Churchill Downs Inc (CHDN) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, an welcome to the Churchill Downs third quarter results conference call. At this time, all participants in a listen only mode. Later we will conduct a question and answer session and instruction will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Ms. Courtney Norris. You may begin.

Good morning, and welcome to this Churchill Downs Inc. conference call to review the Company's results for the third quarter, ended September 30, 2012. The result were a leased 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 Investors section. Let me also note that a news release 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 who 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, andChurchill Downs Inc. 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, Mr. Bob Evans.

Thanks, Courtney. Thanks, everyone, for joining us this morning. To those of you that live in the Northeast, we hope your lives haven't been too disrupted by Hurricane Sandy. And to those who haven't yet voted today, please do so. It matters. Let me now turn this over to our CFO, Bill Mudd, who will take you through our third quarter numbers. I'll then have a few comments about our growth initiatives, and after that we'll be happy to take your questions. Bill?

Thanks, Bob, and good morning, everyone. Overall it was a decent quarter, with total net revenue down 1% to $165 million, asour online business growth of 9% was offset by declines in racing operations and our Calder Casino revenues.

Our third quarter EBITDA came in at $21.3 million, down $21.7 million from the prior year's recorded of $43 million, but it was still our second highest ever recorded for the third quarter. Net income from continuing operations was $6 million, or earnings per diluted share from continuing operations of $0.34. There were a number of unusual or one-time items in both periods that led to the year-over-year decline, which I will describe in the segment results.

Year-to-date cash provided from operating activities was $102.1 million, down from $131.4 million in the prior year. The decline in [CFOA] was primarily due to $19.3 million in Illinois horse racing equity trust fund proceeds, recognized during the September of 2011.

Taxes on these proceeds were paid during the fourth quarter of 2011. As a result 2012 year-to-date tax payments are $7.3 million greater than the same period of 2011, which also included tax refunds of $9.3 million. Finally, the prior year results also included $8.4 millions in advance billings for the Breeders Cup held auto you're Churchill Downs Racetrack in November of that year.

Year-to-date capital spending was $25.5 million, $13.2 million of which for maintenance purposes, while $12.3 million is related to new projects, including the Harlow's renovation and spending on our new online game, Luckity.com. Long-term debt at $70 million, down approximately $58 million from year-end 2011. In October, we added approximately $140 million of net debt with the closing of the Riverwalk acquisition. Even with this added debt, our balance sheet remains in great shape, with less than [1.5 terms] of debt to EBITDA.

Now let's take a look at our segment information. Racing operations revenues decreased 6% or $3.9 million due to three fewer live race days at Churchill Downs Racetrack and weather-related cancellations at our Calder Race Course. Arlington Park raced 55 days in the period and posted a 1% decline in revenue on a 3% increase in handle for the period, as strong exert handle was offset by weakness in our on-track betting.

Racing operations EBITDA decreased $19.5 million due to the impact of recognizing $19.3 million from the Illinois horse racing equity trust fund, along with recognition of insurance proceeds net of losses [of] $0.6 million during the three months send September 30 of 2011. Partially offsetting these prior year items were EBITDA improvements from operating efficiencies as comp control measures more than offset fewer live race days and weather-related cancellations previously mentioned.

Our gaming revenues decreased $2.4 million or 5% during the quarter. This decrease was driven by a 12% decline in our Calder Casino due to heighten competition in the South Florida market. In our second quarter, we also posted a 12% decline year-over-year, and while we continue to refine our advertising, marketing, and customer loyalty programs, this may represent a new operating reality at this location.

Our Louisiana gaming operations were roughly flat year-over-year, despite the closure of our casino and various video poker operations for up to 5 days during September as a result of Hurricane Isaac. In total, we lost 47 days of operation across our properties in Louisiana. Harlow's also posted revenues that were comparable to prior year.

Gaming EBITDA declined $1.1 million during the third quarter as a result of the revenue declines at Calder Casino, which was also down $1.1 million. The EBITDA effect resulting from the closures in Louisiana related to the Hurricane Isaac is estimated at $0.4 million and was offset by growth in our slots business.

Now let's take a look at our online business. Revenues increased 9% to $45.6 million. Our third quarter handle was $215 million, up 10.6% year-over-year. According to figures published by Equibase.com, handle on thoroughbred racing was up 2.2% year-over-year for the third quarter.

This means TwinSpires.com handle out paced the industry by approximately 8.4% or 840 basis points for the period. The increase is primarily driven by new customers, as unique players increase 9% for the period. Online business EBITDA decreased $0.8 million or 8% to $9 million for the quarter. Increases in EBITDA generated by TwinSpires.com handle and revenue growth were more than offset by $1 million in expenditures related to the launch of Luckity and spending related on the development of an exchange waging platform, $0.4 million in increased losses at our HRTV joint venture. $0.3 millions in expenditures related to a data security incident, and $0.3 million related to non-recurring employee severance.

Excluding these unusual items, our EBITDA growth rate would have exceeded our revenue growth rate. It is important to note that while our annual cash funding commitment of HRTV losses is capped in our joint venture agreement, our recognition of HRTV losses is not. As HRTV losses exceed our annual cap, our ownership interest is diluted, result in a lower percentage recognition of the gains and losses of the entity. This should result in improved performance heading into 2013.

EBITDA from other investments was $0.4 million in the third quarter, down $0.4 million versus prior year. Our newly acquired Bluff Media business is the primary driver of this decrease, with a EBITDA loss of $0.8 million for the third quarter. The Bluff loss included one time severance expenses of $0.5 million, so do not assuming our quarterly run rate is $800,000 loss.

We also included losses related to our Lebanon, Ohio, joint venture of $0.1 million. Partially offsetting these losses was $0.5 million increase of EBITDA in our United Tote business associated with higher revenues on handle-based fees. Corporate EBITDA was a loss of $1.4 million, a slight improvement over the same period in the prior year.

With, that I'll turn it back over to Bob for some final comments about our growth initiatives. Bob?

Thanks, Bill. A couple of comments about 2013 and 2014 before we take questions. We are all pretty excited about how our portfolio of growth initiatives is shaping up going into 2013 and 2014. We closed on the purchase of our new Riverwalk Casino and Hotel in Vicksburg, Mississippi, on October 23, so less than two months from first hello to closing. I wish all deals progressed at that speed.

But what that means is that we will have a couple of months results in the fourth quarter this year and a full year's results in our 2013 numbers. You'll recall when we announced the deal, we stated that based on historical performance, we estimated that Riverwalk's annual impact was expected to be approximately $55 million in revenue, $19 million in EBITDA, and $0.31 in terms of earnings per share.

We hope to complete our $15 million renovation of Harlow's Casino Resort & Hotel in Greenville, Mississippi, by the end of this year. 2011 was awful at Harlow's, as the February windstorm tore the roof off of the hotel, forcing us to close and renovate the rooms. And then we had the Mississippi River flood in May, which pretty much wiped out everything else except for the gaming floor. This year, 2012, the property has largely been a construction site.

So in 2013, we're looking forward to not only having the entire property back online, but also to, in effect, reopening what is largely a new Harlow's, with the new events center, new buffet, a new steakhouse restaurant, a new spa, a new business center, a new outdoor pool and a major redecorating of the property. We hope these new amenities significantly improve our competitive position in the region.

Also on the gaming front, we will open another off-track betting site with video poker machines in New Orleans' Jefferson Parish in December of this year. Many of you saw that just last week we officially launched our real money gaming site, Luckity.com,and we will start to ramp up marketing. Now, there's nothing else like Luckity in the legal US online real money gaming market today, so it's pretty much impossible to predict just how it will fare.

At Churchill Downs Racetrack, the $9 million reconstruction of the mansion, the paddock plaza, and the new media and simulcast center are progressing as planned. The new 300 seat mansion is 93%sold or committed under three- to seven-year contracts at this point. The new plaza will add 200 upper price range seats to our seating inventory for the 2013 Kentucky Oaks, the Kentucky Derby, night racing and our other so-called big event days. And I hope we can put to use some of this new seating inventory next September, September 2013, during the additional 12 days of live racing that the Churchill Downs was granted a month or so ago by the Kentucky Horse Racing Commission.

As we announced in September, we are proceeding with our joint venture with Delaware North Companies Gaming & Entertainment, with the licensing and construction of the video lottery terminal facility and a harness racing track north of Cincinnati, Ohio. Since then, in September we have applied for our racing and gaming licenses, and we are proceeding with the project, which we hope to have open in the first half of 2014.

Finally, we look forward to seeing how the Illinois gaming bill fares in the legislature's veto session that comes up this month. And we were encouraged last week when Kentucky's Governor Steve Beshear announced that he will try to advance legislation in early 2013 that will put gaming on the ballot as a constitutional referendum in 2014.

So with that, Mimi, if there's any questions, we'll be happy to try to address those now.

(Operator Instructions). Our first question comes from Steve Altebrando of Sidoti & Company. Your line is open.

How are you?

Hi, Steve.

I know Luckity is early on in terms of the start up, but is there any commentary that you can provide about some early performance? And then just speak a little bit about how developed the marketing plan is for the site, given that it's obviously a very different demographic you're targeting versus TwinSpires.

Bill Carstanjen, our President and COO, to whom Luckity ultimately reports, is sitting with me, so let me have him address those two questions.

Sure. Hi, Steve. We soft launched Luckity before two or three weeks ago. It was a gradual rollout to various internal databases that we have within the Company. The reason for that is was to stress test the systems and make sure that we had our registration processes working correctly and that the site was functioning well.

Going forward from now starting with this week, we'll begin a more fulsome marketing plan, which will involve paid advertising, search affiliates, registration bonuses, et cetera, designed to take us to customers that aren't currently affiliated with the Company. So we'll continue to do that at a measured pace, again, to make sure we're stress testing the system as the volume picks up.

In terms of performance to date, it's too early to comment, and that is by design. It was more important in these first couple of weeks to make sure that the site functions as we think it should function, and that we address any bugs that materialize in the operations.

Okay, that's helpful. In terms of the economics of Luckity and, I guess, converting handle to revenue, is it a similar dynamic as TwinSpires, or do you have more leverage since the bet is, I guess, pretty much track agnostic?

When you convert to revenue, it will convert to revenue at a very similar pace as what we see in TwinSpires.com. In terms of the economics of Luckity, the content costs, because it is agnostic, it doesn't matter what track you're playing on, I think the cost of content will be slightly less, but the cost of marketing will be more. So overall, it will be very similar economics to the ADW business.

Okay. And then the $1 million I believe in the Q of cost in the quarter for exchange wagering in Luckity, is that a one-time item, or is that just part of the ongoing infrastructure for those segments?

Pretty much the cost of the ongoing infrastructure. There wasn't much marketing costs at all in the current period. The costs were in there mainly for the time for developers that was not capitalized overhead costs associated with the management team, and we leased a little bit more space in California as well.

Okay, thank you.

(Operator Instructions). We have a question of Jeffrey Thomison of Hilliard Lyons. You're line is open.

Thanks, and good morning. Bob, it was good to hear you review the Company's various growth initiatives a minute ago and the related timeframes for them, that's helpful. And it's also good to see that the Company has a lot on its plate, so to speak. Just a quick question on the September race dates at Churchill Downs track. Will that essentially befour weekends of Friday, Saturday, Sunday racing, with Friday and Saturday potentially being at night, then Sunday being afternoons? Secondly, will those date goes back up for review by the race commission each year , or do you expect these to be more of a permanent fixture in your live race date plans?

Jeffrey, let me toss that one to Bill Carstanjen as well.

Hi, Jeffrey. So the plan is to race Friday, Saturday and Sunday, although we have the option -- we were given the option by the racing commission to also race Thursday if we find that the market supports it. We tentatively plan to do two nights of night racing. Those would be Saturday nights, but those plans are still tentative.

In terms of what happens in subsequent years, we think September race dates should be very strong for us. We think it slots in nicely in the national calendar of racing. This is a great month for Churchill to run, but it's in the discretion of the racing commission year-to-year to award the dates as they see fit.

Okay. So the potential for Thursday dates, that hasn't changed the sum total of 12? It's potential reallocation of what days you race is still 12?

No, it could go to 16.

Okay, got you. Thanks a bunch.

You're welcome. Mimi, any other questions?

Yes, wehave a question from Steve Altebrando of Sidoti & Company. Your line is open.

Hi, just a couple of follow-ups. With Derby being about six months out, I wanted to see if you had any commentary about how sponsorships are shaping up? Seems like that's been a stronger segment across most sports, and particularly pricing.

I appreciate the question. It's not something we've addressed prior to the event before, and I'd prefer not do it this time. So I don't mean to be rude, but we're going pass on that question.

The video poker OTB you mentioned, it was Jefferson Parish?

Right.

How -- do you know roughly how machines you'll be opening with?

We'll start with 50 machines, Steve, and if the demand is there, we'll increase that number.

Okay. And in terms of 2014 Breeders Cup, when are we expecting a selection? Is that -- should that be this week?

I can honestly say I have no idea. The Breeders Cup organization probably would have to answer that one. Just -- we don't know.

Okay. Then just last one, any update on the subsidy from the Illinois [tent] river boat, or is that -- the appropriation, or is that still nothing going on still?

Nothing is going on. At least nothing that we're aware of is going on.

Okay, thank you.

You're welcome.

Thank you. I'm show nothing further questions in the queue at this time. I'll hand the call back to management for closing remarks.

Thanks very much, Mimi. So we've got -- this is probably the last time we'll have that call prior to next year, so hope everyone has a happy holiday season, and we'll talk to you soon. Thank you.

Thank you. Ladies and gentlemen, thisconcludes the conference for today. You may all disconnect, and have a wonderful day.