Churchill Downs Inc (CHDN) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Churchill Downs, Incorporated First Quarter Results Conference Call. (Operator instructions) I would now like to introduce your host for today's program, Ms. Courtney Norris, Director of Corporate Communications at Churchill Downs. Please go ahead.

Thank you, Jonathan. Good morning, and welcome to this Churchill Downs, Incorporated conference call to review the Company results for the first quarter ended March 31, 2013. 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 regard statements included in reports filed by the Company with the Securities and Exchange Commission for discussion of additional information concerning factors that could cause our actual results of operations to differ materially from 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. Bob?

Thanks, Courtney. I don't have any prepared comments today, other than what we put in the press release. Let me turn this over to our CFO, Bill Mudd, who will take you through some of the details regarding the numbers and then we'll be back and try to answer whatever questions you may have. Bill?

Thank you, Bob. Good morning, everyone. Despite some challenges, which I will highlight in a few minutes, we set records for both revenue and EBITDA for the first quarter. Revenues increased 7% to $148 million, while EBITDA improved 3% to $17.9 million.

Our racing segment posted revenues of $27.8 million, down 8% from the prior year. The only track that conducted live racing during the period was our Fairgrounds property which revenue decreased 2% on an equivalent number of race days.

The decline in total racing segment revenues was primarily driven by lower host days at Arlington Park. When there is no live racing in the state, a track is selected by the Illinois Racing Board to act as the Host Track. The Host Track receives a percentage of revenues from pari-mutuel racing activity at locations across the state. Arlington was awarded 44 days in 2012, but that number was reduced to 26 days in 2013 and is the primary reason for our racing revenues decreasing year-over-year.

This decision is made on a yearly basis. We don't know what the decision will be for 2014, but certainly we will attempt to argue for a return to 44 days we had in 2012.

Racing EBITDA was essentially even with the prior year. A $0.5 million loss associated with fewer host days in Illinois was mostly offset by $400,000 of net insurance recoveries associated with hail damage sustained at Churchill Downs in April of last year.

While we are on the racing segment, I am sure most of you want to know how the Derby is shaping up. There's not a lot more I can say than what was discussed during the last earnings call, but we continue to be very optimistic about this year's performance. The weather can always affect general admission attendance and wagering among other revenue sources, but all the leading metrics we track suggest another record year.

Our gaming segment posted revenues of $72.1 million during the quarter, up 21% for the prior year, driven by the Riverwalk acquisition. We believe higher payroll taxes and delayed tax refunds impacted revenues at all of our properties but it had a most distinct effect on our Mississippi property's results.

Harlow's had a tough start in the quarter with January revenues down 10%, February revenues down 8%, but March proved to be a much better month with revenues up 7% and we are continuing to see positive results midway through April. We believe these swings in year-over-year performance are driven by the timing of refund checks.

For the quarter, both Mississippi properties cashed 30% to 35% fewer checks than the previous year. Hopefully this is only timing and we will pick up lost revenues during the second quarter.

We were pleased with the Riverwalk results for the period with revenues of $14.1 million. The revenue profile was not that dissimilar to Harlow's, with January and February revenues down approximately 7% while March revenues increased 4% year-over-year. We find the March results for both Mississippi properties encouraging as the Mississippi River counties reported a 5.5% decline for the month, suggesting that we are gaining share at both properties.

Our Calder property continued to feel the effects of new supply in the market, but did perform better than we expected. The year-over-year comparable results will become easier next quarter since the second quarter of last year is when we started seeing the impact of the new competition in the market. Our Louisiana properties performed well this quarter with slots business increasing revenues by 3% and our video poker business increasing revenues by 2% year-over-year.

Gaming EBITDA grew 2% to $20.8 million for the quarter, primarily due to the addition of Riverwalk which generated EBITDA after management fees of $4.5 million. Partially offsetting these increases was the prior year recognition of net insurance proceeds of $1.5 million related to wind damage at Harlow's. in addition, Harlow's EBITDA excluding insurance recoveries decreased $1 million, primarily from increased marketing expenses related to rebranding the facility, higher-end concerts for our grand opening, and costs associated with closing down our temporary buffet and moving into new food venues. These costs are now behind us and our customer-related entertainment costs will now be focused on attracting high value players.

Calder Casino recognized a gain during the prior year of $0.8 million from the collection of receivables related to the 2005 Miami-Dade Gaming Referendum. Excluding this recovery, our EBITDA was down $0.6 million driven by lower revenue.

Our Ohio joint venture, Miami Valley Gaming, is now fully-approved by the Racing Commission and the Ohio Lottery. Construction is moving along quickly and now that we have steel in the ground we have better visibility on the development timeline. We are running ahead of schedule and slightly below budget and now expect to open the facility in December of this year.

Now let's take a look at our Online segment. According to figures published by Equibase.com, betting on US Thoroughbred Racing declined 2.8% for the period. The majority of this decline occurred in February when industry handle was down 6.6% on 10.8% fewer races, race days, due to schedule reductions and numerous weather-related cancellations across the industry.

Our online handle decreased 2.6% this quarter, leading to the decline in revenues. TwinSpires.com stopped taking wagers in Illinois, from Illinois customers, in mid-January as legislation allowing them to wager online expired. Excluding Illinois handle from both periods, our online handle increased 4.5%, outpacing the industry growth rate by 7.3%.

While it is difficult to determine if we are going to be successful, we are working to get a new bill passed to allow residents to resume wagering online. Online EBITDA was flat to the prior year at $10.4 million. The loss of Illinois handle reduced EBITDA by approximately $0.6 million in the quarter. In addition, we spent $0.8 million on the continued development and marketing of Luckity.com, an increase of $0.3 million compared to the prior year. Offsetting these decreases was the prior year non-recurring expense related to an employee separation of $0.8 million.

Corporate EBITDA decreased $0.2 million due in part to an increase in equity and long-term incentive compensation of $0.5 million. Total EBITDA came in at $17.9 million, an improvement of 3% over the prior year. Operating income was down $0.7 million, as EBITDA improvements were offset by higher depreciation and amortization associated with the Riverwalk acquisition.

Our fully-diluted earnings per share from continuing operations was $0.06 compared to $0.08 in the prior year. I would like to highlight one more item before turning it over to Bob for questions, we're going to open the call for questions. Earlier this week, we admitted our bank revolver subject to Louisiana state regulatory approvals, which we expect to receive mid to late May. The new facility increases our revolver to $500 million from $375 million, provides an accordion feature which could increase the maximum aggregate commitment by $225 million on a secured basis, and reduces the pricing schedule across the grid. The new agreement also provides for a two-tiered financial leverage ratio covenant which gives us more flexibility with our debt structure as we continue to grow the Company.

With that, I'll turn it over to Bob who will open the call up for questions. Bob?

Thanks, Bill. Operator, if you could help us here, if anyone has any questions we'll be glad to take them at this time.

Certainly. (Operator Instructions) Our first question comes from the line of Steve Altebrando form Sidoti & Company. Your question, please?

Good morning, guys. It looks like deferred revenue up about 15% year-over-year. How indicative of that is it -- how indicative of it is that of profitability for the Derby?

You know Steve, deferred revenue is a combination of factors. It can change because of the timing of when we invoice customers. It can change because of the timing of when we collect cash from customers. So, it's one point in time, and it's how that is measured. So, I would say that it's better being up than it is being down, from a expectation of revenues, but it could mean that you're collecting cash later so that could be bad as well. So you know, we really don't -- we look at the cash we collect, and obviously the other thing it could be because you have higher pricing or more volume going through it. So, just be careful of looking at the balance sheet and making any assumptions based on that.

I would go more with more of my comments that I'd made that the metrics we look at indicates that it should be a very strong Derby.

Okay, and in terms of Harlow's, how much of the million-dollar decline related to just one-time expense from marketing?

Let me grab that, real quick. I have it, but I just want to make sure that I'm looking at it correctly. About $400,000.

Okay. And then just lastly, some color on the buyback. I'm just curious how you're viewing it. Is it more of a opportunistic or is generally the plan to exhaust the authorization through '15?

You know, we didn't make any comments about how we're thinking about that, Steve. We do, we did put a buyback in place because we view the stock as cheap but we're obviously not going to say what price we'd buy the stock back.

Okay, thank you.

Thank you. Our next question comes from the line of Amit Kapoor from Gabelli & Company. Your question, please?

Good morning, thank you.

Good morning, Amit.

Morning. Can you, there was nothing in the press release -- could you please comment on any updates on Luckity or any measures there, any new metrics that you're tracking in terms of customer acceptance, improvement there, would appreciate that color. Thank you.

Hi, it's Bill Carstanjen, I'm going to take that question, good morning. We spend a lot of time with the customers that we've acquired and really the focus to date has been on refining the product to make it better meet their expectations, to improve their redeposit rates. We have not, to date, really kicked off marketing in any serious way because the approach we've taken to building out this product is we really want to be confident that we've got a product that we believe the customers will not only be attracted to, but once they are attracted to, we'll be able to retain them. So, the product's got to be good enough to meet the hurdle of getting them to -- getting the customer to redeposit funds after they've played the first time.

I think in our expectation, we're still a couple of sprints, as we call them, a couple of releases, away from that but I think you'll see over the second quarter and the beginning of the third quarter, we'll get there and we'll start to market heavily at that point to truly test the capability of this product in the market space. We have been encouraged, that we're getting better and when we introduce the product in the marketplace late in the fourth quarter, we did acquire some customers and we continue to work with that group primarily instead of worrying about attracting masses of new ones.

So, we've got some positive signs, but we're not quite there yet.

Thank you. What is most encouraging in terms of feedback that you're getting from these customers?

In my opinion, the most positive thing that we're hearing is that there is a niche for a product like this. This is real money gaming, but it has elements of social gaming and it's a niche that's not really well-filled in the US market. So, in my opinion what's most encouraging is there are customers out there that seem to be looking for a product like this, that isn't generally easy to find in the US market.

Thank you.

Amit, it's Bob. I'd add one other comment to that, which my perspective on what I find encouraging, is that we are starting to find that we have bigger customers, people that play a significant amount of money -- and secondarily, that they are redepositing, so they're not just doing it once and stopping. They're continuing to play after their first encounter with us. So, I find that really positive.

I appreciate that.

Thank you. (Operator instructions) Our next question comes from the line of Jeffrey Thomison from Hilliard Lyons, your question, please?

Thanks, and good morning. As we approach this first week of May, I was hoping to get some qualitative and/or quantitative commentary from you guys regarding a comparison of Kentucky Derby week 2013 versus 2012, and that could include things such as changes or differences in seating capacity, pricing, sponsorships, industry environment, and then obviously security, but just some comments on how the event might be a little different this year?

That's covering a lot of ground.

You can take just a few of them, then.

In terms of seating capacity, the only significant addition that we've put in place this year is the Mansion, which is sold out. I'm sure there's a seat left in there somewhere, but essentially that's sold out, and in Section 110 where we put in some stadium-style, sort of football or baseball stadium-style seating, so that added a bit of capacity. And then, we opened last fall an area off of the paddock called the Plaza, which is outdoors and provides some additional capacity as well. So, not a lot of capacity but the stuff we added tended to be higher-end in terms of pricing. So, that's the best I can give you, there.

The big wild card, of course, is what the weather does on Oaks and Derby Day, and that has some influence on how many people show up that day, buy tickets that day, and occupy primarily the infield.

So, in terms of seating, I'd say those are the highlights. Did take some price increases this year, and we should see that reflected in our results as well. TV deal is a multi-year deal so that's essentially locked in. The sponsorship deals, we were able to grow a bit this year, so we feel pretty good about that. We may have an announcement in that area over the next week-and-a-half, so, keep an eye out for that one.

And then the other sort of large point of the revenue stream is pari-mutuel wagering. That ends up being a function of how competitive the field is you know. We assume we'll have 20 starters, and if it's a very competitive field, the wagering will be better and if we get good weather, that'll help as well. So, basically at this point the two wild cards are, what happens to day-of attendance, primarily infield, and what happens to the wagering pools.

Great. That was a good job, Bob.

Jeffrey, anything else?

That's all I had. I'll follow up later today.

Thank you. Our next question is a follow-up question from the line of Steve Altebrando from Sidoti & Company. Your question, please?

Hi, with regards to the ADW in Illinois, are you seeing any opposition to reinstating the law, or is it just a matter of getting the organization together and if you could provide any color on that would be helpful. Thank you.

Hi Steve, it's Bill Carstanjen, and I'll take that one. What happened in Illinois is, the law that had been on the books expired and so it was necessary for the legislature to take action to re-pass the law or re-pass a similar law. It really, ADW in Illinois is not a controversial subject. It's not something that we're aware of there's any opposition to. I'm afraid that the bill just got caught up in broader Illinois politics, which of course can be -- in one sense that's encouraging, and in another sense it's frustrating, but our team is working very hard to position that issue to get resolved legislatively as soon as possible, and of course that's been, for the team that's been a hurdle for us, because it absorbed and then some the organic growth that's otherwise in the business. By that I mean losing the core Illinois business that was there.

Okay. That's helpful, thank you.

Thank you. (Operator instructions) This does conclude the Question and Answer session of today's program. I'd like to hand the program back for any further remarks.

All right guys, thanks very much for joining us today. Appreciate it. We're going to be kind of busy over the next ten days, I'm sure you'll understand, and hopefully the night of the Derby we'll be able to get a press release out with some of the preliminary results. Thanks very much and talk to you again next quarter.

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