Churchill Downs Inc (CHDN) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Churchill Downs Incorporated fourth-quarter results conference call. At this time, all participants are in listen-only mode, and later we will conduct a question-and-answer session and instructions will follow at that time.

(Operator Instructions)

And as a reminder this call is being recorded. I would now like to introduce your host for today's conference, Miss Courtney Norris, Director of Corporate Communications.

Thank you, Bethany. Good morning, and welcome to this Churchill Downs, Incorporated conference call to review the Company's results for the fourth quarter and year ended December 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 www.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 facts. The actual performance of the Company may differ materially from what is projected in such forward looking statements. Investors should refer to statements, including any report 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 operation 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 of these forward looking statements to reflect any changes in expectations.

At this point I would typically turn the call over to CDI's Chairman and CEO, Mr. Bob Evans. However, he is unable to join us today. We have with us Mr. Bill Carstanjen, CDI's President and Chief Operating Officer, as well as Mr. Bill Mudd, CDI's Chief Financial Officer, will be available to answer questions at the end. I will now turn it over to Mr. Mudd, who will take you through the numbers.

Thanks, Courtney, and good morning everyone. After I make a few comments about our fourth-quarter and total-year results, as Courtney mentioned, Bill Carstanjen and I will be happy to answer any questions you may have.

Overall, it was a very good year with net revenues up 5%, and a pretty good fourth quarter, with net revenues up 6%. For the year, our Racing Operations revenues increased 1% to $302 million. Racing Operations handle was flat 2011, while the US industry handle posted a 1% increase according to figures published by Equibase.com. This is the first total year increase in US wagering on thoroughbred racing since 2006. For the fourth quarter, our Racing Operations revenues decreased 7%, driven primarily due to the revenues recognized, in the prior year, from hosting the Breeders' Cup at our Churchill Downs facility.

I am certain you will ask how the Derby is shaping up. Well here's where we stand. We are 65 days out from this year's Derby. With the caveats that our total admissions revenue also depends on cash gate sales on the day of the event, which are very much driven by weather; and that our pari-mutuel revenues are also on a still be determined, field size and competitiveness of the Oaks and Derby races, and the other races on the Oaks and Derby Day cards. With those caveats, at this point, 65 days out, our premium admissions revenue, that is boxes, suites, tables, and our premium areas, are very strong compared to last year. Sales of our personal seat licenses are significantly ahead of last year. Sponsorship sales are on track to outpace last year. And handle on the first of the three Oaks and Derby future wager pools was the second-highest single pool total in its 15-year history, missing the 2012 record by $10,000, despite a massive snowstorm on the East Coast. If those trends hold, and there's no way to know if that will be the case or not, than this year's Oaks and Derby week financial performance should be strong.

Now let's move on to Gaming. Our Gaming business revenues increased 5% in 2012, reflecting revenues generated by Riverwalk, which was acquired in October. Additionally, Harlow's revenues increased by $3.4 million, which was closed for 25 days during 2011, as a result of the historic Mississippi River flood. Revenues at our Calder casino declined by 6% this year, as a result of new competition entering the market in the first quarter, along with what we believe to be a weaker South Florida economy. We expect this handling to continue for at least the first quarter of 2013, as we did not begin seeing the impact of new competition on our results until the second quarter of 2012.

For the fourth quarter, our Gaming business revenues increased by 21%. The Riverwalk acquisition was the primary driver, however, our fairgrounds property also posted its strongest quarter of the year, with organic growth of 11%, the entire New Orleans market saw pick up in volume. Our Louisiana video poker business also saw strong growth, with seven of our nine locations seeing increased demand. We opened our newest OTB and video poker facility with 60 machines in the city of Westwego, in the Jefferson Parish, on January 28 of this year, 2013. While it is still early, we have been very pleased with our results thus far.

Our Florida property continued to face headwinds from increased competition, and posted a 6% decline in revenues in the quarter, and improvement from the 12% declines we saw in the second and third quarters of last year. Our Online Business had a terrific year, posting 11% revenue improvement on handle growth of 11%. As previously mentioned, US handle on thoroughbred racing was up 1% for the year, which indicates that TwinSpires growth outpaced the industry by 12%, as it continued to recruit more players to the game via internet wagering, and as customers shift their wagering activity to the online channels.

Our fourth-quarter Online results were not as terrific. In fact, we were a bit disappointed. Revenues increased 2% on handle growth of 4.3%. US industry contracted 3.6% in the quarter, according to Equibase.com, which was, at least in part, driven by Hurricane Sandy. This resulted in fewer races for TwinSpires customers to wager on five different racetracks along the East Coast, and for race day. And residents in the affected areas wagered less, which included wagering on the Breeders' Cup weekend. The good news is that TwinSpires outpaced the industry by 7.9% during the quarter -- handle growth by 7.9% for the quarter, it also highlighted our ability to grow handle, and revenue is affected by the health of the overall industry.

Now let's look at the EBITDA performance by segment. Our total year Racing Operations EBITDA decreased by $13.5 million, primarily on the recognition of the Illinois horse racing equity trust fund proceeds of $19.3 million in the prior year. Headwinds from Breeders' Cup not returning to Churchill Downs Racetrack, and $2.4 million of lower year-over-year tax increment financing credits from the Commonwealth of Kentucky; were more than offset by the $5.4 million improvement in Kentucky Derby week profitability, 13 additional race days, and cost-out action across all of our locations. In the fourth quarter, our Racing Operations loss was $4.3 million, that's $1.5 million more than the fourth quarter of 2011. The increased loss was driven by the Breeders' Cup not returning to Churchill Downs, and was partially offset by $0.5 million insurance gains related to a hailstorm proceeds, and better cost controls.

For the year our Gaming EBITDA increased $10.8 million, primarily due to settlement of insurance claims and our fourth-quarter acquisition of Riverwalk casino. Harlow's EBITDA increased $9 million to $26.5 million for the year, driven primarily by a $6.1 million increase in year-over-year net insurance gains. The improvement in Harlow's profitability during 2012, excluding insurance recoveries, was primarily due to the closure of facility for 25 days during 2011. The renovations, following the flood, are now complete, with a January 25th grand opening. We are excited to see if these renovations will help us attract customers farther distant from our facility.

In addition, our Riverwalk Casino generated $2.8 million in EBITDA since our acquisition in October. So far, we have been very pleased with the performance of our newest gaming facility. Our Louisiana gaming properties EBITDA was even with last year at $25.8 million, while our Calder Casino reported $1.1 million decline. The decrease in Calder Casino's EBITDA resulted from 6% revenue decline, and was partially offset by the recognition of $0.8 million in expense reimbursements from a third party or a slot referendum held a few years ago. For the fourth quarter, our Gaming EBITDA increased 18% to $16 million. Improvements driven by the Riverwalk acquisition, and revenue growth with Louisiana, partly offset by a $0.6 million reduction in earnings at our Calder Casino.

While we are discussing our Gaming Business, I thought I'd give you--provide you an update on our Miami Valley gaming development in Ohio. Our joint venture was issued a temporary video lottery sales agent license from the Ohio lottery on December 19. We completed the purchase of the racing licenses, and certain assets held by [Webbon] and [Trotting] club and Miami Valley trotting two days later. Site work had already begun on the 120-acre development, just off of the interstate 75 near exit 29, and while it is early we are currently on schedule to open in the first quarter of 2014.

Our Online Business increased total-year EBITDA by $2.5 million, primarily reflecting the increases in revenue from continued annual growth. Mostly offsetting these increases were expenditures of $2.9 million related to fourth quarter launch of Luckity.com, $1.1 million in nonrecurring employee termination costs, increased losses of $0.7 million in our investment in HRTV, and $0.4 million in expenditures to credit the wagering accounts of our online customers affected by the (inaudible) payoffs from a New York Racing Association error that occurred in 2010 and 2011. For the fourth quarter, our Online Business EBITDA declined $0.7 million versus the prior year, reflecting $0.8 million of expenditures related to the launch of Luckity.com. Improvements from increased revenues, and reduced HRTV losses, were offset by higher long-term non-cash incentive compensation costs of $0.4 million.

Our corporate EBITDA decreased by $5.8 million for the year, as we recognized higher long-term non-cash equity incentive compensation expenses of $4 million related to the financial performance of the Company. In addition, during 2011, we recognized a gain of $2.7 million related to the conversion of a related party note. The $2.1 million fourth-quarter corporate EBITDA reduction was driven primarily by $2.1 million of higher long-term non-cash equity and compensation expenses compared to the prior year. Overall, EBITDA declined by $7.2 million for the year, and $2 million for the fourth quarter.

Now please turn your attention to the consolidated statements of comprehensive income for the years ended December 31. For the full year, the total net revenues grew 5% over 2011 to $32 million. In the fourth-quarter net revenues increased 16% to $158 million. SG&A expenses increased $8.3 million in the year due, in part, to a $4 million increase in equity and long-term non-cash compensation related to the financial performance of the Company. In addition, Bluff Media and Riverwalk Casino acquisitions increased SG&A by $2 million, while the Luckity launch added $0.8 million. Furthermore we incurred $1.5 million of non-recurring employee termination costs.

Insurance recoveries, net of losses, increased by $6 million reflecting the final settlement of insurance claims related to the flood damage sustained at Harlows in 2011. Equity losses in unconsolidated affiliates increased by $0.6 million related to our investment in Miami Valley Gaming. Miscellaneous other income decreased by $22.8 million for the year, primarily as a result of this $19.3 million in Illinois horse racing equity trust fund proceeds, recognized in 2011. In addition, 2011 included a $2.7 million gain on the conversion of [plated] party note. For the year, net earnings from continuing operations were $58.3 million, down from $60.8 million in 2011.

Now please turn your attention to the consolidated balance sheet. The only thing I want to note on this page is that our current bank revolver matures in September of 2013, now being reclassified as a current liability. We will refinance this debt sometime during the next three to six months.

The final thing I wanted to mention is that our annual meeting will be held in April 23 of this year, at our Arlington International racetrack in Chicago, Illinois. I hope to see you there. With that, we will be happy to take any questions. Bethany, could you open the lines please?

(Operator Instructions)

Amit Kapoor, Gabelli & Company.

Good morning. Thank you. Thanks for taking my question. Bill, can you provide some color on the -- and thank you for breaking out the expenses this quarter at Luckity. Can you provide some color on the ramp up at Luckity, including feedback that you are receiving from customers around the website, ease of navigation, ease of use? And then separately, I have a second question regarding any comments you guys might have on the online gaming legalization dynamics in New Jersey and Nevada? Would appreciate that. Thank you.

Okay, thanks, Amit. I'm going to give those questions to Bill Carstanjen, Our president. Bill?

Sure, thanks, Amit. First, with respect to Luckity, a lot of the ramp of costs were in the fourth quarter of 2012, so we got the product launched. We haven't started marketing really heavily yet, because our focus to date really has been on the quality of the product, and spending our time with the customers that we have acquired, to understand what they like about it and what we ought to improve.

Fundamentally to back up for a second, why did we do this? We have seen the phenomena that's going on with social gaming in the country, and we have studied pretty closely what we have seen in Europe with the explosion of online gaming. So we wanted to take the skills and the capabilities that we have built in TwinSpires, and move into a new area, and use those skills to reach a different customer set. So there have been some -- there's been a lot of learnings, and there's been some hiccups too. And before we really launched, in earnest, any kind of marketing, what we found is we really may need to fill the gap between when the customer plays the game and when the customer gets the results, and then actually also the quality of the games. We have to make them more interactive, more appealing.

So it's fair to say that there are a lot of encouraging signs that we have seen so far. We really, with very little marketing, have not had trouble acquiring customers. But really, the focus needs to be on keeping those customers, getting redeposits, keeping them engaged when they are on the site. And when we have those tasks achieved, then we will go further and market with [serious earnest]. Amit does that, does that --

Yes, thank you, thank you. And could you also comment on the online gaming landscape as it is evolving at the state level, please?

The online gaming landscape is evolving very, very quickly, and probably much more quickly than any of the experts might have expected, say a year ago. With the dearth of true federal progress, what you're seeing are states exploring these issues on a state-by-state basis. And you've seen the passage of the law in New Jersey, and also in Nevada, and there are a number of other states, like Illinois and like California, very serious large states, that are also seriously considering state-driven online gaming legislation.

So that general field of activity something we're [competitively] spending a huge amount of time and attention on. And I think like a lot of companies in our position, we are trying to figure out how we would play, and how these states will end up playing with each other, in terms of sharing liquidity for games like poker, et cetera.

Thank you. At Churchill Downs, do you guys internally think about this as a more, it will evolve at the state level and eventually someone at the federal level will -- there will be enough momentum to take action at the federal level? Or is this going to be a state-by-state task, so to speak?

Well, Amit, I would be the first to say that I don’t know if there's anybody out there that is smart enough to know the answer to that question. But I wouldn't say that we think we're smart enough to know the answer to that question. So the way we approach that general topic is to be prepared as possible for any eventuality. I know for a number of years there was speculation that it would go federal. Now the tide is turning, and the only activity that you really see is state-by-state. So our focus, right now, is preparing state-by-state action plans.

Obviously, there'd be some states we could participate in, and obviously there's some states where it seems like it would be much more of a stretch for us to find a way to participate. For right now, we're focused on addressing any state-by-state opportunities. But that doesn't mean that we have stopped preparing federally. We still have the same resources deployed federally. We still have the same action plan, up on the shelves, that we would use in the event that the feds do take action.

Excellent. Thank you very much. Appreciate it.

Steve Altebrando, Sidoti & Company.

Good morning, guys. With current deferred revenue up about 30%, how much of it is timing, how much of that is strength in ticket sales?

Yes. If you look at the balance sheet, deferred revenue is up about $10 million. I think if you look at the cash flow statement, about $5 million of that converted to cash last year. Obviously, the bulk of that is related to Derby, that's really the primary driver of our deferred revenue accounting. There's a combination to discuss, personal seat licenses are ahead of last year, stronger than last year. A good part of that is timing, and a good part of that is new items like the Mansion, that added to that account. And things like increased sponsorships, things like that. So it's a combination of those.

And you mentioned, I think, premium tickets compared to last year, being strong compared to last year. Is that mostly the Mansion expansion or would you also say that commentary holds for same ticket basis?

So there are basically three parts to that. One is volume. We typically sell out our premium ticket areas. So the only thing that really changes in volume are new areas we get to sell, like the Mansion, or the Plaza Balcony for example, in [the Paddock]. So it includes volume from those two activities. But the other component of that is price. So to the extent that you have higher prices, more personal key licenses as a form of pricing. That is part of the driver as well.

And how is pricing looking?

It's looking good.

Okay. The Riverwalk margins are, I guess, a little lighter than I would have suspected. I know it's a seasonally weak period, and short period of time. Is there any one-time items, and maybe some integration costs that played in there?

Well, the $2.8 million is after management fees. So, if you look at it before the management fees get allocated to that, is about $3.2 million. We did pick it up toward the end of October, and I don't think the calendar was particularly, if I remember correctly, particularly good for us. What I would say is, its kind of hard to do a complete year-over-year comparison, but we were very happy with the fourth quarter growth rate, when you look at it versus the total quarter of last year. [Net both] revenues and EBITDA exceeded what they had done in the prior year. So, yes, it's actually doing a little bit better than what we had forecasted when we purchased it.

Okay. And then turning to Ohio, some of the newer properties have been a little slow out of the gate, a little disappointing. Wondering if you guys have gone back, and maybe revisited your model, maybe, taking another look at the scope of the project, and just generally how you feel about capturing a return on that project?

Obviously, we keep a very close eye on what the competition is doing [to save open], and one of the things that's pretty interesting, if you look at Ohio versus some of the other midwestern, pull out Vegas, other midwestern casinos, table games are running about double as a percentage of total gaming, double what they would normally run. You are seeing the demand there on the table games, the slots are a little bit less. And the hypothesis, I think us, and everyone else is coming back to, is that those little internet cafes are really effecting demand on those slot customers. So yes, we went back, and clearly if we look at our demand study, provided by a third-party, and discussed with them what the impact was going to be. And we haven't made any announcements or changes yet. But we're certainly looking at all the [value interfering] on our development [possibility].

Okay. Thank you.

To include, just to add, to include opening with the lower number of machines. I think what we've said is we are allowed up to 2,500, we've never actually announced how many we had opened [since then]. I think it's safe to assume that we would open with something [classy]. (inaudible)

Jeffrey Thomison, Hilliard Lyons.

Thanks, and good morning. Sorry, guys, I had to join in on your call a bit late today, and you may have already addressed this. But just wondered if you could recap for me, these are fourth-quarter questions, by the way. The margin impact with Gaming and Online, I see Gaming revenue up 21%, EBITDA up 18%. Perhaps that's related to your comment, just a second ago, about Riverwalk, but maybe there are some other things, too? And, then, on the Online Business, with your revenue up 2%, and EBITDA down 8%, I missed the reason for that.

Okay, so let's start with Online, since that's the easiest one to talk about first. In our Online segment, you have to understand we're putting a lot of investments into a new product called Luckity.com. And in the fourth quarter we spent about $0.8 million of EBITDA, so expenses, net of any kind of revenues associated with launching that product. So that's clearly going to put a bit of pain on growing EBITDA at the same rate as revenue, really wasn't any revenue associated. Also from a another expense perspective, our non-cash equity compensation increased by $0.4 million. So there's about $1.2 million of drag on that facility, or excuse me, on that segment of our business with respect to EBITDA not growing as quick as our Online.

In Gaming, grew about 18%, up 21% in revenue, there is a lot of mix within the Gaming business, depending on where margin rates are -- or excuse me, tax rates are on each of the states. And if you look at the Gaming business, Calder down $600,000 clearly didn't help. Not one of the higher margin rate businesses. Also there is an increase in management fees, about $500,000 -- so $530,000, leaving us [without the use of highway].

And then just one more question on revenue at Arlington.

Oh, yes, and the other thing, which I was just provided by our controllers, that we spent some marketing dollars in the fourth quarter ramping up for our new amenities at Harlows facility.

That was spent in the fourth quarter?

Correct.

Okay. But that Harlows is now fully refurbished, and up and running?

Yes. It's always been running, but the new amenities opened. Grand opening was January 25.

Great. Does that mean you have to do some extra spending, in the upcoming, for the rest of the quarter, to really get that excitement level going?

We're definitely going to look at spending some marketing dollars to grab a bigger diameter around the property. How material it will be is yet to be determined.

Okay. And then just the Arlington revenue number there, I know it's an absolute basis, or relative basis, it's not a big number. But what did you say was the reason for the 15% decline there?

In the quarter, one of our biggest OTBs -- First of all, the industry is down, which is clearly affecting our OTB business. And also there is a change in dynamic where people are shifting their wagering habits online. So that's a macro view of what's going on in the OTB space. Remember, Arlington did not run live in the fourth quarter, they only conducted an OTB simulcast operation. So beyond that, we did move out of one OTB, in the inner part of the city, that we went to another location. We lost revenues, but we lost more expenses, so net-net it was big hit. [Lost EBITDA but an improvement in expenses]. (inaudible)

Okay. I may just follow-up with you guys later today.

Okay.

(Operator Instructions)

We have a follow-up question from Steve Altebrando, Sidoti & Company.

Hello guys. I wanted to see if you would comment at all about the M&A environment. Potential use of cash, given your balance sheet being so strong? And in terms of the credit facility, it seems like it's being redone a little, probably, later than usual. If there's a reason for that?

Yes, I would be happy to, Steve. The debt markets, as you know, are pretty -- they're very hot right now. There's lots of money to be lent. So we're not in any particular hurry. We'd like to have to seen the legislation allowing a casino at Arlington to have passed, but obviously a lot of cash to build something like that.

In the M&A, the M&A world, I guess I don't completely understand your question, but I would say that there are good assets that come on, and they're kind of few and far between. I would say that you are seeing the multiples rise for good assets as deals like the Ameristar Pinnacle deal happened, or the Penn REIT conversion, both of those are driving multiples up in that space. But again, I think the M&A in this space is picking up, but it's still kind of few and far between to good assets.

Okay. And then, in terms of getting back to Online gaming for a second, how do you feel you are positioned, if we do see a rollout on a state-by-state basis? And then how advanced, I guess, would you consider your online strategy internally? Bill, do you want to take that one?

Sure. Well our opportunities are going to depend, in part, on what states go, and then what are the relationships between the states. So while we're not able, really, to disclose, in any kind of detail on a call like this right now, what our specific strategies are, we're certainly aware of the dynamics of where we have casinos and where we don't.

And there are a lot of states we'd like to play in where we don't have casinos, and that is something that we've worked hard to address and analyze. So we're not at liberty to disclose, in great detail, our overall strategies for a state-by-state online gaming expansion. But it is something that we have a team here that's focused on quite a bit, and it is something that we certainly intend to do our best to pursue.

Okay. And then just lastly, this might be a little stale, but what's the status of your Nevada online license? I believe that you had applied, but I'm not sure what the end result was.

We are in the process of applying for an affiliate license in the state of Nevada. And that's in process.

Is there a rough timeline that you're aware of?

I'm looking at our general counsel to make sure I can answer that question.

We should be, sometime this year.

In '13. Okay. Thank you very much.

At this time I am showing no other questions. I would like to turn it back to Management for any closing statement.

Thank you for joining us today. We will talk to you guys again in late April. Hope to see you at the annual share holder meeting. Thanks.

Ladies and gentlemen, this does conclude your conference. You all may disconnect, and have a good day.