Churchill Downs Inc (CHDN) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. 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 questions-and-answers session and instructions will follow at that time.

(Operator Instructions)

As a reminder, this conference may be recorded. And now it's my pleasure to turn the floor over to Courtney Norris, Director of Corporate Communications. Ma'am, the floor is yours.

Good morning, and welcome to this Churchill Downs Incorporated Conference Call to review the Company's results for the second quarter ended June 30, 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 are 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 performance 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. Thanks for joining us.

With me today are Bill Carstanjen, our President and COO; Alan Tse, our General Counsel; and Bill Mudd, our CFO. Usually Mudd and I both write our comments independently. This time when we exchanged drafts, we realized we both said the same thing.

So rather than both of us duplicate that information, Bill is going to take you through the second quarter results and then we will be back and try to handle whatever questions you might have. Bill?

Thanks, Bob. Good morning, everyone. I am going to start with a second quarter summary.

Overall it was a great quarter with total net revenues up 8%, to $271 million. EBITDA was up 21%, $95.3 million. Net income from continuing operations was up 21% to $48.6 million. Diluted earnings per share from continuing operations was $2.77, up 17% versus the second quarter of 2011.

Year-to-date cash provided from operating activities is $96.1 million, down from $104.8 million in the prior year. Improvements in operating income were more than offset by $9.3 million for tax refunds received in 2011 and $5.8 million in advanced billings for the Breeders Cup, held at our Churchill Downs racetrack in November of 2011.

Year-to-date capital spending is $16.5 million, $10.2 million of which is for maintenance purposes, while $6.3 million was related to new projects. We still expect to spend between $15 million and $20 million on maintenance capital for the year, which does not include capital to renovate Harlow's. We have already collected insurance proceeds of $15 million, which will be spent in the second half of that project.

In addition, we also announced $9 million in renovations at Churchill Downs racetrack to develop a new high-end venue called the Mansion, a new media center and a new gold room for our high-end patrons. We expect to achieve good returns on this investment from incremental ticket revenues, sponsorships and cost efficiencies. Long-term debt for the quarter ended at $63 million, down approximately $65 million from year-end 2011. Our balance sheet remains in great shape with well under a half a turn of leverage at the end of the quarter.

Now, let's take a look at our segments. Racing had a strong quarter with net revenues up 8% on handled growth of 7%. Our Churchill Downs property accounted for the majority of the improvement.

Revenues increased 7%, driven by broad-based strength in the Kentucky Derby Week. Record handle, higher sponsorships, higher ticket pricing and record attendance all contributed to the gain. We also conducted three additional live race days versus the second quarter of 2011, primarily due to how the calendar fell year-over-year.

Each of our other three racing properties recorded year-over-year gains as well, primarily as a result of running additional race days. With Arlington up 3%, Calder up 18% and Fairgrounds up 9%. Our Calder facility improvement is driven by additional 11 days of racing. This is the result of starting our meet earlier in April in lieu of running in December.

And our fairgrounds gain is driven by the Louisiana Derby following on April 1 this year, coupled with a strong jazz fest on the back of perfect weather and an incredible musical lineup. From an EBITDA perspective, Racing operations improved $6.6 million year-over-year, to $65.4 million for the second quarter. The improvement was primarily driven by an increase in Kentucky Derby Week profitability of $5.4 million, but also from an additional 17 days of live racing and from lower labor costs and other on going cost-reduction efforts. Partly offsetting these improvements is a one-time $2.9 million reduction in operating expense recognized in the prior year related to the Tax Increment Financing agreement with the Commonwealth of Kentucky.

Our Gaming segment had mixed results in the period. Reported revenues improved 4% to $51.4 million. Calder Casino revenues declined $2.5 million, or 12%, on increased regional competitive pressures.

To our north, the Native American casino's being very aggressive with merchandise and cash giveaways, while a new competitor has entered the market to our south. We are being very careful reacting to these marketing pressures and allowing customers to try the newest competition. We are keeping a very close eye on the market and will consider adjustments in the third quarter as we fully understand the long-term effects of these actions.

Our Louisiana properties posted flat revenues, which we believe slightly outperform that market. Harlow's grew revenues $4.3 million in the quarter as we were closed 25 days of May in the prior year due to the Mississippi river flooding. Gaming EBITDA increased $6.6 million to $19.4 million in the second quarter. $4.6 million of this improvement is driven by insurance recoveries net of losses.

We settled our flood insurance claim in the second quarter of 2012 and recorded a $5 million in insurance recoveries net of losses. In the second quarter of 2011, we had had insurance recoveries net of losses totaling $0.4 million related to the February 2011 windstorm damage at Harlow's. Excluding the impact of insurance recoveries, Harlow's improved EBITDA approximately $3.4 million on 25 additional days of operation while Calder EBITDA declined approximately $1.1 million on lower revenue from increased competitive pressures.

Now let's take a look at our Online business. Revenues increased 13% to $52.7 million. Our second quarter Online handle $251 million, also up 13.4% year-over-year.

According to figures published by equibase.com, handle on US thoroughbred racing was down 0.2% year-over-year for the second quarter. This means twinspires.com handle out-paced the industry by approximately 13.6% for the period. This increase is primarily driven by new players as unique players increased 16% for the period and new account sign-ups increased 23%.

Online EBITDA increased $1.2 million, or 11%, to $12.5 million for the quarter. Improvements driven by handle and revenue were partly offset by a $0.9 million increase in HRTV losses, primarily as a result of lower television fees collected from advanced deposit wagering companies. We believe this headwind is behind us as the primary driver was content that moved to a competitor and that need is now over.

Furthermore, CDI's annual HRTV funding is capped as part of our joint venture operating agreement. Additionally, we spent $0.4 million to credit the wagering accounts of our customers, impacted by incorrect wagering payoffs from a New York Racing Association error which occurred during 2010 and 2011. Corporate overhead allocations also increased by $0.2 million on the higher revenue base. Excluding these offsets, our EBITDA growth rate far exceeded our revenue growth rate.

Other investments EBITDA was a loss of $0.1 million, down $0.8 million versus the prior year second quarter. Our newly acquired Bluff business is the primary driver which lost $0.5 million in the quarter and our Lebanon, Ohio, joint venture with Delaware North which lost $0.1 million. Our United Tote business was down $0.2 million year-over-year due to higher bad debt reserves and higher property taxes.

Corporate EBITDA was a loss of $2 million versus $1.4 million gain in the second quarter of 2011. $2.7 million of this change is driven by a prior-year gain recognition related to the conversion of a related party convertible note. In addition, we recognized higher non-cash compensation expenses related to the financial performance of the Company.

With that, I will turn it back over to Bob for some final comments and to take questions. Bob?

Thanks, Bill. Huey, if there is any questions, we will be glad to take them now.

(Operator Instructions)

Steve Altebrando, Sidoti & Company.

The flow-through in Online is somewhat related to HRTV. But it looks like it was a $1 million swing to the downside year-over-year but only $400,000 for the first six months. Could you talk a little bit about how that came about? And I know this is going back a little bit of ways, but how close you are to the cap in terms of your contribution or the max loss, essentially?

Are you talking about the HRTV loss?

Yes.

I was trying to catch up with your comment. You know, our cap is a floating number because of the way it's on a declining balance basis. It's a little bit of a complicated scenario. But really, the first -- if you look at the first half of the year, I think our HRTV did better than the prior year; second quarter we were down. It's really a little bit of a calendar swap and some content swaps between the period. I think the year over year adjustments are, in terms of HRTV, are largely behind us at this point.

Okay. Then switching over to Harlow's, what amenities are remaining to come back online?

We will be opening before the end of the year an entertainment, a multipurpose entertainment venue. There will also be a fitness center pool, a new buffet and a revised steak house and business center. So, a series of amenities, all of them being worked on simultaneously and will all be open for business right about the same time.

Okay, so most of what was damaged is not yet back online?

That's correct. The floor, of course, has been back online and the hotel is, but the other amenities to the property, including the food amenities, we really have been Band-Aiding and holding them together while we truly replace them with something that is not only as good but better than what was there.

Okay. Switching over to Ohio, seems to be a little bit of a trend in the last few years that some operators who have sought to do finance, property level financing, have ultimately elected to essentially finance it by the parent, just given the attractive borrowing costs particularly you guys have. What do you think the likelihood of that -- or is that something that is under consideration for you guys?

It's absolutely under consideration, Steve. That decision won't be made until we get to a point where we are ready to fund it. If the markets are open and we can get a very good rate on project financing, we will certainly consider that, but we are keeping enough capacity at the parent level to fund our share of it if we need to.

Okay. Your revolver to mature is late 2013, is that correct?

Correct.

Is that something you guys are working on currently to extend?

I would say that we always keep an eye on the debt market, Steve. With $63 million of debt at the end of the second quarter and the cash that we generate, I wouldn't say that is something that is a number one priority right now.

Okay. And in terms of insurance proceeds, is there anything remaining, any collectables?

Nothing related to the flood or the wind damage or the tornado. We did have a hail storm which you will see in the 10-Q that affected Churchill Downs racetrack in the second quarter but I do not expect that to be a material number.

Okay. And then last one and I will hop back in the queue. Balance sheet and -- if you could comment a little bit on that, what you are seeing on the M&A front? Seems like the regional casinos bid mask has narrowed lately, and if you have any general commentary in terms of if you prefer something in the interactive space over regional casinos?

I would prefer not to comment on that in terms of what our interests are other than to say that our M&A activities are robust and we are always on the lookout for a good deal. Beyond that I don't really want to comment on what specifically we are looking for.

Okay. I have a few more but I will hop back in queue.

(Operator Instructions)

Jeffrey Thomison with Hilliard Lyons.

Thank you. Excellent quarter by the way.

Thank you, Jeffrey.

I had some back of the envelope math here so forgive me if I'm wrong on these numbers. But backing out the insurance recoveries, EBITDA margins may have declined about 50 basis points. Can you just remind us -- and maybe you covered this in your comments, but just what was behind that EBITDA margin decline?

Secondly, in terms of the Calder casino market, a little bit of background, if you could, as to the timing of the competitive entry, not only the Native American operations but also the new competitive entry to the south, I believe you said. Do you think that -- is it for that market or is there still some stuff coming down the pike?

On the first one, your EBITDA margins, I think that you are not -- I'm not sure what your numbers look like, Jeffrey, but remember last year's $85 million of EBITDA included two one-time unusual events, $2.9 million in tax increment financing that we booked as a result of an agreement with the Commonwealth of Kentucky on the TIF agreement related to the master build at Churchill Downs Racetrack back in 2005.

Then there was a second one that related to a related party note convertible that was called and converted to shares of Churchill Downs. That resulted in a $2.7 million EBITDA pickup. Those two items obviously added $5.6 million to last year's number.

You are talking second quarter of last year, right?

Second quarter of last year.

There was also, was there not, a $400,000 insurance gain in last year's second quarter?

Right.

This year $500,000.

And I was trying to back both of those out. I think those other two items probably account for that margin change.

Okay. Then on Florida competition, Bill, would you like to take that?

Sure. Why don't I start, and then, Jeffrey, if I don't capture all of your question, we can try again. In late March, an outfit called Miami Jai-Alai opened up directly south of us about 16 miles. Miami is a very complex market with lots of different ethnicities and demographics. We have been learning as they have opened up how they impact our business.

We have been careful not to overreact because we expected there to be some trial. We think we are still in that phase. As things settle down and we get a true picture of their impact on our customer base we will make adjustments based on what we think makes sense.

We have also been encountering aggressive marketing from the north with the Seminoles, the Hard Rock, who have just been very aggressive in marketing and have clearly come down attempting to get some of our core demographics, some of our core customers, so we have been caught in the middle of that.

Certainly we are watching that and talking about it every day, but we want to be careful not to overreact to it because we do try to run the business based on return and margins. We want to make sure we truly understand the dynamics before we make changes. In terms of additional competition, certainly there is lots of discussion about destination casinos in the market.

There is nothing going on strictly right at the moment legislatively to talk about, but that is something that we will keep our eye on. A facility called Hialeah potentially will install slots potentially at some point that we will have to keep our eye on because they are in the southern Florida market too, so we will be watching what they do and what customers they go after.

That's a good recap. Thanks for that. Do you happen to know how far away the two main competitors are from your location exactly?

Sure. Miami Jai-Alai is 16 miles directly south, right off the freeway. The Seminole facility to the north is right around 9 miles or 10 miles directly north, also right on the freeway -- also sits right off the freeway. Literally we are high enough up to even see the Seminole property from our property at the high end of our --

Okay, great. Thanks for that.

(Operator Instructions)

Steve Altebrando, Sidoti & Company.

You guys didn't speak much about Luckity.com on the call. I wanted to see if you had any additional color you could add or possibly a time frame when you will be ready to speak more about Luckity?

I think in prior public comments Bob and I identified a late summer time frame. I think we are still in that time frame. We haven't launched it publicly. We will look to do in the late summer or early fall. We have gotten approval in a couple of jurisdictions where that was required. We remain essentially on course to get it up and launched this year.

Okay. In Illinois, obviously, the clock is running on the governor. If it is vetoed, do you suspect there will be a push to get something -- an override in the lame duck session? Do you guys generally view this as the last shot for Illinois?

A couple of questions in there. The first, I think the bill was submitted to the governor around June 29 or so, so, we are still in the 60-day window. We continue to work with the legislative leaders there and the other political leaders there with respect to the bill that has been passed by the legislature. To the extent the bill does get vetoed, I hate to get too far in hypotheticals, but certainly there is the fall veto session that will come up. We are going to pursue all our options in that veto session to work with the legislators and the other political leaders to get this done.

Steve, if it doesn't happen this year, next year. We are not going to walk away from the opportunity.

Okay. And then just last question. Bill, you mentioned it in your script, but was it CapEx $15 million for Harlow's and $9 million for Churchill Downs?

Correct.

Thank you.

(Operator Instructions)

That does conclude our time for questions. I would like to turn the program back over to Mr. Evans for any additional or closing remarks.

Thanks, Huey, for your help. That is all we have got, folks. Thanks for joining us. We will be back together, if not sooner, in October. Thank you.

Thank you presenters. Ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day. Attendees, you may disconnect at this time.