby.com and kentuckyoaks.com, over the weekend totaled a record 14.4 million page views, up 45% from last year. And twinspires.com had terrific Oaks and Derby Days. For the two days, total twinspires.com handle on all racing totaled a record $23.8 million, up 19%, over $20 million in 2011. Over 37,000 unique players wagered via twinspires.com on Oaks Day, and over 69,000 unique players wagered on Derby Day, up 23% and 15% respectively over last year, and we signed up over 27,000 new twinspires.com accounts on Oaks and Derby Days, 15% more than in 2011.

In closing out this discussion of Oaks and Derby Week, I want to congratulate Oaks winner Believe You Can and her connections, and the derby winner I'll Have Another and his connections. And I want to thank the horsemen and the over 11,000 full- and part-time employees who make these wonderful events happen.

So a great first quarter and a great Kentucky Oaks and Derby Week. What's next? Let me update you on two other developments. For the 2013, next year's Oaks and Derby, we will introduce "The Mansion" at Churchill Downs, the pinnacle of live sporting event experiences. Imagine enjoying the sumptuous surroundings of a fabulous southern mansion, the library, the sitting room, the dining room, the private bar, the veranda, the balcony served by a private entrance and elevator, and all with the most compelling view of the entire Churchill Downs racetrack. Private invitations were distributed at this year's Oaks and Derby, inviting recipients to be part of "The Mansion" next year, and if you're interested you can register to receive more information about "The Mansion" at www.churchilldowns.com/themansion. That's churchilldowns.com/themansion.

And, finally, Luckity. This summer we hope to introduce an exciting new initiative called luckity.com, That's l-u-c-k-i-t-y-dot-com. Luckity.com is a mobile and on-line gaming platform that will offer fun, simple, exciting and easy-to-play games with the opportunity to win real money. Luckity.com plays like a social game, but pays like a real money game. It will be licensed, regulated and legal for U.S. residents. Now on a private beta, we hope to launch luckity.com this summer with an initial set of games that will then grow over time. You can go to luckity.com today and sign up to be one of the first to play and win.

And with that, Sean, we'll be happy to take any questions.

Thank you. (Operator Instructions). Our first question comes from Steve Altebrando with Sidoti & Company. Please go ahead with your question.

Hi, guys.

Hi, Steve.

Just quickly on the Luckity that you just mentioned, can you talk a little bit about how the economics work? Is that how you are saying, it's similar to like a Zynga model?

Too soon for us to talk about that. We obviously know, but let us have a few more weeks or months here, and we'll be glad to answer your questions.

Okay. And then in the on-line segment, it obviously looks almost like it's like accelerating here. Do you suspect it's taking share, or is this market growth overall?

I would say that it's market growth overall. I mean we continue to maintain the 10-point delta to the industry, and with the industry now being up 5% in the first quarter versus down 5%, that's a 10-point swing in the industry, so I think that's largely what you're seeing, Steve.

Okay. And then two quick more. Could you update us on the status of Illinois legislation and also on the subsidy?

Let me have Bill Carstanjen, our President and COO, take that.

First on the legislation, it's still very fluid for this session. We continue to work on it, and any pervasions at this point will probably just prove us wrong, so we're going to continue to work and see where it takes us. On the subsidy, as we've talked about in the past on these calls, that money has to be allocated by the legislature in Illinois, and they haven't done that. Whether they will or they won't is something we can't predict.

Okay. And just to be clear, it's not in-held in escrow, those funds?

Bill, do you know if they're technically held in escrow?

I don't think the legislature -- first of all, they haven't appropriated it, but I don't think they can put it to the general fund without taking an action from that perspective either, but it's not technically held in escrow per say.

Okay. That's helpful. And then just lastly, what's your equity ownership of Kentucky Downs now?

I think it is 10.4% now.

Okay. Thank you.

Our next question comes from Jeffrey Thomison with Hilliard Lyons. Please go ahead with your question.

Thanks, and good morning .

Good morning, Jeff.

I've followed your Company for a long, long time, and I just have to say congratulations on generating a first-quarter profit, and a significant one at that. It's very, very encouraging to see that happen. Bill, I could not write down your CapEx numbers fast enough. Could you review what you mentioned on first quarter CapEx spending, and whatever breakdown you gave on the year's expectation, including any maintenance or discretionary breakdown that you might have given?

Sure, happy to. Let's start with we don't look to provide forward-looking guidance. We do provide some guidance with respect to what we'd spend on maintenance capital at the beginning of the year. We did that on the last call. We said we'd be taking $20 million. We're still saying it would be around $15 million to $20 million, so we're still on that same ballpark.

In terms of what we spent this quarter, we spent $9.1 million is what shows up on the face of the cash flow statement. $4.9 million of that was for maintenance capital, and we had spent $4.6 million last year, and those are actually separated in the 10-Q document. The other $4.2 million is project CapEx, and that number is going to be somewhat bigger this year because we're going to spend $15 million renovating Harlow's, for example, and that's not really maintenance capital. That's replacing what was destroyed by the flood.

So so far to date that $4.2 million we've spent is partly for the corporate office move, it's for renovation of Harlow's. Any time we pick up new customers, we have to buy new Tote machines, for example, so that's going to generate incremental revenue. That's also on the project capital numbers. And then we spent a little bit of money on luckity.com, which Bob discussed.

Okay. Excellent. And then lastly I just wanted to let you know that the day before Derby I decided to take my family to the infield, to take in that experience, and that's what it was, it was an experience. I'm thinking about writing a book about it.

Great.

I probably met more investors at this year's Oaks and Derby than I've ever met before. I don't know why this year everybody decided to come, but we're pretty certain that our increased handle numbers are a result of having a lot of our investors here. So thanks.

I would expect that. Thank you very much.

Thank you.

(Operator Instructions). Our next question comes from Ryan Worst with Brean Murray. Please go ahead with your question.

Thanks. Good morning, guys.

Good morning, Ryan.

Yes, I was wondering if you guys could break down the components of the increase in Derby Week, $4.5 million to $5.5 million, almost as much as last year's gain without the benefit of the new TV and sponsorship contracts, so I was wondering how consistent those increases could be and what the components were or how it breaks down for this year.

Well, we don't provide that level of detail, Steve, as you know, but there was some higher ticket prices and higher sponsorships. Those are the two biggest components. And then pari-mutuel commissions obviously are higher too with the increased handle.

Okay.

Oh, Ryan. I'm sorry, Ryan.

Okay. And then -- that's helpful. And then how much are you guys spending on the corporate move in total for CapEx?

I think it's about $3 million.

Yes, it's under $3 million. It's $2.something million.

Okay. Has that all been completed or -- ?

We're tentatively planning to move over the weekend. I think it's June 1, 2, 3, 4, or something like that, so about a month away.

Okay.

Yes, and the bulk of the cash has been spent in CapEx.

Okay. Great. And then this unique customers increasing 14% on twinspires.com, it seems like a big number. How is that relative to where you were last quarter or last year, and what are you doing to drive that? Thanks.

The increase as I recall, and I'm doing this from memory, I don't have the date in front of me, was about the same in percentage terms as we did last year. We give a huge influx of interest about twinspires.com around Oaks and Derby Week and the couple of weeks leading up to that, and we are very aggressive marketers, both at the on-track level as well as the on-line level, so we do a lot of work to drive the new-customer acquisition around Oaks and Derby because it's been a very successful way for us to do that.

Okay. And then, Bill, just on the separation agreement, what line item was that part of, that I think it was $800,000?

Yes, about -- well, there was $900,000 in total, $800,000 of which was in the on-line segment, and they would both affect the SG&A.

Okay. So that affected the on-line segment EBITDA?

$800,000 in on-line, there is $100,000 in racing, and if you look at the statement, consolidated earnings in the SG&A line.

Okay, great. Thank you very much.

Our next question comes from --

Thank you, Ryan.

I'm sorry. Go ahead.

No. I said, "Thank you, Ryan." Go ahead.

Sure. Our next question comes from Anil Gupta with Imperial Capital. Please go ahead with your question.

Hey, guys. Good morning.

Good morning.

I wanted to see if you could give us an update on the joint venture with Delaware North and where that stands now and when you anticipate funds starting to transfer and investment in that new facility to begin. Thanks.

Well, one of the big -- this is Bill Carstanjen. The big event that we have our eyes on is the expected ruling of the court of chancellery on the legal matter, the legal dispute. We expect that sometime around Memorial Day. We probably can expect that ruling to be appealed, but really the timing for the project in part's going to depend on the strength of that ruling and the appeals process that comes after that. So while we're working very hard right now on pre-planning of what we do and what the facility would look like and the CapEx for it, we won't sink -- we're not planning to sink money into the ground until we have much better visibility into the timing and the results of the legal dispute.

Okay. Thank you.

I am not showing any other questions in the queue at this time.

Okay. Well, listen, thanks very much for joining us. One of the good things about sort of extending the Oaks and Derby into a week-long event is that our economics improve. The bad thing is that it exhausts us, so we're all thrilled to get this call behind us. I think we're all going to go sleep for 24 consecutive hours. So thanks very much for joining us. For those of you that were here at Oaks and Derby, thanks for coming, and we'll talk to you again in August I believe. Thank you.

Thank you, ladies and gentlemen, and thank you for your participation in today's conference. This does conclude the conference, and you may now disconnect. Good day.